Why investing in Russia could remain a dicey proposition
Russian equities look cheap on the surface but the risks are huge, Joe Chidley writes.
It wouldn’t be wrong to say that U.S. President Donald Trump’s invocation of double-negative confusion doesn’t not beggar belief.
In explaining away on Tuesday how he took Vladimir Putin’s word as gospel — that Russia wasn’t, wouldn’t and will not meddle in U.S. elections — during that infamous news conference in Helsinki on Monday, Trump “clarified” his misstatement with all the seeming conviction of a nine-year-old forced to apologize for getting caught with a hand in the cookie jar.
His sympathizers might say that the President’s post-Helsinki about-face was at least a tacit acknowledgment that he had gone maybe a little too far in sucking up to Russia and bashing his own intelligence officials. The thing is this, though: that sucking-up moment only reinforced what we already knew about Trump and Russia.
Trump quite apparently likes Russia, or at least the strongman who runs it, and favours much warmer relations with it despite the election-meddling, the nerve-agent poisonings, the Syria atrocities and the military adventurism in Ukraine. Trump’s appeal to other G-7 leaders last month to reinstate Russia should have been sign enough that he was willing to turn a blind cheek to Putin’s misdeeds. Or you might recall how his campaign gutted the Republican platform of a tough position against Russia over Ukraine during the party convention back in the summer of 2016, or his continuing hypothesizing that some other of the “lots of people out there” might have hacked the 2016 election, too.
When Trump won that election, investors in Moscow, at least, took notice of the new president’s Russophilia. In the two-and-a-half months after U.S. election day, the MSCI Russia Index rose by about 25 per cent. Of course, resurgent oil prices — oil makes up more than 10 per cent of Russian GDP — supported that lift, but hopes of a thawing in U.S.-Russia relations, including lifting the sanctions imposed by the Obama administration in 2014 over Ukraine, likely played a part, too.
Yet in the ensuing 20 months, the budding Trump-Putin bromance hasn’t materialized in the form of returns. Not only do the 2014 sanctions remain, but the Trump administration imposed a second level of bans targeting Russian oligarchs and organizations this April. And the Russia index remains pretty much where it has been since February 2017.
Still, throughout his presidency, Trump has been consistent in voicing his opinion that better relations with Russia would be “a good thing.” Yet it’s not at all clear that the Helsinki debacle will do anything to forward that agenda — or lift the spirits of Russian markets. If anything, the embarrassment Trump suffered this week might make him more likely to bow to Russia hawks in Washington.
There are certainly plenty of oligarchs the U.S. could yet target with more sanctions. By the count of Forbes magazine, Russia — where amassing great wealth often goes hand-in-hand with being close to Putin — boasts 102 billionaires with a combined worth of US$410.8 billion. That compares with a mere 46 in Canada, with a combined wealth of US$148.5 billion — in a country whose GDP is more than 15 per cent larger. (Which tells you something about wealth distribution in Russia, where GDP per capita is a quarter of Canada’s.)
But let’s say things change. If the Republicans retake Congress in November, or even further down the road if Trump convincingly wins a second stint in the White House, a thaw in U.S.-Russia relations is at least conceivable over the long term. Pretty clearly, investors aren’t betting on that possibility right now — the Moscow market declined this week after the Helsinki summit — but those with a longer view might be tempted to take a look.
The fact is, Russian stocks might not have done much, but the Russian economy looks in pretty decent shape. When U.S. sanctions and plummeting oil prices delivered a double whammy in 2014, plunging Russia into recession and sparking double-digit inflation, the central bank acted decisively and prevented a major drawing-down of government coffers. With the rehabilitation in oil — which comprise about half of government revenue in Russia — the economy recovered, and looks set to grow near two per cent this year. (The oligarchs are getting richer, too.)
At this point, Russian equities look cheap, at least on the surface. But the risks are huge. To put one’s money on a recovery in the stock market, western investors might not only have to hold their figurative ethical noses so much it hurts, but also make big bets on the future of oil prices (perhaps the only thing nearly as unpredictable as Donald Trump) and on the U.S. suddenly doing a 180 on sanctions — which, given the outcome of Helsinki, now looks less likely than before. Russian sovereign debt might be a safer bet, but the lone easy route to doing so for Western investors is through an emerging market bond fund or ETF that has only partial exposure.
In short, Donald Trump might want a thawing with America’s old Cold War adversary, but he’s not making it any easier. And betting on Russia under such circumstances looks likely to remain dicey for even the bravest investors.