Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

New Russian President, New Investment Opportunities?

Commodities / Russia May 11, 2008 - 12:41 AM GMT

By: Martin_Hutchinson

Commodities

Best Financial Markets Analysis ArticleNew Russian President Dmitry Medvedev wants better links with Europe. Judging by the performance of outgoing President Vladimir Putin , Europe should beware: The so-called "links" he's seeking may resemble those used to chain together prisoners in the Gulag.

On the other hand - though it's admittedly unpleasant to say so - there's a point at which the effects of high oil prices are so great that in the short run they far outweigh one's distaste for the thuggish Russian regime. And at $123 a barrel, we may be at that point.


Politically, Russia has pretty much reverted to the pre-1991 Soviet system.

Today, just like then, there's only one real party: The United Russia party, which controls 315 of the 450 seats in the Duma (essentially the lower house of parliament) and whose leader is one Vladimir Vladimirovich Putin. There is considerable censorship of the media, and dissident reporters and editors have a habit of disappearing - not that there are many left now. There is huge emphasis on military power, and on throwing Russia's weight around in foreign policy.

What's New About the "New" Russia

However, there are a couple of significant economic differences between today's Russia and the pre-1991 Soviet Union. One key difference is economic: While the state still controls most of the property today, it doesn't control all of it, as it did before 1991. Even so, foreign investment in strategic sectors of the Russian economy was effectively banned by a decree of May 5. For this purpose "strategic" covers not only the military sector and energy, but also more than half of Russia's output.

So, if the afore-mentioned difference is one of substance, this next one is all about style. Prior to 1991, Politburo members were relatively impoverished and notorious for their baggy Soviet suits and lack of fashion sense; these days, the top brass - and especially Putin - are snappy dressers with a nice Italian wardrobe, and bank accounts to match.

Putin's even viewed as a sex symbol: In a recent No. 1 single in Russia, a female pop star cooed that she needed a new boyfriend and that " Takogo kak Putin ” (he must be like Putin), and not a useless wimp like her last beau!

If you analyze the economic impact of Putin's regime since 2000, you'll find the result has been huge economic growth - an annual average of nearly 10% since that time with growth of 8.1% in 2007. Now a certain percentage of that was due to the proverbial "dead-cat bounce" as the economy recovered from the debilitated state it had reached by 1998-99. An additional portion reflected the benefit of a Ronald Reaganesque tax reform passed in 2001, which produced a "flat tax" income-tax system with a rate of 13%.

That caused many conservative U.S. commentators to favor the Putin regime in its early years, despite the signs of human rights abuses. However, since the arrest and imprisonment of oil company tycoon Mikhail Khodorkovsky and the looting of his company Yukos , it has become obvious that the nominal rate of income tax doesn't matter much when the state can - and does - seize anything it wants.

Since at least 2004, Russia's economic growth has been driven almost entirely by high oil prices. At first, oil production increased along with prices, producing real economic progress. Since Putin's partial seizure of Royal Dutch Shell PLC ( RDS.A , RDS.B ) concessions in 2006 and BP PLC ( BP ) earlier this year, it has become obvious that the Russian state will control all economic activity in the energy sector. As a result, output has now stopped increasing and in this year's first quarter it actually declined slightly.

I wouldn't want to be a wealthy entrepreneur in today's Russia, no matter how many bodyguards I surrounded myself with. At the same time, however, there's also no question that some of the benefits of economic growth have gone to the Russian people - something that was rarely, if ever, true under the old Soviet system.

Consumer spending rose 12% in 2006 and matched GDP growth of 8% in 2007. With a current account surplus of $74 billion in 2007, foreign exchange reserves of $470 billion and ever-escalating oil prices, Russia's ruble has been strong, making imports super cheap. Given the lack of high quality goods in Russian stores before 1991, and the impoverishment of the country in the 1990s, this consumer boom is not surprising. But it does mean that there are finally investment opportunities in Russia outside the energy sector, in places where the Russian government's heavy hand is less evident.

As long as global oil prices remain high, or continue increasing as they have in the past five years, Russian energy companies will make record profits and Russian consumers will enjoy a bonanza, producing profits in consumer sectors also. Once energy prices turn around, Russia is in trouble. However, there is no sign of that yet, and at least in the short term, there's money to be made from the continued advance in energy prices.

Politically, it's unclear how much of a difference Medvedev will make , since, after all, Putin will now serve as prime minister ( one news report described Medvedev as the "puppet president" of Putin's).

To be sure, as the former CEO of Gazprom OAO (OTC: OGZPY ), Medvedev has at least a basic knowledge of how business works. And it's likely that he'll continue to follow Russia's current "mixed economy" policy, meaning that "strategic" sectors will remain government playthings, while non-strategic sectors such as consumer goods are pretty much left to operate freely - and unharmed. Russia even intends to use its version of a "sovereign wealth fund" to go on a bit of a global buying spree , although it remains to be seen just how aggressive it will be.

Presumably, if Putin had wanted to restore full Soviet Communism he would have chosen someone else; that at least is a consolation.

Cashing in on Russian Capitalism

Does this leave any real plays for U.S. investors? It does, but you must keep in mind that this is a highly speculative market, and that you should be ready to sell if U.S. interest rates are increased. The reason: An upward increase in U.S. interest rates could cause a reversal in energy and commodity prices, which would have a major impact on the Russian economic advance. Here are a few Russian profit plays to consider:

  • OAO Gazprom (OTC: OGZPY ): This is one of the obvious Russian plays, the state-owned natural gas monopoly with ambitions to control Western Europe's gas supplies. Since its ambitions don't yet extend to the U.S. market, it is quoted only on the Pink Sheets. It has a Price/Earnings ratio of 12, based on trailing earnings, but gas prices and Gazprom's dominance are both rising.
  • Lukoil (OTC: LUKOY ): The other obvious Russian heavyweight, Lukoil is the largest state-controlled oil company; again, the firm doesn't care if you buy the stock, meaning it also is only available through the Pink Sheets. This one has a trailing P/E ratio of only 8, and that was based on 2007 earnings when oil prices for the year averaged $80. A good speculative play on a further run-up in oil prices.

Moving outside the oil sector, there are two mobile telephone companies you might look at:

  • Vimpel-Communications ( VIP ): This company has 55 million subscribers and mobile operations in Russia, Kazakhstan, Ukraine, Uzbekistan, Tajikistan, Georgia and Armenia. Right now, it trades at 22 times trailing earnings, but only 13 times forward earnings. It does pay a dividend, but the yield is only 0.9%. I slightly prefer its collection of non-Russian operations to those of MBT (the Russian operator we'll get to in a moment) - you especially want Kazakhstan, which is oil-rich.
  • Mobile TeleSystems OJSC ( MBT ): This mobile operator has 73 million subscribers and operations in Russia, Ukraine, Uzbekistan and Turkmenistan. It is cheaper than Vimpelcom, trading at only 14 times trailing earnings and 12 times forward earnings, and it has a dividend yield of 2.5%.
  • Finally, for a flyer on Russia's consumer-oriented agribusiness, albeit an expensive one, you might look at Wimm-Bill-Dann Foods OJSC ( WBD ), which manufactures and sells branded dairy, juice, water and baby-foods products in the Russian market. The shares trade at a pricey 37 times trailing earnings, and the forward P/E of 21 isn't much of an improvement. The dividend yield is tiny at 0.1%. However, earnings are racing forward as the Russian consumer market opens up to quality branded goods.

Don't put your retirement savings in the Russian market - Vladimir Putin might get tempted! However, for a modest oil-related flutter, Russia is well worth a look.

By Martin Hutchinson
Contributing Editor

Money Morning/The Money Map Report

©2008 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Martin Hutchinson Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in