powered by GlobeinvestorGold.com

Mathew Ingram

In this Issue

From Russia with Love

Mathew Ingram

Legendary foreign investor Mark Mobius of Franklin Templeton Funds may have said it best when it comes to Russia: Investing in that country, he wrote once, is a lot like “entering a rich gold field studded with land mines: laced with veins of rich treasure, and riddled with pockets of pure poison.”

That might be overstating things a little — but not all that much.

The rich treasure part is definitely true, given the oil and gas riches that Russia holds, along with mineral resources and other commodities that are in high demand. The country is already vying with Saudi Arabia as the world’s largest exporter of crude oil, and there are vast, untapped fields of both oil and gas still waiting to be explored.

In the second quarter of 2006, the Russian economy grew by more than 7 per cent compared with the same period a year earlier, an impressive rate of growth for any country, let alone one of Russia’s size. Retail sales rose at an annualized rate of 14 per cent in September. And the company’s dollar-based stock index, the RTS, hit a record high of 1,765 last year and is still not far off that mark -- more than 10 times the levels it was trading at just five years ago.

That incredible climb itself is one reason to be somewhat cautious about investing in Russia, of course -- stock indexes don’t tend to go on bull runs like that without crashing now and then. And while the price of oil is still relatively high, it is unlikely to be climbing by leaps and bounds from its current levels. There are other reasons to be cautious as well, including the fact that prominent people continue to turn up dead, including the deputy chairman of Russia’s central bank.

Andrei Kozlov, 41, was shot in the head execution-style on the streets of Moscow, allegedly because he was determined to clean up the money-laundering and other nefarious activities going on in Russia’s banking system. A well-known journalist and critic of President Vladimir Putin’s government was also shot in the street. Senior officials at Russia’s second-largest bank and at British Petroleum’s Russian unit were also found murdered, their deaths as yet unexplained.

The Putin government has also taken extreme measures against a prominent Russian businessman, Mikhael Khodorkovsky, whose giant oil and gas company Yukos was seized -- allegedly for non-payment of taxes and fraud -- and its assets sold to government entities. Some Russian observers say this was done because Khodorkovsky acquired the assets improperly after the fall of Communism, but others see it as Putin consolidating his power.

Those risks aside, plenty of companies and prominent investors seem to have few qualms about investing in Russia. General Motors is building an automobile plant in the country (Ford and Toyota already have plants), Japanese companies have been investing in oil and gas exploration, and European dairy producers are also reportedly looking for Russian partners. Aluminum producer Alcoa has said it plans to invest about $200-million over the next two years, and Boeing is also planning to boost its investments in the country.

A British investment company, London & Regional Properties Plc, has said that it plans to invest as much as $1-billion in commercial real estate in Russia over the next couple of years. According to recent estimates, more than $2.5-billion worth of investment from Western countries went into the commercial real estate sector in the second half of 2006, and that is expected to grow. Oil giant ConocoPhillips, meanwhile, has said that it plans to almost double its investment in the former Soviet country over the next decade to as much as $15-billion.

If you’re looking to invest in Russia directly, you can buy American Depositary Receipts or ADRs for such stocks as Gazprom, the giant gas utility, or its oil counterpart Rosneft (which bought assets from Yukos after it was seized), or you can look for mutual funds that invest in Russia -- which include the 100-per-cent Russia focused Third Millennium Russia Fund, from a New York-based investment family, as well as ING Russia from ING Investments in the U.S. and the giant Hermitage Fund, which is based in London. In Canada, most of the major international funds, including Fidelity’s, invest in Russia.

Several investment companies offer ETFs that invest in Brazil, Russia, India and China (which many see as the four major developing markets with potential upside), including Claymore Investments Inc., which launched on the Toronto Stock Exchange in September. The Templeton Russia and East European Fund, which trades on the New York Stock Exchange, is run by none other than Mark Mobius, the guy who produced the gold field-and-mines quote. He said recently that he’s “pretty bullish on Russia” right now, and that “generally it’s a pretty good environment these days.” Unless you happen to be the deputy chairman of the central bank, of course.

Mathew Ingram joined The Globe and Mail's online news team in June of 2000, after spending four years as the Western business columnist, based in Calgary.

Back to top