THE INVESTOR
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Oldfield focuses on companies and does
not make projections about economies,
but he says that investors naturally need
to take account of the macro and political
climate in which they are investing. Lukoil’s
sales are calculated in dollars and its
costs are in roubles, insulating it from the
currency’s weakness.While some Russian
oil companies have been susceptible to
political interference, Lukoil has not – the
government does not own any of it. Lukoil’s
board contains Mark
Mobius, the renowned
Templeton fund manager,
and Ivan Pictet of the
Swiss banking family, as
well as former executives
ofWestern oil companies
such as Chevron and Eni,
while its two founders
control more than 30%
of the shares.‘We look at probabilities,’ says
Oldfield.‘We try to estimate the risks – the
US could make it difficult for US investors
to own Russian companies, the government
could expropriate a company’s assets, or
much tighter sanctions could be imposed.’
demand weighed down by falling real
wages, higher cost of capital and weakened
confidence’. But it went on to say that
the rouble’s depreciation would boost
exports.‘Due to the authorities’ policy
response and higher oil prices, growth should
resume in 2016 while inflation is expected to
decline further to single digits.’ However, the
recovery is‘unlikely to be strong’, says the
IMF, as factors limiting expansion‘will take
time to be addressed, leading to medium-
term growth of 1.5% per year
2
’.
A lifting of the international sanctions
could also help sentiment, although that is
not yet on the horizon.A communique after
the G7 summit inApril reiterated the need
for Russia to respect Ukraine’s sovereignty
and to fulfil the requirements of the ceasefire
agreement before they are lifted.
Russia’s recession has reinforced the
need for fundamental economic reforms.
Liza Ermolenko, an emerging market
analyst at Capital Economics, says that
growth in the past few years has been driven
primarily by consumption.‘Investment has
been very low and has been one of the main
constraints on growth,’ she says.That has
made it hard for domestic companies to
increase sales of their products to take
the place of the imports which Russia has
blocked in retaliation forWestern sanctions.
‘Capacity utilisation is already high and
there is a need for more investment,’ says
Ermolenko.‘But that is
difficult because of the
economic uncertainty.’
Even in such
unpromising
circumstances, there
can be investment
opportunities.
Richard Oldfield,
of Oldfield Partners,
manager of the St. James’s Place High Octane
fund, says there are areas of ‘overwhelmingly
attractive’ value among Russian companies.
Among the companies he owns is Lukoil,
which is the biggest privately owned Russian
oil producer.
Oldfield has been investing in Russia
since 1997, when he said what he describes
as one of the silliest things he has ever said
about investment: that it was safer to invest
in Russia than in Coca-Cola.The Russian
market promptly fell 90% in dollar terms.
But it recovered; and since the time of his
comment in 1997, the Russian stock market
has outperformed the soft drinks company.
‘It’s a lesson, in a rather extreme way, about
volatility and the long term,’ says Oldfield.
Equity investment requires at least a ten-year
time horizon; investment in volatile markets like
Russia should have an even longer-term view.
Other fund managers are less enthusiastic.
Tom Prew is an emerging markets fund
manager at First State, which also invests in
good companies, regardless of their location,
rather than taking a view on individual
economies. Its St. James’s Place fund does
not currently hold any Russian companies,
although it has some exposure to the country
via local divisions of global businesses –
such as the local bottler of Coca-Cola or
representatives of Unilever’s businesses.
Prew cites corporate governance concerns
as the key issue, with many Russian
companies ultimately owned either by the
state or oligarchs who may not always act
in the best interests of outside investors.
Whatever the long-term outlook, for
most retail investors direct investment
into Russian companies is too risky.
Exposure to Russia can also be gained
through a global or regional fund, where the
manager will determine the appropriate
allocation to the country.
Russia has many natural advantages, which
make it an interesting economy over the long
term, but the investment case will always be
tempered by political uncertainty.
1
2
Investors need to
take account of the
macro and political
climate
ANALYSIS
Balance sheet
Although not out of the woods yet, the
Russian recovery is gathering pace and country experts
believe there are still investment opportunities that are
worth seeking out.
Investment in Russian
business can be risky, but
there are opportunities
