Reasons To Be Bullish On Russia

A delegation from Abu Dhabi Investment Authority visited Russia this autumn looking for investment opportunities. I also happened to be staying with my mother-in-law in St Petersburg in September.

On the British Airways flight to St Petersburg, the only daily flight these days from London, we were surrounded by a rather noisy bunch of UK students on their way for an exchange visit to Russia. Annoying as they undoubtedly were for three hours, it reminded me of my own introduction to Russia on exactly the same student union exchange 33 years ago.

Then the shops were practically empty and you needed to be a foreigner or party official to buy in special shops for certain quite ordinary goods. There was no advertising anywhere and the folks in the streets were poorly dressed and wary of foreigners. Of course we British students were relatively rich for the first time in our lives and had an absolute ball.

My next trip to Russia was to Moscow in 1990 as a young journalist writing an article on the transition sweeping across the former iron curtain countries. I met the Moscow state contractor Mospromstroi to discuss the market and asked what was the most interesting thing they were working on at the moment. The chairman replied in one word ‘privatisation… all real estate’. That was the scoop that won me the ‘Financial Journalist of the Year’ prize. Russia did indeed go on to do the largest single privatisation in history for its real estate sector.

The next time I went back to St Petersburg in 1995 to write about the transition from communism and came back with a piece all about a city in the hands of the Russian Godfathers. One of the guys I was to interview was shot in front of his wife and children on the steps of his home the week before I arrived.
I had to hire a mafia chap to drive me around and only at the end of the week did he reveal the Uzi submachine gun in his glove box.

By the time I returned again in 2001 with my then fiancé St. Petersburg was out of the hands of the mafia and under the control of Mr. Putin, who amazingly I had actually met on my first trip in 1980 when he sat next to me at a dinner in the Kremlin. I never heard of him again until he became president, though I’ve noticed since that his biographers corroborate that he was looking after young foreign visitors at the time of my first visit.

In 2001 St. Petersburg was still a poor place. People dressed shabbily on the Metro, ballet tickets cost $100 for me and $2 for Russians, supermarkets sold fairly basic stuff though better than in the days of the USSR and a brand new apartment on the edge of the city could be bought for $16 – 20,000.

Fast-forward to today, and six or seven visits later, and the city was hosting the G20 of world leaders in some style with Mr. Putin in the chair. St Petersburg is a far more normal European city. Russian per capita GDP of $12,000 is the highest in the BRIC emerging markets and up with the poorest countries of the European Union. The spread of wealth is very unequal so the richest are richer than many in the West while pensioners are very poor. Those modest apartments are now ten times more expensive.

Still, this is the fastest growing European economy. Income tax is 15 per cent, sovereign and private debts are low, oil and gas revenues are booming and commodity resources are prodigious. The population is also highly educated and illiteracy almost unknown. If you follow the economist theorist Adam Smith then all that is then required now is political stability and a tolerable rule of law. Mr. Putin is the next best thing.

For investors, markets are all about buying cheap and selling high. Fortunately Russia is in a great place right now. Russia comes with about the lowest stock valuations you can find anywhere in the world.

At these prices the Russian stock market is so cheap it is practically pricing in a return to communism. That is not going to happen. Then again the Russian economy is well placed to benefit from QE-driven commodity price inflation and large-scale domestic infrastructure investment.