The Bear is a potential Bull


It may sound crazy but Russia may be a place that should be considered for your portfolio. Obviously, it lies in the High Risk category and should only be a small part of what you have. However, all indications show that Russia’s good economic fortunes will continue and they aim to get better with large potential returns possible.

Russia is trading at a very low forward valuation. In fact no Emerging Market can match it.  With a less than five forward multiple, Russia is trading not only at a deep discount to historical valuations but also when compared to all the other countries that fall in the same category.

It should be remembered that Russia is the largest country in the world and has an overabundance of certain natural resources. Not only this but, in comparison, the country has a well-educated workforce, and healthy looking government finances. It is also trying to improve transparency and improve corporate governance. When looking at all of this, one can only wonder at the reason for such inconsistency between current valuations and economic fundamentals.

Without doubt, Russia is a land that is full of contradictions. Russia is the world’s ninth largest economy and is already an economic giant with a lot more to come. However, like all ex-Communist countries (and quite a few present ones!) it walks a tightrope between promoting free-market capitalism whilst maintaining the age old traditions of such things as cronyism.

President Vladimir Putin is not exactly loved in Russia and certainly has his fair share of critics both inside his country and outside as well. However, most people agree that his policies are almost always considered to be pro-business. There are more and more millionaires and billionaires in Russia these days and they are plainly becoming used to the trappings of wealth and an improved lifestyle. The middle class also has more money to spend which is never a bad thing for an economy. One only has to look around Thailand these days to see that more and more Russians can now afford to go somewhere else apart from the Crimea for their holidays. It is obvious that no-one wants a return of the likes of Brezhnev or his ilk.

The Consumer

A recent report from Prosperity Capital, a leading Russian Investment manager, showed that the Russian consumer is quite a happy chappie these days. Indeed, Russia is now the second largest consumer market in Europe. Last year, 70% of the country’s disposable income (USD621 billion) went towards consumption. This has increased 20% annually since 2000. In August 2103, Russians purchased more new cars than Germans did, and mobile phone penetration is at 140%, growing 7% to 8% yearly. What is even more incredible is that even with a high degree of consumer spending Russians still manage to save around 10% to 15% of their disposable income. This is something the Western world could do well to follow.

Credit card penetration is in the low single digits and household debt is at approximately eleven percent. It is forecast that sometime next year Russia will be the biggest consumer market in Europe. Russian consumer confidence is on an upward trend – especially as unemployment is at a post-Soviet low.


Many people said in 1998, when Russia defaulted on its external debt, the country was in serious trouble. However, just fifteen years on Russia is a net creditor. Indeed, the country has had a current account surplus for seventeen consecutive years.

Basically, Russia has become one of the richest countries in Europe – if not the world. It is also in the very happy position of having the world’s third largest stockpile of international reserves sitting on roughly USD525 billion in cash. Russia also holds significant tangible assets and, at 8% of GDP, has the G20’s lowest public sector debt. Also, do not forget that Russian corporations have low corporate leverage, and households have extremely low debt at 15% of GDP.


At the moment it can be seen that Russian equities, at current valuations, appear to be very cheap. With a current P/E multiple of around five, Russia is trading at an estimated 50% discount or greater to many Emerging Markets.

Russian pension funds have very low allocations to equities. In fact, many local and state pension funds are precluded from investing in equities altogether. However, it is thought that this will change as Russia adopts more and more Western standards.

It should also be remembered that Russian equities have average dividend yields of over 4% and are set to grow. On top of this, the Russian government has mandated that starting in 2013, Russian state controlled companies will be required to pay out 25% of their annual net profits in dividends.

Moving Forward

Russian corporate governance has improved dramatically over the last decade – although it must be said it still has a fair way to go. However, many businesses are now accounting for their books and financial statements using the same standards required of companies in New York or London.

The Russian legal framework and tax code was updated less than ten years ago. There are now much more rigid transfer pricing rules, as well as a much stricter enforcement of offshore earnings abuses. As for FDI (Foreign Direct Investments), Russia has received the largest share per capita in the world – in fact second only to China in terms of dollars allocated. On the political front, Russia’s government is stable and pro-business. Naturally, though, all is not well in the Garden of Moscow. There are still problems with human rights and corruption issues remain prevalent in certain parts of the country. On the hole though this is gradually improving.

Russia has had a very exciting history and its future looks to be equally so. Many analysts are confident that economic trajectory is upward, with significant potential ahead for equity price appreciation. It must be said that Russian equities have always been volatile but if you select the right fund the manager will take all of this into account. However, as with any portfolio, good diversification is vital when investing in Russia and elsewhere.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]


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