Investment Strategies

Comment: Don't Overlook Russia's Prowess As A BRIC Economy - Crossbridge

Tom Burroughes Group Editor London 23 September 2011


Editor’s note: In writing about the BRIC economies, Russia – not always fairly on some eyes – attracts less enthusiasm than the other three. In this interview, Vania Markova, executive director at Crossbridge Capital, makes a series of comments on the Russian market. She is head of Russia, CIS and Central and Eastern Europe and before joining Crossbridge covered the investment needs of high net worth individuals and institutional investors at Goldman Sachs, GE Capital and, most recently, Morgan Stanley.

There has been a lot of focus on Latin America and China and Russia has taken a bit of a back seat. Is there something people are missing and should they pay more attention to this region?

"I am surprised by this assessment. Russia has strongly outperformed every other BRIC market year to date with the RTS [Russian stock market] down by 8 per cent (as of beginning of September 2011) versus Brazilian, Indian and Chinese markets losing 17, 21 and 12 per cent respectively.

The increased desire among investors to gain exposure to the Russian market has also been behind the staggering increase in the monthly value traded on the London Stock Exchange over the last two years (the International Order Book is up 285 per cent for the period to $40.8 billion in July). The seven new Russian issuers that have come to the IOB so far have collectively raised $2.5 billion in the first half of this year compared to the $1.7 billion raised during the whole of last year.

Wealth creation in the country has been significant, as a result. The number of Russia’s ultra high net worth individuals is at record high and has almost doubled in 2010 compared to 2009. The country currently accounts for 15 of the world’s 100 richest people, more than Brazil, India and China combined, according to Forbes latest annual rich list published in spring 2011. Russia currently leads in Europe and ranks third in the World with 101 UHNW individuals (115 in China).

The number of Russia’s high net worth individuals has grown equally strongly, by 13.6 per cent over the last year, which is over double the growth of Brazil (5.9 per cent) and preceded only by India’s growth (20.8 per cent) as per the Merrill Lynch/Capgemini World Wealth Report 2011."

Enviable fiscal health

"Russia is in enviable fiscal health as well with zero budget deficit expected in 2011, large foreign exchange reserves and a sizeable sovereign wealth fund.

Russia has accumulated the third largest foreign exchange reserves in the world ($531 billion in 2011) preceded only by China in the BRIC space and Japan worldwide. The reserves were virtually zero when Russia began market reform in 1992 and in 2010 they were already at $420 billion. As put by the Economist into context: 'If the BRICs were to set aside one-sixth of their reserves, they could create a fund the size of the IMF....' (source: Economist, April 2010).

Russia has been equally successful in amassing the second largest sovereign wealth fund in the BRIC space ($142.5 billion), preceded only by China. The fund was set up in 2008 (by comparison the world’s largest fund, in the UAE, was set up in 1976 and stands at $627 billion and Norway’s fund, now at $556 billion, was set up in 1990). In the current turbulent economic environment this fiscal strength is another important financial cushion for Russia.

Even if we simply consider Russia’s pure presence on the world map, the country is hard to overlook. It is the largest country in the world (area 17,098,242 square kilometres), bordering on both Europe and China, the most populated country in Europe and the ninth most populated in the world (142,905,200). Russia is also the world’s biggest energy producer, the holder of the world’s largest natural gas and iron ore reserves, the second largest coal reserves as well as world’s third largest gold reserves, to name a few.

Compared to the rest of the BRIC economies there are also some significant advantages of doing business in Russia that are not widely known.

There are virtually no restrictions on the free movement of capital; whereas in China and India there are restrictions on direct foreign investments - and Brazil is planning to impose limitations too. Unlike China and India, there are no foreign currency limitations in Russia. There is a regime of managed floating currency exchange rate, whereby the conventional floor and cap values for the ruble are set with respect to the dual currency basket.

 In addition, there has been a strong push towards encouraging foreign direct investments into the country and in June this year President Medvedev unveiled a $10 billion sovereign wealth backed fund to assist this purpose. The fund has been joined by some of the leading private equity names in the world. The FDI target for 2011 is $60-70 billion.

Russia is equally known for its liberal tax regime, which is the most favourable in the BRIC space – 20 per cent corporate income tax rate and a personal tax rate of 13 per cent regardless of income size. From 2011 there will be no capital gain tax for long-term direct investments as well."

Have you seen any trends in this region in terms of what clients are doing?

"Wealth creation in Russia has shown little slow down in 2010. Russian clients have traditionally favoured investments in tangible/real assets and this trend has continued in the recent volatile market environment.

Each of the clients is unique and it is extremely hard to generalize. We see rise in real estate and commodities investments, as well as art and generally the alternative asset space, including luxury collectibles, as these are seen to have a low correlation to global markets. Following the recent financial crisis, we also observe a general tendency away from complexity and towards simpler products

Russia/CIS continues with a healthy IPO pipeline in 2011 expecting an additional $10 billion to $15 billion of new issuance in line with the $10 billion issued by companies in 2010.

Russia’s UHNW individuals are becoming increasingly sophisticated. The number of family offices being set up across the region (Russia/CIS) is on the rise. We are viewed as a direct facilitator and a counterparty of choice to these parties due to our complementary capabilities, including advice on the monetized as well as the operating clients’ assets as well as our access to a proprietary pipeline of off-market opportunities.

This is a region that has seen a lot of change in the last 20 years and hence clients are resilient and adaptable. They are equally alert to opportunities as much as threats in volatile environments similar to the one we are currently living through. What counts in such times is a trustworthy relationship backed by solid investment advice well tailored to the clients’ needs."

How has the unrest in the Middle East and North Africa region affected Russia?

"Political turmoil in the Middle East and North Africa has intensified foreign capital inflows into Russia, especially in the oil sector. The surge in oil prices to above $120 a barrel this spring, is expected to boost Russia’s growth to about 5 per cent this year, which is in line with IMF’s most recent World Economic Outlook (20 Sept 2011) forecasts for the country of 5.3 [per cent for 2011 with the World projected to expand to only 4 per cent.

In the last few years, however, Russia has been actively engaged in diversifying away from its dependency on natural resources; it has pioneered various efforts to become a more knowledge-based economy and given its highly educated labour force (one of the highest in the world according to the OECD), this is fully achievable.

Only 5 years ago, the oil and gas sector accounted to over 40 per cent of GDP, it now accounts for only 17 per cent. In recent times President Medvedev has called repeatedly for Russia to develop its high-technology sectors and a more innovative economy and break its reliance on oil. He recently founded Skolkovo, a business park outside Moscow, intended to be Russia’s Silicon Valley.

In line with this effort, the $10 billion Russia Direct Investment Fund launched by President Medvedev, will also not be investing in energy assets, but focus on healthcare, technology and infrastructure."


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