Why whispers rule in Russian investing

The headlines about Russia have been filled recently with protests and the upcoming exchange of places in March of the country’s two top politicians, but fund managers say a finer understanding of the country’s politics, and more than just company analysis, is required to navigate markets.

Evgeny Linchik at Troika Dialog Asset Management said: “Russian portfolio managers need additional skills, they should pay attention to some areas, which maybe US or European portfolio managers do not have to focus on.

“You need to pay attention, for example, to all the rumours which can come from the State level – not only signed documents and presidential documents, but also to the rumours and if possible try to identify from which sources those rumours come.

“This is because a lot of companies in Russia, especially blue chips, are State-controlled, so officials can have an influence on them. Before official documents are signed they are typically discussed, and different lobbyists can act then. Fund managers should understand which lobbyists or industry groups have influence with the government or officials in that particular sphere.”

He added the planned changing of places of prime minister Vladimir Putin and president Dimitri Medvedev next year is not something investors need fear.

It is something ever more Russians have protested about, but Linchik said it will keep stability while Russia undertakes “long-term infrastructure projects which can push the economy forward. It was Putin and Medvedev who announced them and all the projects should be finished properly. Most important are those for rail and road infrastructure, and the development of ports, because export flows from Russia are quite limited.”

Russia’s pending accession to the WTO would bring mixed fortunes, Linchik said. Technical requirements for Russian industry could become more aligned with global ones, and Russia’s steel companies may also win some advantages in terms of anti-dumping negotiations with foreign neighbours. But the agricultural sector will have to cut some duties, a disadvantage for it in Linchik’s opinion.

He said at the equity market level, the RTS benchmark’s fall of about 23% this year was largely due to problems in Europe and the US.

He also cautioned Russian shares exhibit quite high volatility, but the market has risen over 10 years from a level of 250 points to about 1400. But it has done this via falls back to about 500 points in 2008, and to 250 in 2001.

“We feel, with commodities at high levels, Russia is surrounded by quite a good macro environment. We have seen budget profits this year, good FX reserves, and good and growing disposable income. At the level of industry, growth is 4% to 5%, and possibly half that is due to high commodity prices – oils and gas, and softs.”

But problems outside Russia mean the RTS has failed to show its historically strong correlation to the oil price, which has risen from about $90 per barrel to about $107 this year.

 

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