Investing for Beginners , investing I think and think for months and years. Ninety-nine times, the conclusion is false. The hundredth time I am right.
Albert Einstein

Investing in Russia

2011 Apr 15


Investing in Russia has gotten really widely promoted for the last period. I can remember the talks that stocks in Russia are the cheapest over the world for not less than year. The fact, that those stocks are still the cheapest (I would say cheapest among large investment markets if we would look at market average) should show that the prices of stocks didn’t go up. But actually the Russian market was moving up, if not impressively then still significantly.


But even in this bull market valuations looks still cheap because of high energy and other commodities prices, while a majority of Russian stock market capitalization constitutes raw material related companies.


If the question whether the Russian stocks are really cheap is still open, then I will let to decide it for yourself. There are multiple valuations of several most interesting blue chips in Russian stock exchange:


  P/E 2011 EV/EBITDA 2011
Gazprom 6.5 5.1
Lukoil 6.7 4.2
TNK-BP 6.9 4.5
Sberbank 8.5 -
Norilsk Nickel 9.9 6.3

* According to Alfa Bank April 15, 2011


However all valuations of stocks are made in current commodities price trend. If prices of oil and other basic commodities would drop that would have a huge impact on most of the Russian companies on the stock exchange and then market ratios would look completely different. But the prices at the moment are the way they are and if you are believe that commodities will burst there are different ways to earn from that. If not, then Russian stocks might be a reasonable investment option.


Investing Risks in Russia


Of course investing in Russian market is extremely risky. You could find more risky investments in the world than Russia, but still this place should be in the beginning of the list, and this market definitely shouldn't be main market for investing beginners. During the 2008 crisis Russian main stock market index RTS has lost 80% of the value from the top in little bit more than half of year. And that is not the worst case scenario because during 1998 Russian crisis results of investments in the country were even worse than in 2008. In 1998 crisis Russian stock market lost more than 90% of the value. That means you would be left with less than one tenth of money invested, for example you would have been invested 100 kUSD then you would stay with only 7 kUSD. That is the reality and you never can be sure that such downfalls will not repeat in the future.


I will not talk too much about Khodorkovsky stories and other manifestations of political risk (I have talked more about political risk in article Africa Investing) because all emerging markets includes a high level of political risk and investing in Russia is not an exception.


The economical/business risks are very close together in Russia because the whole economy is dependable on price of resources. Market capitalization of stocks that are closely related to basic resources makes about 90% of the total market in Russia. The main sectors of listed Russian stocks are oil, gas, mining, metallurgy and heavy industry. Also there are some companies that are based on domestic consumption but there are fewer of those and those stocks have more expensive valuations because of impressive growth when economical conditions allow it.


As you understood, the main risks of investing in Russia correlates with prices of commodities. So if your investment portfolio is consisting of investments that are sensitive to commodities price increase (i.e. production of fertilizers) then Russian stocks might be a good counterbalance over longer period for your portfolio.


ETFs for Investing in Russia


You may invest in Russia directly or through the ETFs (or other investment funds) and it’s hard to say which way is more suitable. Several blue chips have a major share of Russian stock market. So if you have a cheap access (low fees) to Russian stocks then you might buy some of main stocks directly and there is no must to use an ETF or any investment fund. But if you have to pay high trading fees for stocks in Russia then would be smarter to invest in Russian market with ETF. In such way diversifying would work cheaper and more effective for you.


These are main Russian ETFs that invests in equity:




Rokas Lukosius - investing book author


* Disclaimer: an author of the article might have been invested in stocks/assets that are mentioned on the article directly or indirectly. 



Other articles you may like:


Baltic Investment

Investment in Bulgaria

Investing in Africa

Investing in Gold


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