Should you invest in Russia?

You would think any mention of Russia would hurl investors into alternating fits of rage and despair. Not so. Investors are forgiving or forgetful or both.

'Investing in Russia [is] like entering a rich gold field studded with land mines: laced with veins of rich treasure, and riddled with pockets of pure poison.'

- Mark Mobius, Passport to Profits

In my more optimistic moods, I look out over the world and think about places like China and India. I look at the bubbling-up emerging markets in Africa, the Middle East, Eastern Europe and South America. And I think of all the potential in places like that. I think of all the economic growth ahead of them, all the untapped and budding investment opportunities.

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Then I read what investors were thinking 50 years ago. And I get pessimistic, because they were thinking the same thoughts. Indeed, their comments still retain their freshness today, decades later. That shows you, among other things, how progress is hard fought and far from certain.

Worse, the same moves tend to replay over and over. And always with a bad ending for investors.

Investing in Russia: Yukos

It was only a couple of years ago, 2004, when investors lost their shirts in YUKOS - the biggest oil company in Russia. The Russian government seized YUKOS for back taxes totalling more than $30 billion. The move was widely regarded as a political act, checking the ambitions of its billionaire CEO. Investors howled, but at the end of the day, foreign investors lost over $6 billion.

You would think after that experience, any mention of Russia would be like (as P.G. Wodehouse once wrote) trying to cheer up Napoleon by talking about winter sports in Moscow. You would think any mention of Russia would hurl investors into alternating fits of rage and despair. Not so. Investors are forgiving or forgetful or both.

Investing in Russia: Rosneft

Now there is a new Russian belle capturing moneymaking imaginations. It is state-owned oil giant OAO Rosneft. What makes this all the worse is that this, in part, is the old YUKOS. Rosneft is the company the government folded YUKOS into. In other words, it stole this asset from investors and is now going to turn around and sell it back in an initial public offering.

The Rosneft IPO could be the biggest in history - at more than $20 billion. This for a 49% stake in Rosneft, while the government retains a controlling 51% stake. Vladimir Putin as your partner? Not me.

Investing in Russia: Investors lining up

Incredibly, investors are lining up to get a piece. As The Wall Street Journal reported, 'Advisers including Morgan Stanley and J.P. Morgan took Rosneft President Sergei Bogdanchikov to London in February for a presentation. So many fund managers and analysts turned up that some had to stand through lunch.' I hope these people aren't investing your money.

Admittedly, the Russian stock market has been among the best performing in the world of late - over the last 12 months, the RTS index (a common benchmark of Russian stocks) has risen 137%.

I came close to recommending a Russian company last year. One year ago, when I prepared the Five Cheap Stocks special report, there was one Russian company that made the list of 16, but did not make the more select cut to the final five (which, again, produced an average gain of 87% in one year). That company was Tatneft, a Russian oil and gas company.

It's true. Tatneft was actually an NTAV stock a year ago (trading for less than its net tangible asset value). It closed on April 1, 2005, at a price of $34.30. Yesterday, it was $120.82. That would have made it the top performer of the group, better than even Imperial Sugar.

Yet I don't regret the decision to pass over Tatneft. For one thing, the financial statements available were old and the disclosures were terrible. It was hard to know what you owned if you bought Tatneft. Over time, passing on companies like this will save you a lot of money - because your winners won't compensate for the inevitable disasters.

Investing in Russia: Technology stocks

Also, I didn't buy technology stocks in 1998, either - even though they went up in 1999 and finally flared to their glorious peak in 2000 before getting seared like the wings of Icarus and tumbling back to earth. Russia is a snake pit, where you can lose your entire investment seemingly overnight because of government confiscation and corruption.

Why the enduring attraction to Russia? Russia's magnetism can be summed up in two words: 'cheap assets.'

Russia is still the largest country in the world, in terms of land area. The expanse covers 11 time zones and nearly every conceivable type of landscape, from frozen tundra to hot deserts, from lush wet lowlands to high dry mountains, from dense forests to open plains.

Investing in Russia: Russia's natural resources

And buried amidst all that are rich veins of natural resources - Russia is a veritable storehouse of Mother Nature's useful goodies. Russia is the largest, or among the largest, producers of palladium, platinum, diamonds, nickel and gold. Russia is also rich in oil and gas. Rosneft, for example, has more proven oil reserves than Exxon. It's bigger than any oil company in the world on this basis save for its sister company Lukoil. It is also the world's biggest producer of natural gas.

I like Jim Rogers' line in his most recent book, Hot Commodities: 'The bright spot in the world's oil picture, according to most analysts, is Russia - additional proof, in my opinion, of how bad things really are.'

To me, investors lining up for a shot at an old dilapidated outfit like Rosneft - with all its shady aspects - is a sign of a market that is getting up there in the thin air of speculation. Investors have more money than they have good ideas. Someone is bound to lose.

Hint: It won't be the Kremlin.


Chris Mayer

For the Daily Reckoning

This article first appeared on

Christopher Mayer is the editor of the US Fleet Street Letter. His contrarian essays have appeared on a number of websites and publications including the Mises Institute, the Freeman,,,, and Individual Investor Magazine. His views on financial matters have also been widely quoted, including in the highly regarded Grant's Interest Rate Observer.