The bear slips up: A Risky Business in Russia

How do you live in an age of no faith? asks John Paul Rathbone on www.Breakingviews.com. This was a question once faced by just about "all the great characters of 19th-century Russian literature". But nowadays it is one for Russia's investors. The arrest of Russia's richest man Mikhail Khodorkovsky, head of oil giant YukosSibneft, and the attack on his property has undermined everyone's faith in Russian property rights. Such are the concerns over the political risks in Russia that on Monday alone, the "frothy" stockmarket fell 10%, after an 8% fall the week before. It has recovered ground since then, but overall it seems that "Russia's long commodity-based bull has been pulled up short."

This should be no surprise, says The Daily Telegraph. Who honestly thought that Russia had become a "modern liberal democracy"? It just isn't. Khodorkovsky may have been accused of "various misdemeanours from the giddy 1990s, including fraud", but "the fact that it is only a month before a parliamentary election and he is the principle backer of two opposition parties is unlikely to be a coincidence". Let's not forget that when Vladimir Putin was elected in 2000, he "did a deal with the oligarchs" - the "youthful entrepreneurs who did so well out of Russia's gangster capitalism in the 1990s". He would leave them alone - whatever they might have done - as long as they didn't challenge his authority. Khodorkovsky hasn't played by the rules: "the truce is no more." The worry now is that this will lead to war between the oligarchs and the Kremlin, and that this in turn will jeopardise the booming Russian economy.

Let's not overreact, says Jeremy Warner in The Independent. Yes, Khodorkovsky's arrest on "trumped-up charges" shows an "intolerable disregard for the rule of law". And yes, investors ought to vote against it with their feet in the short term, but don't forget how far Russia has come. It has "done more in terms of economic and political reform in the 14 years since the fall of communism than most countries achieve in a decade of development". And in doing so, it has "passed the point of no return" on the way to a liberalised free market economy. A consumer boom is under way, the economy is growing at 6% a year, small firms are springing up and government reserves are running at $60bn thanks to the booming energy industry. Russia may still have the usual risks attached to it, but "that's the price you have to pay for high opportunity and return".

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Perhaps, says Bill Jamieson in The Business. But might Russia turn out to be all risk and no return? Moody's has just upgraded Russian debt to investment grade, but remember last time the credit agencies "declared Russia a good risk" in 1998? Shortly afterwards, Russia's markets saw "a meltdown that reverberated round the world". The nascent recovery went into "calamitous reverse." Per capita GDP was cut in half and the central bank defaulted on its debt. That won't necessarily happen again, but Russia has a "tentative and fragile" feel about it that suggests investors should temper their enthusiasm for now. They should also remember that when they buy Russia, they are buying oil and gas, says Sarah McBride in The Wall Street Journal. Only 15% of Russia's economy is made up of this, but 65% of its stockmarket represents the sector. If oil prices weaken it will fall, as will Putin's budget surpluses. Note too that Russia's infrastructure isn't keeping pace with growth: when Yukos showed charts of the pipelines by which it could transport oil at a recent conference, most routes were in dotted lines - they were only plans.

Optimists say that Russia is still cheap enough to compensate for these risks - even after this year's 70% rise, the market's average p/e is under eight times - says Jerome Guillet, also in The Wall Street Journal. But investors need to be aware of the dangers of buying into a country "where arbitrary decisions are a way of life". BP chief John Browne, who has recently formed a joint venture with Russian oil firm TNK, may say that the Khodorkovsky affair has "not dented his confidence in the Russian government or the country's financial stability", says Breakingviews.com. But it has certainly made the point to everyone else that in Russia "uncertainty is the order of the day".