Why you should buy into Russia

Foreign investors have been put off investing in Russia by the uncertainty surrounding the political situation in the country. But they shouldn't be, says Sven Lorenz in The Daily Reckoning. The Kremlin is keen to keep foreign investors onside, and there is a whole country of debt-free potential customers out there, just waiting to gain access to credit cards, mortgages and consumer goods...

By any measure, Moscow is far from being the most welcoming place in the world. Just getting into Russia is neither easy nor cheap.

The entry barriers are the same today as during the days of the Soviet Union. Even if you hold a EU passport, you still need to get a visa. To apply, you can opt to queue at the Russian Embassy in London - a task that could take up your entire day. You may still have a Russian bureaucrat slam the door in your face, just when it's your turn.

Alternatively, you can hire the services of a visa agency, who will queue on your behalf. They guarantee you will get your passport back within 3 days. But their services can set you back more than £200.

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On previous research trips to Moscow, in fact, I've sometimes ended up paying as much for the visa as for the return ticket from Heathrow to Domodedovo Airport!

Then there's the winter weather - temperatures of minus 15 degrees Celsius at present, plus the kind of snowfall even Russians find hard to cope with. The trip from the airport to my friend's home, where I stayed this last weekend - just near Red Square - took several hours.

So just why did I board British Airways flight 0872, bound for Moscow, on Friday morning? Because Russia is, I believe, the global stock market's next big thing, where fortunes will be made during the next couple of years. It's a place that I urge you to invest your money into today.

Yet if you mention Russia to any other investor in the West, however, they'll ask why anyone would risk their money in a country where the richest business man has just been robbed of his entire fortune. Obviously, the Yukos scandal would seem to give us a salutary warning.

But there is more to Russia than Yukos, and the writing on the wall is that Yukos was an isolated incident. Contrary to what most people believe, Putin's government has now embarked on a mission to make the country's tax laws simpler and more transparent. Additionally, the Kremlin is aware that another Yukos would seriously undermine foreign investment.

What's most important for us today is that there is simply no need for another Yukos. Mikhail Khodorkovsky had been arrested and prosecuted because he aimed to challenge Vladimir Putin's grip on power. He appeared to be threatening to run for President himself. Now, not a single one of the remaining oligarchs would dare to pull off a similar stunt. Instead, these big tycoons will stick to the old arrangement with Putin - whereby they can keep what they own, as long as they tend to their businesses rather than trying to become involved in politics.

The tamed-down oligarchs in fact have a new nickname in Russia today. They are the Putinbitches'. None of them will ever enter politics - at least, not as long as Putin is in power. That's why none of them will ever get into hot water the same way that Khodorkovsky has.

With the Yukos debacle now a thing of the past, investors can re-focus on what Russia really is about:

...143 million hungry consumers, who for decades have been starved of consumer goods...a vast country where practically no one is in debt...an untapped market for the kind of credit cards and mortgages that have made America and Britain the most indebted nations on earth...a newly-open property market, where Russians are now able to buy their own apartments...

It is no surprise that IKEA, the Swedish furniture giant, is planning to open another 20 outlets in Moscow, adding to its three existing outlets. With 12 million inhabitants, Greater Moscow alone is a vast market and one of the largest cities on the planet.

Additionally, there are dozens of cities with more than a million people in Russia, but which few outside the country have ever heard of.

All this is unclaimed ground, waiting for entrepreneurs to swoop in. Anyone investing today stands a chance of selling out for a multiple of his investment in a few years' time. I'd liken Russia most to Germany after the end of WWII. Last year, its economy grew by around 8%. This year should bring an equal growth rate, making this one of the world's fastest growing economies.

But just as with travelling there, if you are an entrepreneur or even a multinational corporation looking to invest, getting in isn't all that easy. Nor is it cheap. That's why local companies could become all the more interesting to foreign investors. Instead of setting up their own operations, Western companies are more likely to partner up with a local company. This is a lot easier than trying to do it all by yourself.

In some cases, this will mean buying a stake in a listed company, or possibly even buying out all shareholders of a listed company. British Petroleum has already spent $5bn to gain a foothold in Russia, for instance, by buying a share in the Russian oil company, TKN.

There are still plenty more Russian companies trading at p/e ratios of between just 3-6 times earning - extremely low prices by anyone's standards. But valuations are unlikely to stay where they are for much longer. Last week saw the successful launch of the Russian mobile phone operator, Sistema, onto the London Stock Exchange. This IPO was the largest ever for a Russian company, and the biggest seen in London since Orange floated four years ago this month.

Sistema's launch shows that Western investors are regaining their appetite for Russian assets once more - and they're only going to get hungrier. The firm raised $1.5bn from London institutions this week, eager to profit from Russia's emerging middle class. Mobile phones are among the most sought-after gadgets in Russia, but again the market is firmly in the hands of local operators.

Sistema shares seem likely to become a roaring success on the London Stock Exchange. I'd advise you watch them closely (ticker symbol: SSA). There are many such undervalued plays out...both in Moscow and beyond the Ural Mountains. I've been researching and recommending Russian stocks for several years now.

Back in December 2002, for instance, I discovered a little-known Russian oil and gas company, Surgutneftegas. I recommended it to members of the Zurich Club. Since then, the stock price has gained as much as 176%. It's currently up 143%. Yet incredibly, Surgutneftegas is still one of the world's cheapest oil companies. It trades on a p/e of just 6.

Of course, once everyone is talking about an investment, it's time to cash out - as you may have already found for yourself. Getting into a country or sector while no one else considers them interesting is crucial.

Today, I believe, Russia offers you just such an opportunity.

By Sven Lorenz for The Daily Reckoning

P.S. Seeking out unloved stocks and bonds...those that have been beaten down and ignored by the mass of investors...is what's driven all my research over the last 15 years. The best opportunities, without fail, have been companies which few UK investors - if any at all - have heard of, but which go on to become stars of the global stock market.