Russia has become uninvestable

A couple of weeks ago, back when Russia was still deemed unlikely to invade Ukraine, we noted that history suggests that markets as a whole tend to get over geopolitical shocks quickly. As a result, we said, other than holding gold as a hedge (which you should be doing anyway), there wasn’t anything you should change in terms of your asset allocation. We also said that if you wanted to bet specifically on tensions diminishing, the easiest way to do so was via the JPMorgan Russian Securities investment trust.

Well, as we now know, tensions didn’t diminish. Instead, Russia invaded Ukraine without attempting to find even a flimsy pretext, while the West imposed the most stringent economic sanctions ever placed on a major global power. The point stands that geopolitics tends not to derail major markets. And in recent decades, investors have been rewarded for snapping up markets as and when they became sufficiently cheap on a Cape basis (cyclically adjusted price/earnings ratio), as in the eurozone sovereign debt crisis.

However, it’s also worth remembering that these “don’t worry, be happy” studies mostly draw on data from US markets. Look elsewhere and you find that, as financial historian Russell Napier has pointed out, there are two things that can and have caused markets to shut down or fall to zero. One is communist revolution (investors in Russia in 1917 and in China in 1949 suffered “total losses” as a result, according to Credit Suisse); the other is war. The former destroys property rights, the latter destroys property. A third threat – capital controls – can make it impossible to get your money out of a country even if an asset technically still has value.

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For anyone with exposure to Russia – either directly or via funds – what does that mean? The main immediate issue is that most Russian assets are hard or impossible to trade – the Moscow Stock Exchange is shut, for example. This means that putting a number on what anything is worth is far trickier than usual. In the case of the JPMorgan Russian trust, for instance, which owns a lots of locally listed stocks, broker Numis suggests the fund has a net asset value of around 99p per share (though it emphasises that this is a “guesstimate”) versus a share price of about 160p (as of 2 March).

In the longer run, a truce might lead to relations between the West and Russia being “normalised” and sanctions lifted, but even if that (highly optimistic) scenario comes to pass, there’s the ongoing economic fallout that Russia and Russian companies would have to deal with. And that’s arguably the most upbeat scenario. In short, it’s not an exaggeration (for once) to say that Russia, at the moment, really is uninvestable.