Buy Russia – it’s cheap

Back in the heady days of the 2000s, when mining was in something of a frenzy, and small-cap mining stocks used to behave like cryptocurrencies, I was offered a placement in a Canada-listed Russian mining company.

“Tell me more,” I said to my contact who had introduced me to the story.

“Well, the asset’s in Siberia,” he began. Siberia is extremely rich in natural resources, as well as prisons, and metals especially – in the Urals and Patom Highlands.

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“The CEO is very young, very rich and very ambitious. He’s not as rich as Roman Abramovich, but he wants to be.”

Well, don’t we all.

“And he’s really into body building.”

My own experience of investing in Russia has been somewhat offputting

I can’t say that B-list body building oligarchs are top of my things to look for when making an investment decision, but a bull market is a bull market and this was a bull market.

In I went at a dollar. I then watched with a certain amount of awe as various deals were done, which I didn’t fully understand, and almost overnight the stock launched to ten dollars.

Even more quickly it came back down again. I phoned my broker and instructed him to sell as the thing capitulated.

“What’s the price?” I demanded.

“Er…” came the doddery reply. “What’s the ticker again?”

I repeated it.

“Quickly, quickly,” I added.

After what seemed like an eternity, but was probably only a few seconds, my broker came back to me.

“Three dollars sixty.”

“Sell!” I declaimed.

Other people clearly had the same idea, and in the end the only fill we could get was at C$1.80.

I’d made 80% on the trade – I should have been happy. But, me being me, all I could focus on were the gains I would have had if I’d managed to get out the day before at ten dollars.

I continued watching the stock as it slid over the next few weeks and months to a few pennies before changing its name, and eventually de-listing and disappearing.

I’d lost money on a couple of Russian deals before, and seeing just some of the nefarious activities of the management of this company – and its total contempt for both shareholders and honest process – I muttered the words: “Never again. I am never putting money into a Russian deal ever again.”

It’s never a good idea to judge an entire nation on the behaviour of a couple of wrong ’uns, but, battered and bruised, that’s how I felt. And I don’t think I’ve knowingly put anything into a Russian deal since.

Then last week I was having lunch with my old pal and occasional MoneyWeek contributor, Charlie Morris, of Fleet Street Letter fame. I hold Charlie’s macro calls in high esteem.

He was early into bitcoin, early into oil, and early out of tech, for example.

“What’s your next big theme?” I asked him.

“Russia,” came the immediate reply.

“Oh, no,” I thought.

The easiest ways to invest in Russia

“Why?” I said.

“It’s so cheap.”

“Is it cheap for a reason?”

“Maybe.”

But Charlie’s right – it is cheap, for sure. Gazprom is Russia’s largest company and its price/earnings (p/e) ratio is four; Lukoil is yielding nearly 7% while Sberbank is on a p/e of five and yielding nearly 7%.

The JP Morgan Russian Securities investment trust (LSE: JRS), I think the only investment trust specialising in Russia, yields 7% and is on a p/e of two.

“A low p/e ratio,” says Investopedia, “can indicate either that a company may currently be undervalued or that the company is doing exceptionally well relative to its past trends”.

The Russian market is heavily geared towards natural resources – 40% to hydrocarbons alone – and we are in a commodities bull market. And if you are looking for a catch-up trade then Russia is it – its companies have not moved as much as the rest of the market.

Maybe the way to play it is to eliminate individual company risk and go for the JP Market Russian Securities trust.

Or take the exchange-traded fund (ETF) route and consider the iShares MSCI Russia ADR/GDR UCITS ETF (LSE: CRU1). It is in an uptrend – and the moving averages are rising (top holdings are Gazprom, Lukoil, Sberbank, Novatek, Norilsk Nickel, Tatneft PJSC, Rosneft Oil Co and TCS Group Holding and Polyus).

I was going to crack a joke at the beginning of this article. “Russia’s about to invade Ukraine – how do I invest?” but I knew it would be misconstrued.

Markets are clearly edgy about the potential for actual conflict in Ukraine. At the end of last week, everyone thought it was imminent. Yesterday, all of the newly-minted geopolitical experts decided that it wasn’t going to happen at all. This morning, markets tripped up on reports of shelling in eastern Ukraine.

Who knows what’ll happen?

But maybe, if you conclude that this is more cold war than actual war and that Vladimir Putin is just flexing his muscles and giving the west the runaround, then the subsequent deals he is going to secure as a result of not invading mean that now is the time to play the Russia game.

I’m not wholly convinced.

But you can’t argue with cheap.

Dominic’s film, Adam Smith: Father of the Fringe, about the unlikely influence of the father of economics on the greatest arts festival in the world is now available to watch on YouTube.