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Representatives from the Tacoma (Wash.) Russell 20-20 Association -- among the world's largest groups of pension and investment advisers -- are scheduled to arrive in Russia on May 12 for a very special visit. The nonprofit Russell 20-20 was founded by Tacoma investment manager George Russell Jr., after the fall of the Berlin Wall in 1989 as a vehicle for top financial companies to explore the investment climates in emerging-market countries. Representatives from GE Asset Management, State Street Global Advisors, and Lazard Asset Management, among others, will meet with Russian political and business leaders in Moscow, including Finance Minister Alexei Kudrin.
The goal is for each company to assess Russia's prospects as a place for long-term investment. (The association makes no joint investment recommendations.) Everyone knows the country's stock market is hot -- the Russian Trading System index is up 43% for the year -- but is topsy-turvy Russia a great spot for investors with a 30-year time horizon?
On the eve of the association's visit, BusinessWeek Moscow Bureau Chief Paul Starobin put that question -- and plenty of others -- to Moscow investment fund manager Mattias Westman. The director of Prosperity Capital Management, with $270 million in assets, Westman has had great success in negotiating Russia's investment minefields. Over the last three years, Russian Prosperity Fund, created in 1996, has been the country's top performer, with a return on investment of 557%, according to Standard & Poor's.
Westman, 36, is a native of Stockholm and a fluent Russian speaker. He first visited Russia in 1987 as an officer in training with Swedish army intelligence and later worked for Sweden's foreign office. He also has a MBA from the Stockholm School of Economics. His partner at Prosperity Capital, Paul Leander-Engstrom, has the same background. "We learned about Russia in the army," Westman says.
Great training, indeed, since murky political currents can still influence the Russian stock market as much as the latest bulletin on gross domestic product. Here are edited excerpts of Westman's May 8th chat with BusinessWeek's Starobin:
Q: Does the Russian stock market now look good just because the rest of the emerging markets look bad, along with established Western and Asian markets?
A: Partly. But I think the real thing is that investors [who had stayed out of Russia] lived a long time with the preconception that Russia was a bad place [for investments], and they didn't pay attention to the improvements. Then September 11 came, and the U.S. and Russia got closer, and it just increased interest in Russia. People started looking at the country, and they found the reality was different than their preconception. So it's partly just a catch-up situation.
Q: So what then is the reality?
A: The reality is the economy is fairly sound now. There's a lot of entrepreneurial activity, a lot of import substitution, improved product quality, a very good macroeconomic situation. And there's political stability. The main thing was the election of a new Duma, which made it possible to push through structural reforms. That released productivity gains.
Q: But is this really a place for long-term investors?
A: The type of investor who has invested so far is a short-term person, like a hedge-fund manager. But I would be more prepared to recommend Russia for a pension fund for than for an investor who might need the money to buy a house next year.
Q: But isn't the economy's performance still too dependent on a small number of people -- the oligarchs -- who control the big oil companies and banks, and have a long record of ripping off minority shareholders?
A: That's a bit of a risk. At the same time, you're getting some critical mass with [the oligarchs] looking at each other to make sure the others are not abusing shareholders. If [oil major] Surgutneftegaz does something bad, then [oil major] Yukos suffers, too. [Nobody] wants to lose gains because somebody else is misbehaving in Russia and giving the place a bad reputation.
Q: Yukos shares have had a spectacular ride over the last 18 months, following corporate-governance reforms made by Chairman Mikhail Khodorkovsky. How much better can things get for the stock?
A: It's not the cheapest oil company or the cheapest company at all in Russia. But it may be the best one. Our calculation shows that Yukos shares at the end of 2005 should be worth $25. Now they're at $10.
Q: Gazprom, Russia's biggest company, is being overhauled by its new chief, Alexei Miller. Does it look like a good play?
A: Gazprom isn't a viable structure. It's too big to be managed. It has more hydrocarbon reserves than Saudi Arabia. After a year or two, they'll probably have to split it up. And then the oil companies might take over the parts. Maybe Gazprom's current shareholders and the oil companies will split the upside.
Q: What about investment opportunities outside the commodities sector?
A: The best thing you can ever find is a well-run consumer goods [especially food-related] company at a reasonable price. They're going to keep growing, because people want local [food] products and have local tastes. People are very conscious of health issues. A lot of Russians I know think their own food products are of much higher quality than imports. But right now, choices [for investment] pretty much come down to [juice maker]
Wimm Bill Dann. And unfortunately, they have low profit margins.
Q: What's the biggest downside risk of investing long-term in Russia?
A: The economy will have some mini-crises. Maybe some problem [with state monopoly bank] Sberbank doing some reckless lending.... It's inevitable that that will happen in a few years. There's also the risk of appreciation of the ruble, driven by huge flows of money into the country from oil and gas exports, which is bad for competitiveness. These are the sorts of things that have happened in Mexico.
Q: Should it matter to long-term investors whether Russia ever becomes a Western-style democracy, or is it enough to have political order under authoritarian rule?
A: Russia is a democracy in a way -- not a very well-working democracy, but not a dictatorship, either. But without a fully liberal, democratic society, Russia will not reach its full potential. What really drives
the economy in the end is the middle class. And the middle class, without real freedoms, will not be prepared to invest and will not believe in their country. It does matter.
Q: What if Russian President Vladimir Putin cannot sustain his strategy of a close political and economic alignment with the West -- a strategy that is opposed by much of the military?
A: One thing the Soviets made sure of is that the army is not political. They are suffering. And they are corrupt bastards, most of them. There is a certain degree of discontent. But the risk of a coup is very low. Also, if you're speaking about the general public being unhappy about post-September 11 politics, Putin's popularity is reaching all-time highs.
Q: Is Putin the indispensable President? What if his plane crashed in the woods in Siberia?
A: [If something like that happened] it would pose a serious risk to the investment community. But it's tempered with how happy people have been in the past few years. People with money and influence are happy with how things are now. They would try to find some similar person to replace him -- and the public would vote for such a person. [But] he's not perfect. He's not God.
Edited by Patricia O'Connell
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