Russia's Bad Reputation Brings Good Returns
Russia's reputation as a dangerous country for investors actually gives foreigners brave enough to invest there an advantage, Jochen Wermuth, CIO of Wermuth Asset Management, told CNBC Wednesday.
Moscow's recent decision to ban exports of wheat following the worst heat wave on record has re-ignited the debate over Russia as an investment destination and criticism that its government takes arbitrary decisions without regard for foreign investors.
“You can make more money in Russia because of its reputation and the bad PR. The Kremlin appears to be cracking down on democracy, which is clearly not good for business,” Wermuth said.
“Companies are cheap with small firms trading on three-four or maybe five times earnings due to this discount and we have made a 200 percent return in 12 months investing in Russian firms and international firms doing business in Russia,” he added.
The Russian ban on wheat exports was seen by some commentators as illustrating the problem of unpredictable government decisions, according to Christopher Granville, the managing director of emerging markets investment advisor Trusted Sources.
“I would not agree with that," Granville told CNBC. "I think that a better perspective is to remind oneself that the Soviet Union was a massive grain importer, and now Russia is a swing factor in global wheat markets – a complete turnaround, reflecting the profound transformations which have taken place in Russia.”
But big concerns about Russia, following years of rule by Vladimir Putin and his hand-picked successor Dmitry Medvedev, still remain.
Positive over the Long Term
Following the Kremlin’s nationalization of Yukos and imprisonment of its CEO, the country's reputation with international investors began to fall sharply. BP and Shell subsequently had agreements with local partners ripped up and then there is the case of Hermitage Capital.
Bill Browder, the CEO of Hermitage Capital made a fortune investing in Russian companies before falling out with the authorities, being banned from the country and seeing his close friend and lawyer die in a Russian prison.
Browder maintains that his company was targeted by criminals trying to seize millions of pounds worth of his assets and claims Russia is a criminal state.
The Kremlin disputes Browder's view but in the eyes of many international investors there is no smoke without fire.
However, Russia will be a good news story for the next decade as its basic resources fuel growth in China and India, said Wermuth, who dismissed fears over the impact of the state.
“I feel much freer in Moscow that I do in Germany or America and things are changing in Russia,” he said.
“Three years ago people where talking about Russia becoming a financial centre and people just smiled as you could not even get a visa," Wermuth added.
"Now the Kremlin is working hard at opening up to business. Russia is trying to create its own Silicon Valley, which is a sign that it is attempting to diversify its economy away from basic resources,” he said.
Granville agreed that the long-term story for Russia is positive.
“The key long-term theme in our view is China and, especially, India becoming major food importers," he said. "Russia, along with other exporters (especially Brazil) will be a major beneficiary, and investors should look accordingly for agricultural investment opportunities in Russia.”
Prosperity Capital Management has made a return of 3000 percent over the last decade. Liam Halligan, the chief economist at Prosperity told CNBC earlier this year that the key to investing in the country is patience and local knowledge. (Click here for a video of the full interview)
“You do not fly into Moscow on a Wednesday hoping to be back in London or New York with a deal on Friday afternoon,” Halligan said.