Tim Seymour: Russian stocks were already on the run before the shadow of political change made traders even more nervous. We talk about the return of the infamous “Putin put” this week on Trading the Globe.
Old Russian hands who remember the efficiency with which Vladimir Putin crushed independent corporations like Yukos during his last presidency talk about a “Putin put” as the elevated risk that traders always have to accept in Moscow.
In effect, as long as the “put” is in effect, Russian stocks will always trade at a discount to their fundamentals.
Putin is still in charge. He has always been in charge.
Below him, you have the Siloviki, the alliance between the military and former KGB. This is the dominant bloc in the Kremlin, but part of this is purely a personality issue.
Former finance minister Alexei Kudrin — who resigned yesterday as expected — fought for fiscal discipline and will be a loss to bond markets. He could reappear as prime minister down the road, or even at the helm of one of Russia’s state companies.
Before investing in this market, ask two questions:
1. Is Russia any better than it was 10 years ago on the economic front?
The answer here is “yes,” but progress is slow. Innovation and technology initiatives are now on the table to diversify the Russian economy away from the boom-and-bust oil cycle. This is still a positive long-term story.
2. Are the risks greater?
Yes again. Any time there is political change in Russia, the potential threats to private asset ownership go up and the macro risk of a big mistake rise as well. But the media are making a bigger deal of this than they should.
Remember, Putin was always in charge. People can be disappointed that Medvedev is not the enlightened answer to all of Russia’s problems with a real path to change. But Putin is concerned about his legacy too. The only real mystery is just whose criteria he will use when shaping his legacy in Russia.
Either way, with all this in mind, these stocks are now priced at profoundly low earnings multipliers.
For example, the energy sector — the lifeblood of the Russian economy — now looks cheap even by Russian standards.
The world-class behemoth that is Gazprom (OGZPY) is trading at barely 2.9 times earnings, and as an unofficial arm of the state, Gazprom and the Kremlin will probably see eye to eye.
The mobile carriers are also great dividend plays and cheap in their own right. Mobile Telesys (NYSE:MBT) and VimpelCom (NYSE:VIP) are underfollowed by Western traders, but they provide exposure to the Russian consumer as well as a way to generate current income.
Naturally, the easiest way to get exposure to Russia is via the big portfolios like the Market Vectors Russia ETF (NYSE:RSX):
Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.
About Tim Seymour: Tim is a founder of Emerging Money. He is a founder and Managing Partner at Seygem Asset Management, and The Emerging Markets Contributor to CNBC. Seygem Asset Management focuses on investing throughout the global emerging markets asset class. With a view that emerging and developing economies will continue to outpace the economic growth and advancement of developed economies, Seymour has devoted a career to investing in the dominant markets of tomorrow, today. Seymour’s career has included significant experience in both alternative asset management (hedge funds) and capital markets, having launched two hedge funds, and built the largest Russian broker dealer in the USA. Seymour started his career at UBS, focusing on international credit (cash, swaps, forex) in a specialized hedge fund group (New York). Seymour completed the firm’s training program after graduating with an MBA in international finance from Fordham University. Seymour received his undergraduate degree at Georgetown University.