When the once and current nation of Russia threw off the yoke of central planning statism a scant 25 years ago, it had everything going for it – a country fabulously wealthy in minerals, water, oil, gas, coal and agriculture with a populace eager to embrace capitalism and entrepreneurialism “coulda been a contender.” After all, neighbors like Poland and the Baltic Nations, which faced far greater disadvantages and an economy and landscape left bereft and barren by the retreating Soviets, opened up their economies to the entire populace and are today real players on the world stage.
Russia, on the other hand, is currently not an emerging nation, but a submerging nation. Most people think in terms of the developed world and the emerging world, as if these two represented all countries accurately. I would add a third category: submerging nations. Such nations are characterized by a lack of transparency, a lack of property rights and intellectual rights, cronyism, nepotism, little or no upward mobility for average citizens, paranoia and, often, a xenophobia fanned by leaders who, once elected, rule with an iron hand. I mentioned Burma as one such nation last month. Argentina under the Peronistas is another; a nation that at the turn of the previous century had an economy larger than that of the United States but destroyed it all through short-sighted political and economic decisions. Russia is another. Single-digit PE ratios are luring many investors to consider Russian stocks a bargain. I disagree.
Russia looks particularly strong today, but that strength is relative. Compared to the weakness of U.S. and Western leaders, Pol Pot would look like a giant. Vladimir Putin’s goal is to make Russia a world superpower, with cowed neighbors on all its borders and nations further away paying tribute via high energy prices. By vesting the nation’s wealth in a handful of ridiculously wealthy oligarchs and holding it together with brute force, he has destroyed the glimmer of hope that infused Russians in the early days of the New Russia.
By not investing in human capital, Putin is bankrupting Russia. If not for his nuclear arsenal, he would not be taken seriously. And now, with Russian reserves diminishing every day that oil and gas prices stay below $100 (for how long? three years? five? 50?) he is attempting to prop up support by “defending” Russian speakers in Ukraine (which gave up the extensive nuclear weapons on its soil when it stopped being the Ukraine SSR.) That worked to stir up the masses who receive no news that is not approved by the state, but how many, pray tell, beleaguered Russian civilians are there in Syria?
This new saber rattling is no different whatsoever than that which accompanied the Soviet arms race with the U.S. during the Cold War — and will end the same way. Only this time, Putin is playing his hand with even fewer assets than his predecessors enjoyed.
Russia’s population is declining, as often happens in nations where there is little hope for the future and little money to support a family. It is still higher than Japan’s today, but if current trends continue, that will reverse in the coming 20 years. A nation with 11 time zones – and a population only slightly larger than Japan's – Russia’s GDP last year was a shade over $1.85 trillion (World Bank estimates). That’s less than the GDP of California (speaking of submerging states) at a little over $2.3 billion. And will Russia’s bombing of Muslims in Syria increase or decrease unrest in Chechnya and other Islamic regions within Russia? It’s a dangerous game.
None of this has stopped Putin from doing what any paranoid xenophobic martinet would do: double down until the country is bankrupt or he is assassinated. It isn’t that military incursions are nearly 20% of the Russian economy, which they are; it is the combination of that fact plus the fact that GDP growth is a negative 4.5% plus the fact that inflation is roughly 15%, stealing further hope from the average Russians that they will ever get ahead.
Many analysts recommend certain Russian stocks because of their “compelling value.” The top three recommended are typically:
- Lukoil (LUKOY, Financial), Russia’s biggest integrated oil and gas company with upstream, midstream and downstream operations, looks like a bargain because its P/E multiple is just over four times “earnings,” its price-to-sales multiple is 0.2, and its price-to-book multiple is 0.3. Compelling value indeed – if you can trust the numbers. But since I don’t trust anyone else in Putin’s inner circle, why would I trust his selected oligarchs?
- Sberbank OAO (SBRCY, Financial) is Russia’s largest bank and quite possibly the Kremlin’s favorite piggy bank. It trades at 1.8 times trailing 12-month earnings, 0.64 time sales, and 0.32 times book value.
- Gazprom OAO (OGZPY, Financial) is the planet’s biggest natural-gas producer. Given how much I like and own US natural gas firms like Antero (AR, Financial) and Range Resources (RRC, Financial) you’d think I’d be all over Gazprom. Gazprom dwarfs these U.S. firms with $175 billion in annual revenue and $32 billion in net income. Its stock trades at just 1.4 times trailing 12-month earnings, 0.24 times sales and 0.14 times book value. Cheap – again, if we can trust the numbers.
There was a time, pre-Ukraine, pre-Syria (and pre-Putin), I would have have found Russian companies worthy of investment. Today, I wouldn’t touch them. Between Putin making the same mistake the Soviets did in overextending their economy and the sanctions that result from it, I look forward to investing with our Russian friends when they stop embracing paranoid autocrats – at half the price I would have to pay today
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