Russia May Be Risky, But You Can’t Afford To Ignore It

By Markets Editor Andrew Van Sickle Jun 08, 2006

Andrew Van Sickle

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Russia is on a roll again. Its RTS index has gained 15% over the past two months alone, and is 30% up on the year. Chalk it up to high oil prices – energy and metals comprise 66% of Russian exports – and the conviction of Mikhail Khodorkovsky, the oligarch whose oil giant, Yukos, was hit by government claims for back taxes.

His sentencing has drawn a line under the affair, which raised doubts over the government’s commitment to property rights. Investors seem to be dismissing it as a one-off. “The government has given the oligarchs a clear enough warning to stay out of politics,” said emerging markets guru Mark Mobius, when asked about the threat of another Yukos affair.

Perhaps, but even without a Yukos repeat, Russia is far from risk-free. As Morningstar’s Natalia Siklic points out, the pace of economic reform has slowed of late, corruption remains a problem and the state has been stepping up its interference in the economy; President Putin recently effectively ordered state-controlled gas giant Gazprom to merge with another energy group. Nonetheless, “it’s hard to ignore” stocks on an average p/e of just eight, says Wirtschaftswoche.

All three major ratings agencies have now upgraded Russia to an investment-grade credit rating. Other plus points include GDP growth around 6%, accelerating business spending and the gradual emergence of a middle class: consumption expanded by 8.2% year-on-year in the first quarter. Among Russian stocks worth a look, according to Wirtschaftswoche, is Mobile Telesystems (MBT, $36 in New York), eastern Europe’s biggest mobile group; and Norilsk Nickel (NILSY, $67) a “well-managed” nickel and palladium miner now increasingly concentrating on gold

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