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The Wall Street Journal: Russian Market

Wednesday 30 May 2007

From Breaking Views

Russia’s stock market looks like a bargain among emerging markets. And it should benefit from stable but high oil prices. That is the argument of Credit Suisse emerging-market strategist Alexander Redman. But if the economics are promising, the politics are frightening.

The Russian market sells at 10.6 times expected 2007 earnings, 22% below the average of all emerging markets, although above the nine-year Russian average of 8.2 times. When oil was less expensive, Russia looked a loss less promising.

Russia also doesn’t look like a bargain in comparison with South Korea, which is selling at 12.5 times expected earnings. The main political risk there is a positive one — that a pro-business candidate wins December’s presidential elections.

Russian earnings may be attractive, but it is far from certain how much foreign investors will get their hand on. Property rights in Russia are subject to political control. So while the overall cost of oil extraction may be below $20 per barrel in remote Siberia — a steal at today’s oil prices — Moscow is happier to receive foreign investment than to respect foreign property claims. That is what Shell learned in its Sakhalin II project — and BP is finding in its joint venture with TNK.

Russia’s political aggressiveness may be an even worse problem. As Venezuela’s Hugo Chávez showed, a combination of anti-Western ideology and economic independence through oil can tempt leaders to expropriate Western companies. Investors in Caracas telephone company CANTV are unlikely to get full value for their expropriated investment; shareholders in Russian companies run the same risk, especially if Vladimir Putin’s successor is more nationalistic.

These dire political possibilities seem weighty enough to justify Russia’s discount to the emerging-market average.

–Edward Hadas, Una Galani, Martin Hutchinson

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