Royal Dutch Shell Plc  .com Rotating Header Image Although not for the faint-hearted, Russia offers ample opportunities

Tom Burroughes
Wednesday, 7th November 2007

WITH President Putin continuing to flex his political muscle, and even corporate giants like Royal Dutch Shell scarred by their dealings in Russia, it is understandable that many British investors are wary of the former Soviet Union.

But while this is a market for hard-headed investors only, investment opportunities have by no means frozen up. The economic outlook is strong, and only a significant slump in global demand for commodities – Russia is a major producer – is likely to change that.

The country’s most important commodity is, of course, oil. It is one of the world’s largest oil producers and is benefiting from record prices of well over $90 (£43, e62) a barrel.

Goldman Sachs predicts Russia can chalk up an annual economic growth rate of 3.7% between 2006 and 2050, which translates into an eleven-fold rise in gross domestic product, measured in constant dollars. And investors, however wary they may be about politics, will be impressed by the performance of Russian stocks: the Morgan Stanley Capital International (MSCI) Russia Index has delivered total returns – capital growth and reinvested dividends – of 15.63% since 1 January. In contrast, total returns on the FTSE 100 Index were 11.65% over the same period.

Russia’s MICEX Index of 30 leading companies, including Gazprom, the energy giant, is still relatively cheap, with a combined price-to-earnings ratio, based on reported earnings, of just 11.78. Considering the fast growth of Russia this decade, that is a snip compared to the FTSE 100’s ratio of 13.66 (the London index has risen by only 7.3% this year).

Investors can buy into Russian stocks directly by purchasing London-listed global depository receipts in companies like Gazprom, the energy giant. Depository receipts are quoted and traded in dollars and can be bought via a broker such as TD Waterhouse, which charges £16.95 per trade.

The downside is that with the greenback at record lows, converting dollars back into sterling will trim any gains. So an alternative is to buy shares in Russian companies that are quoted in London.

Aim, the London Stock Exchange’s junior market, has a number of Russian companies, such as Baltic Oil Terminals and oil services group TMK. Share prices around the world have taken a battering in recent months, though, and Aim is not immune. A report out this week by Ernst & Young found that the value of Aim-quoted oil and gas businesses fell 8.2% in the third quarter of 2007.

There is also a range of Russian funds. Examples include JPMorgan Russian Securities, a Britain-listed investment trust, which has made a share price total return of 53.7% over the past 12 months, beating the MSCI Russia Index’s total return over the same period of 25%. The Neptune Russia and Greater Russia Fund, which has risen in value by 24.75% since 1 January, is an unlisted long-only fund. Or you could try Aurora Russia; listed on Aim and set up by John McRoberts, one-time head of Deloitte’s Moscow office, and James Cook, former chief of GE Consumer Finance in Russia, it invests in private companies.

Alternatively, there are exchange-traded funds (ETFs), which track indices without investors having to hold the underlying shares. Examples include the London-listed Lyxor ETF Russia (Lyxor is part of Société Générale, the French bank).

Various private equity firms invest in Russian companies, as do hedge funds, such as the Firebird Avrora Fund, run by Firebird Management, an American firm. It remains open to individual investors with a minimum $250,000 investment.

Yet while private equity and hedge funds offer higher rewards than many traditional long-only funds, the risks ratchet up a notch when you are buying Russian assets directly. At a recent conference, Boris Jordan, manager of the Sputnik Group, a private equity firm, warned that government interference, alongside a lack of clearly defined legal protection, was the greatest risk to doing business in Russia.

Giants to minnows have all felt the pinch. Shell was forced to sell its multi-billion dollar stake in the Sakhalin-2 oil and gas project to Gazprom, while at the other end of the scale, Imperial Energy, a British exploration company, saw its share price slump after becoming locked in a dispute with the authorities.

No one is denying there are no risks to investing in Russia; this is not a market for widows and orphans. But Russia is a key Bric country, with a booming economy fuelled by ample natural resources and strong global demand for commodities. So there are still reasons for investors to be bullish about Russia – just as long as they tread carefully. and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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