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Investing in Russia: An Optimistic Scenario Comments

Kelly Summers   |   April 02, 2008
As the recession in the United States deepens, the growth of the world economy, which heavily depends on this country, shows signs of slowing. It seems like 2008 is not going to be a year of great global achievements. However, a small number of countries will remain to be the driving forces of economic growth. One of them is the Russian Federation.

According to a BRIC report published by Goldman Sachs, it might be much safer to invest in Russia than any other country in the world.

Over the last two years, the Russian companies� index of RTSI has increased by 40 percent, while the U.S. Dow Jones has grown by only 5 percent. There is no doubt that Russia�s GDP is going to be effected by the slowing growth of the global economy. However, the BRIC countries� share in the global GDP growth will make up 55 percent in current year compared to less than 50 percent in 2007. This is partially explained by the fact that Brazil, Russia, India and China are less dependent on the U.S. market than it is believed. This especially applies to Russia which unlike China and India does not export consumer goods to the United States on such a large scale. Russia�s export to the United States constitutes only 3 percent.

The Russian economy by itself is quite strong. Goldman Sachs experts forecast the economy to grow by 7 percent this year, compared to 7.3 percent in 2007; the home consumption will grow by 11.3 percent. Revenues from oil export will enable the Russian government to raise its expenditures. This in turn will stimulate economic growth. The experts forecast that the Russia�s Central Bank will strengthen the ruble to prevent inflation. The country�s export looks more optimistic compared to other BRIC countries. The experts predict that export of China, India and Brazil will significantly decrease, while Russia�s will increase by 25 percent.

On the other hand, despite the sign of strong economic growth, Russia remains a risky country to a foreign investor. The risks include state regulation over the economy and little transparency of Russian companies, including the public ones. Thus, instead of investing in Russian companies directly, American investors should take a look at the Russian-traded fund of RSX and separate companies quoted on the U.S. exchanges. The fund is so far the first one to trade Russian stocks in the USA and it consists of mostly oil stocks. Most of them are not yet traded on the U.S. exchanges, so the fund, which is increasing steadily, is a great way to invest in Russia without money leaving the USA.

There are several Russian technology stocks traded on NYSE in ADRs. For instance, Vimpel Communications (NYSE: VIP) offers services of wireless connection on the territory of five post-Soviet countries, including Russia. The number of its subscribers is progressively growing. Mobile Telsys (MBT) is similar to Vimpel Comm.

Also, there are Russian oil companies traded on the Pink Sheets, e.g. Gazprom Neft (GZPFY.PK), Lukoil Co (LUKOF.PK) and others. Before buying the stocks of these companies, make sure they are fully reporting and are secure for investors.

After all, investing in Russian companies might turn out not only profitable but also a hedge against the falling domestic market. It�s important though to pick the right companies with full disclosure and strong fundamentals.
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