Tensions between the U.S. and Russia — over Syria, Israel and everything in between — are nothing new. Still, despite their differences, both countries and their leaders have been attempting to keep the peace of late.
Or at least they were, until Edward Snowden came along.
As you’ve likely heard, Russia recently gave asylum to the NSA leaker, despite requests from the U.S. that he be returned to the States for a trial. President Obama sure wasn’t pleased, as evident by the fact that today he canceled a summit with President Putin scheduled for next month in Moscow.
Investors should take note. As Obama turns his back on our onetime Cold War rival, folks putting their cash in the stock market would be smart to do the same.
It’s not just because of global controversy like this one, either — although political unrest can indeed affect the market. Just last month, investors fled Russian equities to the tune of $9 billion after prominent opposition leader Aleksey Navalny was sentenced to five years in prison — an all-too-clear sign to many that Putin’s policies are anything but fair.
Instead, such scandal and corruption is just the tip of the iceberg. The eye-popping growth once promised in Russia and its BRIC peers has given way to little more than big-time disappointment, all while the Russian stock market is one of the most volatile in the world, according to Morningstar.
See, the forecast for big-time growth in Brazil, Russia, India and China came as experts “took developing world’s high growth rates from the middle of the last decade and extended them straight into the future, juxtaposing them against predicted sluggish growth in the United States and other advanced industrial countries,” as Ruchir Sharma from Foreign Affairs put it.
In that last decade, Russia seemed to hold even more promise too, considering the country had just emerged from Soviet state to democratic nation around that time. Unfortunately, the modernization promised by Boris Yeltsin instead gave way to not just disappointment, but the eventual appointment of near-dictator Putin.
That’s hardly bred growth. Instead, it’s bred nationalization, corruption and piles of red tape. The result: As recently as 2008, Russia’s annual GDP forecast stood around 8%. This year, it’s expected to be a mere 2.4%. In fact, Sebastian Mallaby summed up the reality of Russia in The Financial Times late last year, writing:
“Microeconomic policy is lousy. Corruption deters investors. State companies elbow out private ones. Plans to diversify the economy have been a failure. Instead of building manufacturing exports, Russia is exporting skilled workers.”
This has been reflected in the recent performance of broad-based country-specific funds like the Market Vector Russia ETF (RSX). Even as a handful of companies — including search giant Yandex (YNDX) and new kid on the block Qiwi (QIWI) – continue to climb, the RSX is sitting further in the red that the S&P 500 is in the black thanks to 14% losses.
At the same time, the SPDR S&P Russia ETF (RBL) isn’t faring much better, with losses of 15% since the start of the year.
One reason: Russia’s economy is extremely dependent on the exports of raw materials and energy. And while competition continues to heat up in the energy space, materials prices have been on the way down — a reality weighing on American names as well. On top of that, a recent survey also shows that “Russia’s economy will remain primarily based on raw materials production until 2030.”
Plus, Russian energy exports are no longer in their glory days, all while Putin doesn’t seem sure of a promising alternative. A recent Wall Street Journal piece noted that, while Putin acknowledged “the days of Russia’s old economic model of high revenue from energy exports had passed,” he also “said there was no ‘magic wand’ to help boost growth.”
State-run oil giant Gazprom (OGZPY) sure could use a magic wand, though. The stock has shed around 22% so far this year — a prime example of the dangers of a Russian investment. In fact, Reuters reported earlier this year that “JPMorgan advised reducing Russian stock holdings,” pointing specifically to Gazprom’s “proposed dividend cut, falling oil prices and policy stasis in President Vladimir Putin’s government,” which overshadow low valuations.
The bottom line: Russia simply isn’t worth the risk. Follow Obama’s lead away from the giant country; you can find more reliable investments elsewhere.
As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.