Alexei Navalny may not be the cuddly Russian teddy bear the Western world thinks he is, but the jailed (again) activist is making it impossible for Wall Street to stay long Russia. This market is a bore. Just buy oil and gas futures at this point. Or Yandex
Despite all the liquidity out there, and markets on a tear every day, the VanEck Russia (RSX) and VanEck Russia Small Cap
Over the last 12 months, both ETFs are negative while EEM is up.
TS Lombard managing director in charge of Emerging Markets East Asia, Christopher Granville, says the root cause of the present domestic political ferment in Russia is the reality that the long rule of Vladimir Putin — like a similarly long rule of his German counterpart Angela Merkel — has entered its final phase.
Russia is full of unknowns.
Two related questions matter for investors: what kind of political system will emerge in post-Putin Russia? How long will it take, and will it be relatively smooth or, on the contrary, involve serious destabilization. No one in Russia wants that.
“The spectacle of Alexei Navalny being sentenced on February second to real jail time seems like a low point,” Granville says. “Further deterioration is all too possible. The longer the Putin endgame drags out, the higher the risks.”
The nearest thing to a solution to Russia’s problem of rising investment risk would be Putin discussing a managed succession operation over the next two years.
Sorry Putin haters, don’t get your hopes up on that one.
Last year’s constitutional amendments were designed to keep Putin’s options open on where he goes from here. The most important amendment exempts him from term limits that would have his time expired in 2024.
The one other politically significant amendment grants former presidents lifetime immunity – ensuring a safe environment for Putin to hand over the reins in 2024 in case someone like a Navalny were to take power and start on a warpath towards revenge.
Putin still has ample popularity to push for the candidate he recommends to replace him. There’s not a lot of good leaders people under 50 can point to.
Before him, after all, was the perennial drunkard Boris Yeltsin, who was seen as doing the wishes of Western business consultants and the International Monetary Fund.
Before Yeltsin was Mikhail Gorbachev, who helped dismantle the Soviet Union, which was good for world peace, but it crushed the economy and in many ways chipped hard at the soul of the Russian nation state.
Putin often refers to its dismantling as one of the biggest human tragedies. Perhaps the best way to understand it would be if Texas, California, Oregon and Washington states all disappeared from America, and with it its tax revenue and political power sharing agreements.
Whenever Putin does retire, TS Lombard thinks it could trigger a strong ‘hope rally’ in Russian markets.
“Such hopes could be dashed,” warns Granville. “Any chosen successor would most likely be cautious about reforms in crucial but sensitive areas such as the rule of law that might be taken as threats by powerful interests. The second and more serious problem with this managed succession scenario is that the escalating tensions surrounding Navalny since last August’s poisoning incident may make it less likely that Putin will go for such an operation.”
Instead, the increasingly embattled ruling class of Russia — picked apart by Navalny for years — may adopt more of a siege mentality, with Putin “having to remain president” in order to avoid Gorbie and Yeltsin style mayhem.
Investors that want to be in Russia should focus more on the companies less prone to sanctions, and more tied to modern Russia. There’s not many of them. The only two I can think of with ADRs are Yandex and Ozon, with only Ozon beating the benchmark this year, up over 34% since the start of 2021. The company, dubbed the Russian Amazon