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Time to Invest in Russia

As Vladimir Putin returns to the presidency of Russia he “orders” increased investment by the government and pressure on government run industries to modernize and become more efficient. If you are thinking that this is the time to invest in Russia please remember that Mr. Putin’s decree for a so called new economy sounds a lot like the pronouncements the commissars under the old communist regime. Then the question is, what is a good investment in Russia today?

Because of the return of Mr. Putin and because the world economy is ever so slowly improving after the worst recession in three quarters of a century let’s say that it is time to invest in Russia. What does Mr. Putin’s call for a new economy mean? Revamping old state run industries may make things run more efficiently but this has little to do with private investors.

Russia is the second biggest producer of oil in the world at just over 10 million barrels a day as of 2010. The nation’s economy consumes 2.2 million barrels a day and exports 5 million barrels a day. Its proven reserves are around 69 billion barrels. It is the world’s second greatest natural gas producer as well at 588 billion cubic meters a year. It uses 414 billion cubic meters of gas a year and exports 200 billion cubic meters making it the world’s leading natural gas exporter. Its reserves are estimated at 45 trillion cubic meters as of 2011 giving it first place in the world. But, if it is time to invest in Russia is it time to invest in oil companies in Russia? Mr. Putin, in fact, is trying to decrease the dependence of Russia on oil and gas exports. On a profitable investment timeline it may be time to get out of Russian oil stocks and not in as European threatens to fall into recession again and drive oil prices down.

The goal is to improve the business climate in order to attract more investment. This includes decreasing the still heavy hand of the state. Mr. Putin’s orders are to produce 25 million high paying jobs by 2020. Sounds like more of the commissars Mr. P. However, the goal of producing more high tech products is not just a pipe dream. Russia has skilled scientists and technicians. They, after all, are the link to the International Space Station now that the fleet of Space Shuttles have been retired.

The complete range of Russian industry according to the CIA Factbook looks like this:

  • Mining and extractive industries producing coal, oil, gas, chemicals, and metals
  • All forms of machine building from rolling mills to high-performance aircraft and space vehicles
  • Defense industries including radar, missile production, and advanced electronic components, shipbuilding
  • Road and rail transportation equipment
  • Communications equipment
  • Agricultural machinery, tractors, and construction equipment
  • Electric power generating and transmitting equipment
  • Medical and scientific instruments
  • Consumer durables, textiles, foodstuffs, handicrafts

The World Bank has a Doing Business Index in which Russia currently ranks #120 in the world (#1 is best). Mr. Putin wants the country up to at least #20 by 2018. If you think that this wish makes it time to invest in Russia please remember that Russia produces as many bureaucrats as the Ukraine produces potatoes. Unlike potatoes bureaucrats are not consumed. They multiply. While good fundamental analysis is essential to profitable investing it can be difficult to factor in the costs in Russia of a bloated and recalcitrant bureaucracy. A place for possible investment in Russia will be the group of companies that may be privatized in the coming years. These will not be in defense or natural resources.

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