By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report
We've talked extensively about the emergence of sovereign wealth funds (SWF) in global financial markets in recent months and much of that discussion has centered on China and the Middle East.
But there's a new player in town: Russia.
As Bruce Willis's iconic alter ego - John McClain of "Die Hard" fame - would say: "Welcome to the party, pal."
Go Forth and "Copy China"
As reported in both the Russian and Chinese media, Prime Minister Vladimir Putin's hand-picked successor, First Deputy Prime Minister Dmitry Medvedev, made his first speech to Russian big-business recently. During the speech, Medvedev called on Russian companies to "copy China" by going on a global buying spree. He noted that foreign investment would bolster the Russian economy while cutting Russia's dependence on foreign technology.
While the notion of cutting foreign dependence by buying the competition is straight out of Sun Tzu, what he said next really got my attention.
Medvedev pledged Kremlin support for companies that go on the hunt over assets abroad.
At the same time - well, practically anyway - Putin has gone on record saying that Russia will not remain a commodity supplier for long. He said, "either we become a raw material appendage to the global economy, which can eventually jeopardize Russia's very existence, or we become a world leader and the best country to live in."
But Russia's definition of an "international buying spree" is probably going to be very different from what we've seen from other nations so far.
Generally speaking, Chinese sovereign wealth funds don't hesitate to pay huge premiums for assets if they also get access to the intellectual property behind those assets. The Blackstone Group LP (BX) deal is a great example. The Chinese could care less that they paid $3 billion for their share of the hedge-fund-master because they know they're getting access to the very best deal-making know-how in the alternative-asset-management business - and that they can leverage what they learn from Blackstone in future global deals.
Middle Eastern sovereign funds, on the other hand, don't seem to be so concerned about intellectual property. Instead, they're pursuing a strategy that's more like being "the house" in a Vegas casino, or owning any one of half a dozen legendary Bazaars in their part of the world. They don't appear so concerned with the individual customers as they do with getting a tiny piece of every transaction, which is why they've gone after the world's financial centers as well as diversified plays.
Here's another interesting point: Neither of these so-called "Cash Barons" - from China or the Middle East - has pushed for management say-so or seats on their target companies boards of directors.
The Russian Model
History suggests the Russians will pursue a blend of these two strategies - but with an aggressive edge. It's likely they'll look to a combination of hard assets and operating businesses but in a uniquely Russian twist, they'll probably seek actual control, too.
And that smacks of Russian nationalism.
Some will view this with suspicion and we concede that as natural. However, we also view this somewhat favorably, as merely the next step in the evolution of the global marketplace that we follow daily as part of the work we do for you through both Money Morning and The Money Map Report.
Here's why.
Prior to Putin, Russia had descended into chaos. The Russian Mafia ruled openly and oligarchs gobbled up assets with incomprehensible efficiency. Under Putin, Russia has effectively reconstituted much of its society. His government has consolidated power as effectively as it has removed it from criminal elements in recent years. As for the oligarchs, they've either been taken to the woodshed, fled the country, or made peace with him.
And therein lies the strength.
Putin has uniquely identified a path to global success and put Russia on it. He's also simultaneously removed potential roadblocks. Some view this as a Stalinist concentration of power to be feared. We think there's another angle.
Putin is the first Russian leader in a generation to realize that a Russia that's dependent on commodities alone will always remain what's essentially a Global Second-Class Citizen, owing its standard of living, if not its very survival, to the health of the commodity markets.
And as sophisticated investors, we all know how volatile commodity prices can be. During bullish periods - when commodity prices are high, like they are now - we've seen how the nations that owe their livelihoods to petroleum, metals or other commodities flourish. And we've also seen what happens when commodity prices decline, as they do from time to time as part of the natural ebb-and-flow of the global marketplace.
Putin understands this cyclical threat to Russia's economic and financial health as well as anyone, which is why he's going on the offensive.
By investing heavily overseas - and taking control of key industries - Putin's government is charting a path that harnesses Russia's strong growth potential and keeps it headed in the right direction [Russia's gross domestic product is advancing by 6% or more. For purposes of comparison, consider that the U.S. economy is growing at less than 3%, while China's economy is advancing at better than 11% per annum].
Funding Controversy
Russia's $1.3 trillion economy is right now rolling in cash from 10 straight years of growth - much of it fueled by oil prices and a global consumer-spending boom, according to The Financial Times.
Russia has been trying to emulate the soveriegn funds of Asia and the Middle East: In the first half of 2007, the most recent figures available, Russian companies invested $36.8 billion overseas.
But the country could have done more, and both Putin and Medvedev seem to realize this.
By hoarding its oil revenue, Russia has amassed a $157 billion "Stabilzation Fund." In January, that fund was split into two other funds:
- A "Reserve Fund" that will be used to cushion Russia's national budget against declines in market prices for oil.
- And a more growth-oriented "National Wealth Fund," which sounds to us like a conventional "sovereign wealth fund."
According to The FT, plans to invest the $32 billion National Wealth Fund in global stocks and corporate bonds have been delayed indefinitely amid fears over the global market downturn and infighting about how best to invest the capital.
What's more, Sergei Storchak, the deputy finance minister in charge of overseeing the fund, was jailed and charged with an attempt to steal public funds. His arrest is viewed as yet another part of the Kremlin's struggle to control the funds.
Leave it to Russia to keep things interesting.
Profit Plays
Despite the Kremlin machinations, we do believe that this more aggressive stance with regards to global investments will deliver results. That means that the big question for us, of course, is how to play this trend for profits.
One possibility is simply to pick up a few shares in the Market Vector Russia ETF Trust (RSX). A few weeks back, Editor Bill Patalon showed me a blog-post quip that investors who were "Russian" to make money were "Putin" their cash into that fund or into the Templeton Russia & East European Fund (TRF). Both funds will be volatile to be sure, but over the long haul will likely pay off very well.
If direct investments are more your speed - and if you truly have the stomach for the heightened volatility - another way to play Russia's future is to consider Russian companies that are likely to go on international buying sprees.
But consider this very insightful warning from my colleague, Horacio Marquez: "Many Russian companies have been delisting from the NYSE. They apparently neither care for our money nor need it and the high political risks that we have seen play shamefully in the past in Russia and those derived from highly illiquid pink-sheet stocks are a huge negative for otherwise very attractive business models."
While there are other stock opportunities, a likely front-runner with the size, scope and scale to be immediately accretive appears to be Gazprom OAO (PINK: OGZPY). Gazprom is Russia's most valuable firm as measured by market capitalization - one of the Top 10 in the world by the same measure, and a company that is enjoying record profits as a result of high [and rising] global energy prices.
By the way, did I mention that Medvedev is also Gazprom's chairman? Should he be elected as Putin's replacement [which seems all but guaranteed on March 2], the company will have unparalleled Kremlin access in a post-Putin Russia.
Hmm...
Editor's Note: For Money Morning's brand-new investment research report, "Three Ways to Profit From Sovereign Wealth Funds - the ‘Next Wall Street'," please click here. The report is free of charge.
News and Related Story Links:
- Money Morning News Analysis:
Qatar Sovereign Wealth Fund Buying Credit Suisse Shares, Qatar Prime Minister Says. - The Financial Times:
Copy China and invest abroad, says Medvedev. - Money Morning Economic Outlook Research Report:
Outlook 2008: Three Ways to Profit From Sovereign Wealth Funds - the "Next Wall Street." - Money Morning News Analysis:
Tough Talk About Sovereign Funds Spawns Fear of Economic Retaliation Against the United States. - Money Morning Economic Analysis:
Different Sources of Demand Mean Different Commodities Will Continue to Rise.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.