The relationship between risk and reward is well documented as a principle in Finance, and it applies both to trading in the stock market, as well as any other form of investing.
It basically states that the more return investors seek on any given investment, the more risk they must undertake. And there are few places in the world that serve as a practical example for that principle, better than Russia does.
Investing After A Revolution
For more than a decade after the ruble’s devaluation in 1998, investors in the largest country in the planet enjoyed just the positive side of that relationship. Its stock market delivered double-digit returns year in year out, while Foreign Direct Investment (FDI) in the country, another measure of the strength of the economy, literally took off.
Over the last few years, however, and especially ever since the Ukraine crisis in 2014, the situation has reversed and the risk aspect of investing in Russia has reared its ugly head.
In the immediate aftermath of the crisis, FDI ground to a halt. The economy has been in a recession ever since, while the price of the ruble has plummeted, losing about half its value against the US dollar.
Yet, nothing’s ever constant, and perhaps nowhere is that truer than in the investing world. Lately, there have been signs and renewed hope that the tide is changing yet again, and that maybe now’s a good time to invest in Russia.
On the hope front, there’s scope for warmer ties between the United States and Russia after Donald Trump’s recent election victory.
Certainly a lot more than if Hillary Clinton had won. Both the President-elect, as well as Vladimir Putin, Russia’s long standing leader, have indicated a willingness to improve the fragile relationship between their countries, which arguably stands at its lowest point since the end of the Cold War.
Big Retailers Remain Strong
But it’s not all just hope. On the ground, big retailers like Sweden’s IKEA and France’s Leroy Merlin are making a strong investing comeback, having already earmarked billions of dollars for new stores and general expansions of their operations. “This is the moment for investment”, says Walter Kadnar, country head for IKEA.
Foreign retailers have certainly had to adapt during the recession. They did so by switching their focus towards selling higher volumes of cheaper items, which are still affordable by the general public. Indeed, while other higher-end retailers were forced to leave the country, those that adjusted their strategy apparently managed to weather the storm.
And now, they may very well be placed in a prime position to take advantage of a coming economic bounce. After all, the effect of the ruble’s demise wasn’t only confined to slashed profits for their local operations; it’s also meant that production costs have come down dramatically, with some estimates putting them even lower than those in China.
Good Reasons To Invest in Russia
And that’s not unskilled labour, either. Historically, there have always been good reasons for investing in Russia, not least because of the country’s unparalleled strength when it comes to human capital. It boasts an amazing 99% literacy, while about half of the general population also has some form of higher education qualifications, as well.
That’s a very important statistic to keep in mind, because it’s built on strong foundations, the type of which are unlikely to be influenced by short-term factors, such as currency movements or crises.
For its part, the government sounds very optimistic that a positive turn is just around the corner. The upbeat tone of IKEA seems to be in tune with many other Western companies as well.
FDI has recently bounced back strongly, and it’s on course to end up at twice the level it was last year. Still, that would need to double yet again, to get to where it was before the Ukraine crisis.
Of course, this being Russia and the topic being investing, risks abound too. For sure, bureaucracy and corruption still pose considerable problems. Even IKEA, with its long-standing presence in the country, was the subject of a criminal probe last month, for a tax-claim case it says it had already settled years ago.
And, well, when it comes to Russian investment risks, nothing can top politics. Just ask investors in Yukos, which went from the country’s biggest company to being declared bankrupt overnight at the turn of the century, after a political tussle between its CEO and the Russian President.
Finally, the country’s very high dependence on its vast natural resources can also pose investment risks. Their volatile price can go down very quickly and literally take the country with them.
In the end, while the link between risk and reward always stands true, there’s another well-known relationship in Finance. Timing is everything. And right now, for Russia, the first one’s a given, while the second one remains to be seen.
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