Russia: energetic investors say it's time to buy

A 'modern' Russia?

Russia’s crumbling road and airport network is a big problem – and deterrent – for some investors. There have long been calls for more efficient public expenditure, which would allow Russia to modernise, crucially upgrading its infrastructure much like other growth markets like China and India are already doing.

Other long held challenges include improving the investment climate for businesses; even Medvedev, who continues to promise reforms ahead of a presidential election next year in which either he or prime minister Vladimir Putin (not both) will run, admits this is still ‘very bad’.

‘The reform process has really reversed under Putin,’ comments Poole. 'Russia has gone back to a state-controlled form of capitalism’.

Unfavourable demographics and corruption – which the World Bank this week said remains a ‘huge problem’ – are additional stumbling blocks. Broadly the challenge is to sustain reforms while avoiding the ‘oil curse’. Then shake off energy dependence altogether.

More immediately, say analysts, Russia must get inflation (which rose to 9.6% in May) under control. Food and fuel price rises have overshadowed a recovery in household consumption, and a gradual economic recovery: last year Russia managed GDP growth of 4%, while growth of 4.4% is expected this year.

Those who see Russia purely as a commodity play though, are unmoved by most of these oft-cited risks and the tired debate over reforms.

‘You can talk about it for hours, but if the oil price comes down then Russia won’t perform well’, says Maarten-Jan Bakkum, emerging markets strategist at ING Investment Management. He adds that Russia is cheap compared to other emerging markets, but again ‘if the oil price works against you it doesn’t matter how expensive or cheap the market is’.

Bakkum's argument works both ways and he is bullish on Russia: ongoing turmoil in the Middle East and demand from other emerging markets will keep energy prices high, he reckons.

Citywire Selection

For a pure Russia play Citywire likes the Neptune Russia & Greater Russia fund managed by Robin Geffen. Some of the funds in the global emerging markets section of our Best Investment Funds page will also invest a portion of their funds. For example, another fund we like which invests heavily in Russia is JPM New Europe , managed by Oleg Biryulyov and Sonal Pandit.