About a week before the barbarism took down Malaysian Airlines Flight MH 17, an investor asked me when it would be wise to begin investing in Russia.
First, let's have a word about the Malaysian Airlines massacre. I have heard it called a number of things, but certain truths speak for themselves -- and the word "massacre" fits the bill.
A Soviet-era Buk surface-to-air missile system fell into the hands of pro-Russian separatists located about 25 miles inside the Ukrainian border. It is assumed that, with Russian assistance, they were able to figure out how to fire the weapon with deadly accuracy. If the transcripts from conversations between pro-Russian militia members after the attack are true, they thought they were firing at a Ukrainian military transport. Instead, they brought down a passenger jet with 298 souls. Whole families were snuffed out in an instant. HIV-AIDS research suffered a setback too because several passengers were major players on their way to attend an important conference in Australia.
The barbarism of the initial massacre has been compounded by the horrifying behavior of Pro-Russian rebels on the ground. International crash investigators are being hounded by local militias who have opened up with live gunfire in order to intimidate those who are looking for answers. Credit cards of the dead are being confiscated by militia members to be used to commit fraud. Worst of all, bodies that were blown out of the sky remain rotting in the countryside for several days instead of being repatriated to their families who wish to pay their final respects.
So let's go back to the question for a moment. When the one investor cornered me at a dinner conference (and again this was a week before the Malaysian Airline massacre), he made a couple of interesting arguments.
He said that the various indices like the Moscow Exchange are artificially low because of the current Ukrainian Crisis and will inevitably bounce back once the situation normalizes. The Micex has lagged this year and it down percent after recovering from a major dip from the first quarter of this year. The economy, which was supposed to make some sluggish gains, is now predicted to fall flat or even retract. He felt that the $45-50 billion in foreign investment that exited the country would inevitably return because money always follows opportunity.
I take another approach.
Investing always requires transparency, something that the Russian markets currently lack. There is a very good reason why so many Russian oligarchs settled in places like London or Los Angeles. They have seen what happens when their peers have spoken their minds. Those who have remained slavishly loyal to Vladimir Putin have prospered.
On the other hand, those who have faced off against Putin have fared poorly. People have found themselves stripped of their companies, charged with a whole slew of indictments, and in the case of Yukos co-founder Mikhail Khodorkovsky, jailed for over a decade in a dank Russian jail cell before being released just prior to the Sochi Olympics.
However the biggest oligarch himself may be Vladimir Putin. Rumored to be worth over $60 billion, his wealth is tied up in the overlapping relationships of his other loyal oligarchs.
However, there is nervousness among the wealthy elites, cautioned by fear. The July 21 edition of Bloomberg drives home the point:
"The economic and business elite is just in horror," said Igor Bunin, who heads the Center for Political Technology in Moscow. Nobody will speak out because of the implicit threat of retribution, Bunin said by phone yesterday. "Any sign of rebellion and they'll be brought to their knees."
For me in order for a financial system to work there has to be overall transparency. It is a bedrock quality for any individual investor. In Russia, it's quite clear that Vladimir Putin not only has his thumb on the scale, but takes his cut too.
There was a time, back when the Cold War was in full bloom, the Soviets could invade a variety of Eastern European allies if their internal politics got out of hand without facing any economic pain. Between Hungary in 1956 and Czechoslovakia in 1968, tanks rolled, soldiers were "invited" in by their communist leadership to quell any desire for freedom.
Now that the Cold War has been over for nearly a generation, many former Soviet satellite states have modernized, joined the West, and have rapidly increased their standard of living while building a transparent investment culture. While the standard of living has increased based on its strengths as an energy exporter, Russia's climate for creating a transparent investment environment still seems to be at least a generation away.
So, until then, I will wait.