Schroders: Why foreign investors should not write off Russia

The most surprising thing I gleaned on my recent investment trip to Russia was how calm the business community was. 

Calm after the storm

Since my last trip in July, the rouble had fallen 60%, $120 billion of private capital had apparently left the country, oil prices were at $50 per barrel from $110, and the conflict in eastern Ukraine was raging. Thinking logically about the situation in Russia—and reading the Western press—I had expected a sense of utter panic. Instead, it felt like the calm after the storm. As a colleague told me, “Russia has just been seriously tested. And we survived. It will still be a very hard year, but we’re used to hardship and we’re ready.” Why?

Whether to invest in Russia

My goal of this trip was to try to reassess our framework for how to invest—or not invest— in Russia after the "Black Swan" events of 2014. I have travelled to Russia several times a year for 22 years. No one that I know predicted a year ago that Russia would be engaged in a proxy war with Ukraine; that oil prices would have plummeted so far so fast; or that Russia’s economy, banking system and asset prices would be so badly impacted. 

Foreign stock and bond investors face two basic questions. First, should Russia just be ignored altogether as an investable market? And if not, then when is the right time to invest?

On the first question, it is very difficult to simply ignore Russia’s markets. Russian stocks and bonds have significant weights in emerging market indices. Ignoring Russia outright would potentially mean large deviations in performance for fund managers from standardized benchmarks. 

It is also difficult to exclude Russia because of disapproval of its foreign policies in Ukraine. Emerging market indices include many other countries with controversial regimes, such as China, Turkey, Venezuela, Saudi Arabia, and Angola. At least conceptually, the role of foreign capital is to help promote market discipline and good policies everywhere, with the hope that greater economic integration can ultimately lead to stronger economies and more democratic political systems over time. 

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