If investors were somehow not scared off by TNK-BP, Mechel, and the William Browder/HSBC corporate identity fraud lawsuit, then Russia’s full scale invasion of a neighboring sovereign nation should be sufficient proof of a devastatingly high new risk premium. The FT’s Lex column takes a look at the cost of war on Russia’s markets. What is interesting about this is that many very powerful people in Russia are going to begin losing significant sums because of the Kremlin’s military misadventures, which could lead to a variety of new, unpredictable pressures on the leadership.
After corporate warfare, real war. For investors, the Georgian conflict comes at an awful time, following appalling newsflow around Russia in recent months. Confidence has been buffeted by the shareholder fight at TNK-BP, which remains unresolved and even more by prime minister Vladimir Putin’s verbal assault on steelmaker Mechel – which hit the market harder than the conflict has done. The oil and commodity prices that have underpinned the Russian investment story are declining too. All that has sent the market down by about a third from its previous high. The consolation is that the Russian market has bounced back from plunges of similar magnitude four times in four years. At these levels – the Russian market is pricing in a risk premium of 7.7 per cent, according to Credit Suisse. On a p/e of 8.6 times it is at discount of about 20 per cent to the global emerging markets average of 10.7 – it starts to look oversold.
Investors will look beyond the conflict itself – which, aside from the human cost, as yet remains small – to other factors. First, does Mr Putin’s high profile in managing the crisis, following his sniping at Mechel, hint at instability in Russia’s dual-headed “tandemocracy”? President Medvedev had, after all, insisted foreign and security policy were his bailiwick. At the very least, investors will fear Mr Medvedev is not as strongly placed as they had hoped to deliver a reform programme they had welcomed. Second, how much will the conflict damage political and economic relations with Russia’s dominant partner, the European Union?Factors supporting previous Russian market bounces – rising oil prices, massive amounts of foreign capital looking for a home – are lacking. Though a full ceasefire will almost certainly see the beginning of a bounce, a full market recovery will be harder and take longer to achieve this time. Seasoned emerging market-dedicated funds will come back, but new money may decide there are less risky opportunities elsewhere. New strategic investors may make a similar choice, which could cause a problem. If oil prices continue to fall, Russia will start to rely more on foreign capital to fund its continuing economic revival.
Image from the Financial Times.