Are Russian Equities Attractive to U.S. Investors?

The vast majority of U.S. retail investors let somebody else do the investing for them. So the average person in Ohio may well own ADRs (American Depository Receipts) in Russian companies without really being aware of it. Given the "buzz" about BRICs (Brazil, Russia, India, China) funds, more U.S. institutional and mutual fund money is likely to find its way into Russia: flows into the BRIC and single-country funds investing in these four markets are responsible for about one-third of the inflows into all emerging markets' equity funds that we track despite the fact they currently represent just 19% of the total assets in those funds.

What percentage of U.S. investors, in your opinion, have invested in Russian equities?

Directly, 2-3%. Indirectly, via mutual or pension funds, closer to 20%.

What statistical and economic indicators are U.S. investors looking at when they consider Russian equities?

They are looking for the same indicators they use to judge companies in the US and other developed markets: free cash flow, pricing power, cost structure, rate of economic growth in key markets, etc. Russian companies are beginning to generate this information. But, in many cases, credible figures only go back two or three years. So a lot of decisions regarding Russian companies still boil down to three things: what's the outlook for the price of the commodity they are selling, what's their valuation compared to their peers in other emerging markets and what's the right risk premium. But that is changing.

What do Russian companies have to do to attract more investors from the U.S.? And what do you think most deters investors?

At the microeconomic level they need to keep doing what they are doing. The longer and clearer their financial track record is, the more comfortable U.S. investors will become. From a top-down perspective they need to find a way to lobby for a better regulatory environment and a stronger legal system.

The idea that a company like Yukos can be re-nationalized by way of arbitrary tax bills is still very much on people's minds. Until the private sector emerges the winner, from some of the inevitable conflicts that occur between businesses and governments, investors in the U.S. are going to have reservations about this market.

How would US investors react if government-owned companies listed their shares on global exchanges?

Foreign investors have been looking for companies with direct or indirect links to the government, since that is viewed as some guarantee against a Yukos-style assault by the tax authorities. Providing companies are acceptable on conventional grounds such as profitability, they are likely to get a decent reception if they list overseas.

Is Russia attractive to investors? Reading the Western press it seems doubtful.

Like any economy undergoing big shifts, Russia presents opportunities. For foreign investors with a short-term outlook, it has many attractions. I would be inclined to turn this question around and ask what kinds of investment are attractive to Russia. Direct, fixed investment that brings new technology into Russia and creates employment is attractive, and will continue to get official support and protection. But keeping equity investors happy is, despite the official pronouncements, not a high priority. They are perceived as predominately foreign outsiders. And, more to the point, it doesn't appear to matter what you do to the equity investors, they always come back.

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