This morning come news that private equity giant Blackstone (BX) has “given up” on Russia. The firm has apparently, as a reaction to a lack of opportunity there, decided to end contracts with its consultants in the country. This prompts the question, if Blackstone and their highly paid consultants can’t find a worthwhile investment in Russia, should you be invested there?
Back in May, I wrote a piece about Russia at a time when Russian stocks were very close to their lows. At the time I wrote that as a trader, I had been taught to view most international “crises” as a storm in a teacup. Occasionally one will blow up, but in general markets are driven down by the hype that surrounds the situation and then drift back upwards as the world moves on to other problems.
Does anybody remember the shocking footage of riots in Greece and the ensuing predictions of the death of the Euro? I do and called them out as nonsense at the time. Now those dire predictions look like just more hype, and the massive selloff of Greek sovereign debt and equities looks, with hindsight, like a great buying opportunity. When it came to Russia then, despite my natural aversion to the country’s action in Ukraine, I could see the market over reacting in the short term. Sure enough, a bounce came as this chart for the Market Vectors Russia ETF (RSX) since the date of that article shows.
Following that initial bounce, however, RSX has drifted lower as increasingly tight sanctions on Russia have begun to bite. There is likely to be a reaction to the weekend’s news and we could see RSX back to those May lows before too long. This time, however, is somewhat different. Blackstone’s decision to pull out is not an overreaction to intense news coverage; it is a considered, long term withdrawal from a market that hasn’t offered up an opportunity to them for over 3 years.
My cynical side doesn’t allow me to just accept this at face value, though. It could be that they had just hired the wrong consultants, or possibly had made a somewhat cynical calculation that pulling out would cost them less than staying in. It is no secret that Washington is unlikely at the moment to look too kindly on companies that are investing in Russia. Not renewing the contracts of independent consultants may result in some missed opportunities for Blackstone, but saves rather than costs money, and can quickly be reversed if things change. Seriously angering your own government, on the other hand, is asking for trouble for years to come.
These things make me wary of reading too much into Blackstone’s decision. There could well be a short term bounce once again following the reaction to this news and those with a short term trader’s view would do well to position themselves for that reaction. Long term investors, however, should be very wary of Russia. Blackstone’s decision may less significant than it seems and the result of domestic political calculations as much as anything, but the very fact that the brouhaha surrounding Russia’s actions in Ukraine has died down should serve as a warning to potential investors.
The Russian President Vladimir Putin makes decisions using different rationale to those which we in the West expect. Many believe that the fact that long term economic sanctions could have a devastating economic effect on the Russian people is of little consequence to him. Those sanctions will just be used as further proof that the U.S. and Europe are enemies of the country who must be opposed and challenged, they conclude, and the fact that things have died down now will be used to show that those enemies can be beaten. Having lived and worked in Russia I am inclined to agree. This disregard for the economic consequences of the country’s actions will, though, at some point lead to disaster for the Russian economy.
I am not sure that Blackstone’s decision, nor that of Bank of America (BAC), Citibank (C) and others to reduce their exposure, has been made purely for business reasons. I have no doubt that they have been subject to pressure at home to “do the right thing”, but I am equally sure that if the opportunities in Russia were many and varied they would have been able to resist that pressure.
If you think that is a little too cynical, then consider this, even at the height of the publicity in May BAC could find a way around the disapproval if the opportunity was good enough, according to this Bloomberg report. The fact that very few such stories have surfaced, however, and that Blackstone is joining the ranks of those publicly disavowing Russia, would indicate that the major U.S. financial institutions can find very few decent investments in the country. If they can’t I’m pretty sure that you won’t be able to either, so, for now at least, Russia is best left alone.