Investing in Today's Russian Economic Boom

Investing in Today's Russian Economic Boom

Published: December 17, 2007

Russia is back, and today's investors have a rare chance to invest in a country that may very well become one of the world's greatest economic turnaround stories. The country has gone from default and disaster to economic powerhouse in just one short decade, and investors who know what to look for can find a multitude of outstanding investment opportunities. . .

A Bit of Russian Economic History
Ten years ago, Russia was "on the radar" of international investors. Its stock market was surging over +200% per year, inflation was falling sharply, and the economy was growing at a fast clip. Russia was finally emerging from its post-Soviet economic malaise, and so foreign investment money began pouring in.

But on August 17, 1998, the Russian government defaulted on its debts, and the ruble collapsed in value just a few short weeks later. The government also declared a moratorium on paying foreign banks and creditors. Investors lost billions as the value of bonds fell, and the stock market collapsed by -90%.

What happened? Well, there's no easy answer, but the Russian government's dependence on tax receipts from ever-cheapening commodities, a massive debt burden, the Asian currency and debt crises of 1997, and difficulties in tax collection and economic regulation (thanks to a large black market economy and widespread corruption) all contributed. Russia slipped into an economic coma, and investors moved on to greener pastures.

The New Boom
Now, a decade later, Russia is once again enjoying a financial boom -- the most obvious reflection is its stock market's meteoric rise since 2000 (growth of more than +1,000%). Inflation has steadily fallen, and GDP growth has averaged +6.9% for the past three years. But is this rally for real, or will it just end in disaster again?

To us, the evidence indicates that today's Russian rally is for real. For example, President Vladimir Putin may be a controversial figure in the West, but he has undertaken some necessary reforms for the Russian economy. His dramatic overhaul of the tax system, for instance, has lowered incentives to evade taxes and has boosted collections -- in turn lowering the country's debt burden to nearly nothing. Furthermore, the Russian government has adopted a budget framework that will force Putin's successor to maintain fiscal discipline -- helping to sustain growth for the long run.

Of course, Putin has also received some help, mainly in the form of higher commodity prices and increased crude oil production over the past decade. This in turn has sent tax revenues soaring. As a result, the Russian government now has $356 billion in foreign exchange reserves and more than $100 billion in an oil stabilization fund, which should help soften the blow should another economic disaster hit. In fact, Russia's currency reserves are the third-highest in the world -- a far cry from when the nation was desperately seeking cash from the International Monetary Fund and other foreign lenders a decade ago.

How Can I Invest in This New Russian Economy?
There's no doubt that today's Russia looks far more sustainable than it did a decade ago. Russia has a stronger currency reserve base, a smaller debt burden, a floating currency, real economic reform and commodity prices that are likely to stay high. With all of this in mind, Paul Tracy, editor of the StreetAuthority Market Advisor newsletter, believes that Russia's economic growth will power strong returns for investors in coming years.

And in the latest issue of Market Advisor, Paul provides detailed rundowns of six promising companies and closed-end funds that have meaningful exposure to the growth of the Russian market. Although a few are natural-resources plays, Paul's picks span the spectrum, from consumer goods to telecommunications, and most are experiencing fantastic double-digit growth rates! In fact, one pick has already returned +41% annualized over the past five years and shows no signs of slowing down now. To learn about these picks, and to learn more about the Market Advisor newsletter, please visit this link.

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