As the New Year turned, Russia again showered its love upon one of its Eastern European neighbors. Of course, their love is a perverse one, and Belarus felt the brunt of it. With the threat of Gazprom (Russia's state energy company) turning off the spigot, Belarus acquiesced to the Kremlin's demands to double gas prices and surrender control to Beltransgaz, the country's gas-pipeline monopoly. This is the latest in a long line of bullying, with Ukraine, Georgia, Moldova, and Azerbaijan all recently succumbing to similar tactics. And then there are the mysterious assassinations of several prominent figures, including a central banker, journalist and former Russian agent. Clearly, you don't mess with Mother Russia.
Strangely, none of this seems to have frightened investors in Russian shares. The RTS index of Russian stocks rose 70% in 2006 to a record high, and the value of Russia's equity universe crossed $1 trillion for the first time. The country has benefited enormously from surging oil prices and renewed interest in emerging markets.
But investors should enter at their own peril. The Russian stock market and economy are dangerously dependent on natural resources, making investment prospects highly sensitive to movements in commodities prices. To wit, almost 40% of the Russian market is made up just two companies: state-owned Gazprom and Rosneft. And we've had plenty of evidence that these companies are nothing more than the Kremlin dressed in sheep's clothing. State-controlled companies are also likely to play an increasingly important role in other sectors. The prominence of the state lends little confidence property rights will be maintained. Which means your investment could easily be wiped away with the flick of a pen or a shot of vodka laced with polonium.
Vladimir Putin, Russia's President, clearly sees energy as the weapon with which to restore the lost greatness of the Soviet Union. Look for future tactics of intimidation and property rights abuses. Luckily, there's a silver lining in all of this. The more Russia pushes, the more the market will adjust. Maybe we'll see gas market liberalization in Europe and a significant push towards alternative energy sources. Then we'll see what the big bully is really made of.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.