Investing in Evil
Investing in Evil
By Todd Strandberg
In the summer of 2003, Vladimir Putin flew to London on a special mission: cementing Russia’s business ties with the West. Now that Russia was free of Communism, many companies saw the opportunity to make huge amounts of money from an untapped market.
Putin donned a white tie and tails to dine with Queen Elizabeth II. He sipped iced vodka with 700 bankers and business executives. And during an energy conference with Prime Minister Tony Blair, he watched the British company BP sign a commitment to invest $6 billion in a Russian oil and gas venture.
“Our priority is the step-by-step integration of Russia into the European and world economy,” Putin told the conference, stressing Russia’s desire to double its economy and attract investment in high-tech and aerospace sectors, too. Such cooperation, he said, three years into his presidency, would be “a great investment in strengthening Europe’s stability.”
Nearly 20 years on, those deals and plans lie in ruins as Western governments and companies isolate Russia over its invasion of Ukraine. BP, Shell, and ExxonMobil have said they will abandon multibillion-dollar investments in energy. Banks and insurance companies worldwide are cutting transactions with their Russian counterparts.
Investors could be forgiven for giving their money to a nation that was free of Communism. When it became clear that Putin was a dictator, they should have looked for the door. They foolishly thought they could work with a tyrant and suffered a great loss for their mistake.
Any money invested in Russia is now trapped. Moscow is blocking foreign investors, who hold tens of billions of dollars worth of Russian stocks and bonds, from exiting. Russian companies were also barred from paying dividends to overseas shareholders.
The Russian stock market has been closed for several days. People need to keep in mind that the Russian stock market closed in 1917 and didn’t open up until 75 years later. At any point, Putin can have a company nationalized, wiping out the stock value of shareholders.
The value of Russian ETF funds that are still trading in the West has seen huge losses. The Dow Jones Russia GDR Index is an index designed to track the top Russian Global Depositary Receipts (GDRs). The index plunged a mind-boggling 97% in just a few days and wiped out $572 billion from the market value of 23 stocks, including Gazprom PJSC, Sberbank of Russia PJSC, and Rosneft PJSC.
One of the most widely traded ETFs is VanEck Vectors Russia fund that trades under the stock symbol of RSX. It traded at $33 right before the invasion and quickly dropped to $5 as Russian troops moved in.
I’m shocked to see that many investors are buying up these Russian stocks. They are lured in by PE rations at one-tenth of US stocks. The people buying these stocks are hoping that peace will return and these stocks could go up many folds.
Stocks like Gazprom would seem to be a good investment with vast resources and a near-monopoly in the natural gas business. However, the stock has done poorly since it became a public company in 2006. Nearly all the Russian ETFs have gone down since their IPO.
Investing in Russia is investing in evil. The nation is run by a tyrant that has pocketed hundreds of billions from bribes and fraud. The oligarchs that run the companies use them as their personal debit cards.
In the past week, dozens of Western companies have closed their operations in Russia. The Russian government has proposed nationalizing these shuttered foreign-owned companies. Toyota, Nike, and IKEA didn’t take their factories with them when they closed up shop. The abandoned inventory, property, and investments worth billions are just a free gift to the Russian government.
Since the fall of the Soviet Union, Western nations have pumped about $400 billion into Russia. These so-called investments have only benefited Putin and his cronies. When BP made that $6 original investment into Russia, it poured another $19 in over the years and now has to write off the whole $25 billion.
I like to think that the West has learned a valuable lesson in realizing the danger of investing with a dictator. We lost equal amounts of money in the 70s and 80s by investing in South American nations that were run by military dictatorships. Things would get tough, and we would have our investments nationalized. The same scenario would play out again in the same nation a dozen years down the road. Greed has a special power to blind people to even the most obvious financial danger.
“For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows” – (1 Timothy 6:10).
– Todd