Russia bleeds cash as investors pull out

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29 September 2011 Last updated at 23:00 GMT By Natalia Golysheva BBC World Service Political turbulence has spooked investors in Russia Five months ago the Russian stock market was among the world's top performer, peaking after a steady rise in share prices that had lasted since early 2009.

Since then, the market has taken a tumble, with Russia's Micex index of leading shares losing more than a quarter of its value and the RTS index of 50 Russian shares falling by some 40% to levels not seen since this time last year.

According to the Russian government, investors are pulling back because they have been spooked by falling oil prices and global economic turmoil.

But many observers are instead blaming internal political turmoil for the retrenchment, which last year saw capital flight to the tune of some $30bn (￡19bn) - only to accelerate this year, with some $31bn leaving the country during the first six months alone.

Wheeling cash out of Russia has become a sport shared by wealthy Russians and foreign investors alike, with one Russian opposition party leader, Boris Nemtsov, predicting that capital flight could rise to $100bn this year.

The capital flight is matched by a brain drain as the country's much needed skilled and educated people head for better opportunities abroad.

A recent survey suggests more than a fifth of Russia's adult population would like to emigrate, compared with 7% in 2007.

'Pillar of stability'

This week's ousting of Russia's long-standing finance minister, Alexei Kudrin, did little to mollify neither the people nor the markets.

Mr Kudrin eventually lost his battle with Russia's leaders

So the Russian rouble, already weakened by the turmoil in the world economy, has plunged and is trading around its lowest level against the US dollar since May 2009.

Mr Kudrin's main cheerleaders, Western investors and analysts, have long applauded the way his conservative budget policies have helped restore the country's financial health in the wake of the global financial crisis.

To them, his departure is seen as a deep blow to Russia's economy.

"The surprise factor of Kudrin leaving is bigger than the nomination of Putin to be the next president," according to Roland Nash, senior partner of Verno Capital.

"Kudrin personifies fiscal stability in Russia. It was really his big success that we've had this fiscal stability now for more than 10 years - him and the oil price.

Neil Shearing, chief emerging markets economist at Capital Economics, a private-sector think tank in London, agrees.

"It's difficult to see how Kudrin's resignation can be anything but market-negative," he says.

Economic differences

Mr Kudrin's departure after 11 years in the job could not have been announced at a worse time, coming hot on the heels of President Dmitry Medvedev announcing that that he will swap jobs with Prime Minster Vladimir Putin in March of next year.

Investors are nervous as share prices, oil prices and the rouble all fall sharply

The Russian media initially speculated that Mr Kudrin may have openly rebelled to bolster his own ambitions to become Russia's next prime minister.

Mr Kudrin has accused President Medvedev of economic mismanagement and excessive spending.

In particular, in the latest of the two politicians many disagreements over economic policy, Mr Kudrin has been vocal in his opposition to President Medvedev's efforts to raise military spending by some 2.1 trillion over three years, insisting the plan would create "additional risks for both the budget and the economy".

President Medvedev has been dismissive of Mr Kudrin's criticism, insisting Russia "cannot avoid defence spending worthy of the Russian Federation, which is not some 'banana republic' but a very large country, a permanent member of the UN Security Council that possesses nuclear weapons".

In the end, the conflict came to a head with President Medvedev telling Mr Kudrin to step down after the rebellious finance minister said he would be unwilling to work with the next prime minister.

And if investors were concerned about Mr Kudrin's departure, then they were far from mollified by the man Prime Minister Putin appointed to succeed him.

Mr Putin described the new acting finance minister, the rarely heard of former deputy Anton Siluanov, as a "good, strong specialist", which investors immediately took to mean he would tow the party line and as such be a safe bet for the Russian leaders during the upcoming election season.

Optimistic assumptions

Mr Siluanov's first challenge will come next week, when Russia's government will have to submit its 2012 budget for approval by parliament.

It will be a challenge because the budget is calculated on a rather optimistic assumption, namely that price of oil will rise to $116 (￡72)per barrel next year.

According to the ousted Mr Kudrin, Russia needs oil to average $112 in 2012 to balance its budget.

However, the price of Russia's main export, Urals crude oil, has recently tumbled and is currently trading close to the $105-a-barrel level.

If the price of oil fails to bounce back, then Mr Kudrin will be proven right about the need to curb spending and plan for a future when Russia's earnings will be much lower than they have been in recent years.

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A lost decade for investors?

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27 September 2011 Last updated at 07:46 GMT By Gemma Godfrey Investment committee chairman, Credo Capital Gemma Godfrey: there is an investing "sweet spot" Over the past 10 years, investors have experienced a stark divergence of fortunes, with some making substantial amounts of money whilst others have suffered losses.

Timing, picking the right investments and employing the right strategy have determined their fate.

When investing, timing can be crucial. You make money if you buy something when it is cheap and sell it when it is perceived to be more valuable. If you buy the same object when its price is high, making a profit will be that much harder.

In the run up to the year 2000, investors bought shares in technology companies to such an extent that values predicted firms would make unrealistic profits. This 'bubble' burst and the stock market fell. September 2001, the start of our 10 year period, lies within this period of selling. Therefore, together with the fall from the financial crisis in 2008, losses were enough to offset the substantial gains achieved in the seven years between these events.

Investing in the 'sweet spot'

An initial investment of ￡100 in the FTSE 100 (the index of the 100 largest companies listed in the UK), would have fallen in value by 4%, returning only ￡96 all these years later.

This return hides a huge divergence of fortunes. Firstly, when choosing the size of the firm in which to invest, there appears to have been a 'sweet spot' for medium-sized firms in the FTSE 250 (the next 250 companies after the largest 100 listed on the London Stock Exchange) - small enough to grow substantially, but large enough to have weathered the storms.

Secondly, the sector. The shares of companies selling basic materials almost tripled in value over the past decade, in contrast to those of financial firms, which lost half the initial investment. The belief driving these moves was that certain materials (for example copper and iron) have become harder to mine and produce, making their producers more valuable. In contrast, banks have suffered from loan defaults, bankruptcies and increased regulation, which have all hurt profits.

Thirdly, the geographic focus. Whilst investing in UK, US or European companies on the whole produced meagre returns or losses, investing in the developing markets of China, Russia or Brazil generated astounding returns; Brazil stands out with a gain of 578%.

Basic Materials outpaced the FTSE 250, while the FTSE 100 did better than financial shares Reinvesting is key

Short-term investment decisions have had as much of an impact as choosing where to place money for the longer term.

During our investment timeline, many companies regularly paid a portion of their profits to shareholders, so-called dividends. How an investor used this payment strongly dictated how much money they made.

If it was re-invested back into the stock market it continued to generate returns, if it was put into their bank account it did far less.

The MSCI World Equity index - boosted by reinvesting returns, lagging when taking out the money Wealth of opportunity

There are other assets an investor could have bought apart from shares, some of which performed far better and greatly enhanced the amount of money made over this period.

Lending to governments or companies in developing countries proved highly profitable, with relatively large interest payments made to the lender (i.e. the investor) until the loan was repaid.

Another interesting investment was property, which in general provided investors with highly attractive returns over the past decade, even after the sharp correction during the recent recession.

Finally, hedge funds, like investors, have had a mixture of fortunes. With focus on different markets, some have made staggering returns whilst others are still nursing losses.

Interestingly, it has not been worthwhile to bet on a falling market. Money managers lost money if they focused solely on making a profit when certain investments fell in value.

Unsurprisingly, fund managers with investments in emerging markets (like Brazil, Russia and China) almost tripled their initial investments.

When investing, during the past decade it paid to be particular.

Brazil was the top performer; hedge fund investments in emerging markets were runner up; government bonds did well; the S&P Global Property index provided returns; UK stocks were lagging

Gemma Godfrey is a quantum physicist, former hedge fund manager and now chairman of the investment committee of wealth management firm Credo Capital.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent, professional advice for your own particular situation.

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Russia bleeds cash as investors pull out

AppId is over the quota
AppId is over the quota
29 September 2011 Last updated at 23:00 GMT By Natalia Golysheva BBC World Service Political turbulence has spooked investors in Russia Five months ago the Russian stock market was among the world's top performer, peaking after a steady rise in share prices that had lasted since early 2009.

Since then, the market has taken a tumble, with Russia's Micex index of leading shares losing more than a quarter of its value and the RTS index of 50 Russian shares falling by some 40% to levels not seen since this time last year.

According to the Russian government, investors are pulling back because they have been spooked by falling oil prices and global economic turmoil.

But many observers are instead blaming internal political turmoil for the retrenchment, which last year saw capital flight to the tune of some $30bn (￡19bn) - only to accelerate this year, with some $31bn leaving the country during the first six months alone.

Wheeling cash out of Russia has become a sport shared by wealthy Russians and foreign investors alike, with one Russian opposition party leader, Boris Nemtsov, predicting that capital flight could rise to $100bn this year.

The capital flight is matched by a brain drain as the country's much needed skilled and educated people head for better opportunities abroad.

A recent survey suggests more than a fifth of Russia's adult population would like to emigrate, compared with 7% in 2007.

'Pillar of stability'

This week's ousting of Russia's long-standing finance minister, Alexei Kudrin, did little to mollify neither the people nor the markets.

Mr Kudrin eventually lost his battle with Russia's leaders

So the Russian rouble, already weakened by the turmoil in the world economy, has plunged and is trading around its lowest level against the US dollar since May 2009.

Mr Kudrin's main cheerleaders, Western investors and analysts, have long applauded the way his conservative budget policies have helped restore the country's financial health in the wake of the global financial crisis.

To them, his departure is seen as a deep blow to Russia's economy.

"The surprise factor of Kudrin leaving is bigger than the nomination of Putin to be the next president," according to Roland Nash, senior partner of Verno Capital.

"Kudrin personifies fiscal stability in Russia. It was really his big success that we've had this fiscal stability now for more than 10 years - him and the oil price.

Neil Shearing, chief emerging markets economist at Capital Economics, a private-sector think tank in London, agrees.

"It's difficult to see how Kudrin's resignation can be anything but market-negative," he says.

Economic differences

Mr Kudrin's departure after 11 years in the job could not have been announced at a worse time, coming hot on the heels of President Dmitry Medvedev announcing that that he will swap jobs with Prime Minster Vladimir Putin in March of next year.

Investors are nervous as share prices, oil prices and the rouble all fall sharply

The Russian media initially speculated that Mr Kudrin may have openly rebelled to bolster his own ambitions to become Russia's next prime minister.

Mr Kudrin has accused President Medvedev of economic mismanagement and excessive spending.

In particular, in the latest of the two politicians many disagreements over economic policy, Mr Kudrin has been vocal in his opposition to President Medvedev's efforts to raise military spending by some 2.1 trillion over three years, insisting the plan would create "additional risks for both the budget and the economy".

President Medvedev has been dismissive of Mr Kudrin's criticism, insisting Russia "cannot avoid defence spending worthy of the Russian Federation, which is not some 'banana republic' but a very large country, a permanent member of the UN Security Council that possesses nuclear weapons".

In the end, the conflict came to a head with President Medvedev telling Mr Kudrin to step down after the rebellious finance minister said he would be unwilling to work with the next prime minister.

And if investors were concerned about Mr Kudrin's departure, then they were far from mollified by the man Prime Minister Putin appointed to succeed him.

Mr Putin described the new acting finance minister, the rarely heard of former deputy Anton Siluanov, as a "good, strong specialist", which investors immediately took to mean he would tow the party line and as such be a safe bet for the Russian leaders during the upcoming election season.

Optimistic assumptions

Mr Siluanov's first challenge will come next week, when Russia's government will have to submit its 2012 budget for approval by parliament.

It will be a challenge because the budget is calculated on a rather optimistic assumption, namely that price of oil will rise to $116 (￡72)per barrel next year.

According to the ousted Mr Kudrin, Russia needs oil to average $112 in 2012 to balance its budget.

However, the price of Russia's main export, Urals crude oil, has recently tumbled and is currently trading close to the $105-a-barrel level.

If the price of oil fails to bounce back, then Mr Kudrin will be proven right about the need to curb spending and plan for a future when Russia's earnings will be much lower than they have been in recent years.

View the original article here