Facing large-scale sanctions for many investors (both Russian and foreign) the main task seems to be withdrawing money from the country, and not at all making new investments. But the wind has changed: since the end of last year, Russian stock market is growing strongly, just as business optimism and investment activity. And this is quite justified: investments in Russia remain risky, but potentially very profitable.
IKEA at a discount
The phrase “despite the sanctions and the departure of Western companies” has already turned into a well-worn stamp, which is widely used. I will say otherwise here: investments in Russia become profitable primarily due to the departure of Western companies. This process can be harmful to the economy as a whole, but for bold investors who are not afraid to stay in Russia, it is very profitable.
I’ll start with the obvious facts: departing companies are forced to sell their assets with huge discounts, which go up to 70%, and sometimes up to 90%. Often these are excellent assets – Western companies have been building business in Russia for years, invested tens and hundreds of millions of dollars using modern technologies and implementing new standards.
If a year ago, customers staged a stampede in IKEA stores, eager to buy the latest items at a discount, now in the same way with a huge discount you can buy IKEA itself. More precisely, its Russian assets are factories and shops. By the way, they are great investments. With any economic situation in the country, affordable goods for the construction, repair and improvement of the house will be in demand, one way or another.
Of course, not every Russian businessman is able to buy an IKEA plant, such chances are for big business. And not by chance, according to our observations, foreign investors (mainly from friendly countries) come in now to Russia primarily with large capital, and domestically many corporations take part in such race.
El Dorado thirty years later
But even speaking not about mega large-scale investments, but about average and even small business, there are enough interesting objects today. It is, in fact, peculiar El Dorado, “the ninetieth once more” for investors who aren’t afraid to invest in Russia.
Parallels in history are obvious. Thirty years ago there was also plenty of opportunities to get ownerless Soviet objects on symbolical prices. It could be the large plants and mortgage auctions, as well as smaller property. Then many enterprises were (or were considered) unprofitable, and therefore seemed doubtful acquisition. But over time, after reorganization of business processes, they became profitable also cost millions and even billions of dollars now.
Now the risks are that many business processes after the departure of Western owners are disrupted, putting profitability at risk. But these are solvable problems. It is certainly easier to cope with them than with those that young Russian business had to solve thirty years ago. And if successful, you can without huge efforts make large capital.
Almost “blue oceans”
There is another positive (from the investor’s point of view) effect of exit of Western companies, as well as from the reduction of European imports – it is decreased competition. There are also noticeable similarities with the nineties of the last century, when many markets were just beginning to take shape, and pioneers could make a lot of money.
Now, of course, it is not quite so – there are few completely free niches. Nevertheless, in many areas there is a shortage of supply, especially if we talk about supply of quality products and services formerly produced by Western companies. There is also a shortage of capital, since for many investors, investment in Russia is now impossible or almost impossible.
Thus, the business has a chance to find the so-called “blue oceans”. For those unfamiliar with the term: the concept of “blue ocean” implies markets with low competition as opposed to the “red oceans,” which are infested with sharks. Accordingly, in the “blue ocean” you can safely do business making big profits, while in a competitive market you can only count on a small margin and minimal profitability.
Low taxes and state support
Russia, of course, is not an offshore, but compared to Europe, we remain a country with relatively low taxes. With a competent approach, the tax rate will be 20%, and with a simplified taxation system, you can meet the 6%. For comparison, in Europe taxes reach 50-60%, and you cannot count on serious profit in such a situation.
We will add here anti-crisis support measures and, in general, the loyalty of the Russian governments to business. Of course, there are different opinions, but in general, we can say: both during the covid crisis and after the introduction of Western sanctions the Russian government is trying to reduce the load on business as much as possible.
Including the administrative load: the number of check procedures lowers, certain indulgences are introduced. In a country where administrative barriers have always been a major barrier to business, it’s very important.
Profit Here and Now
It is not surprising that investments in Russia are now paying off on average much faster than in Europe. And if investments in production assets can be considered promising in the medium term, then there are also options to make money here and now. In the country, you can relatively easily find projects with a yield of 30-40% per annum, and sometimes you can find even those with 60%.
This, however, is about ruble profitability, so it is necessary to make an amendment on exchange rates and inflation. But inflation at any estimates even in unsuccessful years does not leave the corridor of 10-20% per annum, so the result will be anyway in favor of the investor.
First of all, in this sense, we are considering trade projects that have an internal yield of up to 100%. With such profitability, a business can pay the investor 30-40%, while remaining profitable and continuing to grow. There are a lot of such projects in Russia. Their investment attractiveness is usually rated in private indoor clubs, one of which we lead, helping the business in finding investors.
In Europe, you can count on such a profit only in individual speculative directions, such as cryptocurrency. But not in real economic sector.
Lack of alternatives
The appeal of the Russian market is increased also by problems in other countries. The USA and Europe will probably soon face serious economic crisis, stability of their banking system is questionable. It is enough to remember that only merge with the competitor saved from bankruptcy Credit Suisse — and the Swiss banks were always considered an example of reliability.
We will add sanctions risks here. For the Russian investors they are maximum — only obtaining second citizenship allows to lift many limits, but even it doesn’t guarantee quiet life. In the Western world now any money from Russia are considered dangerous and accepted with a big reluctance only.
But for representatives of third countries, anti-Russian sanctions have changed situation. After all, if measures such as freezing assets, closing accounts, etc., touched Russia, then where is the guarantee that tomorrow the same will not be introduced against representatives of some other state whose policy will be deemed “wrong”?
Thus, the sanctions led to an unexpected boomerang effect. In the eyes of investors, investments in the West have lost their main advantage – reliability. Meanwhile, in Russia, everything has changed in the other direction. If earlier businessmen from India, Turkey, Latin America and even more so Africa were sometimes considered representatives of the third world, now they are perceived much more respectfully as equal partners.
It is not surprising that interest in investments in Russia from these countries is growing. Indians and Turks are now actively investing, including in acquisition of Russian enterprises, Africans also show great interest, although they are experiencing capital shortages. By the way, they hope in addition to profit from purchase of the necessary technologies. According to our forecasts, the Latin America will be next beneficiary of what is happening.
And what are the disadvantages?
Certainly, high profits without risk don’t happen, and investments into Russia do confirm that. The main problem, of course, is in a political situation with all consequences that imply from here. Now investors can only guess how will the situation develop and what consequences for internal politics of Russia it will have. These are obvious risks which are necessary to consider.
In this situation, we recommend paying special attention to diversification of your investment portfolio. It is always useful not to risk everything on one endeavor, but now it is becoming vital. It is useful to balance Investments in the Russian economy with investments in other countries, and also in fundamentally different assets.
If we talk about various jurisdictions, then taking into account sanctions and problems in the economies of Western countries we recommend to consider, first of all, the main beneficiaries of the current situation. This is primarily the so-called “friendly” countries that have benefited from transit: Turkey, UAE, CIS countries, some Southeast Asian countries, Africa. From other instruments, you should consider giving a small share in the portfolio to cryptocurrencies: despite the current difficulties with American regulators, they remain perspective tool.
By Alexander Bespalov, founder of Bespalov Finance, co-chairman of all-Russian social organization “Investment Russia”