Why shouldn’t we ignore the political and economic strength of Russia?
Due to its geographical situation and sheer size, its political and cultural history, and its inestimable resources, Russia holds a key place among the major nations. The whole strategy currently being played out by Mr Putin is built on these key strengths. Today, Russia has no major political or economic ally, however Mr Putin knows that there is a strong support from its own population for its political decisions. This is not the case everywhere. In fact, never in modern history, have the presidents of the Western governments received lower levels of favorable opinion than today. As evidence, take the G20 in Brisbane recently, where one single man has taken into account the opinion of the population which has elected him.
Our leaders and the written press try to tell us that Russia is a problem; that they are not playing along harmoniously in the world’ symphony. But we believe that this is not truly the case. Let’s imagine a world without quarrels for territories and natural resources of all kinds. Obviously this is virtually impossible since the dawn of time! But unlike in the past, tensions these days are artifically maintained by Western governments so they can rule in a desired way. A crystal clear example of this is what has been happening in the Middle East region for the last 50 or so years. To what end? Undoubtedly, there are a multitude of reasons, but the most important ones are probably the following: rhetoric and propaganda, political (re-election), diversion (in other words: admission of failure), lack of foresight (our elected representatives are no more far-sighted than you and me), and a dogmatic approach to the problems.
The preceding is probably true for any kind of nation exposed to a conflict or political issue; and it is for that reason that we include in our investment decision making process historical knowledge, geographical issues, and estimates of future growth in order to develop a risk analysis for all investments. In what way can we apply this approach, for example, to industries of the larger nations of the developed countries? If we were to do so, the investment culture in equities would probably take a serious hit, because the countries in which our most preferred companies are located, have been acting for a very long time now as predators. In addition, the statistics published tend to be manipulated to suit immediate needs, or even worse, information is not made public.
Back to some basics! Ever since 2009, some major countries have seen their economies restarting. The United States of America have been mastering their recovery in text book style. Yet, there is a lot of beautification, not all sectors are benefiting to the same extent. The present economic growth is primarily due to heavy investments and the re-industrialization in the shale gas extraction industry. However, according to our readings this situation is not expected to last as most of the rigs are in loss-making territory when barrel prices go below the USD 75 level.
What is more, most of the Western states throughout the world are facing a number of unfavorable long-term trends, i.e. a) the average age of the population is increasing, b) while productivity gains have been achieved, lower inflation rates have resulted, c) developed countries are highly dependent on intercontinental imports, and d) households, as well as the states themselves are stuggling with huge debts.
Thus, according to our findings, we conclude that there is little room for much change during the next decade or so in the developed economies. Inflation rates, growth rates, and therefore interest rates shouldn’t change substantially over the next 10 to 15 years. Expressed differently, with growth less important than in the past, (for the next decade, the global worldwide growth is estimated to be between 3.0 to 3.5 % ), interest rates will remain more or less at their current levels in the developed countries. More importantly, any attempt at monetary tightening will result in irreversible damage to the Western economies, which have become ultra-sensitive to financing costs.
How does Russia fit into all of this?
The population of Russia has declined inexorably since 1920. Economically and geographically, it has been able to cope with multiple problems in recent decades. And today, Russia, the largest country in the world, not only has strong exposure to Europe but also to the Asian continent. For a number of years now, a stream of immigration, predominantly of Chinese origin, has been flowing into the very eastern part of Russia. The restocking of this region, abandoned at the end of the Soviet era, is a very positive signal for Sino-Russian trade development. Chinese immigration has a looming sense for business. This immigration boom, accompanied by the rapid expansion of China, should help bring economic developments into the MRC basin. With this in mind, we believe there are a number of interesting investment opportunities in the making. Particularly around future energy transfer from Russia to China and onwards to Korea, and India which will transit through the MRC region. In testimony, in May 2014, Russia signed a contract with China to supply gas for a period of thirty years for the cost of approximately four hundred billion USD.
As any other seasoned investor, we consider growth before anything else. As the latter is not the problem in a developing country, it is therefore necessary to consider other factors in order to determine whether an investment is valid or not. From a top-down perspective, we look at the interaction between aspects such as the penetration rate of credit, the rate of foreign investment, and the dependency on raw materials. From a bottom-up perspective, points such as the generation of cash flow, the ability to innovate (knowing that the standard is to copy the Western), and the sector of activity are considered. Overall, we believe that the next round of growth in this region will play out in the services sector (excluding banking) and in the generation and processing of food products. It’s exciting to note that a change of attitude is evident in the background. The Sino-Russian population, once submissive and indoctrinated, is increasingly well-trained, pragmatic, and independent. These qualities should be favorable for the development of the services and trades sectors.
What are the other factors influencing Russia position in the MRC region?
The increasing middle class in the emerging countries is generating a booming demand for products and services similar to those available to Westerners. Prestige and quality are key words in these societies as they aspire to improve their status. Today, Russia has nothing to offer the people in the emerging regions because its only strategy to date has been developing its resource deposits as much as possible. But just for a moment consider life under a warming climate (global warming) and the consequences for Russia, Europe, the United States, and Brazil. What assumptions can be made? Let’s start in the Southern Hemisphere:
- Brazil: In 2012, more than 13% of its exports were shipped into the MRC region. Climate change could cause the same conditions in Brazil as in Australia today. A large part of the South American continent would be transformed and would become less appropriate for the production of soybean, corn, cotton, etc. Most likely, under such a scenario, one of the direct consequences would be the collapse of food exports and related products to Europe, China, and the United States.
- Europe: This is the only continent without any relevant primary resources. Rich in culture and history, European engineers have been at the origin of most of the technological advances of today. In terms of food production, available products are of very high quality and the population has, overall, a well-developed sense of criticism towards genetically modified products. Except for exotic products, Europe could be self-sufficient in terms of food production today if necessary, a situation that it will lose when the climate changes. Finally, we deduce (mainly due to a lack of fossil fuels and other resources), that it is the only continent that presently has the capacity to generate viable solutions in the alternative energy sector and suggest different business and economic models as a result.
- United States of America: By excellence, this continent reflects all the superlatives and excesses of consumerism. Consume more and always less expensively are the key words, I call it the “Walmart – Syndrome”. During the last decades, the USA has undergone a fundamental transformation in the tertiary sector, which now contributes more than 75% of the country’s GDP. Today, more than ever in the past, with its re- industrialization now at full speed, the United States is largely dependent on, and therefore vulnerable economically, to actions by the rest of the world. Any potential change in their status quo is severely resisted and even fought, either on an administrative and legal level, or if these avenues are not available, physical action may be resorted to. According to a few reports, the CIA was involved in the private plane crash with Christophe de Margerie on board. He was at that time the acting CEO of Total, who has substantial business interests in Russia, which he kept defending. The question which remains unanswered is how will the USA react and combat climate change, for which we are all responsible and which will probably affect this nation more than any other?
- Russia: Russia is the biggest country worldwide with an area of about 17.1 million km2. On its own, it represents 11.5% of the usable surface of the globe. Nevertheless, a large part of its territory is currently non-arable land, either because it is subject to permafrost, or because the land became a desert area when water reserves diminished. Climate change will most likely bring a large part of the Russian territory into a milder climate and more varied seasons. Its presently non-exploitable arable land is its future asset to satisfy Asian nutrition demands. A more immediate opportunity exists in the redevelopment of the railroad infrastructure. Given the country’s location (2/3 in Asia and 1/3 in Europe) and less extreme weather conditions, it has the ideal opportunity to develop and promote overland transportation facilities (train and truck) which are faster in the case of “point-to-point” transport than the present shipping arrangements. This new bridge for consumer goods, produced in China and sold in Europe, would in turn allow the development of many kinds of services along this new silk-route.
In the next few day we will publish the articles listed below, which provide more detail within the context described here. Don’t hesitate to share these articles.
Links to analyses of providers and enablers with a focus on:
- Investment opportunities in the oil companies
- Investment opportunities among the service providers
- Investment opportunities among infrastructure providers
- Investment opportunities in the agricultural sector
- Investment opportunities in companies that will benefit from global warming