Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

An Investment Banker's Bonkers Confession

To Our Readers

Has something you've read here startled you? Are you angry, excited, puzzled or pleased? Do you have ideas to improve our coverage?
Then please write to us.
All we ask is that you include your full name, the name of the city from which you are writing and a contact telephone number in case we need to get in touch.
We look forward to hearing from you.

Email the Opinion Page Editor

In my career as a strategist with various local financial institutions, since shortly after the 1998 financial crisis, I have repeatedly -- some would say tediously -- argued that Russia was finally turning the corner: Its economic edifice was being rationalized, its political structure consolidated and, given the more rational use of Russia's huge mineral, human and technological resources, intrepid investors would be richly rewarded.

More recently, I have been bitingly critical of sundry Western opinion-makers -- politicos, journalists, a few of my peers, but especially the various "independent and objective" foundations and think tanks that have benefited so greatly from the generous financial support of Menatep's principals -- those self-appointed "patriots and heroes of Russian reform" now bent on wreaking maximum damage via a $250 million PR campaign savaging Russia's reputation in global financial and political circles.

And yet now -- suddenly -- I am coming to realize how wrong I have been. Those of us with a long-term professional commitment to Russian financial markets should instead be thankful to the Russophobes and other doomsayers for allowing us to maintain our marvelously comfortable lifestyles with such minimal effort.

A confession is in order here. As an investment banker, I have benefited greatly from the Russian financial markets massively outperforming their peer group against a backdrop of international pessimism and distrust. Profits are made by trading against misinformation, misconceptions and mispricings. Extracting superior returns from totally efficient markets is like trying to squeeze blood from a stone -- while making money in markets populated by misinformed, fearful and overly emotional players is child's play: Trade against the consensus and you're home free.

In the grim autumn of 1998, at a time when, inter alia, The Economist was warning of Russia imminently splitting into four warring states, GDP collapsing and the ruble being rendered worthless by a new bout of hyperinflation, some were foolish enough to issue a "buy" recommendation on Russia 2028 eurobonds, then selling at a price of 21 cents. Six years later, the total return has comfortably exceeded 1,400 percent. Russian equities have done at least as well. Indeed, Russia has consistently boasted both the world's best-performing bond and equity markets.

Unlike theology or philosophy, finance ultimately has an objective benchmark for success: Either you make money or you lose it. Has this caused the skeptics to re-examine their fundamental beliefs and capitulate? Not a chance. Open any newspaper and you'll find warnings of a fearsome acceleration of capital flight (never mind that Russia's currency reserves recently increased by $4 billion in a single week) and massive disinvestment (although fixed capital formation is forecast to be up 11 percent on the year). Yukos lawyers and PR firms are warning that foreign investors are fleeing Russia, yet apparently no one told BP, Ford, Total, Conoco or the Koreans -- much less the horde of investors who made the recent RusAl eurobond and the Mechel and Efes IPOs such absolute blowouts. And, as always, Russia is about to be thrust into crisis by a collapse in commodities prices. Meanwhile, driven by surging Asian demand, commodities markets seem to take a perverse pleasure in breaking historical records on an almost weekly basis. Investors are right to worry ... all the way to the bank.

Despite the severe dysfunctionalities of the Russian state, the macroeconomic situation could hardly be better. Thanks perhaps to "managed democracy," the administration has been able to resist the temptation of buying popularity -- instead maintaining budgetary discipline so rigorous that Russia has gone from international basket case to the world's sixth-largest reserves position. GDP growth remains enviable and reform, while slow, is undeniable.

Perhaps the most vital point to remember, though, is, as I wrote on these pages in 1998: "If the locals are not getting their share, don't expect to get yours!" Happily, we finance jockeys are now in good company. With the reduction in widespread poverty one of President Vladimir Putin's major goals, his government has forced redistribution of at least some of the fruits of economic growth throughout society. Not only official statistics, but every proxy indicator, from mobile telephones to meat consumption, from rail traffic to car registrations, confirms the rapid improvement in living standards.

The year 2004 has proved more difficult than foreseen. Every market participant has suffered from the egregiously mishandled Yukos affair (stocks sold off, trading volumes shriveled and so on). One would have expected the administration to demonstrate a bit more concern for innocent bystanders, i.e. the Yukos minority shareholders who got caught in the crossfire.

Yet beyond any reasonable doubt, had Putin failed to crush what can only be described as a hostile takeover bid by Khodorkovsky and Co. for the Russian state, we would now be witnessing the restoration of the disastrous "oligarchic model," leading to the sort of financial mayhem last seen in 1998.

Despite concerns over Yukos and fears of a global recession causing a drop in commodities prices, over the past three months, Russia has boasted the world's second-best performing investible equity market, outperformed only by mighty Ukraine.

So thank you, Mikhail! Thanks to the FT, The Washington Post and The Economist! Thanks to the New Right and to the Old Left. Thanks to Carnegie and Heritage and New American Century.

Given the biased and sometimes hysterical rhetoric, any rational investor should by now be rushing to cut his exposure and go short. Although professional ethics requires that we warn against such folly, our words are likely to be met with a healthy dose of skepticism. Your friendly brokerage will be delighted to establish stock-shorting facilities for those who think they know better.

How much money do you want to lose?

Eric Kraus, chief strategist at Sovlink Securities, contributed this comment to The Moscow Times. His full views can be found at: www.sovlink.ru