We often think that Russia shouldn’t even qualify as one of the four most important economies for the few decades, ie. we think it shouldn’t be considered a ‘BRIC’ (Brazil, Russia, India China) even though Goldman Sachs included it in this grouping.
We’ve said this before on the Money Game.
Metal Miner suggests however that Russia has the potential to become a massive driver of global growth, especially when it comes to consuming developed-world products. That’s because Russia is a nation half-way between being an emerging nation and a developed one.
Russia has a much smaller population than China, Brazil, or India, but each person has substantially more economic consumption power. The country’s per capita income is about $18,945 vs. $10,427 for Brazil, $6,675 for China, and $3,248 for India.
It could thus become a substantial car market for example, and its relatively wealthy citizens are far more prepared to buy cars in the near-term than the poor in China or India.
Russia is more of an industrialized country with higher levels of education among other metrics. A prime example of Russia’s position relative to both Europe and the BRICs is car ownership. Car ownership in Russia is 231 per 1,000 people, half that in Western Europe but five times more than in China. Detractors could say this means growth in the market will be slower but the average age of cars on Russian roads is 11.5 years against the Western European average of 8.5. This means that not only will the market double in size as it converges with Western Europe, but it will grow even faster, as car owners have to replace their existing cars sooner than their peers in the West.
So for the right products — those which target higher income global citizens — Russia presents a huge potential market that rivals China or India.
For investors, Russian stocks are also generally far cheaper than other more-hyped BRICs:
Russia’s companies are trading well below the price/earnings ratio norm at a ratio of 7x, whereas those of India, Brazil and China are well above it at multiples of 21x, 15x and 14x respectively. But price/earnings ratios are not the whole story. Russia as a place to invest is for those with deep pockets and steady blood pressure.
Politics still dominates many aspects of business life and connections are crucial, if not for the investor then for the company they are investing in. In the long run, Russia has a lot going for it. In the short term, a little more rule of law, a little more democracy and a little less centralist control would make the climate a lot more appealing.
The catch? Doing business in Russia can be literally a nightmare, but the moment they get their act together (if they do, that is) then it could suddenly become a huge opportunity for foreign companies and for many companies a huge consumer market that seems to come out of nowhere.