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The Benefits and Risks of Investing in Russia ($OZON & Others)
Over the last decade, BRIC countries (Brazil, Russia, India, China) have emerged as new-world economic players, building some of the largest economies in the world and competing with the U.S. and Western Europe. In the process, these countries have offered some compelling investments for American investors: Alibaba ($BABA) and Tencent ($TCEHY) in China, StoneCo ($STNE) and PagSeguro ($PAGS) in Brazil, and so on. In the last week, however, Fintwit and other investing platforms have been ablaze with a new IPO out of Russia: Ozon ($OZON). An e-commerce company modeled after Amazon, Ozon has grown rapidly during the pandemic, and its stock has taken off in the U.S. as part of this year's e-commerce craze. Like many of today's international e-commerce darlings, MercadoLibre ($MELI), Sea Limited ($SE), and Jumia ($JMIA) to name a few, $OZON has the potential to be hugely successful, but there are also some concerning risks that investors should be aware of. This memo outlines some of the benefits of investing in Russia as well as some of the biggest risks.
The Russian Market Opportunity & Benefits to Investing There
Since the collapse of the Soviet Union, Russia's economy has developed into one of the largest, and surprisingly one of the more advanced, economies in the world. Russia is the 9th most populous country in the world, and its economy is the world's 11th largest. The country has emerging IT and telecommunications industries and rich deposits of valuable natural resources. Importantly, Russia has the 7th most internet users in the entire world, the highest level of any European country.
All in all, this bodes well for e-commerce and other internet-based trends in the country. The well-educated, internet-using population could certainly be a catalyst for the rapid development of e-commerce in the region. With a massive market opportunity, there is plenty of room for companies like $OZON to grow, making them a compelling investment.
The Risks of Investing in Russia
Despite the size and the quick development of the Russian market, there are serious risks to investors that must be considered:
- Lack of Regulation - Russia does little to regulate accounting standards and business transparency in their country, especially relative to the strict standards of the United States. Similar to China, this does not necessarily imply that all Russian companies are fraudulent, but rather that the Luckin Coffee ($LKNCY) horror story that investors saw earlier this year in China could just as easily have happened in Russia.
- Overall Instability - Both politically and economically, there is instability in Russia. Although this instability has yet to manifest into any major conflict, there is legitimate concern that any sort of large-scale instability could negatively affect business outcomes
- Reliance on Natural Resources - Natural resources make up an estimated 60% of Russia's GDP. The sector employs a significant part of Russia's working force, and when commodity prices drop, a ripple effect is felt throughout the entire economy. Thus, even if investors are invested in an e-commerce company, they could see diminished returns due to commodity cycles entirely outside of that company's control.
- Politics - Vladimir Putin and the Russian government are notorious for their discreet, corrupt, and sometimes violent method of governing. While this has implications throughout the Russian economy, there are concerns about the effects on major Russian companies. One only needs to look to the story of Yukos as an example. In the early 2000s, Yukos was one of Russia's largest and most successful oil companies. In 2003, however, CEO Mikhail Khodorkovsky had a falling out with Russian President Vladimir Putin. As the conflict between the two deepened, Putin had Khodorkovsky sent to court based on baseless charges. The Putin-allied courts subsequently sentenced Khodorkovsky to eight years in prison, ending his tenure as Yukos CEO and effectively guaranteeing the company's downfall. In fact, over the next few months, Yukos was forced into bankruptcy and its shares were sold off at a fraction of their original price to Putin allies.
- Corruption - Despite its increasing levels of development, Russia is rated as one of the most corrupt countries in the entire world, on par with countries like Iran, Nigeria, and Guatemala.
Overall, in one form or another, significant risks exist in just about any developing economy. Although companies like $MELI and $SE have proven their worth, they too face risks that American companies typically do not have to worry about. Nevertheless, I have closely studied these risks and feel like the risk-reward is worth it for $MELI, $SE, and others. The same cannot be said, however, about Russia, and thus I do not plan to start a position in $OZON any time soon.
Sources:
Russia Business Today
Natural Resources Make up 60% of Russia’s Economy: Report - Russia Business Today
Russia’s Natural Resources and Environment Ministry estimates that the combined worth of the country’s oil, gas and other resources amounts to 60 percent of its gross domestic product, RBC reported on Thursday. Russia’s economy is heavily reliant on exports of its resources, as the country is one of the world’s top producers of natural gas and …
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