At the time of writing the conflict in Ukraine continues to become ever more intractable, bloody and bitter. For many investors this will be too early to be even thinking about investment opportunities after the war ends, says David Amaryan, founder, Balchug Capital.
However, as an Armenian investor with 20 years of experience in investing in the former Soviet Union, I believe it is prudent for investors in the region to look to the future.
Our underlying philosophy remains simple. Everything, even global volatility and wars, has a beginning, a middle and an end. It may be that the current crisis is still only in its beginning phase. Those who keep cool, study history, act prudently and have faith in the capacity of human beings to resolve their differences, will survive the middle and emerge strong at the end. The East and West survived decades of Cold War, realigned and learned to live interdependently. At Balchug, we believe they can and will do it again.
This article is neither a geopolitical critique nor a partisan view of the military conflict dominating world attention. Nor is it a deep-dive economic analysis of this tumultuous moment in history. Rather, I hope to offer a fund manager's pragmatic assessment of the current situation, as well as a plan to navigate our way through a world in conflict and act on opportunities that may emerge despite the perils of our time.
The US and its allies have imposed heavy, unprecedented sanctions on Russia, its economy, its businesses and many of its entrepreneurs. As a consequence, Russian economic growth and development has slowed. But it would be naïve to believe Russia will suffocate or be brought to its knees. Its economy was and is stronger than most Western analysts thought. It is essentially self-sufficient, has had five consecutive years of budgetary surpluses, has comparatively very low debt, and does not recklessly print rubles to meet its needs.
Russia is much more than its comparably small GDP. It is the largest country in the world by land mass, and that land is resource rich, making Russia a key player in world commodity markets. Moreover, Russia is the world's largest exporter of wheat, accounting for 18% of global shipments. Between them, Russia and Ukraine account for 28% of global wheat exports, which the war has already disrupted. And Russia is the largest global exporter of fertilizers. Russia and Belarus combined account for 40% of global potash exports, while Russian exports make up 22% of global ammonia shipments and 14% of world's urea exports.
This is only one way in which retaliatory sanctions hurt both Russia and the West in the short and long terms. Informed observers and even average citizens on both sides appreciate that economic "nuclear options" threaten catastrophic consequences the world over.
While harsh sanctions seriously inhibit the ability of Russian companies to conduct business, many that are essential for global economic growth (such as Norilsk Nickel) are adapting to the new reality. Russian business leaders are acting much faster than usual, rethinking their future, re-evaluating relationships with their partners and reorienting their businesses not only to mitigate the damage caused by sanctions but seizing unexpected opportunities created by them.
Russian businesses are developing new geographic partners and supply chains, shifting more toward Asia, Africa and other countries representing 80% of the world's population that are not part of the sanctions alliance. They are also investing seriously in Russian industries, which is a relatively new phenomenon. There is a real push to create "import substitution" on every level, which will be difficult at first but eventually will enhance the country's self-reliance. Hardship today should result in transformation and strength.
For investors, this is not a time to panic. True, a harsh new reality has descended on us as a result of the protracted war. Frozen assets with no end in sight are hobbling the financial system; investors are differentiated as domestic versus friendly or hostile foreigners; basic market "logistics" seem lacking as to depositories, settlement, asset transfers; and there are uncertainties as to dividend and coupon payments, ADRs and local shares. But besides causing a colossal migraine, this turmoil will create opportunities for pragmatic, patient, long-term investors who know their way around Russia and its financial markets.
At Balchug, as we refine our investment process to meet the challenge of this turbulent time, we try to see through the chaos and focus unemotionally on raw economic facts, performance and potential. Relying on our vast experience and wide network of contacts, we analyze situations and forecast scenarios, assign probabilities and calculate the optimal risk/reward equation of our investments.
High inflation, rising interest rates and the already strained budgets of Western countries, combined with the volatile situation in Ukraine, have led the world to the brink of recession. We believe that in these circumstances, there is extraordinary value in Russia and the region in the future.
At present, of course, no foreign investor, friendly or hostile, is allowed to trade in Russia. We think that this will gradually change, and we will be ready when it does. In the current tempestuous climate, when companies suspend earnings publications and make fewer public announcements, it is important to have as much information as possible to make informed decisions and our presence in the region gives our team the advantage of reliable knowledge.
By David Amaryan, founder, Balchug Capital
