Investing in Russia: Steer Clear of This Debt-Saddled "BRIC" Bully

by Jeannette Di Louie

Investing in Russia: Steer Clear of This Debt-Saddled "BRIC" Bully

by Jeannette Di Louie, Investment U Research

Thursday, January 7, 2010

These days, you don't have to look far to read about success stories within the "BRIC" nations.

However, while Brazil, India and China enjoy solid growth, the remaining member - Russia - has fallen to the bottom of the pack.

And with good reason.

Having gained significant investment popularity before the global financial crisis hit, it's no coincidence that Russia began to fall on hard times around the same time that the recession took hold and oil prices dropped from the $140 level. As a result, Russia experienced a 7% GDP contraction during the first quarter of 2009, a painful 10.9% slump in the second quarter and a further 8.9% tumble in the third.

Despite those abysmal figures, the International Monetary Fund (IMF) projects a much better year for Russia in 2010, with annual growth forecast to come in at 3.5%.

However, there are reservations about the country's debt load and other problems that could stunt its growth for some time...

Russia's Mistakes Instigated It's Own Downfall

Like much of the Western World, Russia made some serious mistakes that instigated its downfall. And it hasn't fixed them.

For example, Russia allowed its banks to write numerous bad loans, many of which came back to haunt them in 2009. That resulted in loan restrictions for small businesses and rising jobless numbers.

Unemployment rested at 5.4% in June 2008, but by October 2009, it had vaulted to 8.1%. And while that's a definite improvement from the 9.4% high in March 2009, Russia's bad loans and poor financial practices haven't disappeared, which means there are no long-term guarantees about the future.

Garry Kapsarov, a contributing editor for The Wall Street Journal, reported last year that:

"The Russian National Welfare Fund - created to back up the state pension system - is being raided to prop up the monopolistic industries belonging to Mr. Putin's closest allies. Billions are... going to service debt, not to develop industry."

And with Putin still calling the shots behind President Dmitri Medvedev, that isn't likely to change this year.

Russia: An International Bully

Russia could help itself on the P.R. front, but in addition to its internal problems, it doesn't play nice with its neighbors. In fact, it doesn't play nice with anybody, except for maybe Iran and China.

Take its war with Georgia in 2008, or its feud with Ukraine in 2009. And a New Year means a new squabble - this time with Belarus over oil prices.

In addition, Reuters recently noted that after "several winters of supply disruptions [Russia] also strained ties with the European Union, Moscow's biggest trading partner."

As the global community pushes forward with alternative energy incentives and the energy sector begins venturing into natural gas, Russia shouldn't be giving its customers any more reason to avoid its business, considering how much it relies on oil sales.

Even President Medvedev admits that the Russian economy lacks real diversification and relies too heavily on exports of oil and other raw materials instead of internal growth.

And with U.S. demand still slack, Russia's position is tenuous...

Problems for Russia: Lagging Demand & Unemployment

Although solid economic growth in China and India helped the price of oil rise from its low last year, the fact that U.S. demand is still lagging and unemployment rests at 10% poses a problem for Russia.

And while the IMF forecasts a better year for Russia in 2010, the World Bank doesn't expect Russian GDP to climb back to pre-crisis levels until late 2012. So until it manages to lower its debt and diversify the sources of its economic growth, exercise caution if you're looking to invest in Russia.

Good investing,

Jeannette Di Louie

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