Global Investor: The Irrational Fear of Putin

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Byline: Barton Biggs (Biggs is a managing partner of Traxis Partners, which has a substantial position in Russian equities.)

Russian President Vladimir Putin is in the world's doghouse because he does not appreciate sanctimonious lectures or missile batteries on his border. He and President George W. Bush patched things up a bit at the G8 summit last week, but the tension remains. Ironically, we as investors should be grateful. As a result of this alleged increase in political risk, the Russian stock market and its oil stocks in particular have been falling even as both emerging markets and energy equities have climbed. After a week in Russia, I am convinced there is no business reason for this stumble; it's all about the media rhetoric.

There is a presidential election in Russia next year, and Putin will stand down. However, he has made it clear he will continue to be the power behind the throne. He is passionately committed to restoring Russia to its former position of pre-eminence as a world power, economically and politically. Putin wants to be the modern reincarnation of Peter the Great. Indeed, I am told that in his working office, behind his desk is a massive portrait of the Great Peter.

A poor, rapidly developing country often does best with a benevolent dictator. Democracies, and particularly messy coalition democracies, are ineffective in imposing the kind of discipline and sacrifices that bootstrapping economies require. Rather than criticize Putin's sometimes heavy-handed tactics, investors and America should embrace Russia and Putin. If we don't, China will. With luck, Putin's upcoming visit with Bush at the family compound in Maine will clear the air.

A year ago, emerging-market funds were invested more heavily in Russia than in the general Emerging Markets Index, but now they have reversed and are significantly underweight. The emerging-market indexes are up about 15 percent for the year. Russia, by contrast, is down about 10 percent and is the only index market that shows a loss. Russia is cheap in both absolute and relative terms, trading at about six to 10 times earnings, depending on which measure you use.

Russia is the ninth biggest economy in the world, with GDP growth of about 7 percent, huge reserves of oil and minerals, a large budget surplus, a strong currency and falling inflation. Productivity is growing at 10 percent a year, corporate profits at more than 20 percent, and believe it or not, corporate governance is improving. …