Russian Interests

By Mark Mobius, Ph.D. | May 29, 2014 AAA

Tensions between Russia and Ukraine remain high, and have spilled onto the international stage. The Western world seemed to be caught off guard by Russian President Putin’s reaction to civil unrest in Ukraine, leading to Russia’s annexation of Crimea and spreading into a broader question of regional sovereignty. The situation remains fluid, so it’s difficult to predict just exactly how it might play out. But given escalating conflict in Eastern Ukraine, we do not envision an easy or quick end to the conflict.

The United States has imposed a number of sanctions on Russia and has taken a stronger and harsher stance than the European Union (EU) simply because Europe would suffer more if it did the same, in our view.

The West has held off on true “sectoral” sanctions – applying sanctions to every company in an industry sector. However, should Russia intervene militarily, we would expect that position could change. Sectoral sanctions could cut the Russian economy off from the US dollar-based global financial system, but would be extremely challenging to implement and could cause collateral damage to Western economies, particularly the Eurozone. Sectoral sanctions also could play into Putin’s hands, increasing his control over the oligarchs and their enterprises, resulting in the oligarchs’ moving money outside of Western control, perhaps to China.

We could envision an agreement whereby the Ukrainian government agrees to a federal system giving the Russian-speaking areas of the country considerable autonomy.

Business on both sides – Ukraine and Russia—should be able to continue despite the conflict. We believe there is considerable trade and investment flow that won’t be interrupted, even with some sanctions. Russia is a major supplier of oil to Germany and the Netherlands in particular, and of natural gas to Western Europe generally. Disruption to energy trade would be in neither side’s interest.

It has been our view that Ukraine’s finances, although under pressure, are likely to be supported by the EU, United States and World Bank. There is a possibility of Russia being able to achieve some financial benefits as well, including gas contracts.

We have been investing in Russia for a long time, and have found that Russian equities have often presented themselves as potential bargains during various stressful points in time. In our view, this is true even more so today. That said, we believe a steep valuation discount is required in Russia given the current geopolitical risk involved in investing there.

We have continued to be interested in long-term opportunities in select companies within Ukraine and Russia and we will continue to monitor the situation. Any future investment decisions that are made in Russia—as in all markets in which we invest—will be made on a bottom-up, stock-by-stock basis resulting from our internal research, which includes an assessment of each stock’s macroeconomic and political risk factors. Our hope is that if there is a resolution of the conflict between Russia and Ukraine, it can restore some investor confidence and allow companies to continue doing business in both countries.

Dr. Mobius’ comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

All investments involve risks, including possible loss of principal. Foreign securities involve special risks, including currency fluctuations and economic and political uncertainties. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Currency rates may fluctuate significantly over short periods of time and can reduce returns.

Investopedia and Franklin Templeton Investments have or may have had an advertising relationship, either directly or indirectly. This post is not paid for or sponsored by Franklin Templeton Investments, and is separate from any advertising partnership that may exist between the companies. The views reflected within are solely those of Franklin Templeton Investments and their Authors.

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