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What can you invest in apart from oil and natural gas

December 2011

Russian Survey has carried out another survey to find out which sectors of the Russian economy are most popular among prospective investors and which are least popular. We asked visitors to our web page to answer the question, ‘Which sector of the Russian economy would you be willing to invest in apart from fuel and energy?’ The results were as follows. Manufacturing came out on top with almost 15% of the votes. The second place was divided between food and hospitality, each of which got 10.5%. Construction was in third place with 8.8% of the votes. This was hardly surprising as the prices of real property in Russia are breaking all records. Investors also expressed interest in metal processing and telecoms, which got 7.9% each. Note that our independent expert believes that these two sectors are most promising in terms of investment opportunities (read the Expert Opinion below). And the least popular industries in our survey were textiles and catering.

Expert opinion

Which industry would you be willing to invest in apart from oil and natural gas?

Ilya Balakirev, an employee of the analysis and risk management department of UFS Investment Company:

In our opinion there are quite a few very interesting sectors to invest in apart from oil and natural gas.

These include other mineral resources, such as mineral fertilisers, for example, Russia has large deposits of phosphates and potassium. The prices of fertilisers have increased substantially over the past few years and so Russian manufacturers of fertilisers now seem like quite an attractive option for portfolio investors.

The Russian metal making companies also look pretty good. Deep vertical integration coupled with relatively cheap electricity and labour make them formidable competitors in the global market. They have higher profit margins than their counterparts in the developed countries and they’re now successfully increasing their share in the global market, buying production assets and deposits both in Russia and abroad, on the whole they look much more confident than their western counterparts. However, since this is a cyclical business, it should be noted that a lot in this industry depends on the situation in the global economy and the trends in commodity markets.

The consumer market still remains interesting. It’s well protected against oscillations in business activity. At the same time household income is growing which ensures there’s room for growth and especially in the premium segment. Low concentration and penetration on the regional level means large retail chains have immense growth potential. Simultaneously retail chains in Russia have paid off a lot of their debts since the crisis and now they’re much better protected against possible deficit of liquidity in the financial sector.

There is great potential for companies involved with the Internet. The market of internet advertising, internet retail, discount services – all these segments are expanding really fast from practically zero, with businesses doubling in size in just 2-3 years. This segment is now at the peak of popularity in the world, which is being fuelled by expectations of IPO’s by large players such as Groupon, Facebook, Zynga, while in Russia for the time being there is significantly less competition in this sector, which in part stems from the language barrier. This segment can also represent an interesting option for both portfolio (which is reflected in the extremely successful IPO’s of Yandex and Uninet) and direct investments.

Agriculture and real property also still retain quite a lot of potential. However, these sectors are most sensitive to oscillations in liquidity and also are very much dependent on state regulation, which creates additional risks. For this reason, the most interesting investment options here are the assets themselves, real property and land. In particular, agricultural lands in Russia cost just a fraction of what they are sold for in other countries with similar climate and yields, so potentially a lot of cash can be made in this market.

The banking sector is still dominated by a handful of major players and the trend towards even bigger banks is expected to continue in the near future. Major investors, in our opinion, may be interested in this market in terms of mergers and acquisitions.

The energy sector, in our opinion, is not very promising under the current conditions; aggressive state regulation has been adversely impacting profitability and until the situation changes towards less regulation the risks in this sector will remain high.

Serge Karykhalin, analyst with TKB Capital:

Russia is in great need of foreign investments to boost its economic growth. Foreign investments can improve corporate governance, increase productivity and introduce modern production technologies.

The main obstacle to foreign investments in Russia is a poor investment climate that manifests in poorly functioning state institutions and inadequate protection of property rights. As a result many investors conclude that investing in Russia is too risky and opt instead for other countries such as China and Brazil.

There are a lot of foreign companies that are already operating in such sectors of the Russian economy as mechanical engineering (and in particular the automotive industry) and the financial sector so it would probably be fair to say that those investors who wanted to come to Russia have already come here.

Under the current conditions it is the consumer sector and retail as well as the high tech sector that seem to be most attractive to foreign investors. In high tech the state is trying to promote the development of the sector through a number of state sponsored projects like Skolkovo etc.