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What Next For Russia?
September 21 - 22, 2016, "Prosperity Investor Trip 2016" brought together the leading experts of the Russian market. FMG attended to catch the latest updates on investing in Russia.
Main takeaways from our visits to
Moscow and St Petersburg
Russia remains at the top of the world's low cost producers of oil (est. cost $4/barrel) and gas thanks to the decline in Ruble and revenue in US $. Given the massive devaluation of the Ruble, Russia is able to hold balanced budgets unlike its Middle East competitors who have pegged their currency to the US $. Oil and gas have gone from being close to 50% of GDP in 2000 to 16% in 2016. Sanctions have had a positive effect on domestic production and agriculture that most developed markets have failed to recognize. Magnit, Russia's largest food retailer, now offers 90% domestic assortment whereas the majority was imported prior to the sanctions.  
 
Famous GUM department stores at the Red Square in Moscow, are now nearly empty except for the Asian tourists who actually have money to spend. Due to the Ruble's collapse, imported goods are now nearly twice the price today vs pre-sanction levels.
Today, Russia has a higher birth rate than the EU and the US after a long period of declines and the court system is operating in a more transparent fashion. Brexit should benefit Russia as the UK has been the most aggressive country in terms of EU sanctions.

Another interesting stop, was the new Gazprom main office in St Petersburg. The company paid out 40% of its profits last year with an aim of paying out 50% within the next three years.

As of late, domestic companies have drastically increased their local and global competitiveness. One example is Aeroflot who now have among the world's newest aircraft fleet with an average age of 4 years vs a large US airline's 17. The company is now very competitive globally with nearly 30 million passengers last year.
 

On FMG's Aeroflot site visit, they displayed one of their brand new flight simulators costing $11 million per unit where pilots go thru regular training, typically in 4 hour sessions.
Russian equities are trading at less than 7x earnings and in 2017 the estimated dividend yield of over 7% may become the world's highest.

Ease of doing business in Russia is dramatically improving with a current slot of 51 vs 112 in 2013.

Government is getting increasingly efficient providing more services online and consequently a 10% work force reduction.

The pension age has increased as well as life expectancy but remains low as compared the to West. Over the last 10 years it has increased for men, from 59 to 66 years.

FX reserves are now US $ 400bn (+50 from 2014) and Russia has a current account surplus of 4.5% with a trade balance of 10%.

Pension funds in Russia had to be profitable by law during a calendar year, if not, the managers had to personally fill in the gap. Consequently, only 4% of investments made it into equities. Now this rule has changed and expectations for 2018 is that we will see 30-40% invested into equities.
On site visit to LSR, the largest producer of housing modules for the construction industry, producing 500,000 m² of apartments per year. LSR employs close to 16,000 people.Their stock price is up 70% in one year with a dividend yield of 9% so plenty of good growth stories to be found in the Russian stock market.
Despite economic sanctions and a drop of crude oil prices of 60% from its peak, Russia is muddling thru well given the overall challenges. Russia is strong in math and science and when times are tough, the best companies take advantage of inefficiencies and consolidations such as in the banking sector. Inflation is falling and as a result, the ruble is expected to strengthen. Most changes in Russia are not from Putin but rather from the private sector achievements. Key commodities are doing well this year with a couple of exceptions, which benefit resource-rich Russia
Sources: Bloomberg, Prosperity Capital Management, Gazprom, Aeroflot, World Bank Group
RUSSIAN FEDERATION FIRST MERCANTILE FUND
The investment objective of the Russian Federation First Mercantile Fund is to achieve long term capital appreciation utilizing a concentrated sector strategy investment approach. The Fund Manager has significant experience gained over many years of investing in Russian companies. The Fund invests mainly in shares of companies with short and long term profit opportunities fueled by export and domestic consumption and investment within Russia.
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Disclaimer: FMG (Malta) Limited (“FMG”) is licensed by the Malta Financial Services Authority (“MFSA”) as a category 2 Investment Services Provider as provided in the Investment Services Act Chapter 370 of the Laws of Malta. FMG is authorized to act as a full scope alternative investment fund manager (“AIFM”) in terms of Directive 2011/61/EU of the European Parliament and of the Council on alternative investment fund managers (“AIFMD”). This summary is for information purposes only and does not constitute an offer to sell or a solicitation to buy. Citizens or residents of the United States and India may not invest in these Funds. These funds may not be marketed to Swiss citizens or residents except those considered as “regulated qualified investors” by the Swiss Collective Investment Schemes Act and the Swiss Collective Investment Schemes Ordinance.  These Funds are not to be marketed to EU or EEA investors.  Investors who wish to obtain information on these funds will only be provided any such materials upon receipt of an appropriate reverse solicitation request in accordance with the requirements of the EU AIFM Directive/Swiss Law and/or national law in their home jurisdiction. Opinions and estimates constitute the manager’s judgment and are subject to change without notice. Past performance is not indicative of future results. Investments in Emerging Markets should be considered high risk where a portion or total loss of capital is conceivable. No assurance can be given that the investment objective will be achieved or that an investor will receive a return of all or part of his/her initial capital, and investment results can fluctuate substantially over any given time period. Please refer to the relative Fund’s prospectus which contains brief descriptions of certain risks associated with investing in the fund. FMG funds or funds marketed by FMG are aimed at experienced investors and you have to fit in this category to be able to invest in such funds. Questions should be directed to your local representative or financial advisor. This document may not be reproduced, distributed, or published for any purpose without the prior written consent of the manager. Copyright (C) 2016 FMG. All rights reserved. TAG 2016109