STOCK MARKET WATCH -- Monday, 3 March 2014

[Demeter]

9. The red flags the West ignored about Putin’s Russia

http://www.marketwatch.com/story/the-red-flags-the-west-ignored-about-putins-russia-2014-03-02?pagenumber=1

Why is anyone surprised by Vladimir Putin’s actions? Experts can jaw all they like on the TV talk shows: Anyone who has followed business or the financial markets has been seeing red flags about Putin’s Russia for years.

1. Look at the Kremlin’s gold reserves

It is a little-known fact in the West, but Putin has been stocking up on gold bullion for years. In five years he has doubled Russia’s bullion reserves to just over a thousand tons, one of the largest holdings in the world, valued at $44 billion. Why? What possible reason could the Russian government have for holding gold, an “unproductive” asset, instead of, say, U.S. Treasury bonds or other financial assets? It isn’t to make jewelry. Gold is the only currency in the world controlled by nobody else. It’s something you buy when you want to have complete freedom, if needed, to defy the rest of the world.

2. Look at the Russian stock market.

Shares of Russian companies are cheap. Really, really cheap. The market overall trades on a ridiculous rating of just five times forecast per-share earnings. To put that in context, stocks in the rest of the world trade on about 14 times forecast earnings, and in the U.S. they trade on 17 times. In other words, investors betting real money value each dollar of per-share earnings in Vladimir Putin’s Russia at about a third as highly as they do in the rest of the world. This “Russian Discount” is by far the deepest in the world. In no other countries do stocks trade so cheaply. Not even in Argentina, where stocks trade on an average of 11 times forecast earnings. Put another way, Russian stocks are so cheap that they are virtually free so long as you trust the government and the rule of law. Good luck with that.

3. Follow the oligarchs

You want to see a booming city full of Russian billionaires who aren’t afraid of being robbed, shot or imprisoned? Fly to Heathrow Airport and take an underground train to the center of town. London has become Moscow-Sur-Thames. The tony West End is heaving with Russian oligarchs, their wives, their mistresses, and their hangers-on. They’ve become a running joke in the Old Town, the social phenomenon of their age. They’re the reason property prices have gone through the roof. It isn’t the Londoners who are buying these homes: They can’t afford them. In the last 10 years the price of homes in the best neighborhoods of London has more than doubled, according to local real-estate firm Knight Frank. They rose last month at an annualized rate of nearly 8%. They have now risen for 39 months—more than three years—without pause.

“It’s no longer just a property market,” one of London’s top financiers told me a couple of years ago. “It’s a place where rich Russians launder their money.”

It tells you something that Russia’s richest and best-informed businessmen have been getting their money as far away from Vladimir Putin as they can. (Is it far enough? In 2006 one of Putin’s fiercest critics, former security agent Alexander Litvinenko, was assassinated in London. Putin refused to extradite the Russian government agent wanted for questioning by the U.K. police. Last year another of Putin’s leading critics, the tycoon Boris Berezhovsky, was found hanging in his home near London.)

4. Talk to Bob Dudley

Dudley’s the chief executive of BP, the British oil giant. He’s the first American to hold the job. He took over in the wake of the Deepwater Horizon disaster in the Gulf. But before his new job, Dudley was known to oil industry watchers for another role: The hapless BP executive trying to run the BP-TNK joint venture in Putin’s Russia. BP invested a fortune putting together this venture, but then Putin and his cronies decided that they wanted control. What happened? Simple. The government harassed Dudley—and then denied him a work visa, kicking him out of the country. Rosneft, Russia’s state controlled oil giant, took control.

“In the light of the uncertainties surrounding the status of my work visa and the sustained harassment of the company and myself,” Dudley said in a statement in 2008, “I have decided to leave and to work outside Russia temporarily.” He said he and the company had been subjected to “unprecedented investigations, proceedings, inquiries and other burdens,” at the hand of Putin’s government.

5. Talk to Mikhail Khodorkovsky

The founder of Yukos oil company was once one of Russia’s richest men, but he made the mistake 11 years ago of standing up to Putin and criticizing him in public. The next thing he knew, Khodorkovsky was arrested in Siberia on charges of “tax evasion” and “fraud” and thrown in jail. He remained there until just before the Sochi Olympics, when Putin was on a public relations blitz. Meanwhile Yukos was seized and sold off cheaply—the main beneficiary being, once again, Rosneft, the oil company controlled by the Kremlin. Funny, that.

6. Talk to Bob Kraft

In 2005 the owner of the New England Patriots football team was part of a delegation which visited Russia and met Vladimir Putin. At the meeting the Russian President admired Kraft’s Super Bowl ring. Kraft took off the ring and gave it to Putin to show him. Putin put the ring in his pocket and walked out of the room. At the time I worked at the Boston Herald and I spoke to Kraft’s public relations team. They were, for some reason, desperate to avoid an incident. They told me Mr. Kraft had “decided to make a present of the ring to President Putin”... after Putin had put it in his pocket. It may seem like a little thing but actually it’s a clue to the character. What Vladimir Putin wants, Vladimir Putin gets. He couldn’t care less what anyone else thinks. (Putin, during his public relations blitz in the lead up to Sochi, offered to buy Kraft a replacement ring).

Brett Arends is a MarketWatch columnist. Follow him on Twitter @BrettArends.