Investors should re-think their view of Russia as an oil-dependent economy, according to Liesbeth Rubinstein, manager of the Invesco Perpetual Emerging European fund.

Accession to the World Trade Organization (WTO) and a new direction for public policy mean the country has already taken significant steps to opening up its economy, reinvesting its huge resource revenues, and developing its consumer markets, she says. 

Investors often worry about political interference in the economy, but Rubinstein says that the Russian government is serious about stepping back and has already started to do so.

"With the presidential elections in Russia concluded, we believe that the pace of structural reforms in the country is likely to quicken."

"Russia’s 2020 Strategy Update lays out a reform programme that should bolster and diversify the economy in a sustainable way. This includes an agenda of reducing the state’s footprint on the economy through privatisation and improving governance." 

Mark Livingston, investment director in the emerging markets team at Fidelity, agrees that the political changes are a step in the right direction, although he has some reservations.

"Russia does have corporate governance issues, and we look to circumvent that wherever possible, but at the moment it’s very cheap so the reward is potentially very high," he said.

Rubinstein points out that not only are valuations at historic lows, but there is also a growing culture of returning dividends to investors. 

Livingston says that seeking out the stocks that pay the highest dividends is one way the Fidelity team tries to counteract the corporate governance issues in the oil industry.

Sberbank, a bank in which the government has reduced its stake as a sign of its commitment to open markets, is another stock the Fidelity emerging markets team likes.

"For us Sberbank has one of the best management teams in Russia and we view it as a way to play the Russian oil story," he said. 

Rubinstein cites research from Merrill Lynch that suggests the middle class in the country will treble by 2020.

"The knock-on effect of this positive trend is that it should provide investment opportunities in areas such as modern format retail, consumer goods, financial services and the development of the healthcare system." 

"In particular, the high fragmentation of the retail market, in our view, offers an attractive growth story with real income growth and robust organic expansion being the key sector drivers. Large western retailers may also be tempted to enter the Russian market through M&A deals to gain access to its higher growth potential," she said. 

She points out that the Russian internet audience has already overtaken Germany’s to be the largest in Europe, even though penetration is only at 50 per cent.

Data from FE Analytics shows that the Invesco Perpetual Emerging European fund has outperformed its benchmark since launch in January 2008, losing 15.48 per cent while the benchmark is down 26.74 per cent.

Performance of fund vs benchmark over 3yrs



Source: FE Analytics

In the recovery after the 2008 crash the fund has also outperformed, making 13.12 per cent over three years while the benchmark has risen 5.87 per cent.

The fund is 70.86 per cent invested in Russia, with a further 16.03 per cent invested in Poland. The energy sector makes up 40.78 per cent of the fund’s holdings.