Tuesday, March 2, 2010


Companies that are either primarily listed in countries outside of North America or that do much of their business outside North America are often discussed on this site. As a result, I receive many questions regarding additional risk factors such companies may face, and whether such risks would ever deter me from investing in such companies.

While I agree that stocks facing uncertain or anti-business regulatory environments can be more risky, they can also offer more opportunities (i.e. trade at larger discounts). Furthermore, one can diversify certain country-specific risks away by avoiding over-exposure to high-risk regions. As a result, I will generally stick to a bottom-up approach when it comes to international investing, subject to some region-specific portfolio allocation maximum. However, there is one exception to this: of the countries that represent a significant portion of worldwide trading, I will not invest in companies that have a material portion of their business in Russia.

I should first note that my opinions in this regard are not based in scientific fact or research, but are instead formed by a mosaic of information that I have accumulated or come across over several years. This is not because I haven't sought out formal literature on the subject, but rather it is the result of the fact that it is incredibly difficult to objectively ascertain which countries are the least investor-friendly. What data can you use to draw such a conclusion? Can you find reliable data of that nature?

Therefore, my conclusion may suffer from several biases, not the least of which is confirmation bias. But what I have found is that a systematic regulatory culture of entitlement and corruption has resulted in an anti-business climate in Russia for as long as I can remember. From the way Russia handled its arrest of the world's 16th wealthiest man, to IKEA's reaction to Russia's regulatory procedures, to the bizarre theft of Hermitage Capital's assets (that subsequently became owned by common criminals!), and the many incidents in between, Russia has shown itself to be an investing minefield. Below is a startling video where CEO William Browder describes how his VISA was cancelled and how his company was stolen from him by the Russian authorities:

What do the rest of you think of investing in Russia? Do you have any countries that you stay away from? What has prompted you to do this? Could you be suffering from one of these biases in your assessment, or would a reasonable, objective person find fault with your argument?


Anonymous said...

Venezuela is a country I've shied away from investing in. HNR is a stock that seems very undervalued. The various media outlets that have been censored for disagreeing with Chavez and the various take overs of natural resources/heavy industry that has occurred. While there has been some compensation, unlike Russia, it would definitely be harder for a ~200 million mkt cap company to survive having their assets taken away than COP or XOM.

Parker Bohn said...

I tend to invest in places that scare other investors I know, but I've avoided Russia, for the same reasons you have mentioned.

I now avoid Venezuela, after being burned there once when Chavez nationalized VNT, a telecom.

I would invest in either country at 4 times earnings, however. I mention this because a glitch in Yahoo's data listed iShares Russia at PE=4, and caught my interest for 5 minutes until I figured it out.