COMMENT: The myth of a new Cold War

By bne IntelliNews August 28, 2008

Kingsmill Bond of Troika Dialog -

There is no new Cold War. As strains from the Georgian war spread, investors should avoid the tired calls for a renewed Cold War as the last gasp of the warriors against the Soviet Union. There is neither the ideological difference, nor the equality of power, nor the desire on either side to spark another. The conflict of words we are witnessing is rather an aspect of the waning global power of the US and the rising local power of Russia.

More tensions are likely. The conflict will strengthen hawks in both the US and Central and Eastern Europe, as well as in Russia. In the US, Senator John McCain has used the Georgian conflict as a central issue in his presidential campaign. In Eastern Europe, Ukraine has turned up the tension by its comments on the Black Sea fleet and US missile bases. And in Russia, those fearing encirclement by Nato have only had their fears enhanced.

Investors are unlikely to buy. Unknown political risk and constant negative headlines are not likely to induce investors to buy the market, especially at a time when commodity prices are falling and legal risks seem high. We estimate that foreign investors own around half the free float, and at the last time data was available, they were nearly 2% overweight the market. Although the market is cheap at 7.5 times forward earnings, it was cheaper than this in the period before 2003 when we also faced considerable scepticism on the Russian investment story.

Market is vulnerable to foreign capital flight. Although Russia's macroeconomic framework remains extremely robust, it is foreigners who are the country's key sources for long-term debt and equity capital as long-term domestic sources of money are still relatively underdeveloped. Foreign selling not only undermines the equity market, but can slow growth if companies are unable to access international debt markets.

No rally till 2009. Although the market is cheap and the domestic story remains resilient, it will need a pretty significant catalyst (such as a rising oil price or a major package of oil tax reforms) to counter global risk aversion and investor shock after the events of the last month, even if Russia pulls out of Georgia. We would be surprised to see a catalyst to take the market up before year-end.

A good opportunity to find bargains. The two key risks for emerging markets have always been macroeconomic disaster and politicians leading the country away from a market economy, and a good rule has been to avoid markets affected by these until after a major shock. However, we believe that neither risk applies in Russia, and expect the rising cost of money to create attractive bargains, especially among the domestic plays.

Ukraine is the most vulnerable area. Unlike Russia, the Ukrainian macroeconomic framework is dependent upon foreign capital, as the country runs a large current account deficit. The latest geopolitical fragility could damage the country's currency and market still further.


Send comments to The Editor


COMMENT: The myth of a new Cold War

Related Articles

Drum rolls in the great disappearing act of Russia's banks

Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more

Kremlin: No evidence in Olympic doping allegations against Russia

bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more

PROFILE: Day of reckoning comes for eccentric owner of Russian bank Uralsib

Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more

Register here to continue reading this article and 2 more for free or purchase 12 months full website access including the bne Magazine for just $119/year.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

Thank you. Please complete your registration by confirming your email address.
A confirmation email has been sent to the email address you provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

If you have any questions please contact us at sales@intellinews.com

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at sales@intellinews.com

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

Thank you. Please complete your registration by confirming your email address.
A confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.

Dismiss