Combine the convergence of East and West that followed the fall of the Berlin Wall in 1989 with the tastes of modern global consumers and rich oil and gas reserves, and there are plenty of ways to make money in Eastern Europe and Russia.
But as with any emerging market, an understanding of cultural and corporate nuances is essential for success.
While the economic fundamentals are strong, you need staff on the ground – and people who speak the local language – if you hope to truly understand the subtle signs which are part of any business transaction, East Capital chief executive Michael Hanson-Lawson told Business Insider.
While Russia is the country with oil and gas, growing consumer spending power and the convergence of east and west Europe — which improves manufacturing and infrastructure — is a region-wide story, Hanson-Lawson said, but tapping into it requires local advisers.
Since East Capital’s Russia fund launched in 1998 — the same year the former Soviet nation’s stock, bond, and currency markets collapsed — it has returned an annual average of 18.5%, a 5.2% leg-up on the index. The Eastern Europe fund has returned 16.2% since 2002, 5.4% more than the index against which it’s benchmarked.
It is a success Hanson-Lawson credits to the 1000-plus company visits East Capital conducts in Eastern Europe each year, as well as a network of local sources with their ears to first-hand company information.
“If you really want to figure out the nuances of the meeting you need to speak the local language.”
You also need to go out an visit companies, “rather than saying ‘right, we will sit in this nice office in Moscow’.”
Once two of East Capital’s Russian-speaking fund managers visited the regional operations of an oil company claiming to have $30 billion in cash. During the visit — after which East Capital decided they were telling the truth and took a position — they two fund managers were told they were the first to actually make the trip from Moscow in two years.
“If you are on the ground you have your sources everywhere.”
This is important so you avoid making investments in companies connected to the wrong people, who often “behave badly” to minority shareholders, and run companies with poor corporate governance.
“Very often they might have two companies, a deal will be done with a lot of debt into the public company and the good assets go up in to the private company.”
Corporate culture — especially in Russia — has also changed. Many businesspeople have been educated abroad, and many leaders of top companies have grown up entirely outside the communist era.
In the Soviet days no meeting kicked off without vodka, and “everyone was completely stokers by midday”, Hanson-Lawson said.
“These days, lunch in Moscow is seldom with booze. This is because its a new generation of entrepreneurs – they have been educated in the US, and they are serious and pretty ambitious.
“The way that international business is conducted in Moscow is the same as in Sydney or in London.”
Avoid mistakes in Eastern Europe is imperative, especially in Russia. The country’s own Prime Minister Dmitry Medvedev has said less than 1% of all criminal cases that make it to court result in a not guilty verdict or acquittal.
The most high-profile horror story is that of jailed oligarch Mikhail Khodorkovsky. President Vladimir Putin “broke the back” of his Yukos oil, one of the largest companies to emerge after the privatisation of state-owned assets.
East Capital held positions in Yukos when its shares were frozen by the government, and it is a burn Hanson-Lawson said the company has learned from. But he added the dangers of doing business in the region were generally overblown.
“As an investor [in listed companies] nothing awful is going to happen to you – you are not going to be one of those terrible stories where you end up in prison.
“Private equity has to tread a bit more carefully,” he said.
The same corporate morals which mean investors must tread carefully also have a plus side. Access to bosses and politicians is easier in Eastern Europe, Hanson-Lawson said.
“That’s one of the pleasures of being a big fish in a small pond. You can get in to see ministers as well, in all these countries it is easier.
“The great thing about emerging markets, and with our own position — as in Russia we are one of the two biggest investors — is you get access to the top people.”
Of course, “Then you have to make a value judgement,” as to whether you believe what the region’s top businesspeople have to say.
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