Did you see Henry Kissinger on CNN Sunday morning two weeks ago? At 98 he is as fluent as ever on foreign affairs. Then there is Kissinger’s dictum that America can only handle one big power rival at a time.
This brings me to America, Russia and China and rising energy prices. It was Ukraine, and especially the takeover of Crimea, that drove America and Russia to opposite ends of the boxing ring and Russia into the waiting arms of China.
It looks like a beautiful mess right now but within a reasonable period, American foreign policy will gravitate back to Kissinger’s dictum. And right now, that clearly means China. In short, the whole Ukraine, Crimea, Russia fiasco could have and should have been avoided.
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Unfortunately, Ukraine is a prisoner of geography and history. It is a bridge between east and west – a classic buffer state. The country will always need to balance closer ties with Europe with good relations with Russia, and this practical consideration should be reflected in American diplomacy. Pushing Russia closer to China is certainly not in American interests.
As former British foreign secretary Lord Palmerston once said, “Nations have no permanent friends or allies - they only have permanent interests.”
For all these reasons, with time, probability is on the side of U.S.-Russian relations improving. The stakes are simply too large and the logic of some sort of rapprochement too clear and convincing.
So while headlines have created a perception of a crisis in U.S.-Russian relations, the reality is that diplomats on both sides are working hard on “alliance management.”
This is important to us as investors because despite Russia’s reputation as being a non-competitive, monopolistic economy, there are over 20,000 foreign capital enterprises operating in Russia. So while Russia is a country with enormous challenges, its stock market is trading at astoundingly cheap multiples right now, though some stocks are in an uptrend due to higher fuel prices.
Howard Marks of Oaktree Capital puts price and value at the center of his book, The Most Important Thing:
“For a value investor, price has to be the starting point. It has been demonstrated time and time again that no asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough.”
Here are two cheap Russian stocks and one ETF in an uptrend to consider as plays on the direction of energy and commodities prices.
Russian Stock #1: Norilsk Nickel (NILSY)
Norilsk Nickel (NILSY) is by far the most expensive of the three, but perhaps the most protected from the ongoing crisis in Russia. Norilsk is a mining giant focused primarily on producing nickel and palladium, with smaller operations in copper, platinum, rhodium and other metals. Despite the enormous attention paid to electric vehicles and other clean tech, this stock is up only 5% in the last year, but should be doing better and trades just a bit above six times earnings.
The company has been selling unprofitable assets around the world and its debt burden is low, with a current dividend yield of around 12%. Norilsk Nickel is very profitable and has a strong balance sheet leading to investment grade status by U.S. credit rating agencies. The company faces no sanctions due to very low level of government ownership.
Russian Stock #2: Lukoil (LUKOY)
Lukoil (LUKOY) is one of the largest oil and gas companies in the world, exceeding even Exxon Mobil (XOM) in total proven oil reserves. What particularly impressed me was that they have remained free cash flow positive during the entire past decade.
Again, very low risk of government intervention, with a professional board and management. And the stock is actually up 29% this year, despite a recent retreat.
Russian ETF: VanEck Russia ETF (RSX)
VanEck’s Russia ETF (RSX) is a shotgun, broader approach and is up 17% this year. Its assets are of course slanted to energy and commodities including the two above ideas, but a diversified approach with this ETF might be the smartest strategy.
Russia may be on my blacklist for political reasons but perhaps there is a place for it in your stock portfolio. It is not going anywhere, that’s for sure. And these Russian stocks and ETF are good, low-risk ways to play it.
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