With the FIFA 2018 World Cup announcement on 3 December, Russia joined its peers in the so-called BRIC group of countries as the host of a high profile sporting occasion, at least for UK-based spectators.
The BRICs – Brazil, Russia, India and China – have recently hosted or are set to host major sporting occasions – in part a symbol of their now established place in the global economy.
The next World Cup in 2014 will be hosted by Brazil, Delhi in India played host to the Commonwealth Games this year, and the Chinese capital Beijing was the location of the 2008 Olympic Games.
Although most coverage in the UK about the World Cup vote will focus on analysis of why England failed again to secure the votes to be the 2018 host, there are interesting implications for Russia as it seeks to overcome the challenges involved in delivering on its pitch.
Responding to the announcement Russian prime minister Vladimir Putin said the World Cup would have a positive impact because Russia’s main challenge ‘is to diversify its economy and develop its infrastructure.’
“Preparation for the World Cup solves at least part of this challenge, infrastructure development,” Putin said.
He also told a press conference that it showed Russia was trusted and insisted that the country’s economy, social and political spheres were ready to host this kind of event.
The country is already in an advance state of preparations for the Winter Olympics to be held in Sochi in 2014. The cost of that work has increased and there will be some concerns about the cost to the government of the large scale development work it must do for the World Cup, especially if it does not attract commercial investment.
The investment picture
Jim O’Neil, head of global economics, commodities and strategy research at the bank and asset manager Goldman Sachs, created the term BRICs at the beginning of this decade. In 2008 he said there was a lack of understanding about what a good story in the BRICs economic development Russia was.
Speaking at the end of 2009, O’Neil said Russia had more scope to recover from the global recession than the other BRIC countries that have surpassed expectations for economic growth.
Although identifying fundamental issues to overcome including serious problems with corporate governance, O’Neil believed there was growth potential in the Russian economy despite its dependence on energy and natural resources.
Concerns over corporate governance in Russia are unlikely to have been allayed by reports this week stemming from the WikiLeaks publication of diplomatic cables. Reports quoted correspondence from US diplomats suggesting high level corruption in the country.
It is potentially these concerns, a lack of understanding about Russia or preference amongst investors for other markets that has lead to lower valuations in Russian equities than its peers.
Asset managers have commented on Russian equity being undervalued and the potential for growth in share prices to reflect positive performance and outlook, partly driven by domestic demand.
On 2 December the PepsiCo corporation announced it had agreed to take a 66 per cent stake in Wimm-Bill-Dann Foods a leading Russian food and beverage company, giving PepsiCo exposure to a growing consumer market.
Several specialist and emerging market funds invest in Russia. The Allianz BRIC Stars fund seeks capital growth through investments in all of the BRIC countries with holdings in Russia.
Neptune chief executive Robin Geffen manages the firm’s specialist Russia and Greater Russia Fund. The fund’s commentary for October said political and economic reform was unlocking ‘catch-up potential’ with wage growth driving consumer industries and Russian resources supplying emerging markets.
Broader emerging market funds will not necessarily invest in Russia simply because it is grouped in the widely used BRIC category of leading developing economies. Other emerging markets where investments may be made include Poland, Hungary, Turkey, South Korea and Mexico.
The value and income from equity investments can fall as well as rise and investors may not get back the full amount invested. Different types of investment may carry different levels of risk and may not be suitable for all investors.
© Fair Investment Company Ltd