Investors, disgruntled with the dismal performance of US markets, are looking for fertile investment pastures abroad. But that is easier said than done. The once red-hot markets of China and India have cooled off along with almost any other equity market including Europe.

The Vanguards Emerging Markets ETF (AMEX: VWO), the broadest measure of emerging markets, is down over 17% year-to-date and is closely followed by the Vanguard European ETF (AMEX: VGK).

Aside from the iShares MSCI Turkey (NYSEarca: TUR) which is up nearly 10% since its launch in March, 2008, Brazil is the only country (tracked by ETFs) that was in positive performance territory, at least until the end of July. It seems as if global concern caught up with Brazil starting in August but as of 7-31-2008, the iShares MSCI Brazil (NYSEarca: EWZ) was up 2.1% rivaled only by the iShares Latin America 40 (NYSEarca: ILF), up 3.2%. ILF enjoys a 67% weighting in Brazil. See below for a complete list of Brazil-related ETFs.

6-year chart of the Sao Paulo Stock Exchange (BOVESPA):




As the largest exporter of agricultural commodities such as coffee, sugar, beef and orange juice, Brazil is the center of the South American trade bloc. In 2005, Brazil exported $118 billion with a trade surplus of $47 billion.

With the recent run in commodity prices, it is no surprise to see Brazil on top of the YTD leaders list. This makes you wonder, what other countries are blessed with abundant natural riches? Saudi Arabia is the world’s largest oil exporter but doesn’t allow foreign investments. Russia is the second largest exporter of crude oil and welcomes foreign investors, at least at first glance.

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Russia’s economy is growing because everyone wants a piece of Russia’s oil and gas. Foreign investments rose to $52 billion in 2007 from $32.4 billion the year before. Russia seems like a slam dunk opportunity, right?

Van Eck made a pure investment in Russia easy with the Russia ETF (NYSE: RSX). The Russia ETF is a market cap weighted ETF with about 40 holdings. The three top sectors are oil/gas, iron/steel and telecommunication with a 39%, 24% and 12% weighting. See below for a full list of Russia-related ETFs.

While investing in Russia is now easy (technically speaking), it is burdened with other complications.

Unfortunately, Russia (245x larger than Georgia) brought its conflict with Georgia (a major US ally) to the brink of war and is sending a loud and clear message to the markets: Investor’s interests take a back seat to the country’s geopolitical ambitions.

A brief summary: While both nations are playing the blame game, in essence the conflict is over the province of South Ossetia (population: 70,000) which first tried to break from Georgia in the early 1990s.

Georgia is a key transit route for oil heading west from the Caspian Sea. That transit route is an important counterweight to Russia’s influence in the European energy markets.

The recent months have revealed another major flaw. David Littmann, senior economist with the Mackinac Center for Public Policy, emphasizes that investments in countries without a market system, are speculation, not investments. "An economy can’t develop naturally with government interference in form of subsidies, quotas and property expropriation" he says. Below are two recent examples of unwanted government interference:

Robert Dudley, the American CEO of TNK BP, a joint venture of British Petroleum and a consortium of Russian investors has fled Russia complaining of official harassment. Some corporate functions are effectively controlled by the Russian shareholders instead of the company’s management. The government seems to be siding with local shareholders, entangling the company in tax, labor and immigration investigations.

The ADR of steel and coal producer OAO Mechel (NYSE: MTL), a 1.71% holding of the Russia ETF, dropped more than 50% following Mr. Putin’s (former President and current prime minister) criticism for price-gouging and alleged tax dodging.

Putin was indirectly criticized by Medvedev’s noble observation: “We need to create a normal investment climate in our country. Our law-enforcement agencies and government authorities should stop causing nightmares for business.” Oh really? 

With its seemingly endless supply of natural resources, Russia is swimming in export wealth and essentially does what it wants, regardless of what foreign investors think.

The RTS index (Russian stock market) rose 141% the year following Mr. Putin’s brutal invasion of Chechnya in 1999. Even though the RTS has corrected nearly 30% amid the above issues, some analysts predict that the conflict with Georgia offers another “Chechnya-like” buying opportunity.




Russia wouldn’t be the first resource-rich country to become (or be resurrected as) a political bully. Foreign investors have shown an immense capacity to swallow concerns about Russia’s behavior. The nepotistic government and its meddling in the private business sector might do little to change that. But remember, investments in countries like Russia are speculation more than investments.

Russia and Brazil related ETFs: