Strategy – At a time when the western world no longer knows where to turn to find an investment that can hold amid a flood of falling asset prices, it is interesting to look at what our distant neighbors, the Russians, are doing.

To grasp the Russians’ investment philosophy, you must observe the current situation in Russia from both an economic and a socio-political perspective while also attempting to understand the country’s rapid growth over the last ten years. Those of us who were already working in this market before it was considered a real GEM (or global emerging market) remember it when it still resembled a jumble of BRIC-a-brac (BRIC for Brazil-Russia-India-China), and are amused to think back to 1998, when a good many Swiss and multinational companies, having suffered heavy losses, shut their books and fled Russia, on the verge of bankruptcy, for fear of going down with the Titanic. What can have happened in the past ten years to allow this country not only to bounce back but to emerge as one of the major players on the world economic scene?

A likely explanation lies in the Russian capacity for faith; or rather, in an access of some sort of genetic fatalism, which enabled them to view the 1998 crisis as a trial laid upon them by destiny, one it was their duty not to fail. Many people lost the very shirts off their backs, yet they would never say die. And perhaps they had no choice. With hindsight, the 1998 crash seems entirely diluted by the performance of the Russian Trading System Stock Exchange over the last ten years.

Of course, Slavic fatalism cannot explain everything. Despite President Vladimir Putin’s various shortcomings, which economic analysis tends to discreetly overlook, the end result of his term is more than positive. If Russia can maintain an annual growth rate of 6-7% and an S&P rating of BBB+ (though of course one should be wary of ratings these days), it could become one of the world’s five largest economies by 2020. The middle class has more than doubled in size, and the birth rate has finally begun to grow. The 2014 Olympic Games in Sotchi are not only a boost to morale and a source of national pride, they also represent real economic added value, with public and private investment in the project expected to reach USD 12 billion. Two large companies, BazEl and Norilsk Nickel, have announced plans to develop hotel infrastructure, and airports and ski resorts, respectively. Rumor has it in Russia that high construction demand has already made building materials, including bricks and iron, a scarce resource in the Sotchi region.

Of course, the high price of oil has also supported Russia’s economic expansion. The oil price spike has filled the coffers of government funds, which should grow to USD 220 billion by the end of 2008. This figure is even more interesting since, should oil prices drop, these funds would be used to cover any shortfall in tax revenue.

Now, let us ask ourselves once again how Russians invest. Why, they do it at home, of course! While already holding a good deal of money in foreign accounts, Russians have even begun applying to set up fiduciary deposits at Russian banks. Although they are currently interested in structured products based on the steepening of euro interest rates, in guaranteed capital products based on soft commodities futures and in those based on the ruble’s appreciation against the dollar and they also continue to be interested in the price of silver or nickel and do not shun certain private equity funds, the largest share of their wealth goes back to where it came from, Russia; and it does so for several reasons.

Taxation levels in Russia remain reasonable. With a flat tax rate of 13% for individuals and 24% for corporations, Russians declare their income more readily, allowing them to reinvest in their own country.

Moreover, political continuity seems assured: the king is dead, long live the king! The election of Dimitri Medvedev suggests that there will be no change in political or economic direction, and markets like predictability.

And finally, the most important reason lies in the fact that Russians can understand an infrastructure development project in the Urals better than the content and basis of an American CDO (collateralized debt obligation).

However, let us not overlook the fact that the Russian stock market also felt the backlash of the subprime crisis, with a downturn in January, and that Russian revenues are too dependent on gas and oil. But when we observe, for example, the share price of potassium producer Uralkali, which floated at USD 18 in October 2007 and now trades at USD 39.60, we can understand why the Russians are primarily interested in investing in their own country. And can you really blame them?

Daria Mihaesco, Head of Eastern Europe in French-speaking Switzerland at Lombard Odier Darier Hentsch & Cie