Given the strong start this calendar year, there appear to be solid prospects for the Russian economy and stock market in 2012. Last year, the BRIC markets generally got crushed and the Russian market was down over 20% so that, today, the market P/E is about 5 making it the cheapest one in the Emerging Market space. At current prices, Russian stocks are a bargain relative to their international peers. The MSCI BRICs index is up 12.2% year-to-date, with an average gain in these markets of 12.9% . Both tallies are well above the 8.9% gain for the benchmark MSCI GEMs index so far in 2012. All of the BRICs markets are in the list of the top eight EM performers this year, Russia being up over 10%.

Russia’s current economic fundamentals, in terms of low trade and budget deficits, central bank reserves and domestic inflation rate, continue strong and 4% GDP growth is again predicted. Last year we heard a giant sucking sound throughout the Emerging Markets as investors ‘fled to quality’ back to the US. It was, quite simply, a panic, ignoring fundamentals of the fine companies whose performance remained strong, albeit tempered by weaknesses in commodities prices and consumer demand. But growth and profitability, especially as compared to international peers, is impressive.

More Mainstream Russia

In December, after an 18-year tussle, Russia joined the World Trade Organization (WTO) and the benefits that will accrue to its economy as a result should become evident in the years ahead. Later this year, Russia will host APEC (Asia-Pacific Economic Co-operation) in the Russian Far East at Vladivostok’s Russky Island where it is building an 1100 meter bridge. In 2014, Russia will host the Winter Olympics in Sochi on the Black Sea and, in 2018, the soccer World Cup.

These vast infrastructure projects, including roads and airports, as well as stadia and hotels, offer investors some opportunities, but the leading near term opportunity is in the under-valued oil & gas sector.

Rising Middle Class

Overall, positive impact of Russia’s rapidly rising middle class is being felt in retail and other sectors. A Citibank report issued this month estimates that between a third and one-half of the Russian population is now middle class: 82% own their own home (with little mortgage debt) and 55% of youths are graduating university, larger percentages than in the US.

“Russia Discount”

Political consciousness is also rising in that growing middle class as seen by recent demonstrations following December’s State Duma (parliamentary) elections. “We need to ensure that our economic transformation brings about the growth of the middle class…..the standard bearer of democracy.” These are the words of Vladimir Putin in December, 2007 quoted in my book OUT OF THE RED (John Wiley & Sons 2008, page 175). If Mr. Putin heeds his own words and democratic practices become even more evident in Russia – after all, there are four major political parties and even more Presidential candidates, all of whom are getting copious amounts of free TV time during the election cycle — hopefully this will greatly reduce the deep ‘Russia discount’ which investors currently suffer and the Russian stock market will better reflect values relative to international peers.