It’s hard to say whether Friday’s night’s drive-by assassination of Russian opposition leader Boris Nemtsov can drive market sentiment any lower. Investors will have to wait and see how Sunday’s planned anti-war march-turned-funeral procession will unfold in Moscow. Any heavy-handed police crackdowns will continue to put Vladimir Putin in a corner. As it now stands, the majority of the Western media have convicted the Russian president with homicide.
The investment community has been a lot less knee-jerkey. Fund managers and analysts are willing to admit they don’t know who fired the four “magic bullets” that took the wind out of Nemtsov, Red Square lit up like a holiday postcard behind him.
“This clearly doesn’t look good and it raises the specter of more governance issues in Russia. Human rights, free speech, open opposition are all immediate concerns,” Michael Reynal, portfolio manager of the RS Emerging Markets (GBEMX) fund, told FORBES late Friday evening after the news of Nemtsov’s death broke.
Reynal is a close observer of Russia. We met recently in Moscow in October during an investor conference attended by Putin. Then, Reynal said Russia was already in trouble and things were going to get worse following four months of harsh sanctions from the U.S. and E.U.
Investing in Russian equity is more like Russian roulette. It’s a gamble. There’s a lot to lose.
Nemtsov’s murder reminds investors that besides the oil risk and the geopolitical risk associated with the Ukraine imbroglio, there is also domestic political risk.
If Putin ordered the killing of Nemtsov, a former high official within the Boris Yeltsin administration, we will surely never know. If the opposition parties see Putin as the West does — a cold-blooded killer out to turn Russia into a dictatorship — they should call his bluff and cause a ruckus during Sunday’s rally. If not, then some form of official political protest should arise in the days ahead. Now is their moment. The West is in their corner, is it not? Why bother to stand down?
And what if Putin were to respond through disappearing acts of his rivals, or a poisoned shot of Russian Standard? If so, he risks even deeper isolation. His fragile peace with Germany and France would crumble as people see him as a despot. Sanctions will get cranked up and extended. From there, it will only be a matter of time before the public, many of them card carrying members of Putin’s United Russia party, will come to see that the nation’s isolation is causing them financial duress. None of this turns out well for Putin.
New Yorker writer Joshua Yaffa put it best in his commentary published shortly after Nemtsov’s death. “Either the authorities would kill someone who poses little real political danger, or they have given rise to a venomous hatred that they can no longer control.”
Russia investors have done alright for themselves this year trading on volatility in oil markets and wagering on Ukraine-Russia peace deals. The Market Vectors Russia (RSX) exchange traded fund is up over 21% this year. The ETF is the most liquid day trade into Russia. But where will it go on Monday because of the murder in Moscow?
“I don’t think this does not much damage to RSX on Monday. It’s a tragic incident, but I don’t think it stirs the geopolitical pot for Russia. If (Ukraine president Petro) Poroshenko was gunned down that would be a different story. This is not a market relevant factor,” says Vladimir Signorelli, chief economist and co-founder of Bretton Woods Research LLC, a macro investment research firm based in New Jersey. “Here’s how Putin would have done this if he was to do it correctly…he’d make it look like an accident, like a car crash, not something like this,” Signorelli says. “Unless I’m missing the calculus of power, whereas you want to make a statement to your enemies,” he wonders out loud.
Nemtsov was a local politician in the state of Yaroslavl. He was a member of the PARNAS party, a small liberal-democratic party that has no seats in the national parliament.
He was one of the chief organizers of the protest rally scheduled for Sunday.
On Friday, the night of his death, he called Putin a “liar” on national radio and said the president was inciting violence in Ukraine. He said he had evidence and was going to publish it. His interview, broadcast on the independent Echoes of Moscow radio channel, is what has the anti-Putin crowd convinced the Kremlin either knew about the killing and did nothing to stop it, or orchestrated it from on high.
This month, Nemtsov said he was afraid Putin might kill him. The day before his murder, Nemtsov published a lengthy report on the exorbitant salaries of Russian members of parliament on his blog page. This was not a man afraid to fight the power.
See: Russia’s Best Bet – NYT Op-Ed by Boris Nemtsov and Ian Bremmer written in 2010.
For now, Russia’s government pleads innocence. Putin’s office has blamed everyone from Islamic terrorists to some in the opposition movement looking for a martyr to ignite their cause.
The only eye-witness to the murder was 24 year old Ukrainian model Anna Duritskaya. She was apparently Nemtsov’s girlfriend. Authorities were questioning her on Saturday.
See: Fear Envelopes Russia After Killing – The New York Times
Mikhail Khodorkovsky, no stranger to Putin’s wrath, said in a statement yesterday that Russian society can no longer let political killings go unchecked. Khodorkovsky saw his billion dollar net worth evaporate when the Putin government shut down his oil firm Yukos in 2007 and put him in prison for alleged tax evasion. His lawyer, Sergei Magnitsky, died in a Russian jail. Khodorkovsky is now a free man, but is not welcome in Putin’s Russia.
“For more than a year now, the television screens have been flooded with pure hate for us,” the ex-billionaire said in a statement on the Khodorkovsky Center’s website. “And now everyone, from the blogger at his apartment desk to President Putin himself, is searching for enemies, accusing one another of provocation. What is wrong with us? How can we hate one another so much?”
Remnants of the Cold War remain. Putin is untrusting of the West, and sees Washington as using the Ukraine crisis as a means to kick Russian oil and gas out of Europe and extend NATO’s reach. NATO and Ukraine have military training agreements, but Ukraine is not a NATO member state like other former Soviet nations.
Western governments turned sour on Russia following the March 17, 2014 annexation of Crimea, a peninsula in Ukraine’s Black Sea. The Organization for Security and Cooperation in Europe said the annexation was illegal.
Meanwhile, institutional investors have grown accustomed to Russia being the wild east, led by a man who sees the West from a deeply suspect, counter-intelligence viewpoint.
“We haven’t had any people say they want to drop Russia so far,” George Houget, global investment strategist at State Street Global Advisors told me just a few hours before Nemtsov was gunned down. “At this junction, I’d say that these sanctions get extended.”
In 2007, when Khodorkovsky’s Yukos Oil was stripped down and taken over by Rosneft, Market Vectors Russia rose 30%. His lawyer, Magnitsky, died on Nov. 16, 2009 and RSX fell roughly 2% the week after.