Many US businesses continue to be interested in the Russian market, which they expect will recover over the next three-four years, Kyle Shostak, director of Navigator Principal Investors, told Sputnik.
“Despite the gloomy geopolitical outlook, quite a few American companies remain interested and expect the Russian market to recover in next 3-4 years,” Shostak said.
Shostak spoke to Sputnik just a day before the US presidential election, and expressed belief that trade relations between the United States and Russia might actually have a chance of improvement within the next four years.
“For one reason is that they had already hit the lowest bottom and have no further room to fall,” he explained. “Some smart and adventurous Russian companies will be finding their way into the American market with certain niche products or services that will appeal to American consumers and compete favorably in prices (IT/fin-tech, specialty food products, even fashion designers).”
At the same time, Shostak said that some US businesses, for example consumer goods, presently sitting on the side, would look to the Russian market to expand their footprint as part of their strategic play in the emerging markets.
“It is worth remembering that Russia has never discouraged foreign investments including from the US,” he added.
Shostak pointed out that now it was a good time for the international companies to invest into Russia.
“The Russian stock market and the ruble remain cheap. The key MOEX index is trading at only 8.6 times earnings. That’s more than half as cheap as emerging markets, three times cheaper than the S&P 500 and 3.5 times cheaper than European stocks,” he explained. “Clearly, there is a big upside, riding on a wave of economic recovery into the next 12-18 months period. A handful of Russian technology and e-commerce companies are making plans to go public internationally, including at NASDAQ, having already filed with the regulators (Ozon), or having plans to do so in the next 12 months. We certainly recommend making some allocations to Russian stocks, especially the technology and e-commerce.”
The US sanctions against Russia remain in place and Shostak admitted that he did not foresee much material change in their scope and depth regardless of who would occupy the Oval office.
The investor believes that the sanctions pretty much exhausted themselves and hardly serve the original purpose anymore.
“For one, they failed to destroy the economy,” he said. “The sanctions were laid on the entire participants of the Forbes List, all significant top managers of state — owned assets, all the trading arms of the Russian energy companies. They covered a wide range of industries and products, from commodities to capital markets instruments, such as equities and debt of the Russian issuers. At the worst, they inflicted damage in terms of time and resources needed to carry on domestic productions, previously lacked, they delayed processes (Nord Stream) but didn’t stop them.”
In other cases, Shostak noted, the sanctions helped boost domestic production and made Russia a net beneficiary.
“A good example is the agricultural sector where Russia has become the world’s leading grain and other commodities exporter,” he said. “At this point, the feeling is that the US has run out of any significant new names to add to the already existing long list and the sanctions pain doesn’t hurt as much as it used to. Moreover, I don’t foresee any new significant geopolitical moves by the Kremlin, comparable in impact to Crimea or Georgia, which would be viewed as highly disruptive and threatening to its close neighbors and the West as the Kremlin seems to be preoccupied with the domestic economic agenda in an effort to achieve the much-needed growth amid the global pandemic.”
“I don’t see the US elections as having any significant impact on the future of the sanctions regime and their intensity as I believe they are to remain in place as having a full bi-partisan support,” Shostak concluded.
Earlier in October, Russian Prime Minister Mikhail Mishustin said that the unilateral sanctions the United States had imposed against Russia were dealing a serious blow to US companies operating in the country.
Mishustin emphasized that Russia was open to building multifaceted interaction with all members of the international community and was shaping its market to be an attractive environment for foreign economic entities.
Relations between Russia and the United States deteriorated in 2014 under then-US President Barack Obama during the crisis in Ukraine, when Washington imposed sanctions on Moscow. Since then, the United States has expanded and tightened the sanctions regime following accusations of Russia’s alleged meddling in the 2016 US presidential election. Moscow has repeatedly denied interfering in Ukraine and in the US political system.
Likely US Election Influence on American-Chinese Market Ties
Shostak noted that the US investors will keep working closely with China as its short-to-medium-term prospects look very encouraging.
“While investors may get scared away by the military-like rhetoric, the actual rewards of holding Chinese stocks in the last six months have been remarkably generous,” Shostak said. “We intend to continue working closely with our Chinese investments and believe that their short-to-medium-term prospects are very promising relative to what can be expected elsewhere. We don’t expect the US election to have any significant impact on our plans.”
The investor noted that Beijing expects GDP to top 100 trillion yuan (about $14.9 trillion) this year, which would imply an increase of at least 0.9 percent from 2019’s level.
“This is by far the world’s most impressive economic growth which the investors must take advantage of,” he said. “More and more Chinese stocks are available for purchase via traded indexes as well as through some bulge bracket US brokerages who recently opened up their offices in China to trade domestically.”
Shostak believes that the framework of the US-China trade agreement, reached in January, will remain in place as both parties rely heavily on mutual trade and “the economic decoupling voices on both sides of the Pacific are still a minority.”
“I expect the two sides to recalibrate the agreement, a process that seems to be underway as a high-level US trade delegation is visiting China these days,” Shostak stated. “We recommend increasing China’s allocation, which should include not only Chinese equity but also the US companies continuing to do business in China and benefiting from improving supply chain.”
The tariff war between the United States and China started after US President Donald Trump decided in June 2018 to impose 25-percent tariffs on $50 billion worth of Chinese goods in a bid to fix the US-Chinese trade deficit. Last May, the United States more than doubled import duties on $200 billion of Chinese goods. Beijing retaliated by increasing tariffs on US imports later that year.
At the beginning of 2020, the United States and China struck the Phase 1 trade agreement in which Beijing agreed to increase purchases of US goods and services by $200 billion over the next two years. In February, China reduced by 50 percent tariffs it had imposed on a number of US goods.
The possibility of reestablishing US investments in Cuba if Biden Elected President
Shostak pointed out that US investors with an eye on Cuba’s market expect Joe Biden to opt for the Obama-era reset in relations with the Caribbean island nation.
“The Cuban case will actually be very dependent on the outcome of the US election,” Shostak stated. “No significant investment can be expected shall Trump keep the job.”
Shostak pointed out, however, that under the democrats, the US-Cuba relations may see a reset to where former President Barack Obama wanted them to be, and in that case the economic embargo may be eased.
“The country may see a much-needed capital from quite a few US companies, ranging from agriculture and consumer goods to logistics, tourism and transportation, who were willing to enter the Cuban market several years ago,” the investor explained.
Following the victory of the Cuban revolutionaries over the US-backed regime, Washington severed diplomatic ties with Cuba and imposed a trade embargo on the country in the 1960s. Washington and Havana expressed their intention to start working on normalizing bilateral relations only in 2014. As a result, many restrictions on exchanges between the two countries were eased during Obama’s presidency.
However, Trump toughened the policy once he took office in 2016, restricting travel, boosting the economic embargo and imposing sanctions on Raul Castro, Cuba’s Communist Party leader, over alleged human rights violations and for supporting the Venezuelan leadership.
A chance of slight improvement of US-EU Relations
According to the investor the ties between Washington and the European Union are currently at the lowest point and will be at the minimum less conflicting after the presidential election.
“The relations have now hit a tipping point where the US pressure on its European partners is becoming counterproductive and contrary to the US own interests which in turn prompts Europe to build its own protective defenses and implement counter-measures,” Shostak stated. “That said, I truly believe that the US-EU relationship has reached the bottom and will remain if not entirely comfortable but at least less confrontational.”
Shostak hopes that there will not be a new trade war especially with Europe.
“All trade wars have already taken place. The EU was the top US export market in 2018, led by aerospace products and computers, before the United Kingdom left the bloc,” he explained. “The Trump administration is focused on shrinking its growing deficit in goods, which hit a record $178 billion in 2019.”
In August, the United States and the European Union concluded an agreement on reducing tariffs worth $271 million that the two sides hope will lead to concluding additional trade deals in the future.
The agreement stipulates that the two sides stand ready to dial down trade tensions after a series of tariffs initially imposed by the Trump administration last year on EU steel and aluminum. The two sides have also fought in the past over farm subsidies and aircraft production.