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Author`s name Alex Naumov

Risky investment in Russian economy may bring huge profit

Military conflict in South Ossetia is a tragedy for the people involved but prompts some investors to recall the cynical adage: "Buy on the bullets". Could conflict in Russia present opportunities for long-term investors?

James Davies, investment research manager at Chartwell, says: "One of the factors that separates emerging markets from developed ones is that in emerging markets the actions of government generally have a far more pronounced effect on market movement.

"The events of the past couple of weeks have demonstrated that Russia is still an emerging market. Russia is a land of enormous opportunity, but also risk, and the world looks a very different place from Moscow – something that is not always appreciated in western Europe."

Gary Reynolds, chief investment officer at Courtiers, says: "The Russian economy has increased by around 75 per cent over the last 10 years."

A lot of the growth can be attributed to rises in commodity prices, says Reynolds.

He adds: "Russia is a big exporter of energy as oil and gas account for around 60 per cent of exports and fuel alone accounts for 20 per cent of Russian GDP. As commodity prices fall, and they will trend down, prospects for the Russian economy will deteriorate."

Justine Fearns of AWD Chase de Vere says this has worried some investors but she warns it is important to remember that Russian oil and gas companies are generally more efficient than some of their international counterparts which creates a slight cushion against falling prices.

She says: "We also need to remember that Russia has other things going for it, including an aspiring middle class with cash to spend and a broadening financial services market that has little exposure to the current credit crunch."

Meera Patel, senior analyst at Hargreaves Lansdown, believes the conflict with Georgia should not have a significant long-term impact on Russia’s economy or corporate fundamentals.

She says: "It is the latter that should ultimately drive the Russian market rather than swings in sentiment. The Russian market is up 1,400 per cent over the last 10 years and we feel there is plenty of room for growth going forward."

She says investors should put the Georgia conflict into context: "The Russian market was already weighed down by other factors before the conflict. The main reason for the market’s fall has been the fall in the oil price and the government’s interference in the pricing of coal by Mechel. Invasion into Georgia was just another factor dragging down an already weak market."

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