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03/25/2011 11:06 am EST


John Connor

Founder and Portfolio Manager (retired), Third Millennium Russia Fund

More grounded political leaders and an expanding middle class have thrown fuel on the commodity giant’s fire, but Russia still trades at a discount because of its bad reputation in the West. John Connor, manager of theThird Millennium Russia Fund (TMRFX), explains what this means for foreign investors in this exclusive interview with

I know you’re an expert on Russia and Russian investment. What’s happening in the economy; is the market stalling there?

Well, I’m a little concerned about growth this year. Recently, they increased the GDP projection up to 5% again, which is good.

They had had several years at 6%—which was great—but the earlier projection had been 4%, which is what we had in 2010, so that was making me a little nervous.

But the rising middle class, as seen through the OECD projected statistics on per-capita income, are very, very hardening—because you get the middle class buying automobiles, spending money on home-ownership improvements and traveling, and generally consuming at very outstanding levels. In addition to oil and gas, and the other commodity exports.

How about the political backdrop with Medvedev as well as Putin now?

Well, I’m very big on Dmitry Medvedev—he gets it, as far as I’m concerned.

Putin has done a good, competent job. Don’t forget, he picked it up when things were pretty chaotic, and the oligarchs thought they were in charge of the country and were throwing their weight around.

That’s why Mr. Khodorkovsky ended up in jail; he was kind of the local Martha Stewart—remember when she said everybody perjures themselves, and the prosecutor said, “That’s right lady, but you’re the one going to jail…?”

Khodorkovsky was the poster child for that kind of excess, and he’s done nothing to ingratiate himself with the parole board, if I may say so. But he spends an enormous amount of money on PR in America, and lobbyists in America, and that’s one reason people are reading about him all the time, and it gives Russia a very bad name.

Did he get due process? Absolutely not—but in those days, none of the oligarchs were obeying any of the laws, so they had to pick on a Martha Stewart, so to speak.

In any event, Russia does get very bad continuous PR, and so you have a Russia discount, which is why the multiple for Russia is much below India, Brazil, and China.

But it’s still a very positive growth profile with very good fiscal discipline, great monetary controls, and tremendous reserves. They’ve got the third highest central-bank reserves in the world, and generally it’s a one-foot-in-front-of-the-other type of progress, it’s very encouraging.

How would you recommend investors get involved in Russia?

Well, you can pick stocks, of course—and I think some of these markets have ADRs and GDRs, but generally some of the stocks you want to own are local stocks.

This is where a mutual fund comes in, with a portfolio manager whose job it is to sift through all the considerations and pick the winning companies and the winning sectors.

But certainly if you’re buying a company like Gazprom (OGZD) or Lukoil (LKODN), you can just buy the stock through your broker—even if it’s a GDR, it’s readily available in New York.

[One readily available ETF with heavy exposure to Russia is the Market Vectors Russia ETF (RSX); its Top 5 holdings include oil majors Gazprom, Lukoil, and Rosneft (RNFTF), as well as Sberbank (SBRBF) and nickel miner MMC Norilsk (NILSY)—Editor.]

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