Trading the Globe: Bullish on Russia with Putin in control

Vladimir Putin’s victory in this weekend’s Russian presidential election was never in question. The question now is where we go from here, and the latest Trading the Globe serves up some answers. 

First, Putin has a clear mandate here. Say all you want about blatant voter manipulation in the Duma, but in the presidential contest, there really was no clear competition.

And for the markets, this being read as a very good thing. Putin has delivered a 1,000% increase in Russian stock prices over his three terms in national office and has accomplished some extraordinary feats of economic liberalization.

He has established a flat tax as part of a broader tax reform. He has nourished the retail sector and transformed the utility sector from a megalithic super-monopoly to something more conducive to free competition.

From here, Putin knows he has image issues in the cities, and this is where he should be concerned.

“Basketball oligarch” Mikhail Prokhorov got 20% of the vote in Moscow.

Putin, who knows Russian history better than everyone, knows that all historic social and cultural uprisings in the country have started with small majorities in one of those cities. This is not China where the peasants rise up. This is a country where the elites turn.

Watch to see him start making positive statements on diversifying the economy. He fully understands that oil above $100 is no longer the answer for all Russian problems.

Spending has reached the point where prices cannot dip much below here without creating major budget issues.

In the meantime, the Russian market will be pushed around by external beta — China in particular — but will outperform the asset class in the second half of 2012. After all, within 6 weeks following three of the last four elections, the Moscow market has risen to new highs.

As it is, Russia (RSX, quote) is ultra-cheap at 4 times enterprise value divided by EBITDA. Factoring out oil and gas, the EV/EBITDA ratio “jumps” to 5.

Compared to global emerging markets trading at 6.5 on the EV/EBITD scale, you have a situation where Moscow is trading at a 40% discount.

Where do you go? Capex issues in oil and gas industry are really unhealthy, but this is the cheapest sector and the beta grab on the next leg higher. The best play is Gazprom (OGZPY, quote).

Online, Yandex (YNDX, quote) and Mail.ru (MAIL, quote) are real companies that are leaders in technology and maintaining their position even against giants like Facebook and Google (GOOG, quote).