You missed the Big Tech explosion because you didn’t understand what de facto monopolies wedded to economies of scale can do. You have been deplatformed by Zuck and @jack for being a racist and a white supremacist, and you don’t even have their stonks for consolation. You didn’t hop aboard the Tesla train because you thought it was going to zero. You didn’t buy and hodl Bitcoin in 2013, Ethereum in 2017, or Chainlink in 2019. You kept your savings as certificates of deposit. You listened to Peter Schiff and plowed all your money into a shiny bauble that has been devaluing for centuries because the hyperinflation was going to take off any day now. You rushed into the GME squeeze just as the music stopped. You belated bought Coinbase to get crypto exposure against my advice and were dumped on by the founders.
But opportunities come time and time again, and crypto aside, I think that one of the best candidates for OOM-tier increases this decade is Russian tech*.
First things first. Russian nominal GDP was just 7% of the US level in 2020. Russia has had a pretty bad 7 years since 2014, in which its prior one and half decades of convergence to developed world income per capita stalled. But national economic fortunes tend to come in cycles, so there’s good reason to believe that the 2020s will be one of resumed fast growth in Russia. There has been adjustment to the negative external shocks of the 2014 oil price collapse and the Crimea sanctions, infrastructure has been upgraded, zombie banks closed down, business regulations liberalized, the threat of further sanctions downgraded thanks to lesser reliance on foreign financing and more trade shifting to China.
The current capitalization of the Russian stock market is at 55% of its GDP, which is lower than its ten year mean of 62%. Meanwhile, the US at 190% is similar to that in 1929 and 2008 and by some measures is the single most overvalued stock market in the world. This does not necessarily mean that the American stock market is in a bubble and that a collapse is imminent. Unprecedented low interest rates, the increased prominence of tech stocks with their high p/e ratios (justified by their quasi-monopoly status), and broader market participation (i.e. zoomers plowing their Bidenbux into stonks and $DOGE on Robinhood) may mean that the US has simply become permanently more “financialized”. But, whether or not a crash is on the cards, it’s hard to believe that further rapid growth in US stocks this decade is possible, at least relative to opportunities in less pumped markets.
This is not the case in Russia, which is modestly below its historic average and which is now seeing a phenomenal increase in the amount of small time traders on the Moscow stock exchange. Thanks to the spread of cheap mobile brokerage services, the number of individual investors on the Moscow stock exchange has exploded in recent years, going from 417,000 in 2008 to 1 million in 2015, 2 million in 2019, 4 million in 2020, and 9.5 million this January. It is currently increasing by close to a million per month and now stands at 11.2 million. (In per capita terms, this is now not that far off from the $10M shareholders of Germany). This is driven by what seems to be a sharp change amongst the younger segments of Russian society to investment. While the Soviet generations are financially illiterate, some pensioners even preferring the mattress over bank deposits, zoomers are using mobile apps from companies like Tinkoff and VTB to play about with stocks, ETFs, and bonds just like the Robinhood degenerates in the US.
So what we have in Russia right from the get go is a virtuous trifecta in which GDP (PPP) is on the cusp of resuming upwards convergence to developed world levels, nominal GDP is poised to rebound even harder (Russia is literally the world’s cheapest country at this moment after Lebanon, as proxied by the Big Mac Index – more so than the likes of Ukraine and Vietnam), while the stock market in turn is poised to ramp up as a share of this GDP as the fintech revolution and fading sovok mores make Russia into a stock owning society again. (Incidentally, this would not be a novelty but a return to historic normality – Russia before 1917 had one of the world’s biggest stock markets, accounting for ~10% of world capitalization). This alone has a reasonable likelihood of eking out a doubling or a tripling during this decade and one that it’s possible to gain exposure to from some ETF that tracks the MOEX.
However, I believe that the real promise lies in Russian tech stocks. In contrast to Europe, whose native attempts to set up a tech ecosystem have failed/were brain drained away to Silicon Valley (only one of note is Sweden’s Spotify), Russia has its own, significantly self-contained IT ecosystem covering the broad range of search, e-commerce, social networks, car-hailing and ride-sharing, and fintech. But unlike American Big Tech, which has seen epochal increases in market cap over the past decade, the process is only in its incipient stages in Russia. They are ridiculous undervalued – but only so long as both Russians and foreigners don’t notice it.
That said, this isn’t an absolutely guaranteed money-making play. There are structural reasons why these prices will probably remain much lower than those of their American equivalents, even if the gap narrows. Hence, I’ll provision a “FUD” (fear, uncertainty, doubt) section to each stock.
Yandex (YNDX) is the biggest tech company in Eastern Europe. It has consistently accounted for 60% of the Russian search market (most of the rest accrues to Google), but it has its fingers in many other pies:
- It not only owns Yandex.Taxi (Russia’s Uber), but has a dominant stake in Uber Russia. Accounting for ~60% and ~30% of the mobile ride-hailing market, this makes it a near monopoly in the sector.
- It is working on self-driving cars and the results have looked promising from as early as 2018.
- Yandex.Drive carsharing service.
- Expanding into e-commerce sector with Yandex.Market, previously the dominant price aggregator/comparison site – now developing own capabilities to compete with main rivals Ozon and Wildberries.
- Has a broad presence in various IT services in general: Personal assistant (Alice), cloud storage (Yandex.Disk), food delivery (Yandex.Food), and seems to be actively developing a YouTube replacement of late (Yandex.Efir).
- Has the most advanced AI labs in Russia (though it pales besides Google, which controls two of the world’s top three, DeepMind and Google AI).
Market cap: $23B (60x lower than Alphabet’s $1,360).
FUD: Google dominates not just US search but global search, whereas Yandex only dominates 60% of the Russian market (though it also has a substantial presence across the CIS and even a minor one in Turkey).
Ozon (OZON) is Russia’s biggest publicly listed retailer, third biggest online store, and biggest multi-category online store.
Market cap: $12B (125x lower than Amazon’s $1,540B)
Its stock prices have gone up by 50% since it IPO’ed in December 2020. (I am very happy to have jumped on that train from the start). Even so, it remains a bargain basement buy in the long run.
To find out why, I would recommend Gleb Krivosheev’s article about Ozon at Seeking Alpha. But I will recount the main points in short here. The Russian e-commerce market was only worth $30B in 2019 (or just 6% of the Russian retail market), but has increased at a rapid clip over the past few years and CAGR for the next 4-5 years is projected to be 40%. Corona has helped this sector along as has a breakdown of hangups originating from the low-trust Soviet era and 1990s about paying for a product before it’s delivered. This will put the size of the Russian e-commerce market at $100B by 2024.
But another critical consideration is that the Russian e-commerce market, being in an earlier historical stage, remains highly fragmented relative to most other countries. The competition is likely to focus around Ozon (6% of the market in 2020), Wildberries (13%), Ali Express (8%), and Yandex.Market (2%). Wildberries is run by Tatyana Bakalchuk, who at $11B net worth is Russia’s richest woman (and probably the richest self-made woman outside China). It has branched out from specializing in women’s clothing and become Russia’s leading e-commerce store, with a very good distribution network but mediocre website. Yandex.Market represents Yandex’s foray into e-commerce and enjoys access to its parent’s technical expertise, but its distribution network is close to non-existent, it is starting from a very low base, and it will find it hard to muscle in at this stage (Beru, its prior e-commerce venture with state bank Sberbank, was folded up in 2020). Ali Express is a joint venture between mail.ru and AliBaba. Ozon has a very nice website – it is explicitly modeled on Amazon – but its distribution network and volumes remain inferior to Wildberries. Still, the money from the IPO has helped it grow and in my opinion it is in the best position to become Russia’s Amazon.
FUD: Ozon will never have the global reach of Amazon, it will not account for as big a share of the (much smaller) Russian market, and it also doesn’t have Amazon’s cloud services division.
mail.ru (MLRYY) is mainly known for its 100% ownership of VK (Vkontakte), the largest social network in Russia (43% of people on some social network use it), as well as the more boomer/prole Odnoklassniki (31%). This is the dominant social network in Russia and, confounding some predictions, has increased market share against Facebook (9%).
VK’s user experience is often considered to be superior to Facebook’s. It runs faster and more smoothly, has fewer weird bugs (Facebook’s codebase is atrocious), and doesn’t need add ons like Facebook Purity to restore some semblance of sanity to all the clutter.
It has its fingers in some other pies as well, such as cloud services, online games, and its own email and search engine. That said, Vkontakte is without a doubt the crown jewel in its portfolio.
Market cap: $6B (120x lower than Facebook’s $730B)
FUD: However, so far as social media goes, network effects are key and Facebook dominates the social network landscape not just in the US but across most of Europe as well as India. Meanwhile, VK has a merely preeminent position within Russia and the post-Soviet countries (even in Ukraine, despite VK being ostensibly banned).
TCS Group (TCS), more commonly known as Tinkoff Bank, is the largest digital bank not just in Russia but in the world by number of customers, who number 10 million.
Market cap: $11B
No obvious American analogues, but it’s an very clean and user-friendly product that dominates Russian fintech. Added bonus: Neo-Tsarist aesthetics.
FUD: Has already doubled in the past half a year, so will probably take a pause in further growth.
Another fintech company of note is payments processor Qiwi. However, it’s quite dated and much of its recent price movements are driven by rumors over an imminent buyout by Yandex (which has failed to materialize).
PREDICTION. Huge #FOMO into Russian “Big Tech” in next few years driven by increasing numbers of Russian investors and cheap American money migrating to emerging market for cheaper assets. This will replicate what happened in the US during 2010s. Yandex worth $250B by 2030, Ozon worth $100B. OOM-tier increase across this sector producing gainz rarely seen outside crypto.
Perhaps the very best thing about this is that the two most common and obvious objections FUDs against Russian Tech should in fact turbocharge it even further.
Sanctions Risk – In the short-term, increased American sanctions – should they actually happen – could drive out American investors, who despite poor US-Russian intergovernmental relations account for a stunning 50% of all foreign ownership of Russian stocks (the Brits account for another 20%… despite high trade flows, Europeans only accounted for 26%, probably due to continental aversion to stock investment). OTOH, this also increases the risk of significant Russian restrictions on American tech within Russia. There are already moves towards this that I have covered on this blog due to American Big Tech censorship of state-affiliated Russians – and this isn’t just happening in Russia, but in some other countries concerned with American tech pushing a culturally SJW and bluntly pro-American regime geopolitical agenda. Restrictions or outright blocks on American social media will unequivocally benefit their Russian competitors by opening up their market share to them. Restrictions on Google-YouTube and Facebook/Twitter will directly benefit Yandex and Mail Group in a sector that naturally tends to winner takes all. While those Russians who really need it for work or are heavily invested into Western networks will get around them via VPNs, the normies are unlikely to bother with it. Meanwhile, those Russian companies are insulated from counter-reactions by virtue of having very little presence in Western markets in the first place. Consequently, the trend towards national fragmentation of the Internet that Balaji S. Srinivasan often talks about constitutes a major downside risk for American Big Tech but an upside one for Russian Big Tech. (While being largely irrelevant to Chinese Big Tech, which completely dominates the Chinese online ecosystem thanks to American Big Tech having been barred from there from the start).
Rule of Law – Many Russian stocks trade at a discount relative to earnings on account of the perception (not on the whole unjustified) that Russia has inferior rule of law and property rights protections. (Though this disproportionately affects state-owned companies like Gazprom and Rosneft). However, this also happens to be a “fixed” factor and as such, irrelevant – it is, after all, the dynamics that are important so far as changes in valuation are concerned. At worst, perceptions on the Russian business environment will remain constant, which will keep the p/e ratio steady – you’ll still make tons of money when Yandex and Ozon earnings increase fivefold and they start paying dividends. However, should perceptions of Russia improve to the point that it becomes perceived as a “normal” developed country to do business in, then default p/e ratios could double and you could be looking at crypto-tier returns for Russian tech during the 2020s. Moreover, this should be set against the possibility of Western and especially American corporations being hamstrung by increasing inane social justice-driven ESG requirements.
* Necessary boorish disclaimer that this is entertainment not financial advice, invest at own risk, DYOR, etc, etc.