I was a Russian major in college, learning Russian language, history, culture, and literature, and I loved learning about this important, vast, and extraordinary country. I also learned about its problems, and its historical failure to form a truly democratic system. I traveled and studied there as a student in 1986, when the country was still under Soviet rule. It was difficult to find food and other basics in the stores, and many needed goods were instead traded on an (illegal) black market. It was clear to me that Russia’s economic system had failed its people.
That failure would, in turn, result in the disintegration of the Soviet political order, and the subsequent traumatic attempts to form a liberal democratic market system. Modern Russia, led by a former KGB spy turned autocrat, is partly the result of largely failed attempts of foreign assistance, capitalist financiers and entrepreneurs, and the (often unscrupulous) transfer of publicly owned assets to private oligarchs. This Russia is now attempting to export its autocratic-oligarchic system, as it previously exported its totalitarian communist system, to the rest of the world.
How do markets value Russia’s current system? Here is the price/earnings ratio (a higher ratio indicates a higher valuation) of ERUS, a publicly-traded ETF of major Russian companies offered by Blackrock’s iShares division:
And how do markets value our system in the United States? Here is the price/earnings ratio of IVV, an iShares fund of large US companies:
US companies are roughly four times as valuable as their Russian counterparts.
The valuation of companies is determined by market participants across the globe, connected by the global Internet. Our trading markets are a form of democratic expression, allowing all participants to freely and voluntarily “vote” with their money for and against assets. All publicly known information about an asset – the business it is in, the managers who lead it, and the country and legal systems in which it operates – are factored into the market price for an asset.
The verdict of the marketplace is clear. The Russian system is far less valuable than that of the United States. Rather than Russia bringing its system to the rest of the world, a new concerted attempt to bring to Russia our highly valued system, with its dynamic industries, qualified, ethical, and regulated managers, and time-tested political and legal systems, should be attempted. The world should be strongly supporting the pro democracy demonstrations and reform efforts now taking place there, and linking arms with the many honest Russian people (and there are many) who want change and can bring change.
Any American President who attempts to bring the corrupt Russian system to the United States, to replace our democratic government and economic market systems with less time tested Russian systems, is, as market valuations make clear, empirically dangerous to your wealth.
As a financial advisor, I am often asked by my clients for my opinion about markets and where they are headed. In this upcoming election year, I will give the same response whenever I am asked: the value of your financial assets is not in my hands. It is in yours, and dependent upon your consistent and substantial support of the American democratic system - and its own badly needed and now unavoidable reforms.