Is Dubai buying at the peak of the Russian economic boom?
Posted on 02 July 2008 with no comments from readersDubai has a mixed record for buying foreign assets in recent years. Property group Emaar bought UK estate agency Hamptons just in time for the market to slump, and acquiring the second largest US housebuilder John Laing was arguably even worse on timing. But then Madame Tussards in London proved an excellent buy and was sold on for double the sale price.
So what of the decision by Dubai World and OAO Roskommunenergo to bid $5.3 billion for Russia’s biggest wholesale power producer before price caps end in 2011? This would be the first Russian Energy investment by a GCC oil state, and part of a $34 billion sale of electricity generation and distribution assets since 2006.
OGK-1 has four plants in European Russia and two in Siberia, and supplies electricity to Moscow and the oil-rich Tyumen region. Only time will tell if this is the right time to buy. It is only too easy for foreign investors to become the late comers to any investment party.
Last August Dubai World agreed to invest $5.1 billion in Kirk Kerkorian’s MGM Mirage company in Las Vegas as part of Dubai’s diversification plans. Since then Las Vegas has gone into an unprecedented slump with revenues falling in the city once thought recession proof.
Russia is deregulating electricity prices and will free prices completely in 2011, and needs to invest $185 billion to modernize and expand power plants and infrastructure through 2011. The country has enjoyed seven per cent annual growth in GDP for a decade and is currently riding rich on foreign currency reserves in excess of $500 billion.
DP World’s Limitless subsidiary has also said it will build a new Moscow suburb with a local partner to create homes for 12,000 people, and clearly sees Russia as a prime emerging market for expansion, but an earlier deal was cancelled without explanation.
Ultimately Russia may prove the best investment in emerging markets at the present time. Commodity prices are sky high and keeping the economy red hot at a time when the European Union looks set to join the UK and US in recession before long. How long can commodity prices stay up when the consumer nations are down?
That is the big question. The Russian economy is quite highly geared and would take a commodity fall badly. But this could still prove a good deal for Dubai and another Madame Tussards rather than a John Laing Homes.
no Comments posted by readers:
Intersting point Peter. When the consumers default and the West goes into deflation…where is there a hiding place? Jim S says that Gold is that place, and I think you will agree it does have attractions. My problem is how to hedge it…what funds to use. You have indicated ETFs and yet others have said “paper” only as good as the counterparty’s standing. Then others have said “Perth” with real minerals. Perhaps Krugerrands might be good here in RSA?
It is one thing to know how the markets goes…another how to capitalise on it.
Any advice welcome.
Personally I like Perth. Before investing there I interviewed the treasurer of the mint and saw his operation. No flashy cars or big commission salaries, just diligent officials doing a solid job. I can not imagine the West Australian Government auditors allowing a big position of unallocated metal being allowed to build up without asset backing. Remember officials protect their careers and actually have a long-term view on their institutions, they are not in it for a quick buck. On ETFs I am less sure but presumably you would exit before any problems that might or might not arise – and ETFs are splendidly liquid. But so is the Perth Mint. On Krugerands in RSA I would only ask what happens when the power fails and your security system goes down and the millions of illegals in your country decide to takeover?
I feel sorry for investors betting on future of the Russian Economy which relies on diminishing production of oil wells.