The Mafia State
Putin is Dangerous to Your Wealth
Vladimir Putin might as well be a Corleone, the Sicilian mafia family from Mario Puzo's epic Godfather books.
Yeah, I know, we like to romanticize the mobsters. They have a certain moral code and appear to love their families and take the bonds of friendship seriously — thick as thieves and all that nonsense.
But the bottom line is that mobsters are sociopaths.
And so it is with Putin.
I know Putin gets a certain amount of admiration from Americans. He has power, and he does what he wants, damn the politics. He gets portrayed as the master chess player, soundly beating the politically correct President Obama and the spineless European leaders.
The fact is, Putin is a power-hungry sociopath. He's a godfather, and despite Puzo's romanticized view of the Corleones, he is every bit as dangerous as a real mafioso.
And he is likely to go down just like they do: in a pool of blood.
Putin is almost certainly the richest man in the world, but he hasn't earned a penny of his massive wealth. He has stolen it all from the Russian people. A recent book called Putin's Kleptocracy, by Karen Dawisha, details how it happened...
In the late 1980s, when it was clear the Soviet Union was crumbling, Putin and a group of high-ranking KGB goons started stealing money from the government and stashing it in overseas banks. Then, when the Soviet did fall, they were ready to swoop in and buy former Soviet assets for pennies on the dollar.
This is how the oligarchs came to be. They weren't savvy — they were thieves. They laundered stolen money right into Russian assets... and then they took over.
When Putin officially became Russia's president in 2000, 30% of Russia's companies were state-owned. Today, it's over 50%.
And that's because Putin will simply take your company if he doesn't like you, as he did with the $38 billion oil company Yukos in 2003. He had the owner, Mikhail Khodorkovsky, put in jail, looted Yukos for $27 billon in fictitious back taxes, and then transferred all the assets to state-owned oil companies.
That's how the mafia operates. Maybe they lend you money and become your partner. Then they start stealing your merchandise and selling it for themselves. Then, when you can't pay the loan, they beat you up and take your business. That's Putin for you...
In fact, that's what he's doing in Crimea right now — a region he recently said had "sacred meaning for Russia, like the Temple Mount in Jerusalem for the followers of Islam and Judaism."
And now his cronies are looting it.
On November 13, Sergei Tsekov, a senator who represents Crimea in the Russian parliament, told a Russian news service: “All enterprises on the [Crimean] peninsula that operate inefficiently, are on the verge of bankruptcy, or have been abandoned by their owners, will be nationalized.”
The Russian government has nationalized Zaliv, Crimea's largest civilian shipbuilder; Krymkhleb, Crimea's biggest bread and confectionery maker; and a big resort complex that was owned by a Ukrainian oligarch.
Sergey Aksyonov, Crimea’s recently elected prime minister, says that Austrian-owned Activ Solar owes $300 million to Russian banks. The company says it has no loan exposure to Russian institutions. It won't matter — Putin's buddies will take that, too.
Yeah, it's a funny way to treat something sacred...
But Russia's invasion and annexation of Crimea was never about protecting Russian-speaking citizens. It was a bank robbery from the start.
Blood in the Streets
I love to buy when there's "blood in the streets." Picking up beaten-down shares when economies are in chaos is a great way to make huge profits.
Russian stocks definitely qualify as beaten down. Gazprom, with $175 billion in trailing revenue, is trading with a forward P/E of just 2. The company has $31 billion in cash and is valued at $61 billion. Sounds like a bargain. Will it still be a bargain if Putin decides he needs that $31 billion?
Mobile Telesystems OJSC (NYSE: MBT) is Russia's biggest telecom company. It serves 102 million mobile phone customers and also offers Internet and pay TV service. The company employs 67,000 people and did $13 billon in revenue over the last year. It even pays a 7.8% dividend!
The company, along with an oil company called Bashneft, is controlled by Vladimir Evtushenkov, one of Russia's richest men, through his AFK Sistema holding company. Since September 16, Evtushenkov has been under house arrest in his Moscow Mansion on charges of money laundering.
Recently fired Deputy Economy Minister Sergey Belyakov told Bloomberg, "Bashneft will go the way of Yukos."
And who knows? Maybe Putin wants to own Mobile Telesystems, too. Anybody think he'll keep paying that dividend?
A Lost Generation
Over the last 15 years, Putin has systematically dismantled what little free speech and journalism there was and has taken over television to spread his propaganda.
My dad sponsored a Russian exchange student in the late 1980s. She still lives in Richmond, Virginia, but her mom is in Russia. They've been fighting because her mom fully believes the U.S. is afraid of Russia's strength, is intent on destroying Russia, and is supporting neo-Nazis who are ethnically cleansing Russian speakers in Ukraine.
Putin is convincing a whole new generation of Russians that America is the enemy.
Regarding the sanctions that were imposed, Putin said in his recent state of the nation address: “If none of that [the Ukraine situation] had ever happened, they would have come up with some other excuse to try to contain Russia’s growing capabilities.”
And it's going to get worse before it gets better. The Russian ruble is down 33% since Crimea was annexed. The Russian central bank has already spent 20% ($74 billion) of its foreign reserves supporting the ruble.
Russia estimates $130 billion in cash has fled the country, but the European Central Bank says it's more like $300 billion. Inflation is running at 9%, and interest rates are going to rise.
To top it all off, oil prices are crushing Russia. Just the other day, Putin signed the budget for the next two years, and all its projections are based on $100 oil.
Putin says it's all America's fault. But all he needs to do is look in the mirror. When he came to power, he said he would diversify the Russian economy and use oil and natural resource money to increase the service sector, boost export quality production, and foster domestic demand. He did the opposite. Russia exports weapons and fossil fuels.
There are few small businesses, and the Russian economy as a whole is more dependent on oil exports than ever. Fossil fuels make up 70% of exports and half of budget revenue. Non-commodity exports are less than 10%. High-skill exports are less than 2%.
Russia is likely in a recession now. Wages will fall, and people will lose jobs — that's the inevitable outcome for a mafia state. Maybe Putin will try to sell more arms to terrorists to make ends meet.
I have a pet theory that the greed of the oligarchs will eventually trump Putin's ambition. Maybe when he gets taken care of mafia-style and is sleeping with the fishes, it will be safe to buy some beaten-down Russian stocks.
In the meantime, I'm not touching them.
Until next time,
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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