No to Russia, Yes to China

It is my opinion that Russia has no place in a policy portfolio or strategic asset allocation. Most US institutional investors do not agree with me and have specific allocations to "Emerging Markets" which of course includes Russia. There are many reasons why I believe Asia should be a meaningful part of a policy portfolio and Russia should not, the most important of which is the fact that I do not believe Russia offers sustainable and rapid long term economic growth (as does China). Russia's growth is driven primarily by energy demand and hence is a function of the price and demand for oil. The population of Russia is shrinking faster than any other large country - hardly a formula for strong long term growth. The Russian government is not only corrupt, it is defiantly and thoroughly corrupt (unlike China which at least makes an effort to combat corruption and occasionally imprisons high ranking officials). But, there is another reason that Russia has no place in a long term strategic allocation, and that is it's imperial ambitions. As ridiculous as that may sound to New Yorkers, it is not ridiculous to Poles, Hungarians, or Estonians. This opinion piece in the Wall Street Journal by a former prime minister of Estonia (subscription required), is a reminder of the sinister quasi-Stalinist regime that rules Russia today. How anyone can view this country as a long term home for investment is beyond me.

During the presidency of the recently departed Boris Yeltsin, Russian archives were opened to the public and its recent past examined. President Yeltsin was ready, at some times more than others, to recognize the crimes of communism. For example, he apologized to Finland for the 1940 Winter War.

But Mr. Putin has dramatically altered the approach at the Kremlin to the past -- and therefore to the future. The current Russian president builds a new messianic and imperial identity around the victory over Nazism, which was also used by his predecessors to legitimize the U.S.S.R. This war, which the Russians call the "Great Patriotic War," didn't start with Hitler's invasion of Poland in 1939. Russia helped start World War II through the Molotov-Ribbentrop pact signed a week before the Panzers stormed east, while Stalin's troops took chunks of Poland and all the Baltic countries. The "Great Patriotic War" begins in 1941, when Hitler turned on his ally.

In a context where Stalin is more and more a founding hero for the "new Russia," it's no wonder that the crimes of occupation of neighboring countries and of communism are denied. And Russia aggressively demands that formerly occupied countries in the Soviet bloc accept its new understanding of the past. Any mention about the crimes of the Soviet era is called an insult to the "heroes of the Great Patriotic War."