May 27, 2014
Sanction threats against Russia sent shockwaves of panic across the world of investment. There’s still those who still believe in the prospects of the Russian economy, despite the political turmoil. So, what are these prospects? How are sanctions affecting the financial balance of power? And, finally, what does Moscow’s turn to Beijing mean for the future of the global economy? We ask these questions to a renowned investor and businessman – Jim Rogers is on SophieCo today.
SS: Jim Rogers, renowned investor, businessman, author, welcome to the program, great to have you with us. We’re going to start with sanctions, the West is busy with them, coming up is a new round for Russia – but Russia, meanwhile, has made a historic 30 year gas deal with China. How painful do you think the consequences could be for Europe and US?
JR: Well, I will have to say that Washington seems to be making one mistake after another and I don’t like saying it, since I’m an American citizen, but, you know, America is driving China and Russia together – America is driving Russia more and more to Asia… That cannot be good for America but they still keep making mistakes in Washington.
SS: So you’re saying the US and Europe unwillingly pushed Russia and China together?
JR: Unfortunately America seems to have really bungled this whole thing very badly. As you know, they’ve tried to instigate a coup in Ukraine against an elected government, and they did that somewhat successfully, but then they didn’t think through the consequences. Mr. Putin seems to have outsmarted us, Putin now is in control of Crimea, which Russians have controlled for many decades, so that’s not so unusual – what’s unusual is that America didn’t think through what they were doing, they seem to just react on a day-to-day basis, so now… Crimea is part of Russia, the Russians have more and more allies in Asia. I’m afraid America just didn’t think it through, they’ve bungled, they’ve acted on a day-to-day basis, and they’ve reacted to events instead of looking to the future and controlling events. Mr. Putin seems to have outsmarted Mr. Obama.
SS: You have called US actions in regards to Ukraine “another embarrassment for the US foreign policies”. Why? Why do you think the US got involved in the first place?
JR: That’s an extremely good question. Why did they get involved in the first place? Because we have incompetence in the State Department, in Washington. I guess they thought that they could take over control of Ukraine, which will give America more influence in central Europe and would certainly damage Russia, but in the end it seems to have strengthened Russia and has damaged America. You know, politicians make mistakes; bureaucrats make mistakes all the time. Looks like this time it was America that made the mistakes, and not Russia.
SS: But if you’re saying the whole Ukrainian affair is a geopolitical failure for America, why do you think it will also hurt the US economy? Where does the economy come in?
JR: I didn’t say it’s going to hurt US economy, not anytime soon. But, if Russia now does more and more trade with Asia, instead of with Europe and the West, then obviously that’s not… that’s good for Russia, that’s good for Asia, but America gets cut out and Europe gets cut out. You know, Russia used to sell a lot of gas to Europe, it still does, but if they stop selling natural gas to Europe, and sell it to Asia – that is not good for Europe, and, ultimately, not good for the US either, because the US and Europe are huge trading partners.
SS: George Soros proposed opening up US strategic oil reserves to drive the prices down in effort to hurt Russian economy. Now, is that feasible? Is punishing Russia worth tapping into those reserves?
JR: America does have oil reserves, but they are not enough to… I mean, if we’ve sold all of our oil reserves, it’s not enough to have any kind of significant effect on the world oil market. It might make the market go down for a day or weeks, or two weeks, even. But, then the markets it’s going to go back before, and the market may even go back more, because then America would have sold its oil reserves, and we wouldn’t have anything in reserve, so… again, you have to ask him, I don’t know, but that doesn’t seem like a very viable solution to me.
SS: But once again, in your opinion, if Russian gas is sent flowing eastward to China, and there’s trade trouble with Russian gas in Europe – will the US be able to fill the gap?
JR: No. America says it could, but it would take a long time for America in order to get natural gas from America to Europe. You don’t just sort of snap your fingers and do that. You don’t just put in on a boat or plane, you’ve got to have special ports on both sides, you’ve got to have special ships, and you’ve got to have natural gas in the right place. Yeah, it could happen someday, but some day is a long time away, and if Russia stops selling natural gas to Europe – that’s going to hurt Europe for several years until American gas can come, and that if we presume and suppose that there is enough American natural gas to ship to Europe. Europe uses a lot of natural gas, and America at the moment seems to have surplus of a natural gas – will they have a surplus in five years? I don’t know. Will we have enough to supply Europe gas for many years? I doubt it.
SS: I don’t know if you know that the EU has begun sending financial aid to Ukraine. Do you think Ukraine will ever be able to pay that money back?
JR: Pay it back to the European Union? No, I doubt it very seriously. They’re going to have to take that money to pay Russia for the natural gas. I think this will be just a form of foreign aid from Europe to Ukraine, if they do it. I don’t see how Ukraine can ever pay the money back.
SS: Now, as an investor, what economic benefits are there for the EU and the US? What are they expecting out of this whole affair? I mean, how do you attract investors to the country when there is civil war raging between East and the West?
JR: Sophie, you’re asking extremely good question. I don’t see what was in it for Europe and the US, other than some kind of geopolitical game that bureaucrats and politicians like to play. I don’t see what the purpose of this was other than some kind of supposed chess game. I don’t see what America expected to get out of it. Ukraine has a lot of agriculture, but other than that… I mean, those agricultural products get sold on to the world market, so I don’t see why America tried to get so involved with Ukraine. It just does not make any sense to me, and as I said earlier, it seems to be hurting America now, rather than helping America, since the consequences have not gone the way they thought they would.
SS: But do you think the West has failed to isolate Russia politically and economically? Or is the West going to end up isolating Russia at the end?
JR: I don’t see that it has hurt Russia. Maybe there’s something I don’t know, but I don’t see that this has hurt Russia in any way at this point.
SS: What all of this means for the dollar? I mean, last week Russia’s economy minister told me that ruble and other national currencies will be used for trade to diversify risk. So where does that leave dollar?
JR: Again, I don’t particularly like saying this, because I’m an American citizen, and American taxpayer and American voter, but if you drive people away from the dollar… many people now must be saying“guys, if we have dollars, and the US decides that they don’t like us, they’ve going to put sanctions on us!”So more and more people would say “maybe I shouldn’t use the US dollar, maybe I shouldn’t have my money in US dollars.” At the same time, as you know, Russia and China are now going to trade with each other in their own currencies instead of the US dollar. More and more people are doing the same thing, they’re starting to trade in other currencies besides US dollar. This is just a continuing long-term move away from the US dollar. And, I am afraid, that US is pushing people away from the US dollar with our actions.
SS: So, if you’re saying that other players will move away from the dollar eventually, where does that leave the American economy?
JR: The US has been the world’s reserve currency, has had the world’s medium of exchange and so far we’ve been able to do a lot of things because we can just print more US dollars. We have a huge balance of trade deficit; we have huge government deficits, because we can print more money. If there comes a time that we cannot print money, when the world will not just take US dollars because we say“here they are!” – then that cripples America in many-many ways. The Pentagon, the Defense Department of the US has already said that the deficit in the US is a major potential weakness from the military point of view. Just recently, the space people said “every country in the world has eventually collapsed” and the way America is going, we might collapse too. This is not me, this is the Defense Department of America, and this is the Space Agency of America saying these things. If you read history, Sophie, it’s true, it’s correct. When people do not have the money that they used to have – they’re limited in many ways. You cannot have as many soldiers, you cannot have as many airplanes, you cannot send ships all over the world, because somebody has to pay for it, and if you don’t have the money to pay for it anymore, you’re in trouble.
SS: You are known to invest in places where others will not dare to, and right now you seem to be putting your trust in Russia – why now, when all the instability in Ukraine is causing the ruble to fall, investors are extremely scared and cautious?
JR: It’s a been a long-term adage in the investment world that you buy when there’s a disaster, because if you buy when everybody else is panicking and dumping, you’re probably going to make a lot of money in the end – unless the world comes to an end. I don’t suspect that Russia is going to come to an end, Russia has assets, Russia has lots of foreign currency in reserves as well, so when I saw Russia collapsing I thought I should buy, and I did buy. I’ve been becoming more optimistic about Russia over the past year or two anyway, because you do have big reserves and there are positive changes taking place in Russia as far as I’m concerned, so I hope, Sophie, that your parents taught you to buy low and sell high – that’s what I’m trying to do.
SS: Listen; why not invest in Ukraine in that case? I mean, obviously, that’s where the real turmoil was going on, you can buy really low right now…
JR: I certainly could, but I have only been to Ukraine twice in my life, but I’ll tell you – I have never been impressed by the government or the management of Ukraine. You don’t buy something just because it’s low – because it can get lower and lower and lower. I’d rather buy a sound situation, rather than one that is in turmoil and it’s going to continue to be in turmoil. If you’ve looked at the Ukrainian government over the past 10-15 years – you know what I’m talking about. Someday, of course, I might invest in Ukraine, but not now.
SS: So what are you thinking – how soon will all this political turmoil blows over for the Russian market? A month, a year?
JR: I would suspect that it’s going to… America may put on some more sanctions of some sort, but even that is not working terribly well. As you probably know, the Canadians, who are first allies of America, recently said “No, we’re not going to do this anymore, we don’t want to play this game of sanctions against Russia”. Europeans don’t seem to be too keen on sanctions, so I suspect that the sanctions after another round or two will probably sort of dry up and go away, because again, it’s doing nothing. It doesn’t hurt the Russians – doesn’t seem to. There are plenty of people who will do business with the Russians, look at the map, Russia is gigantic country, there are lots of countries that will do business with Russia, and so I don’t suspect that this is going to last much longer.
SS: Now, you personally, in terms of investing in Russia, you’re looking at non-energy companies. Is it right?
JR: I have plenty of energy investment, so I’m not investing in energy companies in Russia. I’m trying to find other parts of the Russian economy.
SS: Well, that’s what I was going to ask you – what do you invest in, in Russia?
JR: I buy the Russian index, which is a basket of Russian shares. I own shares of the Moscow’s stock exchange, I own Aeroflot, and I’m looking for other areas to invest. I don’t have any others yet, but I’m looking.
SS: Look, I’ve got a sense from what you’re saying, that the more sanctions are imposed, the more buying opportunities there are in Russia. Is that’s how it works, exactly?
JR: I said, “if there are more sanctions”. Washington keeps saying they’re going to put on more sanctions, so I presume they will. That’s what they say they’re going to do, they probably will do it. And usually, when something like that happens, stock get weak, at least for a while. I have no idea of what’s going to happen, whether they will do it, or whether the stocks will get weak. But it often does.
SS: Okay, but buying low, like you say, seems like a well-known basic strategy – but you’re not afraid for the long-term state of the Russian economy? Even with a possible third wave of sanctions?
JR: No, of course. My point about sanctions is that they don’t seem to be hurting Russia, I don’t see that there’s any major sanctions that can hurt Russia over any extended period of time, so, no, I am for one do not see how sanctions from America, especially if their allies don’t go along with them, or don’t go along with them in a big way – I don’t see how that can hurt Russia other than, maybe, in the short-term. It’s just that I don’t see it.
SS: With all these numerous trade deals, signed in Shanghai, do you think it will lure investors back to Russia, reassure them?
JR: Yes. I mean, the Russian market is already up over the last couple of months, as you’ve probably know. Yes, more and more people see that the sanctions aren’t very viable, that they haven’t hurt Russia – in fact, in some ways it is strengthening Russia because now they’re doing more business with China. China is a pretty successful economy, so it’s not hurting, and in some ways it’s actually helping Russia, because it’s driving Russia to other parts of the world, Russia doesn’t have to use the US dollar to trade with China now, because Chinese and Russians made currency deals. It’s just driving people away from the US dollar, not towards the US dollars.
SS: Now do you expect seeing gains from your investments in Russia, let’s say, during your lifetime?
JR: During my lifetime?
JR: Well, I hope I’ll live a long time, Sophie, so – yes. I hope I’ll live a long, long time.
SS: Well, we hope too. But tell me one more thing: do you think there’s a shift in global economic balance? Are we going to see more Asian giants sign economic deals with Russia, you think?
JR: Oh, I’m sure we will. If at no other reason, and the fact that the Russians are now pushing more towards Asia, partly out of necessity, and so you will certainly see… I know that Moscow was putting huge amounts of money to the Far East, I know that you’ve built a railroad all the way into North Korea. I know Russia is putting a push towards Asia, and obviously, if there are opportunities for Asians, they’re going to take advantage of it. So, no, it’s happening.
SS: You have said that you’re that Moscow is on its way to become an international financial center – you really think it has what it takes?
JR: No, what I’ve said was that I’m astonished that they think that, that they’re going to try – I don’t know if they can make that. Mr. Putin says he wants to have Moscow a major financial center. I’m astonished. I’ve never thought of Moscow as a potential financial center, but I do know, Moscow is going to spend a lot of money and time and energy, trying to develop itself as a major financial center. And just by trying they are going to make Moscow more attractive. Whether it works or not in 10-15 years? I don’t know, but in the meantime, a lot of money and effort is going into trying to make it a financial center.
SS: Talking about 10-15 years: I know your children have been learning Chinese from very young age. Is that where the future is, in China?
JR: In my view, China is going to be the most important country in the 21st century, whether we like or not. Again, this move of Russia more towards Asia just reinforces that whole trend of China becoming more and more important in the world.
SS: Why are you investing in Russia, then? Or are you investing in Russia and China as well?
JR: Well, Russia is one of the most hated stock markets in the world, perhaps second only to Argentina, which is hated more. I have learned, when things like that happen, they usually put it cheap, Russia has a convertible currency, has a very low debt, has lots of resources, and when the stocks get knocked down, I started investing. Listen, I was very bearish on Russia for forty six years of my life. I’ve only started becoming positive on Russia in the last couple of years. I do think I see opportunities and therefore I’m investing.
SS: So when did you first come to Russia?
JR: I first went to Russia in 1966! And came away pessimistic, and was pessimistic for the next 46 years. I knew I wouldn’t work. But now I see positive changes taking place, and so I’ve started investing in Russia.
SS: So, when was that moment that actually changed your mind? You remember?
JR: No, no, it was not anything specific; it was a series of events. I went to Vladivostok; I saw what was happening in Vladivostok. I saw changes, I went to Moscow a couple of times, I saw changes taking place… I heard some of the government officials and what they were doing, how they were setting up investment funds to invest with foreigners, so that everybody would either make money or lose money together. I saw a variety of things happening over a period of time, and in that result I decided that Russia wasn’t as bad as it had been for 46 years.
SS: I want to ask one more question about China. I’m thinking that China is still an emerging market, even though that it is huge and strong, and it hasn’t suffered any crises yet. But, it might at some point, like all markets do – so when that happens, how do other world markets protect themselves, is it even possible?
JR: Well, China is the second largest economy in the world, and if the second largest economy in the world has problems, it’s going to affect some people. If nothing else, the people who do business with China, will be suffering. That’s a lot of people, because it is such a huge economy now. It’s just like…if America has problems; it affects a lot of people. If Japan has problems, it affects some people. So there is no question that China will have problems – I don’t know what, or when, or why – but every country has problems, somewhere along the line. What is a little bit unusual is that it’s been a long time since China has had major problems. That is extremely unusual. That’s one reason I’m not buying many shares in China right now: they have big debts, internal debts, so I’m waiting in case there’s a problem coming out of China. If there is problem or some problems, I hope, I’m smart enough to buy more china.
SS: Alright, Jim, thank you so much for this interesting insight, for your advice. We were talking to Jim Rogers, renowned investor and businessman, author. We were talking about whom the sanctions can benefit and also why should people invest in Russia and not China. That’s it for this edition of Sophie&Co, see you next time.
This article was posted: Tuesday, May 27, 2014 at 10:22 am