Russia may be synonymous with oil and gas, but investors’ enthusiasm for the country is shifting steadily towards other sectors. Instead of putting their faith in companies such as Gazprom and Lukoil, it is the supermarket chains, mobile phone companies and property that have caught the eye.

In fact, anything related to consumer goods, infrastructure and banking are stand-out opportunities for foreign investors in Russia.

But while Russia has moved away from a pure reliance on energy and commodities, the two still dominate Russian indices. Indeed, some 60 per cent of most Russian indices are weighted towards oil and gas, despite the sector only counting for between 20 per cent to 25 per cent of GNP.

East Capital, the Stockholm-based specialist asset manager for eastern Europe, has long underweighted oil and gas.

“It’s not that we don’t believe in the oil and gas sector. It’s just that we believe even more in other sectors. We also do it to spread risk,” says Marcus Svedberg, chief economist at the firm, which only has a 30 per cent exposure to oil and gas within its Russian portfolio.

Other fund managers agree. Douglas Helfer at Halbis, the manager of the HSBC GIF Russia Equity Fund, says that although the equity market is dominated by oil, other sectors offer better opportunities. He points to the surge in disposable incomes, which have increased by 300 per cent in dollar terms since 1999 and are predicted to double within four years.

“Therefore, it makes sense to invest in stocks with exposure to the increasingly under-leveraged wealthy consumer. Russia’s fashion-conscious youth are helping to close the gap with the rest of the world in penetration rates for mobile phones, PCs and broadband, and there are many listed companies providing access to these trends,” says Mr Helfer.

Raiffeisen Capital Management (RCM), which is launching a Russian equity fund, only plans to include an exposure of about a third to oil and gas in its new fund. However, Angelika Millendorfer, its head of emerging market equities, says the relatively small amount invested in energy also relates to the fund’s 20 per cent exposure to small caps. She still expects the oil and gas sector to perform very well.

Reducing exposure to oil and gas has been a trend for some time and the MSCI Russia Index has significantly decreased its exposure over the last few years. At the end of 2003, 75 per cent of the MSCI Russia Index, for example, was made up of the energy sector, compared to 58 per cent at the end of last year. Instead, the financial sector has emerged from nothing to become the second biggest part of the index (13.5 per cent).

The booming consumer sector is also related to the profits of energy. Russia’s main revenues come from exporting oil and gas, which have resulted in a rapid increase in income, stronger purchasing power and increasing consumer demand, in particular among the middle class. That, in turn, has led to a boom in other sectors. Domestic demand is, hence, emerging as one of the most important driving forces for the Russian economy.

“Over the last two years, domestic demand has been steadily increasing and will continue to do so,” says Mr Svedberg.

Furthermore, the rapid increase of high net worth individuals, which have grown into a significant number, is another factor boosting the economy.

The consumer sector and other areas outside of the energy sector are also a theme for Baring Asset Management.

“Our key investment themes for Russian equities are the strengthening of the domestic economy, investment in infrastructure and the rapid development of the agricultural sector,” says Martin Majdaniuk, manager of the Baring Emerging Europe Trust at Baring Asset Management, which is looking to benefit from domestic growth through consumer stocks.

HSBC is also seeking to capture the consumption boom by investing in retailers, mobile telecom firms, banks, property and the media.

Apart from a belief in telecom firms such as Vimbildan, Mr Svedberg is confident that anything related to the consumer sector offers interesting opportunities, pointing to the retail sector as well as the whole supermarket sector as very interesting arenas.

RCM also has its eyes on the supermarket sector, which it expects to consolidate going forward. At the moment, the largest supermarket chain, X5 Retail Group, only has a market share of 3 per cent while the five largest players have a combined share of just 8 per cent.

Infrastructure and property are also interesting investments. “There’s an enormous need to upgrade all kinds of infrastructure, including houses, railways, airports and roads. Construction and property firms provide some great opportunities,” says Mr Svedberg.

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