Investors in Russia & China: Cruising for a Bruising

A forgotten artifact from a French rummage store is a harbinger about the dangers for investors in China and Russia.

Imperial Russian Bond - Unpaid Coupons Attached

Emmaüs is like the Goodwill of France except where Goodwill might occasionally feature interesting finds alongside junk, Emmaüs is more likely to yield treasure. Ever wanted a bargain Louis XIV’s era cabinet? You have a chance of finding one scattered amongst other odds and ends there.

On a treasure-hunting trip with the family, my wife and daughter went into a side space we don’t normally visit. There were the usual dusty drawings, an apparently genuine judicial robe, and plenty of other odd stuff but one item, in particular, caught my eye: a bearer bond from Imperial Russia.

For those not in the know, bearer bonds are like a type of private cash, the Bitcoin of way back when. Banned in the US in the 1980s because of their occasional use for illegal purposes, the old bonds are still valid and some still float around. Bearer bonds have information about the bond (loan) being offered, the interest rate, and the coupons.

Whereas modern bonds use the term coupons to indicate dates when disbursements will be paid, old bearer bonds featured literal coupons. Owners would cut off the coupons — which matured at various intervals — and redeem them for principal and interest. It didn’t matter who you are when redeeming them any more than it matters who has cash: money is paid to the bearer which is how the bonds got their name.

Since the old bonds are still legal tender, I thought maybe I’d found a literal treasure. The coupons could still be exchanged for … well, something. Thanks to my abysmal French language skills, the price turned out to be the coins in my pocket which I think came to a little over a euro, give or take a few centimes.

The bond was written mainly in Russian but also in English and French, the latter of which helps explain how it turned up at what’s essentially a French junkyard. The coupons were carefully torn off, exchanged for cash way back when. Each coupon matured at six-month intervals.

Early coupons were carefully clipped but there are a few coupons remaining, the last with a maturity date of January 1919.

I’ve little doubt the owner of the bond would’ve preferred to cash in the coupons which were guaranteed by Nicholas II, Czar of Russia. Unfortunately, for the long-lost bond owner, not to mention the Czar himself, his family, friends, and millions of random others, this guy got in the way:

For those who slept through history class, that’s Vladimir Lenin, head of the Bolshevik division of the Russian Communist Party. His followers swept through Russia in 1917 murdering, pillaging, and stealing the ancient version of washing machines. Among other things, they eventually slaughtered the Czar and his family, suppressed any political group besides the Bolsheviks, butchered lots of random Russians, elevated Joseph Stalin to power, and negated the value of Russian debt including my bond.

My dream of cashing in were crushed, explaining why those last coupons were never redeemed. Of course, given the severity of everything else Lenin’s followers destroyed whoever owned my bond probably got off a lot better than whoever oversaw the creation and sale of the financial instrument way back when.

Today, a different Vladimir rules Russia. A once prominent member of Lenin’s Communist Party, he’s technically an independent but is often referred to as the de facto head of the United Russia political party. Technically, he’s elected but realistically anybody who runs against him tends to fare poorly at the polls, in health, or both. Like the other Vladimir, he does appear to be genuinely popular with the Russian people.

Despite the connection to Lenin’s bolsheviks, Putin sees himself as more like the Russian leader Peter the Great. Like Peter, Putin sees his legacy tied to grabbing land and geographic expansion. He’s been fighting to steal Ukraine since 2014; his aspirations accelerated over the past year as his “soldiers” (an insult to real soldiers everywhere) rape and pillage that poor country. Thankfully, they also often get their butts kicked by the vastly superior Ukranian military.

In response to the barbaric behavior, many countries have cut off Russia from everything from flyovers to financial transactions. That move left over $100 billion of US and European investments stranded in Russia. I strongly suspect those investors are no more likely to get their funds back than the original owner of my bearer bond.

On the other side of the world, China’s Xi is similarly unhappy: “Western countries—led by the U.S.—have implemented all-round containment, encirclement and suppression against us, bringing unprecedentedly severe challenges to our country’s development…” he ranted. Never mind the never-ending trade imbalances, industrial and military spying, ridiculous trade barriers, forced “joint ventures,” and that — even with all this — it still seems like everything is Made in China. It’s all unfair, Xi whines, ignoring the havoc Chinese outsourcing caused to western manufacturing, especially in the far less protectionist US.

There will come a time, likely not in the far future, when investors in China are likely to face the fate of my long-lost bond owner. Whereas few people thought Putin would actually go on his rampage leading to the sanctions that locked up their investments, Xi is pretty clear that his intentions aren’t especially peaceful. For investors who keep their factories or capital tied up there, nobody will be spilling tears if it all disappears, swallowed as if Winnie the Pooh became the cocaine bear then stumbled across a pot of honey.

I prefer to write about innovation, to focus on more uplifting material. But innovation is tied to economics which is often tied to politics. Innovation requires capital investments which come with at least minimal moral responsibility. Expecting your money will be safe in FDIC-insured banks without doing deep due diligence is arguably reasonable. In contrast, expecting imperialist genocidal tyrants will protect for-profit investments isn’t. When investments in countries ruled by grievance-driven dictators disappear, investors deserve to bear what’s inevitably coming to them entirely alone.