Russian politics "marginal driver" of European markets

(Editor's note: The following are excerpts of a Reuters interview with Andrew Milligan, head of global strategy at Standard Life Investments, on investing and market risk in Russia)

EDINBURGH (Reuters.com) -- Q: What's the assessment of Russia among UK fund managers, especially in the light of recent political events?

Milligan: Can I start with a little background on investing. Financial markets find it very easy to price in economic or corporate issues, which happen on a recurring basis, but they generally find it difficult to price in politics. Political events like an election do not come along that often, while political change need not always happen at election time. Turning to Russia, looking back over the last couple of years, there is a growing realization across Western and Eastern Europe that their relations with Russia are becoming more complicated. Russia is becoming incredibly important, for example, as a marginal energy supplier for Europe. It is also a country that is flexing its muscles politically, militarily and, say, via capital flows. It's not a country, I think, that's necessarily well understood by Western politicians and it's a difficult country for financial markets to understand. All of that's a way of trying to say that financial markets find it difficult to price politics and Russian politics are becoming more important as a marginal driver of financial markets in western Europe.

We're not investing much in Russian assets. It is an emerging market that we have some assets in but there are many other emerging markets that are larger or that are easier or safer to invest in than the Russian market. Indeed, I'd say a lot of the interest in Russia will either be foreign direct investment or say on the debt side.

Q: Have you changed your views recently on Russia?

Yes and no. Let me explain what I mean! Countries like Russia or, say, Venezuela could be classified as true emerging markets. By that I mean that any investor has to enter those markets thinking that, during the time scale of the investment, what are the chances of some big geopolitical, legal or electoral issue coming along, which will have a material impact on the investment. Russia would certainly fall into that category. Of course, that's what also makes it rather interesting! We are always looking for markets where assets may be mispriced and where the information flow is not as fixed and extensive as say, the U.S. or Germany, where markets are obviously very efficient. We are clearly interested in investing in areas where markets are less efficient because then there may be areas of value. That's the risk and opportunity we face. The events of the last couple of weeks are a reminder that Russia is a very large military and political player in eastern Europe and can through its actions have a material impact on commodities prices. Yes there are surprises - who would have thought six months ago that Russia would invade Georgia? On the other hand, these events should not be surprises, because they are what one would expect to see in a true emerging market!