Derrick Irwin, portfolio manager on the Berkeley Street Emerging Markets Equity team at Wells Fargo Asset Management, discusses 20 years of opportunity and investing in Russia.
Derrick Irwin: Russia in 1998 really had a “wild west” feeling about it. It really was a challenging place. But at the same time, really exciting to be there.
Laurie King: That’s Derrick Irwin. I’m Laurie King, and you are listening to On the Trading Desk®.
In this episode, we’re hearing from Derrick Irwin, portfolio manager on the Berkeley Street Emerging Markets Equity team at Wells Fargo Asset Management. He recently penned an investment perspective recollecting his “20 years in Russia,” which, in fact, is the paper’s name. You can contact your relationship manager to get your own copy. This paper serves as both a look back, but it also offers forward-looking thoughts on opportunity and investing In Russia.
My colleague John Natale, a thought leadership manager, helped Derrick shape that perspective, and he recently met Derrick in his Boston office to discuss highlights for us. John, welcome to On the Trading Desk!
John Natale: Thank you, Laurie—I’m happy to be on the program. You know, emerging markets, it’s a complex and wide-ranging investment space. Right?
So, someone needs to help us understand emerging markets, doing the homework for us through their research, their travels, and their on-the-ground insights. And I think that’s the difference that Derrick brought.
Laurie: Well, let’s hear your interview with Derrick Irwin, then rejoin after.
John: For sure.
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John: Derrick, thanks so much for taking the time to sit across the table from me today and join us for On the Trading Desk. We’re looking forward to hearing about your insights from Russia—both recently and 20 years ago.
Derrick: Well thank you, it’s great to be here.
John: Much of the emerging market dialogue these days focuses on hot topics like, say, China and trade. But you’ve been busy uncovering opportunities in Russia.
Derrick: Yes, you know, it’s interesting that—you’re right—I think Asia, in particular, for obvious reasons, gets a lot of the press with emerging markets. There is an awful lot of interesting stuff going on in other countries, and Russia is a great example of that. Russia has been in a fairly slow-growth phase over the last few years, partially due to U.S. and European sanctions. But even in slow-growth periods like that, there are some pretty exciting changes. One of the most interesting changes that I noticed, and opportunities I noticed, while I was in Russia in late 2018, was the emergence of the IT space, and in particular, e-commerce. We all know about the Chinese e-commerce giants that are almost household names to many investors. But Russia has really lagged in that respect. And it feels to me that that’s changing.
John: So in your new commentary, “20 years in Russia,” you drew a pretty colorful contrast between 1998 Russia—still struggling to find its footing after the Soviet break-up—and 2018 Russia—a region that’s transformed and is possibly hard-wired for IT innovation. So, can you tell us about the forces that came together to enable this type of change?
Derrick: Well, that’s a great question, and I think Russia really did struggle for a long time to find its footing, to find a place in the rest of the world, but, at the same time, there are some really big bright spots and certainly IT is one of them.
If you think about the “raw materials” [that comprise IT] Russia has a very well-educated population. It took to the computer age pretty aggressively—particularly during the cold war—and Russia has built on those skills of well-trained, intelligent, tech-savvy people, many of whom, by the way, have worked at fairly high levels at U.S. tech companies. So that’s been [one of the biggest forces]. Of course the development of the internet and high-speed telecommunications has really helped Russia. Russia really started from zero there. The rumors about having to wait a year to get a telephone in Russia are absolutely true. So, they started with very little infrastructure and were able to build, from the ground up, a better, particularly wireless, infrastructure than many countries.
John: This is the difference between a region serving as a hot-bed or an obstacle to innovation—all these forces coming together. So, come to think of it, I’m recalling [a company called] mail.ru because I think you’ve got an interesting story to tell there.
You actually went and visited because it is, essentially Russia’s top social media company.
Derrick: Well, it’s social networking and gaming. I guess you could think of it as the Facebook of Russia, or the Instagram of Russia. They have looked into a number of different ways to build out e-commerce opportunities, particularly building off their own niches.
John: Can you paint a picture for our listeners? Tell us what that visit was like—from the moment you walked into the lobby until you started to come into touch with their experts.
Derrick: Certainly. It’s like being in Silicon Valley—or maybe even the TV show Silicon Valley—but with better haircuts.
You really feel like you’ve gone into any major headquarters in California. You walk in and there is a Starbucks in the lobby, all sorts of young and skinny people walking around.
You have a full ball court in the middle of the offices. There’s a gym with people talking to their trainers. And just as importantly, a lot of very smart people, working very, very long hours, looking for ways to not only build on what the West and what the Chinese have done with social networking, but to add a Russian spin on it. So, in many ways, it feels like an island of Silicon Valley in Moscow.
John: Alright, that’s great. Now we’ve all heard the term “logistics nightmare.” For many of us in the States that pertains to when our Amazon Prime delivery comes a couple of hours late.
But it’s very different in some emerging markets regions. Let’s talk about e-commerce logistics in Russia. What are the challenges?
Derrick: You know, it really is a large challenge. In fact I’m just reading a book now about the geography of Russia, which is one of the more fascinating topics you can think of. Obviously Russia is a huge, huge country, and apart from a handful of major cities, is also very sparsely populated, and, frankly, not the most forgiving climate and geography for folks who want to put logistics down. So, logistics has been very slow to develop in Russia. I think that, maybe from a strategic standpoint, the Russians have not wanted to open up significant links with the rest of the world, given their history as well, so that’s slowed it down. So you have an environment where if I want to move something across Russia, you’re talking about seven time zones anyway, huge pieces of land, not great roads, and not great infrastructure to do this.
This is in huge contrast to China, also a very big country, that 20 years ago, you would have said similar things—terrible roads, inhospitable climate and geography—but they’ve poured hundreds of billions of dollars into infrastructure and into logistics companies that have developed, certainly, world-class logistic services. So, the contrast is stark, and it’s really sort of a “chicken-and-the-egg” sort of problem—you really can’t have e-commerce without logistics. But you can build on that pretty easily.
John: And who would you say is making entrepreneurial moves to solve those challenges?
Derrick: Certainly the retailers have had to do it. Retailers have very advanced infrastructure in place. But for moving fast-moving, consumer goods around, not necessarily. The Russian Post is exactly what you’d think the Russian Post might be like. It is very slow. It is very inefficient. And things do get to you, but it takes a very long time. Early e-commerce players have co-opted the Russian Post to do a lot of their logistics, but it’s largely for goods that people are willing to wait several weeks to get, and not for the very quick, overnight service that we in the West and, frankly, those in the large Russian cities have come to expect.
John: Interesting. Let’s go back to your 20 years in Russia commentary. In the beginning you talked a little bit about your hotel stay during your 1998 trip. From what I gather, this place would not be in the TripAdvisor® top ten. Dare I ask, how was your stay 20 years ago?
Derrick: It was educational at best. The Rossiya Hotel was the name of the hotel we stayed at in 1998. Russia, in 1998, really had a “wild west” sort of feeling about it. The hotels were, at best, rudimentary. They kept very close eye on all of us. I don’t think it was because of the old Soviet paranoia, more like that we were spending enough money at the hotel. And also not getting into too much trouble in our rooms. But we didn’t want to spend much time in our rooms anyway, because they were pretty terrible. It really was challenging place to stay, but at the same time, really exciting to be there.
John: 20 years later, I’ve heard that something very different stands in its place.
Derrick: It turns out that they made a beautiful park there with a museum. I did note what a beautiful spot that was and thought back to how less-than-beautiful it was back in 1998.
John: Would you say that this transformation at the Rossiya’s former site would be a good metaphor for how Russia is transforming itself?
Derrick: I think that’s probably a pretty good one. Something that was best torn down and turned into something pretty impressive.
John: Derrick, thank you so much again for giving us your time, sharing some insights that span 20 years in Russia. We look forward to speaking with you again.
Derrick: It was great to be here.
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Laurie: John, so as I was listening, a key takeaway that I found intriguing was, well, the 20 years, really the contrast of the Soviet-era challenges and how—it’s almost because of those challenges that Russia has now become a powerhouse in areas like IT.
John: Absolutely. I picked up on that as well. When it comes to an IT infrastructure, many regions have had growing pains that could span several years as they try and set themselves up in industries such as e-commerce. But Russia was kind of lucky in the sense that it didn’t have much of an infrastructure to begin with.
So it could really start from the ground up and build the technological infrastructure that it needed so that companies could really shine, and innovate, because of that.
And I also found it interesting that you have this large and growing body of engineering experts—people who are well-versed in STEM, coming out of Russia’s universities. There may have been a very different purpose for them entering this field back in 1990s Russia and before that. But now, it’s almost like, it’s a very good thing that this has been such a big focus in Russia—science and technology education. Because what it has done is create a very good workforce for the type of IT innovation that Russia aims to make as a top competitor in the global space.
Laurie: Right, the human capital. That was something that I think could be easy to not know about, or, overlook. But absolutely, that’s obviously very important too.
John: For sure.
Laurie: Well, we’ll wrap this episode up for now. John Natale, thanks for catching up with Derrick Irwin.
John: Alright. Thank you so much Laurie. Was great to be on.
Laurie: And for those of you listening, I encourage you to contact your relationship manager to get Derrick’s full perspective, it’s called: 20 years in Russia. We think you’ll enjoy the read. Until next time; I’m Laurie King, take care.