Pattern Corporation: long-term investment strategy facilitated by the climate change.
Based on an actual project done for a CIS oligarchic investment fund (real name disguised to maintain client confidentiality).
The process of climate change, specifically the global warming aspect of it, creates enormous long-term challenges for companies and governments worldwide. However, it also opens up certain opportunities that would be unavailable otherwise – for some of the global players it can be a complete game-changer. Russia is one of such players, likely the one that stands to gain the most.
While certain negative aspects of the climate change, such as the shoreline erosion, warming-induced draughts and wildfire, as well as potential social consequences (including an expected refugee influx) do represent a substantial threat to the Russian economy and society, the potential upside is far greater. There is no other country with a comparable share of land economically useless due to the extreme cold. Substantial part of that is covered by the permafrost, which makes not only human habitation, but even mineral resource extraction impossible. Even using the conservative estimates, the amount of resources (such as rare metals, chemicals and natural gas) that will be unlocked in the next few decades by the retreating permafrost is simply enormous. And this is not even the most important of the economical “tectonic shifts” expected in the northern Eurasia (as well as Canada).
The Pattern Corporation is a privately-owned investment company managing the assets of several of the richest men in the post-Soviet space. As many of the largest corporation in CIS, it has strong ties to the government and invests in many of the basic sectors of the economy, such as mining, energy, construction and utilities. Pattern is a long-term investor with most of its assets in the form of majority equity stakes in capital-intensive companies which it actively manages, and hence correctly identifying long-term economic and demographic trends is of critical importance to its success (in general, academic research has shown that identifying and “riding” on economic and social megatrends has been one of the most common source of outsized long-term returns for companies in the 20-th century).
Among many of the necessary changes made by Pattern to its portfolio is the ongoing exit from the utilities space. Heating is a crucial industry in Russia, and a substantial share of the electricity consumption is also related to the extreme weather conditions during much of the year (especially in the eastern provinces) – per capita costs related to the winter season are by far the highest in the world. However, these are projected to decline drastically over the next decades, and the valuation of the industry will inevitably follow the decline in spending.
On the flipside, Pattern is funneling its capital into agricultural assets, having acquired a number of farming and animal husbandry companies as well as accumulating large tracts of land that are currently of little or moderate agricultural value, but are expected to become food-producing powerhouses of the 21st century. Even the relatively small increase in temperature compared to the 20th century has already allowed Russia to become the largest exporter of grain in the world by 2015-2016, and this is a mere fraction of the agricultural boom to come. With a rising global population, increasing living standards in the developing countries and the forecasted drastic negative impact of the climate change on the current global “bread baskets”, agriculture might well supplant oil as the leading driver of the Russian economy.
Since this is based on an actual consulting engagement, the additional steps that could be considered were actually suggested to the company and some of them are being implemented. One of the boldest and, frankly, my personal favorite strategy is investing in the so called “Northern Sea Route”. Historically, the maritime trade between East and West has relied on circumnavigating the African continent and the Suez canal. However, receding ice levels in the North Sea are gradually making it possible to travel from Asia to Europe and vice versa by following the northern oceanic coast of Russia, which is a shorter and economically much more attractive route. A short opening has happened for the first time in the late 2000’s, and the route now stays open only for a few short weeks during the summer, but this window is increasing each year. Pattern is currently in the process of acquiring companies and building the harbors and logistics infrastructure that might one day turn it into one of the biggest transcontinental shipping corporations in the world.
Student comments on Pattern Corporation: long-term investment strategy facilitated by the climate change.
Thanks for the post, Dima. To be honest with you, I had not previously considered / appreciated how warmer temperatures will not only make the poles more accessible but also more relevant w/r/t commerce. After doing a bit more research, I’ve also come to learn about some of the many emerging geopolitical debates, particularly as they relate to who has rights to what territory and by what definition. As an example, the US and Canada disagree on whether the Northwest Passage (which connects the Pacific and Atlantic Oceans via the Arctic Ocean) is legally considered internal or international waters. Russia aside, I’ve also come to appreciate how important the Northern Sea Route is to China, as they will likely rely on it as a supply route for raw materials going forward.
Taking a step back, the emergence of new sea lanes can have a monumental impact on the balance of economic and political power, so I definitely think we should all pay close attention. Thanks again for starting the discussion.
Dima, great write-up. The potential of a Northern Sea Route is increasing the U.S. Navy’s attention to Artic capabilities and operations. Although I find the Northern Sea Route to be a huge economic enabler, I was surprised when I recently read that we are still many years away from being significant.
According to the CEO of Maersk, ““The way global warming is going, of course there is the opportunity in a very far, very distant future that the northern sea route will open up and it will be a major shipping route. But it will definitely not be within the next 15 to 20 years in our opinion so it’s far too early to start constructing vessels for it.”
I would be interested to see how much Pattern invests in port infrastructure and other North Sea Route enablers in light of an extremely long time horizon. That said, the globe IS warming, so it seems they are well positioned.