Dateline: Kuala Lumpur, Malaysia
Imagine starting a business and getting an instant 23% return on your capital.
We frequently discuss the concept of “crisis investing”. This has been referred to as “buying when blood is in the streets”, or simply going to a place everyone else thought was left for dead.
Investing, while deeply analytical and quantitative in nature, involves human beings. Even those of us who call ourselves logical and data-driven have inherent emotional biases.
I remember growing up helping out in my father’s financial business and seeing people buy $800 shares of high-flying tech stocks right before the crash. Every sane financial advisor warned their clients to be cautious, but the emotion of greed caught up.
Likewise, when the market crashed several years ago, no one wanted to get in. Today, people are deathly afraid of “evil Russia” and follow whatever the mainstream media tells them on countries like China.
If you’re an investor, making reasoned investments in markets that have been kicked to the curb can result in huge gains. My friends Adem Tumerkan and Tres Knippa, among others, frequently speak of possible 100X returns on certain opportunities.
For entrepreneurs, it is also possible to get stellar returns in beaten up markets. In fact, entrepreneurs can benefit from these opportunities much more quickly and more handsomely than investors.
The biggest expense on almost any small businesses’ balance sheet is staff. Hiring a team to work for you is certain to cost more than all of those $47-a-month productized services you buy online.
Any way you can cut down on that expense is more money you can put toward your business and increase your odds of success.
The situation in Ukraine right now is an interesting opportunity to lower your business costs and hire talented workers in a place that was never really on anyone’s radar.
An acquaintance of mine who works at a bank in Ukraine (the ones I tell you to avoid) was recently telling me of the currency black market going on there.
You’ll remember that Ukraine’s currency, the hryvnia, made headlines about a year ago when it fell from 8:1 against the US dollar “all the way” down to 11:1 or 12:1.
With the strength of the US dollar this year, and the political uncertainty in Ukraine, the hryvnia has been in free fall, shedding almost two-thirds of its value in just a couple months.
At one point about a week ago, the hryvnia was trading at 33:1 against the dollar (it’s recovered slightly since then).
And just as Ukraine’s currency was digging out new lows, my banker friend was sending me a message about how the currency black market in Kiev was actively buying US dollars for at least 40 hryvnia each.
Now, compared to other black markets, that number seems a bit low. I’ve spoken to folks in Argentina who speak of behind-closed-doors currency exchanges that will pay double the “street value” of dollars in exchange for worthless Argentine pesos.
The somehow-reviled “black market” knows the REAL value of things, and in places like Argentina and Ukraine, the capitalists running it realize their governments are full of hot air when it comes to the currency.
However, let’s just assume the black market rate in Ukraine is as quoted. 40:1 with a real exchange rate of 33:1 is a 23% premium over the “spot” price of US dollars.
From the black market traders’ point of view, this is both a desperate move to pay whatever premium is necessary to acquired a stable asset, AND a bet that the Ukrainian currency will go lower.
If you hold US dollars and are willing to accept that 23% premium, you’re essentially betting the hryvnia can’t go any lower.
It’s important to note that the much-reviled black market is nothing more than two parties agreeing to a more realistic value of an asset without any third party (read: government) interference.
Now, normally I would caution against “catching a falling knife”. If you have some real data to support such a purchase, then go for it. That’s how crisis investments are made. If you’re buying just because you figure “how can it go any lower?”, you will often be surprised to find out it CAN go lower.
But Ukraine is an interesting case study.
My banker friend said that wages have barely gone up, if at all, since the currency free fall. Ukraine was never a hotbed of full employment to begin with, and things are tougher now.
Meanwhile, prices on everyday commodities have gone up, she says, but not as much as the 23% premium.
If you had a business, or wanted to start one, Ukraine is an extremely affordable place to live as well as hire people. Costs of everyday commodities haven’t soared the way you might expect, although this is certainly a possibility at some point.
That said, if your company was largely labor-intensive – say you needed to hire a lot of administrative staff – you could easily set up shop, turn your US dollars into hryvnia, and instantly pay your employees in devalued currency.
The same concept could work in Russia, where the ruble has turned into rubble and dropped by 50% recently. I’ll be in the Baltics next month learning about a new Russian citizenship program for entrepreneurs, so keep an eye out.
Countries like Ukraine have a vast untapped pool of talent for both administrative and more technical tasks. Balkan nations like Romania have long been known as an outsourcing hub for tech work thanks to their fast internet speeds.
Ukraine, while politically undesirable right now, is cheaper than EU members like Romania or even non-EU Balkans nations like Serbia or Montenegro. And you’ve got an entire pool of highly savvy English-speaking people in cities like Lyiv and Kiev.
The world is opening up to entirely new places to do business. Southeast Asia is a great place to start a business on a shoestring, but I believe there are a growing number of other emerging places that any entrepreneur should consider.
Not only do many of these European countries offer relatively straightforward residency (and future citizenship) to any entrepreneur who can turn even the slightest of profits, but tax rates in central and eastern Europe are almost universally in decline, with Ukraine knocking 1% off their corporate tax rate each year.