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EScroogeJr (< 20)

Bleak prospects for Russian stocks



November 21, 2007 – Comments (3)

Being fully absorbed by domestic news, we haven't payed much attention to another soap bubble, which I think fully deserves your red thumbs, growing quietly on the emerging markets, and I'm not talking China. Ten days from now, Russia will hold its parliamentary "election". The "election" itself is a non-event, however, Dec 2 is an important milestone because right after that Putin will name his successor, and then all masks will be off and we'll see the next stage in this regime's evolution, which won't be pretty for the foreign shareholders of Gazprom, Lukoil, MTS, Rostelecom, Wimm-Bill-Dann and other comanies. We haven't witnessed many nationalizations of late, and I believe foreign shareholders will soon be in for a rude awakening. Meanwhile, whatever upside these stocks had to offer is now rapidly dwindling. Wimm-Bill-Dann has become the victim of socialist economics, when October inflation got so out of controle that the government froze food prices. Lukoil and other "oils" are not going to benefit from the rising price of crude because all the extra profit is going to the government coffers. Rosneft is the only oil company with a future because they are gobbling up other companies, exproptiating what they want and when they want, but you, as a foreign shareholder, will participate in this feast only as a meal served for the dinner table. Gazprom, which has the stupidest management team among Russian companies, has been growing its revenues by eliminating subsidies to the ex-Soviet republics, which by itself makes full economic sense, but now with the subsidies mostly gone, growth will hit the wall next year. Its CEO is a moron who thinks that gas prices will keep rising forever and dreams about 1200 ft-tall office buildings. Telecoms are solid enough, but for only as long as the ruble remains strong, and it means for as long as oil doesn't get cheaper. In short, this commodity-driven boom is dangerously close to its peak, and if you take a 10-year time frame, all the big names are nothing else than overpriced cylcicals. Usually you take the country risk in exchange for a good upside in the stock price, but here is the case where you've got the country risk and no upside, only some short-term "catalysts". Meanwhile, after Dec 2, we will be in for a major reevaluatuon of political risks. The foreigners who think that the current regime is going to turn the country into an extention of the free-market, prosperous Western Europe, have no clue.  This regime's role model is Iran, not China and not even Venezuela. So I wonder what will happen to all these green thumbs when the new president will announce a) his preference for economic autarky, b) his admiration for Stalin, c) his intention to restore the USSR, d) his new expensive military programs, e)  his belief that foreign currency reserves should be used to subsidize state-run factories, and finally, f) his view that it would be a mistake to squander money by paying dividends to foreign shareholders? 

3 Comments – Post Your Own

#1) On November 22, 2007 at 1:20 AM, abitare (30.33) wrote:

Good write up. I am not long any Russian stocks. Although I do recognize, that a country can be well managed and capitialistic and NOT be a democracy. If you look at the performance of China and Singapore, both NON-Democracies, their growth, currency (China's will rise) and markets have far out done the US.

Good governace can take many forms, look at Dubai and Singapore. I prefer a Republic, but under the current administration, the US dollar has fallen 30%, the US debt
has doubled?, the military spending surpasses all other Nation States, the size of government has grown to unmanagable levels, we have done to a permanent war against a tactic and the US government is involved in micor-managing significant parts of our lives.

Do you really think their is a difference between Bush / Gore / Kerry / Clinton / 9udy 11uiliani?

28 years of Bush / Clinton rule?  

There is hope:

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#2) On November 22, 2007 at 11:42 AM, MakeItSeven (31.54) wrote:

Barrons had a recent article on 10/25 which touted Russia as the best potential emerging market.   Here are a few quotes from that article:

"Putin's government is now changing its strategy. Ahead of the March presidential election, Weafer says: "We are now about to see a shift as the government's priority changes" from building its financial reserves to investments in strategic industries."

As the government starts to increase investments in strategic industries such as natural resources and infrastructure, those government investments are expected to reach $400 billion by 2010 from $160 billion in 2006, he notes.

Weafer says that 2008 "will be quite a bullish year for the market and particularly as we see Putin's continuing role." In anticipation, he is shifting exposure to those "strategic" industries and trimming consumer names in general because of their pricey valuations.


Leading Russian bank Sberbank "is the proxy of the economy" and has been the one of the best emerging market stocks in recent years, says Weafer. In a fragmented market, Sberbank is poised for strong growth with plenty of holdings in deposits.

Russia's exposure to global credit woes is minimal because of its still developing financial system, says Alexander Pertsovsky, the chief executive officer of Renaissance Capital, a Russian financial firm.

Among telecoms, mobile phone operators VimpelCom and GoldenTelecom and broadband company Comstar-UTS are also poised for growth. Increasingly affluent Russian consumers are buying more premium services, use more than one phone and demand access to the Internet, says DWS Oberbannscheidt.

On the retail side, X 5 Retail is a market leader with ambitions to become "Russia's Wal-Mart," notes Weafer. With strong cash flow, it has only a 5%-6% share in a very fragmented market.

To be sure, the political risks are high due to the interventionist government. A slowdown in growth, rising inflation, a sharp pullback in commodity prices and the antiquated bureaucracy continue to pose threats.

But valuations look cheap, particularly in the energy sector when global supply is tight and demand is robust, and consumer-oriented industries continue to show strong growth.

Weafer's advice: "You can put money in Russia that you would use to go on vacation or buy a car, but I wouldn't put your college fund in [Russian stocks].""

What I like best about Russia is, unlike the US which splits its citizens into the investor class and the working class in recent years, the government's aim to double the number of working middle-class within 10 or so years.  That cannot be done without some level of inflation and government's intervention to tame it.  However, a robust middle class will improve economic activities in the long run and we see some proofs of that already in the quotes above about the "increasingly affluent Russian consumers".

As for clobbering the rich people with taxes, I don't think you need to worry about that.  In the latest Forbe's list of the richest people in the world, Russia catapulted into rank number 3 in the number of billionaires and number 2 in the total networth of those billionaires. 

Anyway, the ruble is guaranteed to remain strong, backed up by the huge strategic reserve which was the government's first priority up until now.  Its future will be boosted by the affluent middle-class, not teetering on the backs of an over-indebted working class and, therefore, will progress well.  I wouldn't worry about the government suddenly going berserk either.

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#3) On November 22, 2007 at 10:16 PM, EScroogeJr (< 20) wrote:


"a country can be well managed and capitialistic and NOT be a democracy"

Couldn't agree more. It is very often that you get a dictatorship that is pro-growth. Russia's is just a dictatorship without adjectives.

"Do you really think their is a difference between Bush / Gore / Kerry / Clinton / 9udy 11uiliani?"

Yes, about the same as the difference between Pepsi and Coke :)


"the ruble is guaranteed to remain strong, backed up by the huge strategic reserve"

The accumulation of reserves has been executed impaccably well. The only trouble is, these reserves are being accumulated for the restoration of the Soviet Union, let's call a spade a spade. Once the people who are running the show proceed to make their dream come true, these reserves will be depleted sooner that you will finish your cigarette.

"I wouldn't worry about the government suddenly going berserk either."

I see them going berserk much sooner than you can imagine. The writing is on the wall: the new president will be announced in a matter of weeks, the one who is deemed the most deserving of wearing Stalin's boots. If Sechin or anyone from his clan becomes the next president, which looks exceedingly likely,  your only profitable Russian investment will be a factory that manufactures barbed wire.

"Barrons had a recent article on 10/25 which touted Russia as the best potential emerging market."

These analysts have absolutely no idea what is actually going on. They were shouting "sell, sell, sell" in 1999, where they should have been buying. Now, looking in the rearview mirror, they decide it's time to buy just as the curtain is about to fall. The cycles of political normality in Russia last for 8 years. The current one began in 1999 and is ending now in 2007. What happens after that is anyone's guess, but I can definitely tell you that it won't make us feel happy...let's hope it doesn't get too ugly.


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