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?
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