Investing in Russia? Three Signs of Change Point to Better Times

By Craig Mellow  OCT 31, 2011 11:20 AM

Russian stocks rebound with Europe, but there's some good underlying news, too.


The beleaguered Russian stock market roared back to life last week, catching positive contagion from Western European leaders’ most convincing plan yet to solve their sovereign debt crisis. Moscow’s benchmark RTS index gained 7.3% in three days, outstripping the 5.1% rebound in the MSCI index of European stocks. The outperformance largely represents the upside of emerging-market volatility: The RTS had shed 24% of its value since August 1, so it has more ground to regain. But some encouraging news about Russia per se was also working beneath the surface:
1. Russia’s business environment is getting better. Really. At least that’s the conclusion of the World Bank, which lately released this year’s annual rankings on ease of doing business around the globe.  Russia came in 120th out of 183 nations. That may not sound like much, but it actually beat fellow BRICs Brazil (126th) and India (132nd). You rarely hear investors complain about what corrupt hellholes Brazil and India are, and their stock markets trade on much higher multiples.

Russia also made it into a group of 30 nations showing the most improvement in business conditions over the past six years, according to the World Bank mandarins. (So did India and China.) Russia excelled at 45th place in the ease of registering property category, and, oddly, in enforcing contracts. It ranked 13th in the world by this vital yard stick, just behind Singapore. Among the country’s weaker points are getting construction permits (a 178th place finish) and access to electricity, where it was dead last at 183rd.  Maybe power-sector privatization was not such a great achievement after all.
2.  Gazprom is coughing up cash. State-controlled Gazprom (OGZPY.PK), Russia’s biggest company by far, is legendary for its investor-unfriendliness. Management has historically combined bloated expenditures, truculence (deputy chairman Alexander Medvedev lately blamed a subpar share price on “mass delusion” among equity buyers), and a stingy attitude toward sharing the company’s massive profits (about $35 billion last year) with the outside shareholders who happen to own 49.9% of it. The market has rewarded this policy with a pathetic price/earnings ratio of 2.5. 

So Moscow pros jumped on a report in the usually reliable Vedomosti newspaper this week that Gazprom plans to double its dividend to more than 4%. That would make the Russian gas colossus more generous than global peers like ExxonMobil (XOM), which pays 2.3%, or Chevron (CVX), at 3%. Gazprom shares jumped 13% last week, capping a 48% run for the month of October.

Hawkers of Russian equities tried to spin Gazprom’s news into a wider watershed, heralding potential dividend increases from other state-owned giants with substantial minority shareholdings, such as oil producer Rosneft and the top two Russian banks, Sberbank and VTB. “This could be a game changer for the market,”  Chris Osborne, who heads the U.S. arm of Moscow investment bank Troika Dialog, told a conference in New York. That remains to be seen. But if the news is true, it can’t hurt.
3. (Big) money is pouring in for infrastructure. Russian Railways, a state monopoly that makes Gazprom look transparent, quietly privatized a hunk of itself this week, reaping a healthy valuation and bringing a powerful new private player into the strategically vital rail network. A transport company controlled by Vladimir Lisin, majority owner of Novolipetsk Steel (MCX: NLMK) and Russia’s richest man on paper, paid $4.2 billion for 75% of Freight One, a subsidiary that controls more than 20% of the railroad’s freight cars .

While the auction for Freight One was closely managed, the price Lisin paid was toward the upper end of independent valuations. The oligarch beat out a close crony of Vladimir Putin, Gennady Timchenko, the top Russian oil dealer who wanted to graft Freight One onto his own existing rail transport business. Lisin is by no means a Kremlin outsider himself. But unlike Timchenko, he has a track record managing a listed company. He promises to bring more visibility and efficiency to the rail network, the literal lynchpin of the economy in vast, poorly connected, commodities-dependent Russia.  

These positive rays do not disperse the gloom most Russia hands feel at the prospect of Putin reassuming the presidency for a new six-year term, and probably two if things go according to his plan. “I don’t expect anything good from Putin’s return,” Dmitry Zimin, co-founder of the cellular carrier Vimpelcom and a hero of Russian business told the Moscow Times last week. “The extended presence of any individual in power leads to negative consequences.” The week’s developments do show that the picture is not uniformly bleak.
Greed is khorosho: Jamie Dimon and Steve Schwarzman join the advisory team for Moscow’s would-be world financial center.
What’s Russian for Angel Investor?: State tech fund Rosnano backs U.S. start-ups.

No positions in stocks mentioned.

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