Investing in Russia used to be simple. Shares rose and fell with world energy prices. End of story, more or less. This year has been different. Oil prices have soared, but Russian equities sank.
The Russian Trading System Share Index
slumped by 1.5% during November, despite an invigorating rally over the last few days, bringing its year-to-date loss to 13%. That’s better than the broader MSCI Emerging Markets Index
, which is off 16% for 2011, but much worse than the Standard & Poor’s 500 Index
of U.S. stocks, which has lost a mere 5%. What matters these days is global investors’ risk appetite, a vaguer and still more volatile metric than petroleum futures.
There are some exceptions to the general gloom, though. The most outstanding example on the Moscow market is Novatek
, Russia’s “other gas producer,” and with market cap north of $46 billion one of the biggest companies anywhere that most investors have never heard of. While big brother Gazprom
flounders, Novatek shares have risen 21% this year, capping a sevenfold increase over the past three years.
Novatek is based on a few monster gas fields that local officials in Russia’s frozen north managed to wrest from Gazprom’s maw during the 1990s privatization scramble. It was built up by the man who remains its chief executive, Leonid Mikhelson. The company was always much better run than Gazprom (not a very tough standard), but the price of its freedom was being restricted to domestic gas sales. The lords of Gazprom maintained a monopoly on export markets, where they always assumed the money was. Thus Novatek’s obscurity beyond Russia’s borders.
After the 2008 financial crash, Novatek brought in some heavy political artillery of its own in the person of Gennady Timchenko. A presumed member of Vladimir Putin’s innermost circle, Timchenko controls Russia’s largest oil trader by far, a Swiss-registered firm called Gunvor
. He started buying Novatek stock after the crisis, and by March 2010 emerged as the company’s largest shareholder with more than 20%.
A lot of good things have come Novatek’s way since then. The company purchased stakes in two new big gas fields from Gazprom late last year at what looked like knock-down prices. It brought in French oil major Total
(TOT) as a strategic partner in March of this year, selling 12% of the company for $4 billion. Total took a separate equity stake in a huge liquefied natural gas complex Novatek is developing above the Arctic Circle on the Yamal Peninsula, paying another $425 million for 20% of the venture. Qatar’s oil minister said a few weeks ago the gas-rich Gulf state is thinking about buying its own share
either in Novatek or the Yamal project.
The internationalization of Novatek’s big LNG effort, while Gazprom dawdles over its own projects on the Yamal mother lode, makes it likely that the upstart will break the state giant’s gas export monopoly once its liquefied plants are producing, an event scheduled for 2016. Meanwhile Putin is pushing resolutely forward with gas price liberalization within Russia, eliminating a presumed major market distortion and giving his friend Timchenko a big boost while he is at it.
Natural gas prices paid by industrial customers in Russia recently shot above those in the United States
, a landmark of sorts for Russia. It’s no wonder Novatek is on fire financially. Revenue and EBITDA both jumped by about 35% year-on-year for the first nine months of 2011, though net profit slumped thanks to foreign exchange losses on a skidding ruble.
Another outperforming Russian stock is Uralkali
, a giant producer of potash, a raw material essential to the most common agricultural fertilizers. The shares have risen 9% this year.
Like Novatek, Uralkali was an already good company whose prospects were enhanced by the arrival of an influence-peddling heavyweight as a key shareholder. The oligarch in question here is Suleiman Kerimov, a one-time oil trader himself from the south Russian region of Dagestan who turned to making billions on speculation in the shares of Gazprom and state bank Sberbank, among other companies.
Last year Kerimov eased out Dmitry Rybolovlev, the boss who had built Uralkali from scratch before running afoul of the Kremlin for obscure reasons. With better connections at the top, Kerimov has been able to fulfill strategic objectives his predecessor could not. Chief among them was merging Uralkali with its chief competitor Silvinit earlier this year. The combined company also cemented a marketing alliance with Belaruskali, a big producer in the friendly country to Russia’s west, making Uralkali effectively the world’s top potash seller. That may be a sobering thought for billions of poor people around the globe, as prices for the mineral will inevitably feed through to food costs. But for the moment it is benefiting shareholders.
Russia is often portrayed as a primitive kleptocracy where everyone of note’s fortunes depend entirely on Putin’s mood when he wakes up in the morning. That is greatly oversimplified, at least for privately owned, publicly listed companies. They cannot succeed without the universal business virtues of competent strategy and execution. But rubbing the Kremlin the right way will also remain essential for the foreseeable future. Companies that get both elements right can produce positive returns even in a tough market.
No positions in stocks mentioned.
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