|Chilling Out Russia: Boeing, BP, Danone Among Western Companies That Stand to Lose|
By Craig Mellow
MAR 10, 2014 10:45 AM
But Russia needs experts and investments from those same Western firms, and others, to further develop key market sectors, especially energy and tech.
When Barack Obama promised that Russiaâ€™s invasion of Crimea would have costs, he was more correct than he probably imagined. The diplomatic dance over sanctioning Moscow is inevitably complex and may yield little in the end given Europeâ€™s heavy interdependence with its large Eastern neighbor.Â But financial markets have been decisive and severe.
Russiaâ€™s dollar-denominated RTS index has plunged by 12% since Ukrainian President Viktor Yanukovych fled his post on Feb. 22, ushering in a Cold War-esque East-West confrontation. The ruble has lost nearly 2% of its value against the dollar, and the Central Bank of Russia, which had not altered rates for going on two years, yanked them up from 5.5% to 7% to defend the currency. These are blows that will damage Russiaâ€™s already stagnating economy even if the Ukraine-Crimea crisis is resolved quickly, which it probably wonâ€™t be.
Gauging the standoffâ€™s effects on multinational corporations involved with Russia is trickier, though the financial press has been going at it energetically. Here is my own less-than-entirely-scientific list of shares to watch.
Standing out among potential losers is BP (NYSE:BP). The oil supermajor made a deal with the devil -- or at least with Igor Sechin, CEO of Rosneft (OTCMKTS:RNFTF) and one of Vladimir Putinâ€™s more sinister old pals -- two years ago, buying 20% of the state-owned Russian flagship in exchange for being extracted from its difficult TNK-BP (OTCMKTS:TNKBF) partnership and vague agreements to exploit the Arctic together. Rosneft shares have fallen by 8% over the past two weeks, meaning BPâ€™s slice of the company is worth about $1 billion less. But given that BP expects its real payoff decades from now, it is too early to press any panic buttons.
Less noted in the collateral-damage category is Boeing (NYSE:BA), which has quietly increased its reliance on Russian engineers and hopes to sell lots of planes there as local airlines replace its depleted Soviet-built fleet. The US aviation giant has invested an estimated $7 billion in post-Soviet Russia and operates two design centers there. With the US likely to be more aggressive diplomatically than Europe, all this business is squarely in the sights of possible sanctions or just lingering bad blood between Washington and Moscow.
Two leading European banks are significantly leveraged to the current crisis. Austrian-based Raiffeisen (OTCMKTS:RAIFF) has the misfortune of owning both the No. 12 bank in Russia and the No. 2 bank in Ukraine. Its shares have been walloped accordingly, sinking by 14% since Yanukovych flew the coop.Â Franceâ€™s Societe GeneraleÂ (OTCMKTS:SCGLY) has so far escaped similar punishment despite controlling Rosbank (MCX:ROSB), which is Russiaâ€™s 11th-largest.Â Among manufacturing companies, Renault-Nissan (OTCMKTS:RNSDF) is particularly invested in Russia. It owns a majority stake in Soviet legacy automaker VAZ, which for all its many troubles still dominates the national market.Â Renaultâ€™s shares have lost 6% since Russian boots landed on the ground in Crimea.
A number of marquee consumer-goods multinationals rely heavily on Russia. Franceâ€™s Danone (OTCMKYS:DANOY) reaps 10% of its global sales from there. Denmark-based brewer Carlsberg (OTCMKTS:CABGY) earns fully 40% of its revenue in Russia, and its shares have duly slumped 7.5% since the Ukraine crisis erupted. But those worries may well be overdone.Â Russiaâ€™s economic hit could certainly be bad enough to affect bank profits and car sales, but probably not so bad as to curtail yogurt or beer consumption.
Spotting companies that can benefit from chillier relations with Russia is a still more speculative business. A lot of loose talk has been heard about new export opportunities for US shale gas producers, as if European customers could switch on the spur of the moment from Russian Gazpromâ€™s (OTCMKTS:OGZPY) pipelines to liquefied natural gas from America. Shares in Cheniere Energy (NYSE:MKT:LNG), the only US company so far permitted to build an export terminal, have climbed more than 6% in the past two weeks.
But permitting, financing, building, and finding firm customers for a slew of LNG export competitors would take most of a decade, by which time the global-energy equation can turn in all sorts of unforeseen directions. Â An equally rational bet might be companies involved in nuclear power-plant construction like Northrop Grumman (NYSE:NOC) or Franceâ€™s Areva (OTCMKTS:ARVCF).Â One sure way for Europe to push back against Russia would be for Germany, Moscowâ€™s largest economic partner by far, to rescind the plan to phase out nukes that Chancellor Angela Merkel abruptly announced after the Fukushima disaster in 2011.Â Â Â Â
One is thing is for sure: The biggest loser -- except for Ukraine, depending on how things turn out -- will be Russia itself. Putin and his diplomatic/military advisers are clearly flattering themselves that the West has little choice but to keep buying Russian raw materials, so the US and Europe will squawk a bit then resign themselves to whatever Moscow decides to do in its own sphere of influence. That may be true in the immediate term, but Russia can hardly forge the future it wants for itself without the trust and cooperation of the most advanced nations.
Rosneft and Gazprom have reached out to half a dozen multinational partners beside BP for capital and expertise on their next generation of energy projects, which increasingly gravitate to the ultra-difficult conditions of the Artic shelf. Â Russia needs the outside, and specifically America, still more to spur the economic diversification that has been a strategic Kremlin imperative since the 2008-09 crisis. The show project for â€œmodernization,â€ a would-be â€œSilicon Steppeâ€ built from scratch in the Moscow suburb of Skolkovo, has been developed jointly with MIT, and depends for credibility on investments by big-name US firms like Microsoft (NASDAQ:MSFT), Cisco (NASDAQ:CSCO), and IBM (NYSE:IBM). Those could be wiped away by sanctions that Congress would pass in a heartbeat at this point with little reciprocal cost to the US.
It is hard to tell how carefully Putin is calculating these costs amid the bluster and cheap patriotism that accompany the launch of armed conflicts anywhere. Previously he has pulled back before the boundary of making Russia an international outlaw. But he is older now, and absolute power has had more time to warp his judgment.
No positions in stocks mentioned.
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