TopCools Editorial: March 6, 2015.
In last 3 days, there are 3 events that shape better picture at Russia asset:
1. The following Forbes article analysis: “Money will continue to flow into Russia even in the bad times, he says, and in both this and next year it will expect a current account surplus of around $30 billion.” He is right, most of the press calculation have been focused on how much debt vs. how much cash on Russia balance sheet. why not check that most big companies in Russia exporting oil, gas, anti-missle system and other industrial products and get paid by dollar or Euro each day?
2. Russia has sold Antey-2500 Anti-Missile to Egypt and Venezuela and offers Iran latest anti ballistic missile system, Tehran is considering deal. If Russia keeps this rush to get hard currency, everyone is in trouble.
3. EU is stablizing and EU QE start next Monday, financial system around the world is awash with cash (while hard asset stills the same). Is US ready to watch French and German using those extra-newly-minted-cash to grab Russian asset because politics for free?
From the 3 cases, as well as Putin initiated Ukraine peace holding and doubling the number of monitor from 500 to 1000 and 300 US soldiers landed in Ukraine next week; Philip Hammond told BBC that “Putin has been running around Moscow to tell his oligarchs that sanction will be over by Summer (see video embed in this article)”. This indicates Putin will be committed to peace in Ukraine to remove sanction. We see things more balanced, Ukraine more secure and most parties realized that it is better to get peaceful and normalized, rather than spread the anti-missile to more countries. There is no need to dog-fight. additionally, Russia is the last investment frontier and US has less incentive to pressure oil. US should take this golden opportunity to grab Russian assets. such as RSX, RUSL. We already beat up the bear and it is not wise to try to corner the bear.
The Case For Investing In Russia — Forbes
Everything appears to point against investing in Russia today: oil price, recession, sanctions, currency, the lot. But with asset prices having fallen dramatically, is there a case to be made for buying, with a long term view?
Yesterday I interviewed Joseph Dayan, Head of Markets at BCS Financial Group, an independent broker and one of the leading financial services groups involved in Russia. It’s an interview that presents a more nuanced view of Russia than one receives from the headlines.
He starts with what we know: that oil has a profound effect on Russia’s economic health. “The dependecy that Russia has on oil, in extreme situations like now, is exacerbated exponentially,” he says. “Russia’s oil and gas revenues account for over 50% of the direct income of the government. With secondary income sources – Gazprom, Rosneft and their derivatives, and what they pay to the tax man – it goes up toward 70%.Wherever oil goes today, that’s where Russia goes.”
Any investment view on Russia therefore has to take into account what will happen to oil. “Prices are very depressed and we can see huge opportunities in Russia, but it would be a value trap if the assumption that oil will bounce back falls apart.” The BCS house view, though, is that it will recover: that oil will stay around $60 for most of the year and rise to $80 at the end of it.
The oil price is not the only problem. “Russia is going through a brutal recession, which has a lot to do with oil, but also has to do with the sanctions and geopolitics in Ukraine.” And that brings us to the second significant issue around Russia: sanctions and war.
“We think we are going to have a lull in that situation because Ukraine is, for all practical matters, bankrupt,” says Dayan. There are moves towards a sort of DMZ being established through the Minsk II accord, although lasting peace will of course depend on agreement between very different hopes and demands. Discussions on federalization are likely to be complex and there remains the risk that violence will flare up again. “We are very constructive, but are conscious of the risks,” says Dayan. But in any event, he argues that sanctions have hurt Russia much less than the oil price, and in some cases have actually prompted an improvement. “It did make the life of Russian corporates more difficult, but it also instigated lots of long-term structural changes Russia should have done years ago,” such as agreeing on pipelines for oil and gas with China, which they had been haggling about for a decade (and which have been covered in previous blog posts, here and here). That said, investors have to be comfortable that more extreme and damaging sanctions will not be imposed, such as those set upon Iran.
On the positive side, it is worth remembering that not every company responds to Russia’s problems in the same way. “Exporters are what the Russian market is really all about,” says Dayan. “It’s not just oil and gas. Everything you can dig out of the ground, they have and they sell: coal, nickel, copper, fertiliser compounds, potash. And these companies are usually very rouble dependent in their cost base. For them, when the rouble devalues by 50%, this is a huge boon.
“There are a lot of ways to value companies, but if you take the traditional approach of the cashflow model – what is it going to make in 20 years, and start discounting – Russia gives you some problems,” he says. That is partly to do with the cost of funds in Russia. Today, Russia is trading as junk, and has been doing so for the best part of a year now, having been downgraded twice along the way. CDS spreads and other indicators show that the market shares the view of a country that could default. But the truth is, Russia is not going to default; Dayan says debt at the state level represents about 13% of GDP. So our traditional methods of valuing companies, and assessing risk, may be skewed in Russia’s case. Inevitably, he thinks, the risk premium must at some stage dissipate. “And the easing of the risk premium that is baked into Russian assets will allow for a big re-rating, with multiple expansions and prices going up.” On top of that are potential operational gains, with expansions of margins and profitability. “The fact that people smell opportunity in Russia is not because they are delusion or suicidal. It’s because it’s true.”
But if Dayan’s confidence comes from the fact that prices have been hit far harder than Russian sovereign debt should suggest, what about corporate debt? “It’s manageable at the corporate level,” he says. “There is about $100 billion of debt repayments to be made, and a lot of that won’t be rolled over because it can’t be, but in terms of Russia’s ability to finance itself, it has forced lots of its oil exporters to leave their dollars in Moscow.” Capital expenditure is being slashed dramatically to accommodate it – Rosneft just cut its own capex for the year by 30% – but it has helped with the debt issue. “It’s not a capital control… but it kind of is.” Money will continue to flow into Russia even in the bad times, he says, and in both this and next year it will expect a current account surplus of around $30 billion.
If one believes in Russia as a long-term story, how to play it? “In the early stages, it depends on risk appetite,” he says. “The easiest way to do it is through Eurobonds. Locally nobody wants to chase rouble bonds, although you can find good double digit yields in high quality Russian quasi-sovereigns out there, but you can get 12% in dollars in terms of yield. Swiss franc denominated eurobonds are available for some quasi-sovereigns, with a still higher yield but a bit less liquid.
“If you want to be more aggressive, go into the equity market. I’m not a big fan of index buying – I understand that it’s cheap and easy and diversified, but it doesn’t really work in Russia because the index is crowded by state owned companies that we don’t think create long term value for investors.” Instead, individual stock selection would be a better approach, either through the commodity exporters with rouble cost bases he mentioned earlier, or, “if you think the rouble and oil are going to recover, go to the consumer space. There are excellent companies in Russia. Management has gone fro being obscure and unavailable to really high quality.” He mentions Yandex – Russia’s equivalent of Google – as a good example. “People use it because they like it, not because they’re forced to.”
source: Forbes: http://www.forbes.com/sites/chriswright/2015/03/06/the-case-for-investing-in-russia/
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