Russian Discount
Pfäffikon SZ, Switzerland – In the coming weeks, Russia will be in the spotlight. An ideal opportunity for the average Western journalist to once again undermine this huge country. The myth is maintained, but the reality is often somewhat different. In the run-up to the Olympic Games we were given a taster, not to mention the Netherlands’ ‘Russia Year’. The Dutch delegation going to Sochi would be too large. But I think this is ridiculous, I have often argued that it’s a good idea for the Netherlands to maintain close ties with Russia. Prime Minister Rutte and King Willem-Alexander understand.
High James Bond level
For years I have heard intelligent people talk nonsense about Russia. Communism, the cold war, the collapse of the Soviet Union, it is still a very sensitive subject and very ‘James Bond’. Now the emerging markets are the talk of the town, the collapse of the Russian stock index in 1998 is as well. But this was macro forces at work. The Russian stock market decreased by a dizzying 82 percent. However the market clawed its way back and in the subsequent years has performed more than excellently. Since that time, much has improved in Russia, but the Western media doesn’t want to report that.
The myth created by the Western media discourages investors to do business in Russia, despite the fact that many shares are cheap. Investors call it the ‘Russian Discount’; I call it the ultimate ‘Margin of Safety’. Managers of various well-known pension funds are not allowed to invest there. I note that for a very long time European pension money has been successfully invested in this region. Considering the yields obtained, apparently these pension funds have done their homework well.
Khodorkovsky
Mikhail Khodorkovsky captured the headlines here in Switzerland. After release from prison he obtained a temporary Swiss residence permit to stay here with his wife and children, who have been staying in the country for some time already. In 2004, Khodorkovsky was the richest man in Russia. Khodorkovsky was a gentleman of position and according to the Western media, he was put in prison by Putin because of a political feud.
In my view, the facts are a bit different. I will try to explain this complicated matter as concisely as possible. Yukos, Khodorkovsky’s oil company, did not care about anything. Yukos leadership did not want to know anything about corporate governance. The smaller shareholders were squeezed because no dividends were paid. All profits were surreptitiously channelled to Khodorkovsky’s holding company, Menatep. The Russian state and the minority shareholders did not benefit because of the use of these so-called ‘onshore-offshore accounts’. The Netherlands also played a minor roll. It is obvious that of all the oligarchs, Khodorkovsky, broke the law the most. Therefore Khodorkovsky was indicted for a huge $27 billion.
Kudrin Scissors
The brilliant Russian minister of finance, Alexei Kudrin, along with Vladimir Putin, wanted to stop the rampaging oligarchs. Kudrin took care of this through the so-called ‘Kudrin Scissors’ whereby oil producers were forced to pay a fee of about 90 percent of export revenues above $28 per barrel. Russia needed a lot of money to finance reforms. You probably now understand better why Khodorkovsky today is extremely polite about Vladimir Putin and does not intend to fight his case against the Russian state.
Sakhalin
The gas and oil project involving Shell in 2007, Sakhalin, is also cited by the Western media to illustrate how Russia does business. But there are two sides to this story. The original agreement was signed with Shell by Boris Yeltsin in 1996, based on an oil price of $21. You know what the price is doing today. Furthermore, Shell did not take too kindly to the environmental requirements. There are more striking aspects to this case, but that is too detailed. Today Shell is active in Russia again and works satisfactorily with Russian partners.
Discount
It strikes me that more and more investors, as well as banks and brokers, see Russia as an attractive region in which to invest. They use the same arguments which I have preached for years and years and that have not changed. Russia is a ‘former super power’ that is working hard to make a successful comeback. It’s not easy, but the numbers do not lie. The recent noise on the financial markets has made the undersigned more convinced to buy more Russian equities, no matter what the Western media say. You must do your homework, but this is true for every investment. We want exposure to the Russian market over the next decade. The “Russian Discount” will disappear one day so in this case, time is on your side.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
