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Russian roulette

Investors are responding to this month’s Anglo-Russian row with remarkable equanimity
Russian roulette

It was Churchill who famously suggested that Russia is a riddle, wrapped in a mystery inside an enigma. Currently the UK’s favourite parlour game is to shake that Russian doll and speculate as to what will fall out.

Shake it – metaphorically speaking – over the London Stock Exchange and quite a few companies tumble out. Trading on the London market’s International Order Book for overseas companies is dominated by Russian ones. They account for 29 of the 142 securities listed on the order book, but have a near-monopoly of the order book’s trading. In 2017, turnover in shares of Russian-incorporated companies made up over 80 per cent of the top five countries’ trades ($75bn out of $90bn). In the scheme of things that amount is just a slither of London’s total equities trading (about 4 per cent). But it does mean that among Russia’s major companies there is – if not a lively turnover – then at least a steady one.

Take Russia’s biggest company, Sberbank (Rus:SBER), whose roots reach back to Imperial Russia – in February, trading in London averaged about 8,000 bargains a day with an average value of almost £10,000. That amount is typical of trading in most of the companies in the table. True, most trading is likely to be in exchange traded funds (ETFs) – iShares MSCI Russia (øJLS), for instance, is a $500m ETF that fully replicates the index, thus driving much dealing. But the smallish average bargain size also implies that private investors are putting money directly into Russian companies.

Do they really want to be doing that? One response is to say ‘why not?’ Apart from some of the fat dividend yields on offer, it’s a fact of life that being an equity investor necessarily means having some complicity in dodgy dealings in dodgy countries. If even the squeakiest-clean UK-based multinational does some business in the more lawless parts of the world – and which one doesn’t? – then getting a bit grubby is unavoidable. So why get fussed about the implications of this particular ethical issue just because it’s close to home and topical?

Now the response might be ‘self interest’. If there is a series of escalating tit-for-tat exchanges between the UK and Russia then soon enough the wealth of the richest of Russia’s kleptocracy would be targeted. That would almost certainly affect the companies that some of them run and, in turn, the shareholders.

In that context it’s easy to spot that the three biggest companies in the table – Sberbank, Rosneft (Rus:ROSN) and Gazprom (Rus:GAZP) – are all run by bosses who go way back with Vladimir Putin to the days when they worked with him at the city council apparatus for St Petersburg. One of the three companies, Rosneft, and its boss, Igor Sechin, are already blacklisted by the US government as so-called ‘specially designated nationals’, which means it is illegal for US citizens to do business with them.

Sup with the devil
CompanyCodeShare price ($)Mkt Cap (£bn)Div Yield (%)Price % ch -1 yrPrice to bookPrice to salesPrice/norm eps
SberbankSBER18.068.82.359.11.63.29.1
RosneftROSN5.541.92.41.71.00.621.4
GazpromGAZP25.038.95.79.40.30.54.5
LukoilLKOH67.234.35.323.90.80.511.3
Norilsk NickelMNOD18.921.56.219.56.93.316.5
TatneftTATN63.216.84.566.41.92.013.5
MagnitMGNT19.35.85.4-48.92.20.412.5
Source: London Stock Exchange; S&P Capital IQ     

Another, Gazprom, effectively functions as Russia’s exporter of pipelined gas and has shown its readiness to tamper with contracts when that coincided with the Russian state’s benefit. Gazprom has not been targeted by the US sanctions and – perhaps amazingly – its shares are even traded on the US over-the-counter market. However, it is easy to imagine the company itself or its boss, Alexey Miller, getting sucked into the mess. Ditto Herman Gref, who runs Sberbank. In that scenario, it would be equally easy to see these companies’ dividend-paying machines getting shut down. Or possibly it would become illegal to receive a dividend from the likes of Rosneft (theoretically, it is already in the US). Developments such as that would be miserable for share prices.

So far, the response of investors has been remarkably relaxed. Since the close on the Friday before Sergei Skripal and his daughter were poisoned, the biggest faller has been Sberbank (down almost 9 per cent), while the price of Gazprom and Rosneft has barely budged. Much the same has happened – or, rather, not happened – to UK companies closely involved with Russia. Shares in Russian property fund Raven Russia (RUS) and BP (BP.), which owns 18 per cent of Rosneft, have been equally calm.

Such equanimity may be because every conceivable risk is already factored in to the Russian companies’ share prices. As the table shows, some of them – the oil companies especially – trade at rock-bottom ratings. Alternatively, investors may be excused for taking the cynical line that this little storm will blow itself out soon enough – they generally do.

Perhaps even the markets are wise to Churchill’s famous words of 1939 when he reckoned that the key to unlocking the enigma lay in Russia’s self interest. If that applies today then the Russian state might draw back from endangering the future of its biggest companies. Not that I would like to have money invested in them.