Sistema update & general thoughts on Russian stocks
The News
Today, Sistema dropped by some 40% because the boss of Sistema, Vladimir Yevtushenkov was put under “House arrest” following money laundering charges in connection with the Bashneft acquisition.
Going back to my initial Sistema posts (part 1, part 2), let’s look back at the original investment thesis. One fundamental assumption for me was the following:
Is a Russian stock really “investible”
This is a big question for me. A couple of months ago, I wrote a post why I would not invest in Greek stocks (mistake !) or German-Chinese companies (score).
Honestly, a Russian stock is clearly in general much more a “speculation” than a German or French one. Compared to Italian stocks however, I am not so sure anymore, as the EMAK and ASTM example clearly showed that Corporate Governance for instance in Italy is not that much developed.
The two most relevant questions in my opinion are:
a) Are the managers fraudsters or thieves ?
b) Can someone else easily interfere and take away assets etc. ?
At that point in time, my opinion was that:
It looks like that Sistema is at least on neutral to good terms with Putin. In the case of the Indian Mobile subsidiary for instance, Putin put the problems of Sistema on the table when he visited India in 2012.
and
This sounds like a guy who knows how to maneuver (so far) within the harsh Russian political and business climate. So the risk should be a lot lower than for instance for Pharmstandard, but clearly, a dispute with government (see Rosneft/Bashneft) or a more powerful oligarch could change this real quickly.
Well, it looks like that the core foundation of my thesis is not valid anymore. Putting someone under house arrest to me looks already like a significant escalation. To add insult to injury, one of my readers alerted my already end of July:
Seb
26. July 2014 10:26 (Edit)Hi,
there is something brewing with regards to Sistema’s shareholding in Bashneft. The chairman, Vladimir Evtushenkov had to appear in front of the Investigative Committee in relation to the “the theft of shares of oil and energy companies in Bashkortostan”. Sistema’s Shares in Ufaorgsintez and Bashneft are now restricted from being traded.I guess, the Bashneft SPO which was planned later this year, will not go ahead. There is even a chance that Sistema could be forced to give up their shares in Bashneft. I feel that the political risk for the company has increased a lot so that I decided to sell my Sistema stock at a nice profit. What’s your opinion on that situation?
I personally thought at that time that they will somehow sort this out but it doesn’t seem to go away easily. Rosneft (and Putin) seem to want Bashneft (and the dollar cash flows) badly and what Putin wants, he gets at some point in time.
What to do now ?
For me the answer is clear: My core assumption has turned out wrong. I do not feel comfortable to price the political risk in this scenario and the only consequence for me is to sell first and ask questions later. Speculating on a rebound would be the other possibility, but this is too much speculation for my taste. In my experience, selling fast is often better in those cases.
Additional remarks on Russian stocks /Sberbank
As some readers might rmemember, I still have a postition in Sberbank and I used to own Pharmstandard for a short time. For now the score is 2 down, one still open for my Russian investments. Not a very good one which shows clearly that both, there is a lot to learn and that the market itself could be rigged against outside investors.
For the time being, I will keep my Sberbank shares but I need to think hard if I can justify investing into Russian stocks with such a personal track record.
I have also underestimated the escalation in Ukraine, where I thought that this will be settled without huge noise at some point in time. Doesn’t look like that and Sberbank could be one of the casualties along the way if the sanctions escalate.
value and opportunity 
Even though most of the others here presumably have read it:
“Russia’s central bank is weighing the introduction of temporary capital controls if the flow of money out of the country intensifies”.
http://www.bloomberg.com/news/2014-09-30/russia-said-to-weigh-capital-controls-if-net-outflows-intensify.html
What do you think about Ukrainian companies? These are cheap, too.
I don’t hold any Russian company and would only buy small Russian companies, if I had direct access to the local market. This is not going to happen in the foreseeable future. The big ones are all corrupted by the system, although this was part of your thesis.
That’s what I like about you and your blog. You’re honest to yourself and are able to renew/change your opinion when things, that were a big part of your initial thesis, change dramatically (and then you act accordingly). From a fundamental basis there are a lot of interesting companies in Russia, but in my opinion you never know what crazy things happen next over there. Right now I’m glad that I didn’t buy any shares of russian companies in the spring/early summer after Putin took over crimea and everybody thought everything would calm down now.
@MMI: Don`t you think that the likelyhood of a severe recession due to the sanctions on Russia, combined with another serious decline of the currency would speak very clearly for a sell of Sberbank also? Since you have already mentioned that you underestimated the situation in the Ukraine…
#daniel,
Sberbank is priced for recession in my opinion but not for recession plus additonal government actions against shareholders. So yes, I will think hard over the weekend if I should sell.
mmi
Thanks for your analysis. Your conclusion is to me the only reasonable consequence at the moment. Sistema appears to be riskier right now even at the current price. What has happened really is a big Stop sign! I am asking myself which type of company we still can invest in in Russia as valuations are again attractive. In the recent past I have decided that I will not invest in any Russian commodity related business anymore. Sberbank is on my list and I still like Magnit which is of outstanding quality in my opinion – not very cheap but a little like the earlier Walmart with good potential of reinvesting profits.
Hi Seb. I am invested in a russian commodity company. Why did you decide not to invest in them? Any theme or topic?
Hi Stefan, I believe they are more at political risk due to the governments reliance on commodity funds. Banks for example are more closely tied into the international market. If Putin would upset the financial market by stealing shares the bank itself might get problems to operate as the risk perceived increases. In the case of Magnit a lot comes down to the management people which built the business from scratch and cannot easily be replaced. In contrast nobody cares where e.g. the oil he burns comes from, extracting is not the big problem either and it also increases leverage on Europe. I might be wrong. Time will tell.
Given those risks, I would not talk about a personal track record.
In September 1998, I bought some shares of Lukoil, but shortly thereafter I sold due to political risks and invested more in Korea.
One of my sources was the Salomon Brother research report “Current Status of Russian Oil Sector” (March 1996), where Yukos also received a good score. Lukoil was then a 20-Bagger in eight years, and yet the sale was the right decision.
Interesting thoughts! Just thinking out loud and hoping to hear other’s opinions, but what do you see being the likely case with the Bashneft ownership being? At the current price, assuming Bashneft is the only stake that’s being affected (don’t know whether that’s reasonable to assume or not), if they were taken out of their stake even with the current price that’d account for approximately the whole market cap of Sistema. Sure you’d miss the potential upside that Bashneft seems to have but I’m not sure if I’d see it as a catastrophe.
Of course though, even if I’m right that today’s 35-40% decline is at least partly just panic selling, it doesn’t mean that Sistema couldn’t be facing other major issues. Will be interesting to see how this plays out and whether minority shareholders will be screwed big time. I’m ready to wait years though, hoping we won’t see it going to zero in the mean time.
eepi,
for me, Sistema was an investment case assuming no theft by the Goevrnment. Now, with this situation, it is a pure “speculative” situation. It could work well, but who knows ?
As I have written, in such cases I prefer to take the loss first and then wait and see what happens.
mmi
It looks like that Sistema’s Bashneft shares have been seized:
http://uk.reuters.com/article/2014/09/26/russia-yevtushenkov-stocks-bashneft-idUKL6N0RR0BG20140926
So the old saying “if you panic then panic first” has been right again…