Jerome Booth, head of research at Ashmore Investment Management also believes that companies most threatened by overseas competition will adapt over the long term because of the country inherent entrepreneurial culture and dynamic workforce. While he admits corporate governance is an issue, he thinks “the concerns have been overblown in the sense that there has not been a major problem since Yukos and that was really about a bid for political power. In fact, there have been much bigger corporate scandals in the West.”
Governance concerns
Yukos was Russia’s largest private company, worth over $40bn before tax authorities seized its largest production asset in 2004 in a case analysts linked to the opposition political activities of its founder, Mikhail B. Khodorkovsky. His lawyers have lodged several complaints with the European Court of Human Rights seeking redress for alleged violations of his human rights. In December of 2011, the Moscow City Court reduced his sentence from 13 and-a-half years to 12, but did nothing to address any of the procedural violations his lawyers have asked to be investigated by the courts since 2003. There is talk of Putin granting a pardon but market participants are doubtful.
“The biggest question is whether the country is moving forward and there are several signs that it is moving in the right direction,” says Reid. “ There needs to be a generational and culture change but there are many positive signs such as the government setting itself a target to improve its position on the World Bank “Ease of Doing Business” rankings from its 120th in 2011 to 50th by 2015 and 20th in 2018.”
Climbing up the rankings
The World Bank usually ranks countries on 11 categories ranging from starting a business to bankruptcy policy, with the scores then combined to get an overall ranking. Russia performed the worst on obtaining a permanent electricity connection, for which it ranks last out of 183 participants. However, it is placed 13th in enforcing contracts and rose six spots in its three most improved categories – registering property, trading across borders and enforcing contracts.
Jacob Grapengiesser, partner and senior adviser at East Capital, says: “It is easy to identify the factors that will help Russia climb to 50 from 122 but the changes need to be more cosmetic such as making it easier to get a construction permit. The government also needs to diversify their economy away from oil but all these things take time.”
Many are hopeful that the new infrastructure programme will be a significant step forward by bolstering its ageing transport, roads, ports and electricity systems. Morgan Stanley estimates that a total of $500bn worth of projects are underway or about to start with the most significant being the development of the Vankor oil and gas field, the biggest find in Russia in the past 25 years and the Ust-Luga port in the Gulf of Finland – the largest warm-water port in Russia. Other notable projects include the reconstruction of the Black Sea resort of Sochi ahead of the 2014 Winter Olympics; and the building of the East Siberia-Pacific Ocean (Espo) oil pipeline. Also in the offing is the long-delayed privatisation programme, which was first launched nearly two years ago by Medvedev.
Volatile markets and political infighting between government liberals and hardliners favouring a slower approach has hampered the process. However, activity has gained momentum with Sberbank, the largest bank in the country, being the first out of the gate with around 49% of its shares put on the block valued at around $5bn (£3.1bn).
Western capital
Other signs of progress, according to Liesbeth Rubinstein, fund manager, emerging markets at Invesco Perpetual is the signing of a joint venture in April between Rosneft and Exxon. “This successfully reflects the Russian government strategy of attracting Western companies to invest capital and modernise technology in high profile industries.”
Overall, Rubinstein is bullish on Russia. “We believe that its transformation into a modern society from its Soviet past is irreversible and will be sped up by this virtuous circle of reinvesting its resource revenues into other sectors of the economy. The country’s sizeable current account surplus (equal to 5% of GDP in 2011) and manageable debts ensures that Russia is now much better prepared to deal with major external events such as a Greek exit from the eurozone.”
Although participants welcome the reforms, it has not translated into increased interest into the stock market even though Russia is trading on a p/e ratio of about five, compared with eight to 10 in other emerging markets. Many are likely to wait for the fruits of Putin’s efforts as well as visible signs of improvement in corporate governance to materialise.
“Our job is to find companies that are reasonably priced, have good governance structures, management teams and profits but the opportunities are sparse,” says Gary Greenberg, head of emerging markets at Hermes Fund Managers. His list includes Sperbank because management is exploiting the growth opportunities; Globaltrans, Russia’s leading private freight rail operator which is a well managed company with good growth prospects and M Video, a retailer of consumer electronics and household appliances which are sectors that are still underrepresented in the country.
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