Investors are being encouraged to take a fresh look at Russian state dinosaurs as investment ideas and opportunities dry up on the Russian stock market, with the Moscow Exchange announcing on September 29 the launch of an index focused on state-owned companies.
This interest springs from the growing and pervasive influence of the hard-line siloviki faction in the Kremlin, who have great nostalgia for the Soviet past. With their passion for praising everything they see in the rear-view mirror, they want to prove it to the rest of the world that the way the economy was organised during Soviet Union was the best way.
The imprisonment of Mikhail Khodorkovsky was seen as a landmark in the Russian state wresting back control of the oil industry, which underpins President Vladimir Putin’s grip on power. And along with the growth of state oil major Rosneft through its takeout of TNK-BP, the government has expanded its role in the wider economy in spite of its much-vaunted privatisation programme. State-owned companies have reached more than half of Russia’s economic output, compared with 42% in 2008, according to BNP Paribas' Moscow unit. This has inevitably led to more corruption, theft, waste and corporate governance flare-ups with minorities.
To reflect the growth of state control in the economy, in the spring of 2015 investment strategy boutique MidLincoln Research launched the Gosplan Index. The index is an equal weighted index of Russian state-owned companies, including companies where the state is a direct an or indirect shareholder with less than a controlling stake. For instance, the MidLincoln Gosplan index also includes companies such as Surgutneftegas or Megafon, where the history of ownership has been controversial and the main shareholders could be regarded as just temporary nominees.
Following in the footsteps of MidLincoln’s idea, the state-controlled Moscow Exchange has decided to get in on the act. On September 29 it announced the setting up a similar index highlighting Russian state-owned companies. According to the press release, “the Economy Ministry of Russia, the Federal Agency for State Property Management (Rosimuschestvo) and Moscow Exchange have signed a cooperation agreement to create two new equity market benchmarks, indices of publicly-traded companies where the Russian state has an ownership stake.”
In the last few years, Russian state-owned enterprises have tried to court investors by ramping up their dividend payout ratios – the proportion of earnings paid out as dividends to shareholders. Gazprom’s payout ratio last year totalled 40%, while Rosneft’s was almost 30%. But the idea that being state owned means being a good investment has not been proved by the share price performance. For example, the Gosplan Index over the last 52 weeks has lost 44% of its value, while the dollar benchmark index RTS was down just 27%. While year-to-date the Gosplan Index is down 7.4%, the RTS index is down just 1.8%.
This performance is not only a barometer of investors’ sentiment toward the shares of these state-controlled dinosaurs, but is also a reflection of the misfortunes of these companies on the financial front. Energy behemoth Gazprom now trades on the trailing price/earnings ratio of 8x, which is twice as expensive as its usual valuation. And unlike its peers in the US, oil major Rosneft has been unable to hedge into the oil price fall and has thus seen its profits eaten up by debt payments.
As a perennial student of the market and as a long-term strategist at both Sberbank CIB and Renaissance Capital, I can recall the days of our Soviet past quite well. There was only one positive thing in Soviet economic system, and that was how research and development was financed in the system of state research institutions, which highlighted how differently research labs have been financed in the West. But then looking closer at the different teams in those labs revealed that only a few did something good; the rest of the bunch was sipping tea all day long.
Undoubtedly, state-owned enterprises have a right to exist. However, there is nothing positive in being state-owned vs. being private – as the siloviki will discover to their cost