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Following a catastrophic fall in equity prices Tuesday, September 16, some Russian companies have announced they will take the opportunity to buy back their own shares.

With debt markets now closed to everyone, including first-tier borrowers, only companies that have lots of cash on their books can afford to take advantage of the current fire-sale in Russian equity. Analysts estimate that of the companies that have already announced plans, plus the companies that actually have the money to make purchases, the total buyback programme will amount to just under $6bn - slightly more than a single day's average turnover on the Russian bourses - and so will have little impact on the overall health of the market.

However, the move will shore up prices in some individual stocks. Companies are also buying at the behest of the Kremlin. Uralsib's Chris Weafer says that no explicit order has gone out from the Kremlin, but the powers have made it clear that companies should rally round and join in the state's efforts to curb the damage by pumping money into the equity market. The Central Bank of Russia pumped $20bn into the bank sector - roughly equivalent to doubling the normal liquidity needs of the entire sector - but this money was swallowed up without a trace.

First up

One of the first companies to fall into line has been Lukoil. The oil major has always fallen over itself to meet the Kremlin's wishes. Amongst the more notorious of its fawning obedience was its announcement during the end of the Yukos affair in 2005 that it would start paying, "more taxes than it legally has to." More recently, it has picked up on the Kremlin's desire to hold prices down in the face of high inflation and in August it announced it was unilaterally cutting 15% off petrol prices at its forecourts. Last week, Lukoil was the first of the big Russian companies to take advantage of the falling equity prices when its top managers increased their respective stakes. Company president Vagit Alekperov bought 1.2m shares to raise his stake to 20.54% and vice president Leonid Fedun purchased 0.8m shares to bring his stake in the company to 9.21%.

While Severstal also announced September 16 it would spend $400m on buying its own stock and several other companies said they are weighing their options, Kingsmill Bond, an analyst with Troika Dialog said many companies do not have ample cash balances to conduct buybacks. "Even if a company is not leveraged, it is impossible to raise debt for buybacks under current conditions, when credit spreads, even for first-tier borrowers, may be as high as 700 basis points; VTB is a spectacular example of this. Needless to say, the primary debt market is effectively closed for all borrowers regardless of their credit quality," he says.

Troika did a short study assessing which companies have the cash on their books to buy back shares, but the list is short. "Almost all of [the companies that can afford to buy] have already announced buybacks," says Bond. "The exceptions are some oil companies like Surgutneftegaz and Tatneft, and companies in the utilities space like RusHydro and OGK-3. However, utilities companies have strict obligations to their investment programs. OGK-3 is the most astonishing example, with a cash balance equal to 150% of its market cap."

The total sum of these buybacks is $5.7bn due in the next 12 months. This amount is negligible for the market, which sees $5bn in average daily trading volumes.

"Mandatory buyouts of TGK-2 and TGK-4 set a clear price floor. An important factor is the timing of the buyback. We believe that Novatek's buyback will take place in the near future, which should support the stock," says Bond.

Meanwhile, Severstal and MTS are to complete buybacks within 10-12 months, which makes the effect on their stock price very limited.

source: Troika Dialog

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