Buyers of Russian equities should realize that such depressed valuations generally are characteristic of economic malaise, which isn’t present in Russia at the moment. On a three-to-five-year horizon, this index-wide discount to book value is unlikely to persist, while the Russian economy is likely to grow.
There are expected moves on the tax front in 2013 to lure more foreign investors, which should provide a boost to economic growth. Credit should be given to then-Prime Minister and now President Putin for pulling off the lengthy negotiations with Exxon Mobil (NYSE:XOM) to develop Russia’s vast Arctic reserves via state-owned Rosneft. While a similar British Petroleum (NYSE:BP) deal failed because of opposition from the British energy giant’s local partners, Exxon is back in a big way after pulling back for years. (Rosneft owns the former Yukos crown jewel Yuganskneftegaz.)
This seems to be a much bigger deal for Exxon Mobil than the never-officially announced failed takeover of Yukos. Russia is willing to abolish export duty and slash the mineral extraction tax to keep taxation stable for 15 years. (At present, oil companies in Russia pay a 60% tax on oil exports).
Rosneft also gets minority stakes in Exxon projects in North America, and both companies are working toward unlocking shale oil and gas in Siberia, which Rosneft does not have the technology to extract on its own.
Where to Look
Rosneft has no listed ADRs in the U.S., but Exxon Mobil is another alternative. The stock market currently has a hard time discounting this deal to its present value, as any benefits will trickle to the bottom line only a couple of years from now and hit critical mass much later. But the largest undeveloped oil reserves lie in Russia’s Arctic region, and the largest global oil company by market capitalization made a giant first step toward putting them on the market.
As to the Russian stock market in general, it will remain captive to developments in Europe and the short-term gyrations of the oil price.
Many Russian companies — including Gazprom (PINK:OGZPY), the No. 1 publicly traded owner of hydrocarbon reserves in the world — have long surpassed revenue and EPS high watermarks seen during the all-time highs in Russian equity benchmark indexes in 2008, yet their shares continue to languish.
Regrettably, this cannot be considered as a timing indicator, and it might last for a long time until the situation in Europe is resolved.
Ivan Martchev is a research consultant with institutional money manager Navellier & Associates. The opinions expressed are his own. Navellier & Associates holds positions in Exxon Mobil and Gazprom for its clients. This is neither a recommendation to buy nor sell the stocks mentioned in this article. Investors should consult their financial adviser prior to making any decision to buy or sell the aforementioned securities.