3 Russian Stocks That May Never Recover From the Recent Sanctions 


Russian stocks - 3 Russian Stocks That May Never Recover From the Recent Sanctions 

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Painfully, the ongoing Russia-Ukraine conflict has too many unfortunate victims. Investors who couldn’t get out of beaten-up Russian stocks before international exchanges abruptly suspended trading in Russian shares may still hope to get out someday once trading resumes.

However, the tough, painful, and crippling global sanctions imposed on Russian entities, its oligarchs, and key industries could dent any prospects of near-term recoveries from capital losses as many affected stocks may never rise back to pre-war highs.

As of now, there is no way for investors to trade in any Russian stocks as Moscow shut down the local stock market. It blocked sales by foreigners, world exchanges where Russian stocks traded all suspended trading in the country’s stocks and financial assets and index providers removed the assets from key indices.

It’s still possible that some Russian companies may still find alternative export markets after losing access to North American and European territories — that’s to be expected. However, financing channels will be tougher to navigate. A coming recession will still hurt their local sales, and companies may have to offer price incentives to gain new business and friendships with a few potential sympathizers.

That said, a few names like steelmaker Mechel PAO (NYSE:MTL) had little exposure to the enraged markets. Mechel generated just 15.3% of its annual sales from Europe and Turkey. Perhaps it could find alternative markets after an EU ban on Russian steel.

The same can’t be said of many Russian stocks caught up directly or indirectly in the sanctions net. I will touch on three such companies whose shares may never fully recover as long as sanctions stand.

  • Sberbank (OTCMKTS:SBRCY)
  • PhosAgro (OTCMKTS:PHOJY)

Russian Stocks: Sberbank (SBRCY)

A sign for the Sberbank of Russia located in the Czech Republic.
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Sberbank is a banking giant that is majority-owned by the Bank of Russia. It is the country’s largest bank by asset base and had a significant international presence — until a bank run triggered by international sanctions changed that.

Everything changed in February when international sanctions included an unprecedented exclusion from the SWIFT payments network for several Russian banks, including Sberbank. Pandemonium followed and the bank experienced a run on its deposits as customers rushed to withdraw funds and the exit of VISA (NYSE:V) and MasterCard (NYSE:MA) services from Russia hurt its business.

Sberbank stock last traded 95% lower year-to-date as the Russian banking giant announced its withdrawal from the European market on March 2, 2022. The group’s subsidiaries “faced an exceptional outflow of funds,” and “a number of safety concerns regarding its employees and offices.”

The bank could no longer provide liquidity to its European subsidiary banks, and bankruptcy proceedings will follow as assets go into liquidation. That said, the bank retained ownership of its Switzerland subsidiary which it claimed continued to work as normal and had sufficient capital to continue operations.

Sberbank will report on the full impact of losing its European business later in its first-quarter results and it claims that Sberbank Europe represented just 1.3% of the group’s net assets.

It has been spared for now, but a potential removal from the SWIFT payments systems will harm the bank’s ability to continue serving international customers and damage its ability to operate globally.

The bank had just sold its branches in Bosnia and Herzegovina, Croatia, Hungary, Serbia, and Slovenia in November 2021 as it reduced exposure to Central and Eastern Europe. And now it has totally lost its European division altogether.

Gazprom PJSC (OGZPY)

oil stocks: stacks of oil barrels
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Gazprom PJSC is Russia’s largest listed firm by annual revenue. The integrated oil and gas company is majority-owned by the Russian government. Gazprom is a major gas supplier to EU countries and has substantial gas pipelines throughout Western Russia going into Europe.

Although Europeans have been slow to ban the company’s supplies due to a current reliance on its gas. However, Germany dealt the company a blow when it decided not to approve a recently completed Nord Stream 2 pipeline that had gobbled billions to construct.

Gazprom had a majority stake in the new pipeline, and due to German sanctions, there were rumors in the market that Nord Stream 2 is considering filing for bankruptcy. Key pipeline partners including Shell are no longer involved with the project and its fate looks bleak.

The bottom line is that, after years of investment, Gazprom and partners won’t be able to profit from gas sales through the 767-mile pipeline.

United States authorities also sanctioned Nord Stream 2 AG, the company in charge of building the pipeline. Nord Stream 2 is now a distressed and stranded asset.

Moreover, Europe is most likely on the market looking for alternative supplies of its oil and gas needs at the time of writing. The Russian oil and gas giant might find itself losing long-term customer contracts in 2022 and beyond.

Perhaps the Chinese market could open up to Gazprom’s products. However, recent sanctions have done some lasting damage to Gazprom’s financing lines, credit ratings, and probably its international pricing power.

Russian Stocks: PhosAgro (PHOJY)

Closeup Of Small green Agricultural Toy Tractor loading money coins, Icon Farmer Machinery, Agriculture Business Concept (Harvest Finance)
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London-listed PhosAgro is a Russian company that produces and distributes fertilizers to the global market. Its major markets are Russia and Europe.

PhosAgro common stock is majority controlled by Mr. Andrey G. Guryev and his family, while Vladimir S. Litvinenko holds about 21% of the company’s shares. The two billionaires are deemed too close to the Russian President.

The majority of PhosAgro’s annual sales are international exports. Exports sales for 2021 represented 73.7% of total annual revenue. Exports to Europe and North America comprised 48% of total exports for 2021 or more than 35% of total group annual sales.

To remain cost-competitive, the company owns its logistics operations through ownership of cargo ships, ports, and railroad cars. Global sanctions are hurting its operations.

To buy a lifeline, PhosAgro announced on March 18 the reduction of its stake in a Cyprus incorporated subsidiary Phosint Limited to 5%. Before this material change, PhosAgro owned a 100% stake in Phosint. Negrinio Limited, a Cyprus registered company scooped a 95% stake in Phosint and no further details were provided.

It’s not clear how much the acquirer paid for Phosint, but the company could have lost a significant subsidiary due to international sanctions. Earnings results should exclude this former subsidiary’s operations going forward (the company has shrunk).

PhosAgro is also undergoing a leadership crisis after losing its CEO Andrey A. Guryev and three other members of its Board of Directors through resignations this month.

A credit rating downgrade to speculative-grade which followed a low country rating will also raise the cost of doing business and eat into margins going forward.

Even if the sale of an international sales-focused subsidiary could alleviate some pain, valuation multiples on PhosAgro stock won’t recover as fast.

On the date of publication, Brian Paradza did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Article printed from InvestorPlace Media, https://investorplace.com/2022/03/3-russian-stocks-that-may-never-recover-from-the-recent-sanctions/.

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