* Shares in Russia-exposed firms slip on Ukraine crisis
* Some European companies make operational changes
* Slowing Russian economy discourages investors
By Atul Prakash
LONDON, May 23 Russia, which once promised rich
pickings for European firms highly exposed to the country, now
looks more like a liability for them as the economy struggles
and investors worry the Ukraine crisis is set to fester.
The toppling of Ukraine's pro-Russian president in February
has triggered the biggest row between Russia and the West since
the Cold War, leading to sanctions on some Russian individuals
and companies and a knock to Russia's economic growth prospects.
The crisis has also heightened investors' sensitivity to
geopolitical risk and Ukraine's planned presidential elections
on Sunday provide the latest prompt to shareholders to
reconsider their exposure.
Companies such as Nokian Renkaat and Raiffeisen
Bank are facing a turning point in their stock-market
fortunes as investors bet the "Russian proxy" label will stick
for some time to come - even if the companies themselves are
stepping up efforts to change their business tactics.
"The bottom line is the risk premium for these companies
(significant exposure to Russia) has increased, not just because
of the political situation but also because the Russian economy
is worsening," Jorge de Mariscal, chief investment officer for
emerging markets at UBS Wealth, said. "That's going to impact
profits and revenues of companies exposed to it."
German retailer Metro AG postponed the launch of a
partial initial public offering of its cash and carry business,
while Coca-Cola HBC, the world's No. 2 bottler of
Coca-Cola drinks, has started cutting costs. The two
companies generate about one-fourth of their revenues from
Finnish tyre maker Nokian Renkaat, which makes about a third
of its sales in Russia and runs a large factory there, has
postponed expansion of the plant due to the geopolitical crisis.
Although most of the Western European firms contacted by
Reuters maintained business was normal, investors have punished
stocks of the firms heavily exposed to the region.
Shares in companies such Nokian and Coca-Cola HBC have
fallen 10 to 15 percent since the start of the Ukraine crisis
after spiking 15 to 20 percent in the previous eight months.
Analysts said the decline is likely to gather momentum as
Russia faces the risk of further economic sanctions.
"From a top-down point of view, Russia-exposed companies
have the risk of being treated as a proxy for domestic stocks in
the event of hard economic sanctions against Russia," Christian
Stocker, equity strategist at UniCredit in Munich, said.
Russia is accused of fomenting pro-Russian sentiment in
Ukraine, which has already lost Crimea after it was annexed by
Moscow. The United States and EU have threatened to ramp up
sanctions on Moscow if it interferes in the Ukrainian vote.
As a consequence, a subsidiary of Raiffeisen Bank said last
month it would close all its branches in Crimea, while around a
dozen chief executives and chairmen of major U.S. and European
corporations pulled out of the St. Petersburg International
Economic Forum from May 22-24.
Eduard Zehetner, chief executive officer of Austrian
property group Immofinanz, told Reuters the current
political situation was "certainly not encouraging" for
attracting foreign investors to Russia.
"This is also reflected in some retailers' expansion plans
(sitting-on-the-fence-approach for the moment). But things can
change quickly and retailers are not moving out as consequence
of the political tensions."
Analysts said a slowing Russian economy would prompt
Russia-exposed companies to refocus on other regions.
Russia's economy minister has predicted recession by the end
of the second quarter - although since then, data has shown a
surprise spurt in local production of goods usually targeted at
the domestic market, such as foodstuffs and textiles.
Either way, European firms which saw growth potential in
Russia when sovereign debt crisis hit western European markets
look set to suffer.
Now Western Europe is recovering while eastern Europe is
seen at risk from the geopolitics and sanctions against Russia.
"You have to look at the companies exposed to Russia one by
one and see how much the Ukraine crisis is already in the price.
At some point, if prices drop down fast, it could be a buying
opportunity, but we will be cautious and not rush for them,"
Ronny Claeys, senior strategist at KBC Asset Management, said.
"We were already negative on Russia before the crisis
because the economy was slowing. So it's not sufficient that the
crisis ends. We need to see something more profound on the
Russian economy," Claeys said.
A basket of the 20 companies most exposed to Russia shows
that despite recent share drops, the firms are still expensive.
According to Thomson Reuters Datastream, the basket trades at 15
times its 12-month forward earnings, against a 10-year average
of 13 times, reducing investors' appetite for such companies.
According to global asset allocation analysts at Societe
Generale, net outflows from Russian equity funds between January
and mid-March reached $2.2 billion.
However, "it's a little bit risky to be too much underweight
because the situation could quickly change," said Philippe
Gijsels, head of research at BNP Paribas Fortis Global Markets.
"The Ukraine crisis is political and the political can change
very rapidly. Don't take too much position on either side."
(Additional reporting by Michael Shields and Georgina Prodhan
in Vienna, Blaise Robinson in Paris, Angeliki Koutantou in
Athens, Sujata Rao in London and Jussi Rosendahl in Helsinki;
Editing by Lionel Laurent/Ruth Pitchford)