Oil and Gas

Crisis draws dwindling band of Russia bulls

MOSCOW, Feb 5 (Reuters) - A dwindling but hardened band of Russia enthusiasts has descended on Moscow for an investor conference, some drawn by the possibility of bargain asset prices, others hopeful that the financial crisis would accelerate overdue reforms.

Russia has been in the investor doghouse since a toxic combination of war in Georgia, government interference in major companies and a collapsing rouble made its stock market one of the world’s worst performing last year.

Moscow's RTS stock index .IRTS plummeted 75 percent from its highs in 2008 and has fallen further this year.

Underlining the grim mood at the Russia Forum 2009, hosted by local brokerage Troika Dialog, news arrived on the opening morning on Wednesday that Fitch had downgraded Russia’s credit ratings. And the top government speaker, First Deputy Prime Minister Igor Shuvalov, signalled big cuts in government spending to preserve Moscow’s dwindling reserves of cash.

Adding to investor perceptions of heightened political risk, Russia’s Central Asian ally Kyrgyzstan announced on the eve of the investor forum that it would close a key U.S. military base, a move diplomats saw as inspired by the Kremlin.

But despite the gloom, some investors were still bullish.

“You have some assets here with a 25 percent dividend yield,” said Jochen Wermuth, chief investment officer of Frankfurt-based Wermuth Asset Management.

“And how bad can it get if you have a company with $18 billion of net cash on its balance sheet ?”

Wermuth was referring to Surgutneftegaz SNGS.MM, Russia's fourth largest oil company. Analysts say concerns over its opaque ownership structure and its corporate governance are the reasons why the market values the entire company at no more than the value of the cash on its balance sheet.

Several speakers at the conference said the collapse in the price of crude oil, Russia’s main export, would increase the pressure on Moscow to clean up its act.

“When oil was at $147 a barrel people would overlook institutional issues,” said Joel Kurtzman, chairman of advisory firm Kurtzman Group. “But with oil in the low $40s and going to the 30s, they are not willing to overlook some of these issues.”

Shuvalov, addressing investor concerns, said the crisis was good for Russia because it would force the country to go through a period of real restructuring.

“The glamour period is over,” a participant who took notes in the closed session quoted Shuvalov as saying. “Now businessmen are turning to what they should be doing - running their companies efficiently”.

Recalling past financial storms that buffered Moscow, Ian Bremmer, president of political risk consultancy Eurasia Group, noted that “Russia was more investor-friendly when it had a more challenging economic environment”.

He said that the country’s highly centralised system of power meant that Prime Minister Vladimir Putin was “the world’s most powerful individual” -- a possible advantage in a crisis which required tough, rapid responses from the government.

Wermuth endorsed that view. “The great time of arrogance (in Russian) is behind us,” he said. “I remember birthday parties where you wouldn’t speak to people unless they were worth $1 billion.”

Now, he said, investors should give the Russian government a break. “Maybe they are actually doing the right thing,” he added.

Herbert Henzler, a senior adviser to the chairman of Credit Suisse CSGN.VX, pointed to Russia's success in attracting direct investment from a raft of big German companies including Siemens SIEGn.DE, Daimler DAIGn.DE, Adidas ADSG.DE, E.ON EONGn.DE and BASF BASF.DE. "I would just watch what is happening on the micro level," he added.

But with valuations for Russian companies near historic lows -- the market is trading on a forward price-earnings ratio of around 2.5, well below other major emerging markets -- and nagging worries about politics and corporate governance, many investors seem to have given up on Russia already.

Alexei Novikov, head of Standard and Poors in Russia, said foreign direct investment was very low as a proportion of GDP. “Why ? The answer is country risk,” he said. “This creates a lot of mistrust and a lot of fear.”

Troika’s Russian Forum 2009 - in past years a more international event -- was attended mainly by Russians, with a hardened minority of foreign Russia-boosters.

Even Troika’s own Russia Company Handbook listed “investor revulsion” among the concerns hanging over the Moscow market - though it said it believed this would only be a temporary issue.

“I don’t see any bad things specific to Russia here amid the global financial crisis,” said one New York-based fund manager, who spoke on condition of anonymity because he was not authorised to speak to the press.

“The government is doing all the right things and the quality of their macroeconomic management is quite impressive.

“But the reality remains that a lot of investors in New York just don’t want to get on a plane and come here right now. They argue: ‘If all assets globally are cheap right now, why bother with Russia ?’” (Editing by Greg Mahlich)