December 13, 2011 / 2:08 PM / 8 years ago

Analysis: Russian politics hits "Putin" stocks

MOSCOW (Reuters) - Call it the Putin sell-off.

Shares in Russian companies perceived to have ties to Prime Minister Vladimir Putin, or to have profited from the economic system he has built, have sold off hardest on a spike in political risk following this month’s parliamentary election.

The biggest faller in a declining market has been gas firm Novatek, in which oil trader Gennady Timchenko, a friend from Putin’s days in St Petersburg’s city hall in the early 1990s, is a major shareholder.

Other stocks to have been whacked have been resource firms controlled by Russia’s ‘oligarchs’, who have parleyed their close ties with the Kremlin into multi-billion-dollar fortunes.

They include gold miner Polyus, in which Russia’s third-richest man Mikhail Prokhorov owns a stake, and potash miner Uralkali, over which Suleiman Kerimov and allies won control this year with the backing of state banks.

These firms have benefited from what Kingsmill Bond, chief strategist at Citi in Moscow, calls “rent redistribution” - a polite way to describe the benefits of insider status in Putin’s Russia in terms of access to deals and the country’s vast trove of natural resources.

With the opposition crying foul over alleged fraud in the December 4 election, which cut the majority of Putin’s ruling United Russia party, investors have slashed their exposure to stocks whose prospects they see as tied to the stability of the regime.

Putin, 59, has set his sights on returning to the Kremlin next March but with the opposition demanding a re-run of the parliamentary vote, his path to a third term in office is now a narrower one riddled with pitfalls.

“Before, it was very obvious the political system was controlled and dominated by Putin. Now it still is, but the ‘power vertical’ is breaking down, or at least there are cracks in the facade,” said one analyst who requested anonymity.

“What we know for sure is that the Putin stocks are losers, but it’s not easy to say how things will settle.”

FOREIGNERS OUT

Between the market close on December 2, the last trading day before the parliamentary vote, and Monday’s close, Moscow’s rouble-based MICEX Composite Index fell by 10.3 percent.

The dollar-based MSCI Russia Index, an international benchmark that includes stocks listed abroad, has shed 13.2 percent - the difference in large part reflects the rouble’s 2.5 percent slide over the period.

Novatek’s London-listed global depositary receipts have underperformed the MSCI Russia Index by 9.9 percent over the period, making them the worst performer in the 26-share index.

Novatek, with a 5.4 percent index weighting, had been a particular favorite among foreign investors as a play on Russia’s growing domestic gas market, viewed as better run than lumbering state export monopoly Gazprom.

But a foreign exodus has all but erased the 15 percent premium that Novatek’s GDRs had over their Moscow shares on December 2, despite an upbeat company presentation to analysts last week that triggered a slew of ‘buy’ recommendations on the stock.

Some equity traders in Moscow are more sanguine and see the Russian stock market, already trading at a 40 percent discount to its emerging markets peers, as offering deep value for those who expect the political situation to calm.

“People are scared that someone else will get scared,” said Alexey Bachurin, head of Russian cash equity trading at Renaissance Capital, a Moscow-based emerging markets investment bank.

“I believe it’s temporary - there is no threat to Putin unless he behaves in some outrageous way.

“People will look again at companies like Uralkali and Novatek - these are examples of extremely well-run companies.”

GETTING TO MARCH

Investors’ fears would be confirmed if protest rallies that have drawn tens of thousands of people build enough momentum to challenge Putin’s presidential bid, but market players do not expect an ‘Arab Spring’ scenario to unfold.

The authorities have ruled out a re-run of the parliamentary election, and the launch of a presidential run on Monday by Prokhorov is widely viewed as enjoying tacit official approval calculated to split the liberal vote.

But nagging concerns persist, with utilities stocks such as the state-controlled Federal Grid Company, InterRao and RusHydro underperforming on fears that the government will further delay unpopular tariff hikes.

“It’s a case of selling anything where an acceleration of the reform process could be a catalyst for the stock,” said Tom Mundy, chief strategist at Otkritie in Moscow.

The prospect of higher government spending has, meanwhile, led consumer stocks to outperform despite their relatively high valuations.

The non-strategic nature of their businesses has also helped retailer Magnit and MTS, Russia’s largest mobile phone company, to outperform during the sell-off.

Calling a bottom for Russia’s high-beta market is always a dangerous proposition, and dynamic and uncertain politics makes that nigh-on impossible.

“The upside is capped until March,” said one Moscow-based equity salesman.

But with stocks trading as if oil is at $75 per barrel, and not close to $110 as it is now, something is likely to give, if the historical correlation between Russian stocks and the price of Russia’s main export is anything to go by, argues Citi.

“Either oil prices will fall or Russian stocks will rise,” said Citi’s energy analyst Ron Smith.

Additional reporting by Megan Davies; Editing by David Cowell

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