[GMO] Russia: A Riddle, Wrapped in a Mystery, Inside an Enigma

  • There’s something going on behind the scenes in Russia – something we’re not privy to
  • On the heels of new US sanctions and a chemical weapon attack in Syria, the Russian market fell 10% on April 9th, a much larger reaction than expected
    • It suggests to us that the market perceives the risk of a major blowup with Russia, possibly taking the form of Iran or North Korea-style sanctions, has dramatically increased (We don’t buy it)
  • Given the fact that Mr. Oleg Deripaska (who is closely associated with Mr. Manafort) and the companies he controls were the primary targets, one might draw a conclusion that there’s a political dimension to this
    • If the intent was to hurt Russia economically, sanctioning companies such as Gazprom and Sberbank would have had a much more profound impact
  • The new risk is that the White House is now actively involved with day-to-day Russian policy and everyone is uncertain as to what Mr. Trump might tweet tomorrow
  • We don’t think the US is exercising the “nuclear option” of trying to tank the Russian economy
  • While it will cause pain in certain areas, we do not think this action will have a profound impact on the Russian economy
  • We are quite comfortable with our overweight in Russian equities, as these positions continue to be extremely cheap in our view
  • Within the Russian market, Gazprom fell 8% while Sberbank fell almost 22%
  • As the supplier of 30% of Europe’s gas, Gazprom is unlikely to be sanctioned or suffer significant negative effects
  • On the other hand, we believe Sberbank’s dramatic fall reflects the fact that it is the most foreign-owned and most liquid Russian stock and was hard hit for liquidity, rather than for fundamental reasons
    • Only 3% of Sberbank’s assets were exposed to sanctioned companies
    • It is Russia’s largest bank, with 20,000 branches and 65% of the country’s deposits
    • It trades at 5x current earnings and 1.3x book value while earning 23% return on equity
    • It is one of the largest positions in our portfolio and we are adding to it

GMO – Russia: A Riddle, Wrapped in a Mystery, Inside an Enigma, April 2018

Image Source: Forbes