Monday, March 24, 2014

Russian government controls some 60% of the market - good luck to foreign shareholders

Some investors have been jumping into Russian equities in the wake of the recent selloff. After all it's one of the BRICs that is now up "for sale" - assets that would have been in high demand just a year ago. But before getting too excited about this investment opportunity, consider the structural issues that smaller (particularly foreign) investors would face in Russia.
Barrons: - Russia's concentration of economic power means the state can hold its oligarchs for ransom and force enterprises to forgo profits at the bidding of politicians. A 2012 study by Troika Dialog Research estimated that the Russian state owns 30% of the equity market, with another 30% held by oligarchs and domestic "businessmen." Russia's 10 richest men own $25 billion in publicly listed Russian companies, according to Wealth-X, which tracks individuals of ultra-high net worth. The Russian stock market has a total valuation of $150 billion. Many of these rich individuals owe their wealth to Putin, so they aren't likely to defy him. 
This means that in effect the state controls some 60% of the market because the Russian oligarchs will follow Kremlin's lead - simply to preserve their wealth and often their freedom (Khodorkovsky, who has been a leading financier of Russian opposition parties got 14 years in prison a few years back). In fact the situation could be getting worse as the oligarchs have bought additional shares in recent weeks to gain an even greater percentage of the market.

And just in case you are still considering making a long-term strategic investment into some Russian shares, remember that minority shareholders can be squeezed simply by not being a member of the elite "club" - see this story for example. It's no wonder that analysts have now labeled the Russian stock market a "frontier" rather than an "emerging" market (similar to many African markets except for poor economic growth - see story)

Foreign investors are especially vulnerable. With so much control of the market in the hands of the government, if Western sanctions tighten further and tensions escalate, Putin's retaliation could easily involve exacting pain on certain foreign shareholders. For those who wonder what a retaliation like that could potentially look like, here is an example from another emerging markets nation with an authoritarian government.
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