While I’m not surprised to see the weekend press dominated by the impact of sanctions on Russian macro, I have been pretty clear in saying the Russian economy was headed for flat to slightly higher (+0.5%) GDP growth in 2014 unless the world economy demanded much greater from the commodity space.

We know, we know. This should be a picture of a Russian bottom.

Russia’s (RSX, quote) economic reliance on commodities for 50% to 80% of exports has not broadened to the place we expected despite some real consumption in the consumer sector in the last few years.

Russia actually has surprised many despite the overall lower prices of core consumer items like education and medical, allowing slightly better wage growth leading to strong spending patterns into the last 5 years. You can see this in the performance of such major retailers like Magnit (MGNT, quote) or M Video (MVID, quote).                    

If you’re playing the pullback in Russia via sanctions, go after those companies that have leveraged balance sheets where we think the biggest issue is cost of capital increases.  Look at Norilsk Nickel (GMKN, quote) Rosneft, Rusal (RUALR, quote) and Evraz in the commodity space for the leverage aspect.  Be sure that Rosneft will find its way to necessary "bailout" financing from the state if it ever came to that.  

Also watch analysts starting to fear any impact on Lukoil (LUKOY, quote) which has always been the "cleanest" Russian oil export story.  Lukoil does have gas stations throughout the East Coast of the USA.  The retail component of their business is tiny by comparison to the overall upstream and other downstream refining but sentiment will be affected.  Lukoil gets 93% of its revenue from exports according to Bloomberg.        

We continue to say that Russian companies we are buying on pullbacks are Yandex (YNDX, quote) and Mobile Telesystems (MBT, quote) but are watching key technical levels for stop loss activity where we think the market sentiment can overtake fundamentals.    

Tagged with:

Leave a Reply