Thu. Jan 20th, 2022


Every news consumer in the Western world can now be an expert on the Ukrainian front. The daily Russian battle order, unit names, logistical issues, or the ground frozen deep enough for heavy armor – it’s all online there for the amateur analyst. We even know Russian strategic and tactical intentions thanks to psychologists and Washington think tanks.

But what if there is no war? For investors with a high-risk appetite who are willing to ignore geopolitical tensions and concerns about the way Moscow governs, the research could be better deployed on Russian stocks with a deep value.

One outcome of the Kremlin’s economic and social control over its large corporations is high dividend payouts. Since 2016, it has been Russian state policy to force key companies to pay out at least half of their profits in dividends.

It was useful to raise the cash to cover pension and military-industrial development costs. For investors, this means that there are quite a few deep-value Russian stocks with high dividend yields. According to Renaissance Capital, the consensus forecast for the dividend yield on MSCI Russia Index companies over the next 12 months is currently at 11 percent. It is the largest such estimated return among all countries in the MSCI Emerging Markets Index.

This may be counter-intuitive to those who shaped their understanding of Russian asset management based on the 1990s model of crime bosses becoming goon-activated oligarchs. Or about the longer history of Russian corporate mismanagement. Note the old Russian proverbs: “counter (corruption) is stronger than Stalin ”or“ In the west they make money out of profits. In Russia we make money from costs. “

President Vladimir Putin knows more of those jokes than you do. From the Kremlin’s perspective, every dollar that a corporate insider collects from the company’s cash flow to property on the Côte d’Azur is lost a dollar. And while Moscow does not care what some non-governmental organization thinks about Western-style freedom of the press, it is interested in enforcing international accounting standards on public companies. Particularly state-owned heritage resource companies.

This may seem contrary to the usual classic liberal reasoning, which is that state-owned enterprises will be less investor-responsive than sweet-of-the-brow private-sector entities, but go back to that saying about Russians making money from costs . Cash paid in dividends is cash that has not been diverted by crooked managers.

And according to one study co-authored by an Interior Ministry (MVD) academic, “in Russia, when information asymmetry is greater, dividend payments will be lower”. In this context, “information asymmetry” means that company insiders do not pass on the truth to either the public or the state. This leads to bad decisions in the middle.

It would be better if there was a free press to analyze that information, and there is not. Enterprising financial publications such as VTimes were conclude.

However, there are supervisory “bodies” such as the MVD and the Accounting Office. And local institutional and retail investors are growing in influence. In fact, international investors have transferred oversight “technology” to Russia, which helps strengthen the internal transparency that the Kremlin has sought since the tsarist era.

The high-dividend-enhanced corporate transparency regime was first codified by the finance ministry under former prime minister Dmitry Medvedev, who was arguably not the most convincing leader in anti-corruption campaigns. The current Prime Minister, Mikhail Mishustin, has made his bones through his digital transformation of the Russian tax service.

While making all the expected noises about “sovereignty” and “Made in Russia”, he supported the Ministry of Finance’s corporate governance, and focused on reducing the burdensome complexity and opacity of the central administration.

His efforts can, and are, described as “Foolish Putinism”. And they were accompanied by political repression and an aggressive foreign policy.

However, the corporate governance efforts have the effect of serving not only “Putinism”, but the interests of foreign portfolio investors in Russia’s resource extraction industries such as oil, gas and fertilizer, as well as the country’s skilled metallurgical sector.

Of course, there are still major risks involved in investing in Russian companies. The companies that attract what can be described as the acceptable face of Russian capitalism tend to be the ones that interact most with the outside world. Others are more opaque.

There are also major problems with the Russian state’s arrogant approach to the law, and its mistreatment of companies that offend it for some reason. You never quite know what’s lying around the corner. The Mishustin administration is also stay behind behind with the introduction of 5G wireless, which is essential for Russia’s diversification beyond resource extraction and its attractiveness as an investment center.

Nevertheless, investors seeking dividend yields in some of Russia’s largest companies may find that their interests may be in line with those of Putin and his finance ministry.



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