Banking, Beer, & BP

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Max Lutikov-Kurono was raised in Moscow, took his first job abroad in Morocco, got his MBA in Singapore while being the first graduate student from Russia at the NUS Business School. He later set up the first Russia-focused wealth management practice in Singapore. He is also a Director of Emerging Capital Group (a firm focusing on private equity investing in Asia's mining sector) and the Portfolio Manager of the Raffles Oracle Fund, a specialist investor in global emerging debt and equity markets.

[continued from Russia from the Inside Out]

Nick Slepko:  Isn’t Russia all about oil?  What’s your outlook for the rest of the Russian economy? 

Max Lutikov-Kurono:  More positive than for oil and gas. First of all, it is less regulated and less taxed. Second, there’s a lot more room for growth than in the oil sector. If you look at the Russian consumer spending patterns, real income has been growing for the last several years. They spend more on discretionary and non-discretionary items, and the number of organized retail shopping centers has been growing. For example, you would go to an outdoor market to shop in, but now it is all big retail chains, international as well as Russian. X5 Retail Group (LSE:FIVE) is one of them.  [NS: No Gorbushka!?]  Well, there is some Gorbushka left, may be 5 to 10 guys standing around talking to each other smoking one cigarette…There are less black market deals to be found, things are normalizing, and now that Moscow and St. Petersburg have developed these retail centers, the companies are starting to expand across the Russian Federation.

Slepko:  How true is the country’s reputation for Russian mafias and Chechen syndicates today?

Lutikov-Kurono:  If you are a small or medium-sized business you are not so much concerned about mafia guys or Chechens, you are more concerned with the Russian fireman or the guy from the environmental agency. All these guys do is rent extraction from the local business owners.

Slepko:  So, on one end of the [politicized] spectrum you have oil and gas, and on the other end of the spectrum you have the consumer sector. 

Lutikov-Kurono:  And within the consumer sector I use a broad definition.  I would include banks and financial institutions as well because consumer lending is a really hot trend in Russia in the last three or four years – it is one of the fastest growing segments...Bank Vozrozhdeniye (NASDAQOTH: BKVZY) is one.  BV is a relatively small private bank with the operations mainly in Moscow and [the greater Moscow region], and has a secondary listing in Frankfurt.  But for fixed income investments, there’s a better one – Tinkoff Credit Systems.

Oleg Tinkoff used to own a large brewery in Russia which he sold to Heineken (OTCPINK:HEINY)(NASDAQOTH: HEINY), and with the sales proceeds from the beer business he built one of the fastest-growing consumer lending banks in the country – and Goldman Sachs (NYSE: GS) bought a 10 to 15% stake…Apart from Tinkoff, Heineken bought a couple of other Russian breweries, and frankly speaking aside from Ochakovo in Moscow I am not aware of any sizeable brewery in Russia that is not owned by foreigners. The major players in the Russian beer sector are Carlsberg, SAB Miller, Anheuser-Busch, and of course Heineken. So, skeptics should recognize that foreign companies do come to Russia to do business, and Russia is open to business for overseas investors.

Tinkoff was successful because he developed his business model according to the Russian reality. He issues credit cards and unsecured financing only to consumers. Instead of opening branches all over Russia, which is difficult to do because it is a huge country, he does everything by Internet and mail. So regardless of whether you’re in Murmansk or Vladivostok, you just go to his website and fill out an application for a basic credit screening, and if you qualify they mail you a credit card. So Tinkoff has almost 100% coverage of all Russian territory. Even Sberbank (OTCPink:SBRCY)(NASDAQOTH:SBRCY) can’t compete with him.

Speaking of Russian banks, now that Troika was bought by Sberbank recently, Renaissance Capital is the only large independent investment bank left in Russia – and now that Steven Jennings stepped down as CEO, it is majority owned by Mikhail Prokhorov (best known to Americans as the owner of the Brooklyn Nets).

Sberbank recently launched a sponsored ADR, and is also a good play on the Russian consumer.  It is a whole lot bigger than Bank Vozrozhdeniye, and if you are an institutional investor it would be very difficult for you to build a large block of shares of Vozrozhdeniye – you could find yourself a market maker.  On the other hand, Sberbank not only has the largest physical branch coverage of Russia, but is the largest bank in the entire [Eastern Europe, Middle East, Africa] region. I own preferred stock in Sberbank because it trades with at a discount to ordinary shares, and it pays the same dividend. Why do you need voting rights?  What’s the use?  These companies are majority-owned by the Central Bank of Russia, so no matter how you vote the bank will overrule you.

Slepko:  With Russian state-linked enterprises, are you more cautious, or are you more bullish? 

Lutikov-Kurono:  I would look specifically at the company and their business model on a case-by-case basis. For example, when German Gref [former trade minister and current Sberbank president] came to the company he brought with him a highly qualified, professional team of Russian professionals from McKinsey, Bain and Company, and other similar firms. So, obviously, his intention was to turn the Soviet behemoth into a modern, Western-style business. I think Sberbank is on the right track.

If you look at the other end of the spectrum at Surgutneftegaz (OTCPink:SGTPY), they they did not even want to publish their accounting statements according to IFRS. So, obviously, they have some kind of old Soviet style mentality in them top management. I would stay away from that. If you look at Rosneft, it is often portrayed as a pro-Western top management company that cares about minority investors and corporate governance. I think they are in the right track – in terms of disclosures and investor relations, they have made great progress.  It helped that their former CFO was a [Western] foreigner, and it continues to have foreign independent directors, and BP (NYSE: BP) will be the second largest shareholder after the Russian state. 

Slepko:  What’s your take on all the problems BP had recently in Russia?

Lutikov-Kurono:  It was all headlines.  Political headlines.  Just look at the payoff they generated from the acquisition.  They paid six or seven billion for 50% of TNK in 2005, and just in dividends they have received three or four times more.

Slepko:  Who’s creating the headlines?

Lutikov-Kurono:  Mostly the Western press.

Slepko:  What should an English-speaker read if they are interested in Russia? 

Lutikov-Kurono:  Moscow Times, the English-language newspaper published in Russia is a good start.

[continued in Russia: Beyond Oil]





Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication. The Motley Fool recommends Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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