Russia from the Inside Out
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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.
Nick Slepko: Back in 2000, you were one of the first Russians to study for an MBA in Singapore – and then helped put Singapore on the map for Russian, Kazakh, and other CIS investors. How’d you end up in the anti-Moscow?
Max Lutikov-Kurono: Besides wanting to try the topics, unlike a lot of Europeans and Americans, I didn’t have access to any scholarships or state support, so I had to pay everything out of my own pocket. If I went to the States, they’d charge me tens of thousands of dollars. At the time, [the National University of Singapore MBA program] cost me a total of USD 10,000. I also liked the idea of studying in the fastest-growing region of the world, and the fact that Singapore had one of the lowest corruption scores in the world.
Slepko: After you graduated and were getting your investment firm up and running, you also spent time helping NUS recruit more Eastern Europeans and Eurasians. How did that go?
Lutikov-Kurono: Yes, for two years I recruited students and professors. We brought in professors from Russia, Ukraine, Poland, and Czech Republic – but only from specific fields, engineering, computers, and hard core sciences like physics and nuclear physics.
Slepko: No artists, no psychologists?
Lutikov-Kurono: At the time, Singapore didn’t need any research into those kinds of sciences…Now, there are a number of wealthy Russian-speaking people in Singapore…A decade ago there were only 300-400 registered with the embassy, now it’s over 5,000. (Of course, in London there are now 300,000.)
Slepko: Sounds like the Turks, where the US gets all the rich ones, and Germany gets all the rest.
Lutikov-Kurono: The Russians and Kazakhs in Singapore are so different than the ones in Canada too. [In Canada,] they come basically for economic reasons, coming even for low-paid jobs. With those in Singapore, their basic concern is wealth preservation, lower income taxes, and a near absence of drug abuse (which is important for families with teenage children)…
Slepko: So many of the Russian stocks are listed on the London Stock Exchange’s International Order Book. What’s the difference between the LSE and the IOB, and why do the Russians gravitate towards it?
Lutikov-Kurono: Basically, the London Stock Exchange (LSE: LSE) has three different trading segments (Main, IOB, AIM), with the main segment being the LSE’s Main Board where the stocks are mostly traded in British pounds. One of the main inconveniences to investors there is that you have to pay a stamp duty whenever you purchase any stock from the Main Board. The stamp duty would be a half percentage point on your purchase, so when you buy you are already 50 basis points behind. This is why Russian and a lot of international companies choose to list on the IOB as there is no stamp duty and all trades are done in US dollars.
Traditionally, London has been the financial hub of Europe and as always been number one so that’s why Russians initially flocked to London. However, in the late-’90s and early-2000s, a few Russian companies tried to list on the Frankfurt Stock Exchange, but it did not prove to be successful. The volumes were very low, and those stocks are basically forgotten and illiquid. [NS:Only about six Ukrainian DRs and one Russian DR remains.] Yes, I’ve been following that stock for many years, IBS Group (FWB:IBSG), a computer-related stock. It is so illiquid that even if you want to buy USD 50,000 worth of the stock it is impossible.
On the other hand, [LSE IOB] Russian stocks are highly liquid, and so liquidity is not a concern even for institutional investors for over 90% of the Russian stocks.
Slepko: When you are buying and selling Russian equities, do you prefer ones that are listed outside of Russia, or when given an option do you go with the ADR or GDR versus the ordinary share in Moscow?
Lutikov-Kurono: If I like a particular company, then I first look at what classes of stocks they have issued. I have a preference for preferred stock because, in the case of Russian stocks, they are usually traded at a discount of anywhere between 10-50% to common stock. Preferred stock also generally pays higher dividends. The problem for most US-based investors is that the majority of Russian preferred stocks are listed in Moscow.
Slepko: What about oil and gas major Surgutneftegaz (NASDAQOTH: SGTPY), which trades both common and preferred on OTC Pink? [Surgut is an exception as its preferred stock is traded outside of Russia.]
Lutikov-Kurono: Yes, they are Russia’s fourth-largest oil company. They are pretty liquid, trade OTC, but up until now the company only publishes its financial statements according to Russian accounting standards. Starting this year, a new Russian law makes it mandatory for them to publish according to IFRS. Surgutneftegaz is currently one of the hot stocks because the company has more than USD 20 billion on its balance sheet, and during the stress times that the stock traded below its cash value. Its market value was below USD 20 billion even though it holds USD 20+ billion on its books. Still, investors did not trust Russian accounting standards…Basically, foreign investors don’t understand Russian accounting standards or they don’t have any experts on their team that understand the Russian standards…I think they have close to USD 20 billion because their free cash flow is at least a couple of billion US dollars a year, and they did not spend anything on acquisitions. So while Rosneft bought Yukos, and Gazprom (NASDAQOTH: OGZPY) bought Sibneft [now traded OTCCQX as Gazprom Neft (NASDAQOTH: GZPFY)], Surgutneftegaz developed their own oil fields in Western Siberian and just kept piling up cash. The rumor in Russia is that the company cannot easily spend their own cash at their own discretion because they have to consult with the government on how it will be spent… I think this is at least partly true.
Slepko: Russia’s best known firms are probably “good guy” Lukoil (NASDAQOTH:LUKOY) originally designed to compete with other market capitalists, and “bad boy” Gazprom the living embodiment of state capitalism.
Lutikov-Kurono: I would invest in Gazprom as an equity investor, but I would not as a fixed income investor. The yields are way too low on their bonds, and dividends yield is actually higher than coupons on fixed income. You have to wait for corporate governance in this company. They spend enormous amounts of money on CAPEX which is not bringing in any visible rates of returns. Why do you need North Stream [Baltic pipeline]? Why do you need South Stream [Black Sea pipeline]? Why do you need the Yamal Project when there’s a visible oversupply of natural gas in Europe? Who’s going to buy these new supplies? There’s no increased demand in Russia itself, and even [energy handicapped] Ukraine wants to buy less. Even with China, where they are building the Far Eastern Pipeline, they have yet to negotiate a price.
Slepko: With Japan moving away from nuclear, do you see that having a big impact on what they are buying from Gazprom, or are they going to go with someone else?
Lutikov-Kurono: In Sakhalin [the resource rich Russian island north of Japan] what they’ve done with Exxon (NYSE XOM) is to develop liquefied natural gas. LNG is a very big thing in the industry, and one of Gazprom’s primary objectives is to become a global LNG player – which they are not yet. Also, two of the largest investors in the Sakhalin project are Japanese majors Mitsui (NASDAQ MITSY) and Mitsubishi.
Slepko: What about Gazprom Neft?
Lutikov-Kurono: Basically they will be the fourth largest oil company in the country, after the merger of Rosneft and TNK-BP is completed. If you are an institutional guy, the first concern would be their free float – about 6% – and in Russia there are minority squeeze out laws. If the outstanding free float is less 5%, there is a mandatory buy back for minorities. Whether you like it or not you will be squeezed out. I had to go through one of those squeeze outs myself when I owned Baltika [brewery] shares. It was 95% owned by Carlsberg, they wanted to attain 100% ownership. The price they offered was way below the fair value, from my point of view. Of course, they gave a decent premium to the market price, but I would have held the stock for many years to come as Warren Buffett holds Coca-Cola. To Russians, Baltika [beer] is like Coca-Cola to Americans.
Slepko: How does Lukoil stack up against Gazprom Neft?
Lutikov-Kurono: With Lukoil, I think the better comparison is with Rosneft – Gazprom Neft is a much smaller company. Lukoil used to be number one in oil production, and then around 2007, the state wanted to increase ownership in the strategically important industry. So Yukos was taken over, Sibneft was taken over, and Lukoil is the only large private oil company left in Russia, and its future is relatively unknown. How are they going to compare with the Rosneft-TNK-BP (which will be far larger than Lukoil)? Some people are talking about a possible merger of Lukoil and another Russian oil company, but there are not many out there. Privately-owned oil assets in Russia are few and far between. If you look around, who could they merge with? Surgutneftegaz? They are so different in terms of transparency, corporate governance, culture and investor relations. There is Bashneft, a small public oil company owned by the Systema conglomerate. Bashneft is ten-times smaller so what it brings to the merger may not be much. However, they are developing joint projects in Eastern Siberia, and that might be the first step.
Slepko: How do you respond to perceptions that everything in Russia’s totally corrupt and everything is controlled by Putin?
Lutikov-Kurono: I think it truly depends on which industry you’re talking about. If you’re talking about oil and gas, the most strategically important industry in Russia, then probably it is 70-80% true. If you want to make any sizeable acquisition in Russia’s oil & gas industry then you have to talk to Putin’s guys. In the consumer or technology sector, I do not think this is true.
[continued in Banking, Beer, & BP]
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