As Russia-Ukraine Tensions Heat Up, Russian Stocks May Be Too Cheap to Resist

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If you forget about small business with Ukraine, Russia is a screaming buyout.

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The VanEck Russia Exchange-Traded Fund (ticker: RSX) has fallen a quarter from its late-October peak. The ruble is down more than 8% against the dollar. Oil prices, which typically drive Russian assets, are also higher over that period.

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The poor show continued this week as Russian-West diplomatic talks ended without any progress. Russian stocks soared, then sank back. Brent oil jumped 3%.

But an agreement to move the jaws forward is a bullish sign given Russia’s weak valuation, says Christopher Granville, head of global political research for independent analyst TS Lombard.

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“There is an upside slant to risk,” he says. “I’ll buy on weakness.”

Enthusiasts argue that the market has overestimated how much the latest crisis could affect Russia’s raw material exporters, who are making huge profits at current prices.

“Market prices are likely to invade Ukraine at 50:50. We see it like 35%,” says Aaron Hurd, senior currency portfolio manager at State Street Global Advisors.

Even if President Vladimir Putin’s tanks roll south, the West will likely fall back on the most radical economic sanction – isolating Russia from the SWIFT system of global bank transfers, says Conrad Saldanha, head of emerging markets strategies at Neuberger Berman. Huh.

“It will do more harm to the global economy than Russia,” he says. “It’s illogical where commodity prices are right now.”

Moscow has also emerged as a model of the macroeconomic, if not a geopolitical, virtue. Its central bank has doubled interest rates over the past year to 8.5 percent, keeping inflation in check while others delay. Hurd predicts that real bond yields could reach 3% later this year as inflation eases. “Political risks aside, Russia is clearly the best game this year among emerging markets,” he says.

The Kremlin has introduced state companies into increasing dividend payments in recent years, and private firms have followed suit, says Vyacheslav Smolyaninov, chief strategist at BCS in Moscow.

State-owned natural gas giant Gazpromo

(GAZP. Russia), for example, is trading at a price/earnings multiplier of three, with a 2022 dividend yield of 14%. The average yield across the market is above 10%. “On evaluation, Russia looks surprisingly spectacular,” he says.

Saldanha’s top Russian pick is private oil producer Lukoilo

(LKOD.UK), which he calculates, would be “a good long-term investment” with oil at $45 a barrel (it’s now around $85). “Russia is an anomaly in today’s markets, with quality assets trading attractively,” he says.

TS recommends exposure to Russia through Lombard’s Granville currency, which is less than 76 rubles against the dollar. “The fair value for the ruble would be 55 to 60. At a steady level of geopolitical risk, it’s about 70,” he estimates.

Granville sees a potential off-ramp from the Moscow–NATO confrontation in updating the Conventional Forces in Europe Treaty, a 1990 agreement detailing where forces and armaments can be deployed on both sides of the old Iron Curtain.

Some people will bet on the farm on that outcome. Yet Russian stocks have held up through past political turmoil. The VanEck Russia ETF has risen 74% since January 2015, when the West was pushing for sanctions from Putin’s first invasion of Ukraine. Global emerging markets are up 30 per cent.

Something to think about. b


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