Elliott Auckland

Elliott Auckland
Contributor since: 2012
It's the second blog on the link, the one called "the economics of corruption"
http://bit.ly/ZvJQvr I wrote a thing about this on my blog, correlating GDP growth against Transparency International rankings, democracy index and looking at resource extractive industries..
People in Russia and abroad are too against the notion of Putin turning "good". They believe people and things always stay the same. In the short run they are right.. in the long run though its a different picture. Putin is intelligent and in my mind, he will do what is best for himself and that is a strong economy.
By the way every political change in Russian history has been caused by a deterioration in economic conditions.
1861, 1905-1917, 1989-91, 1997-9
Im not saying that it is the only factor, but its a very large factor... And regarding the potential for political change and control of the country.. While it is true your babushka in some small village near Yakutsk will support Putin, her voice doesn't matter... The people of Moscow and St Pete are the ones that matter. Revolutions start in major cities not the countryside...
Now will there be a revolution... NO.. we are a long long long long way off that.. Its just a potential outcome and a threat, that Putin may want to avoid. Particularly given what happened to his friends in the middle east.
By the way... Putin clearly agrees with you.. So far the response to weaker economic growth has been a political clampdown. Which in the short-run works... in the long-run it is less sustainable. But will take years of under-performance to break. It just depends how long Putin wants to stay in power for....

till 2018? then he can clamp down and leave probably ok..
till 2024? then he really has to do something about restructuring the economy.
Some Oligarchs have changed, they care about their family, next generations and want a better Russia for it.. or they want to protect their wealth instead of take more.
The problem is so many people have dirt on their hands, corruption isnt an Oligarch problem is a society wide problem. Even if you havent done it, it can be made up that you have. Russian and Western businessmen I know continue to divert money out of Russia into Western markets. Real-estate is always the favourite, and there are large areas bought up by Russians: London, New York, Monaco and even less "obvious" places like Montengro.
Its sort of game theory as well, no-one wants to make a move until they are sure everyone else will with changing Russia, otherwise you might piss someone off and lose a lot. Things need to change from the top down, from within government. An opposition would be very healthy for encouraging that, it would give an alternative and an incentive to change.
Interesting analysis I did of former soviet union countries... I basically found that the ones which are less corrupt and more politically free have lower growth rates and no natural resources (Serbia, Croatia etc.). The ones which are bad had easy growth from natural resources (Kazakhstan, Azerbaijan Russia etc..)... So maybe now the easy growth has gone, Russia will move in that direction. Its that or a big political clampdown.. (unfortunately the latter appears to be happening at the moment)
Please... Every businessman in Russia knows that Russian corruption is far in excess than western corruption. The extent difference is huge. I know countless business owners both Russian and foreign who own businesses in Russia and internationally and consider Russia the worst.
Yeltsin left because the economy collapsed and he wanted a safe way out. It was his last chance to leave before things would get messy. There could be a point in time when Putin would like to do the same... and I would say Putin will go out with a very similar deal to what Yeltsin got.
Governments all over the world have changed since the financial crisis, in fact Russia is one of the few that has not.. because the crisis was short lived and barely touched the household sector. But this is the point entirely, a short crisis is easy for Russia... she has the buffers to prevent it from spinning out of control. A sustained period of under-performance she cannot. Oil spending a few months at $40 is far better than it spending 5 years at $80 for Russia. (unless the latter brings about change)
Sovereignty is useless when people dont have jobs and inflation is surging. You are right for what you talk about, but this is when the economy is healthy. When times are bad, yes some political rhetoric is needed to divert blame but to solve it economic reforms are needed and this is where Russia is heading today unless reforms are made.
Putin's power comes from the economy's success. Without economic success he will lose his power. If the Russian economy goes into a sustained period of economic contraction Putin will be forced to leave. Putin knows this, this is why he has started the rhetoric against corruption. His support has deteriorated notably and yet the economy is still growing, unemployment is low and inflation is low. Just imagine if all of these go in the other direction... Please do not think I am talking about today in Russia, I am talking about the future if the economy is not reformed and there are pro-longed economic difficulties.
Lawfully elected.. Im not sure which laws you are talking about? :) I work and live in Russia, and I know exactly what type of election abuses go on... still I dont dispute he is the tallest guy in the room, in the room of midgets. The majority of Russians think all politicians corrupt, and try to live their life ignoring it.
Also the reason why the swing is important is that once someone is perceived weak politically in Russia the game is up, so once you start falling from an "ok" level of power it becomes self-fullfilling. Putin is not at that critical level yet, but he is going closer to it, and a recession would push him there.
I have supported Putin for a long time, he was certainly the right man for the job before, but now its not clear he is.. unless he is willing to change himself,and actually do what he says regarding reforming corruption.
It seems so... the question is who spent the gains on productive and diversified industries? and who spent it on corruption and consumption?
Unfortunately too much of it in Russia was spent on the latter. That is not to deny that real industry outside of commodities has been built over the past 10 or so years, but its not big enough to compensate the headwinds.
The communists are not opposition. They are exactly the same type of people as the United Russia party, same background, commit the same abuses, vote yes on the same measures.
You always talk about war and geo-politics like it is the only thing in the market. There is a lot more to the market, any spike in $150-$180 would be disastrous for EVERYBODY including Russia. It is demand destructive and would only be a temporary spike.
As for Navalny... please... Calling him a crook is to call every single Russian a crook. You need to draw a line somewhere to separate the good guys from the bad, and I don't think you can call him bad. If you send him to prison for 9 years, the rest of the Russian government should be getting 30+ years.
But whether Navalny is right or not for opposition is besides the point. There is no opposition, this IS the problem. You have one set of views in government with no pressure against them. There is no way to punish poor governance.
The recommendations are all for trading, I do not believe Russia will default. But critically the reason why Russia is exposed is that if oil&gas prices fall, they cannot finance their spending and will end up with a large deficit. But how to finance it? It wont be financed from international borrowing. Or to put it another way, Russia cannot have a sustained capital account surplus; where will the money come from?
Anyway CDS's are a leveraged way to play it. Russia needs oil above $100 (on their own estimates) and some put it at $120-$130. Simply this won't happen. So any sustained period below this will cause carnage.
True, but the others have much more of a "free-ride" that is easy to get.. Russia doesn't have that anymore, they need to stop acting like kids and grow up.
to look at it roughly:
India & China are 3,000 5,000 GDP per Cap.
Russia $17,000...
Easy growth is that first bit from 0-15,000 depending on what resources etc your country has. But resource growth story is over now for Russia.
If you take away the Rosneft TNK BP event, I am still positive on Gazprom. But this event has changed long term risk of holding the name.
If you assume your shares are worth what they are meant to be, then I'd double up on Gazprom.
While western press is extremely negative on Russia. Russia does not help itself. It is Russia's responsibility to change the perception of the press instead of bitching about it.
Westerners do not understand Russia, but when Rosneft wipes out minorities in the way they did, you can understand why the West has the view it has.
Reform will come from the next generation, as it has done already where it has been present. At the end of the day Putin is 61 and cant stay around forever, he along with many his age are ex-KGB and a certain way of thinking...
Next comes the Medvedevs, people who are "genuine" politicians (not coming from KGB/FSB) Medvedev was a professor.
Finally comes those who grew up in Russia, not the Soviet Union. Those who grew up with internet, and no Soviet schooling.
Progress takes time.
Well Yearly GDP growth is.
But you are right, things are soft at the moment. But a lot of it is statistical noise to do with inflation. Second half of year inflation will be lower and "real" economy will be higher, but still the economy has slowed dramatically. As for IP, it is always highly volatile, but lets not get lost in the short term. If you want I can right an article on the short term about Russia (which would show fairly similar sentiment to your comment) but I focus on the long-run.
A rate cut is imminent.
Alex, comparing Russia to US is a bit false. US has become hugely competitive with energy prices, core Europe is the big loser. But this isnt really the driver of Russian growth, its not a Manufacturing exporter, unlike US and Europe where elec prices will make a difference.
Russian growth is coming from the consumer. Higher debt and wages fuelling consumption boom.
& Russian history is littered with way too many of them. It is not a good economy to go in "blind"... this is why if you look at global asset allocators they are hugely underweight Russia.
To make it clear though... Russia is behind where I originally believed it to be in terms of reform, and it poses some significant downside risks if not correctly addressed.
Russia as a market has been a big under performer in the past 18-months on an equity point of view (bonds is the complete reverse). Relevant commodity prices, particularly in the metals complex is causing a lot of the under-performance.
Domestic names such as Magnit have been huge outperformers
Well that analysis I did was very raw and incomplete for one big reason; index composition. So headline wrong for sure.
Should a company like Magnit trade to a premium to Carrefour. Absolutely, because the growth potential of the Russian economy (and specific to the food retail sector) is far higher than France & rest of Europe.
Should Gazprom or Rosneft trade at a premium to Total or BP. Its a lot more complex, on an asset point of view maybe yes. On a Corporate Governance point of view a clear no. So overall they should trade at a discount. Also critically Gazprom DO overstate their earnings, so they aren't really a 3x company.
Critically, companies with domestically (russia) sourced revenues should trade at premiums. Infrastructure, Banks, Consumer etc.
Companies with internationally sourced revenues should trade at discounts due to worse corporate governance.
Dan you are ofcourse right, but I could not go into every company in one article. In light of the TNK:BP situation I produced a rating agency esq rating system, which the only three oil companies I consider close investable are Lukoil, Bashneft and Tatneft.
So looking at Lukoil, there are three large positives for your protection:
1. No government
2. Large Minority Shareholder base
3. Large Array of International Assets (In the event of the company being stolen, international courts will rule on the international assets)
On the negative side;
1. Russian assets were acquired through the loans for shares scheme. Every energy company who has done this has been reeled in over time, Yukos, Itera, TNK:BP etc.
2. It is not Oligarch free. Although much better than the rest
Its disclosures and corporate governance in general are the best for the oil&gas companies in Russia.
In light of the recent events though, the risks facing all names in the O&G sector are high. TNK:BP was a fully private company, and has essentially been nationalised, BP and AAR got their fair stakes, but the minorities have been left with nothing. Do I see anything bad happening to Lukoil? No, but the probability spectrum has altered.
Moscow has a buzz about it that only Emerging Market cities can give. But at the same time its now an incredibly developed city which most other EM cities aren't, I mean its the city with the most billionaires in the world, so, naturally you have all the expensive restaurants and fun things a person could want.
Culturally, it is fantastic. So much history, art, theatre ... there is a bit for everyone! Architectural is beautiful, although far better in St Pete. (but can always go there for a weekend).
In the summer its 30 degrees, and less rain the London. The winters are long and cold, but actually it doesn't feel as cold as London sometimes... The wind in the UK really makes it feel much worse than it is.
I would recommend it, its a fun place and worth a try. Even if you don't want to take a year working here, Id recommend coming as a tourist. There is nothing to be scared of here just a place filled with wonderful opportunities and expierences.
Stop all your quibble about Russia being too dangerous to do business, every oil company in the world (and gas) wants a piece of Russia because the resources quality if vast. Leaving Russia completely would be a stupid thing for BP to do.
It would be great news for Shell, Total, Exxon and Statoil who are all pushing hard to get a piece of the pie.
I would bet all the proceeds of the deal, or a lot of, get reinvested back into Russia with a deal with Rosneft. Rosnefy may acquire BPs stake, but it would be an equity deal, little cash. The only company who has the balance sheet is Gazprom. Their debt ratios are at all time lows. Gazprom also already work with TNK through the Slavneft JV.
I think BP are only doing this to break the contracts it has with TNK, so it can now partner Rosneft in the artic.
BP has no bargaining power here, the Russian companies net will always come off better.
I'm not saying it cant be poorly managed, but the assumptions that people make all the time is that Banco Santander are like any other Spanish bank, simply they are not. They have too large of an international presence to just look at their Spanish operations, context is everything.
Santander are the strongest Spanish bank, they have extremely highly valued assets outside of Spain, like their Brazilian franchise. They have a diversified loan portfolio, unlike many of the problem banks in Spain.
Lumping them in with the other Spanish banks, simply means you have not done your homework and looked at what the bank does, and where its assets are.
I think it is very important, as you have noted to distinguish Israel and the Jewish race and religion.
I think Israel is going to have a challenging 21st Century, not only because of potential Iranian conflicts but the re-emergence of Egypt as an enemy and not ally. We will find out all very soon with the 2nd round of Egyptian Presidential elections, the Muslim brotherhood already dominate the Prime ministerial position (like the senate) and they have got through to the 2nd round of the Presidential elections for the run off with their new candidate... Muslim Brotherhood in power would fairly speedily bring Shariah law into play in Egypt, but more importantly an anti-Israeli government stance. (the previous government was not anti-Israel having brokered peace deals, under the influence of US economic aid). We have already seen Egypt cut its gas supply to Israel.. this isnt hugely significant in itself, Israel has found gas in the Mediterean.. but the political implications are quite large.
You are extremely right about the inner fighting in the Islamic faith, this is particularly interesting in Iraq where a civil war is currently underway, there are weekly bombings & mass shootings.. things are breaking down there (although they have been for a long time). It will be interesting to see if their oil supply increases continue and can be maintained as they enter a new phase of political struggle.
I think it is certainly too early to call any international conflict in the oil relevant middle east*. But as the chance of war increases, this will price in oil, and if ultimately the end is a calm democratic solution, I would bet that things get worse before they get better.. Iran doesnt look like it wants to change its path anytime soon.
*Except Syria, I would say we are immanently entering conflict there.
Hey, Im not talking about Oil at >$200, that would be the scenario of lines at gas stations. Anyway, a lot of US oil comes from North America, but the pricing would feed through regardless (a natural variation will occur).
I think it is very reasonable to see oil up around $130-150, with Middle Eastern tensions and QE. With either happening oil will easily have 20-30% upside from here, going back to the 110-120 levels. The risk reward is fairly attractive here, all the factors that have driven the price down recently cannot last.
We are still in early stages, but the trend towards nuclear is continously "worsening". But my point is the market had previous priced in the risk, recently the market has disappated the risk. How likely conflict becomes overtime will dictate the size of geo-political risk premium
We are in a clear risk off environment, but I feel in the long run a lot of the negatives will turn.
Saudi oversupply, I think is coming from US pressure (they are in bed with you guys). I think post elections this certainly slows. OPEC arent too happy with Saudi incidently.
I feel the ethics of it all are very debateable, the whole area of nuclear weapons are debateable. I would rather not see any, but I dont see it as a consistent and fair playing field between nations. Perspective is everything.
It is also very important to understand that Ahmadinejad is the "public" face, but actually has little power, he is more a puppet than anything else. BBC have a good despcription of the power position; http://bbc.in/JNzhLG
But we dont "care" for ethics as investors, we must analyse what is likely. Whether the US wants to get involved at the moment or not, I suspect not given elections, oil prices etc. But I feel continued Pressure from Israel, and perhaps a republican government will make conflict more likely.
Let us not forget.. we (I am British) went into Iraq for Nuclear Weapons (well that was the excuse (lie) anyway...)
Is growth from $10,000 better than recession at $100,000?
How?? If Greece leaves they have to balance their budget immediately, instead of more gradually over a few years. Who will finance them? The greeks know they are in the **** if they leave, that is why 80% want to stay in the euro-zone.. they DONT trust their own government, they trust Europe.
Sorry for the slow reply, only just saw this comment.
I do not know the exact date, but the Annual shareholder meeting is soon. So it should be very soon.. but the ex-date may have gone already. I thought it had, but cant actually find anything on it right at this moment.
Comparing CHK and Gazprom... It really is comparing apples and oranges, given how separate the Natural Gas market is. Ultimately, your thoughts on US gas prices will drive CHK investment, and likewise European gas prices for Gazprom. I am, maybe, naturally biased with gazprom.. but the valuation is the cheapest in the world, in a market where I see fairly consistent demand and pricing.
I am bullish on US nat gas prices though in LT, I think the next presidential term could see a major move towards US Nat gas, given how much it will help reduce exports and the need to get involved in Middle East. Although, I see it as a move towards, rather than a complete switch. I think higher Nat Gas demand in the US can be pencilled in, and supply should begin to be more controlled as time goes on.
0.44x book
0.69x sales
2.5x 12m trailing PE
6.5% dividend
I know all of this, and have written a lot here, and privately. But every time I do, it still stuns me... the valuation is quite incredible.
Ill try to find a dividend date when I can.. although I think it has gone ex-dividend.
Its a very good question, the market in my mind is reacting irrationally. I am not the only one who thinks this, for instance Goldman Sachs have a 1 year price target of >+50% (for a hundread billion dollar company that is a big 1 year price target).
So, to your question...
There have been many 1 day 5% sell offs in this move, off of news that was already baked in..
1) Taxation. Uncertainty around taxation drove the shares down previously, but estimates were for a 80-100% marginal tax rate on gains made from domestic price increases. This number came in at 80%, on the day lots of negative press stock moves lower. But what a lot of people miss is that this is marginal profit being taxed, there is no cost associated with it, as prices are increasing at 15% pa, it just means Gazprom dont get a benefit of 15%pa.. but closer to 3% for the domestic sales segment
2) Europe. This is a really major one in more ways than one.
a) The most obvious, risk off from the market, everything European sells off. Commodities tanking, hurts everything Russian.
b) Gazprom's biggest profit client is Europe, so weakening economics in Europe could hurt profits. Although critically, weather is much more important than economic fundamentals (within reason!)
c) Q1 was a horrible weather was... (well it was warm in Europe), this put the shares understandably under pressure.. but recently a report came out saying Q1 volumes to europe are down the shares sold off heavily (even though we knew about it).
d) Pricing re-negociations.. people are worried about prices moving lower for Gazprom. EVEN THOUGH in the same report about Q1 volumes being down, prices were up 14% YoY! But it was ignored
3) It traded ex-dividend, for the first time a big dividend of what is now a 6% yield.
In Russia investors generally look at the next 3-6months, its very short termist. Gazprom has a bad image historically, and Russia in general.
Its incredible, they make record profits, post a huge dividend (which will be continuing), and they are only 30-40% off their 2008 low. Incroyable. But hey! Im not complaining, this is an even better opportunity to buy.
http://bloom.bg/Kajgn4 There are many but here is one, there is still some gas there, but given its far smaller than thought it makes it far more uneconomic because of the capex that needs to go in.
I myself talk about risk vs reward a lot, reward is very simply to understand. But I think people often misunderstand the risk side of things. They over criticize foreign equities as they know them less well, and generally praise their own too much. (although this does change with confidence patterns, political attitudes etc. etc.) No investor is perfect, they all have biases. This is where its easiest to get an advantage.
Russia is a increasing dynamic and safe place to do business, looking at a long run picture of how the country has changed over time shows you the improvement that has been made, but not rewarded in price.
1. A fiscal house in order (& private finances in order)
2. Companies are much more shareholder friendly today, corporate stealing is nothing today vs. 90s.
3. Large and rapid dividend increases are occurring across the board
4. Russia are joining the WTO, in August.
5. The currency, rouble, is steadily growing to be accepted more (previously there were confidence crashes in it).
6. While political reforms are slow, there are still reforms, and I am hopeful for the major ones promised for this new term of Putin will come through. Why? Regardless of what you think his ideals are, he knows he cant "trick" the people with false promises any more.