Russian market valuation markdown reveals investor mistrust

There are valuation discounts and risk premiums, and then there is Surgutneftegaz. Russia’s fourth-largest oil producer pumps out more than 10 per cent of the country’s crude, has barely any debt and a cash pile of about $50bn. But investors value it at just $20.5bn.

They have been many justifications for the discount. Analysts have given up guessing why the cash is being saved, when it might be spent, and on what. It is so large that during some quarters, the interest earned generates more income than the company makes from oil production.

Minority investors know they have zero chance of changing strategy: the chief executive is a former Soviet apparatchik who has run the business since 1984. And overshadowing all, there is no public information on who actually controls the company. 

The enormous gap between Surgutneftegaz’s cash pile and its market capitalisation is legendary among Russian investors. But it is only the most conspicuous example of the discount that hangs over much of the country’s financial markets.

Worries over judicial independence and protection of private property are part of the reason for this. But concerns over corporate governance, the rights afforded to minority investors and political influence on company strategy are continually cited by investors to justify the significant markdowns across the Russian investment universe.

Russia’s benchmark Moex index trades at 7.8 times expected earnings for the next 12 months, less than half of the forward price-to-earnings ratio for the MSCI Emerging Markets index, according to Bloomberg data. 

Few companies have a lower such ratio than Surgutneftegaz’s 4 times. Run by the same man, Vladimir Bogdanov, since it was still a division of the USSR’s oil ministry, it was privatised in 1993. Yet despite its public listing, details of its ownership have only been sporadically published, and remain opaque.

In the early 2000s, the company said about 40 per cent of its ordinary shares were held in treasury. In its 2012 annual report, the first results it reported under international standards for 11 years, those treasury shares had disappeared — less than 1 per cent were declared as being owned by the company, and there were no records of any being sold or transferred elsewhere. 

According to the Vedomosti news organisation, the shares had been sold off to a web of interconnected companies controlled by Surgutneftegaz insiders, in tranches smaller than 5 per cent. That meant that the sales, and the new owners, did not have to be disclosed. 

Russian commentators have long speculated that the company’s shares are being held on behalf of other entities, potentially politicians or officials keen to keep such ownership secret. Surgutneftegaz did not respond to a request for comment.

Such “beneficial ownership” relationships were common among politicians, oligarchs and bankers in Russia in the 1990s, when chunks of the country’s vast mineral wealth were snapped up by politically connected financiers in controversial privatisation auctions. 

But investors prefer clarity over shareholders and their intentions. Take Yandex, the Russian tech conglomerate. It had suffered from concerns over what a golden share held by Sberbank, the Kremlin-controlled lender, could be used for. Such shares typically give holders veto power over issues such as a change of corporate control.

In November 2019, Yandex agreed on a restructuring that saw the golden share transfer to a Russian foundation designed to protect the company from foreign takeover. With the uncertainty over Moscow’s intentions removed, shares in the company rallied. Today, the stock is more than double the pre-restructuring value.

Such a restructuring at Surgutneftegaz looks unlikely, though investors never seem to lose hope. In the winter of 2019, its shares jumped 52 per cent in 10 weeks, triggered by the formation of a subsidiary that analysts speculated could be used to spend the cash pile on new investments. Nothing happened, and the shares retreated.

Ron Smith, executive director at BCS Global Markets in Moscow, reckons that if Surgutneftegaz were to pay out a special dividend of about 90 per cent of the cash, and cancel the treasury shares that vanished from the published accounts after 2004, the company’s equity value would be $70bn. 

Bogdanov rarely speaks to the media. Asked in 2019 whether he planned to step down, he replied: “Ask God.”

If Russia’s equities are to close the valuation gap with other markets, investors might need a little more clarity than that.

henry.foy@ft.com