November 3, 2003
The Financial Times
Yukos investment opportunities
John Dizard
Let's say Enron had accumulated billions of dollars, along with a lock
on key energy industry assets, through corrupt methods. Let us further
assume, just for fun, that its top executives had used some of that
money and power to buy influence on the political process. Do you
think that the Washington Post, the New York Times, the Carnegie
Endowment, and much of the rest of the commentariat would be
trumpeting outrage at the arrest of Enron's chairman Ken Lay and CEO
Jeffrey Skilling?
That is a fair analogy, I think, to the western reaction to the arrest
and imprisonment of Mikhail Khodorkovsky, the head of Yukos, the oil
company, and supposedly the richest man in Russia.
Yes, yes, I know, President Vladimir Putin and the Russian prosecutors
are engaged in selective prosecution. Given the enterprising nature of
much of the population, what other kind of prosecution is possible in
Russia?
Most of the time, pomposity and self-righteousness on the part of
editorial writers and think-tank hacks is just random noise. However,
perhaps because ExxonMobil might turn out to have been a little hasty
in choosing strategic partners in Russia, the reaction to the
Khodorkovsky arrest has, I believe, created a number of speculative
opportunities.
The decline in Russian stock and bond prices following the arrest of
Mr Khodorkovsky is a sign of how quickly Russia has returned to being
a respectable country for mainstream investors. Look at the 14 per
cent one-day loss in the Russian equity index a week ago.
Only easily frightened, conventional portfolio managers would have
panicked like that. Back in the day, the hard-core Russia players
would have thought Mr Khodorkovsky had got off easy. The threat of a
10-year sentence? As Solzhenitsyn quoted a camp guard in The Gulag
Archipelago, "The sentence for nothing at all is 10 years."
Not too long from now, though, those pale and trembling portfolio
managers will be terrified of underperforming their benchmarks, and
they will be buying Russian assets again. They have actually done the
cold-eyed speculators a favour. Russian asset prices had been getting
a little ahead of themselves, and the Khodorkovsky affair has
introduced some welcome volatility that can be faded at a profit.
Let's take the Russian Federation's 8.25 per cent dollar bond of March
2010. When Moody's upgraded Russia's sovereign debt to investment
grade on October 8, the bond's spread over the equivalent US Treasury
paper rallied from 212 basis points to 184 basis points "off the
curve". That's some nice vol. By the end of last week, the 2010 had
widened to 225 over the Treasury curve.
Russia's sovereign debt is most often compared to Mexico's, as both
are considered "crossover" credits, right at the border of investment
grade and junk. Mexico's equivalent to Russia's 2010 is trading at 175
over the curve. Given investors' continued yield hunger, another half
percentage point is going to be hard to resist for another couple of
months.
Furthermore, the fundamental story in Russia continues to look very
good. Russia is running a current account balance surplus equal to 10
per cent of gross domestic product. That would be the equivalent of
the US taking more than a $1,000bn from foreigners in surplus exports
and investment earnings. Think the T-note would be catching a bid if
that were the case?
Say the whining editorial writers are right and Russia faces a new
dark age of a dominant state and shrinking "civil society"? That would
be good for its sovereign bonds, right? If the Khodorkovskys of the
country get fewer dollars (or euros) from oil and gas exports, there
are more to cover the state's debt service.
Without too much of a reach, you can go further out on the risk curve
and turn an even better ruble. Look at Gazprom's bonds. Gazprom, which
is already controlled by the state, is the biggest natural gas company
in the world. If western Europe wants relatively clean electric
generation, heat, or petrochemicals, it is going to buy Gazprom's gas.
Last week, Mr Putin said foreigners would be able to own shares in
Gazprom with the same rights as Russian nationals, a change from the
current "ring fence". Gazprom's 9^5/[8] bonds of March 2013 are
selling at 405 basis points over the US Treasury 10 year. You're
getting a fat junk bond yield for what's really an investment-grade
sovereign risk.
The nervy move right now is to buy Russian equities. Mr Putin and
those around him are going to make some conciliatory moves to the
business community. Remember that their problem with Mr Khodorkovsky
and his associates wasn't so much their business conduct as their
interest in mounting a political challenge to Mr Putin.
What, you may ask, about the public's reaction to such a cynical bet
on an authoritarian Russian administration? The Russian public, you
may be assured, would be deeply gratified to see all of the Yeltsin
era oligarchs hanged in Red Square.
The US, British, and continental European publics could not care less.
Their conviction that a liberal-democratic civil society in Russia
could be built on money and organisation provided by corporate
gangsters was absurd.
The oligarchs, by the way, have taken care to throw a bunch of "grant"
money in their direction over the past decade, so take that into
consideration before you worry about getting the think tankers'
approval.
© Copyright The Financial Times Ltd 2003.