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Going Underweight Russia

Continuing the theme of dramatically reducing our exposure to Russia in our CEE fund, we earlier highlighted our exits from various Russian oil & gas names and now highlight our clawbacks from the second pillar of our Russian exposure – the banks. We also note that a portion of the proceeds for the stock sales have been donated to various charities to help with the influx of Ukrainians fleeing west to Europe. Though we still are constrained with minimal levels of exposure to Russia, we can safely say that our stake in Russia has been more drawn down by nearly 2/3rds at this point.

In light of the unprovoked Russian invasion into Ukraine last week, we have seen the US and the EU (basically the western world in general) unify in a way never seen before to aid Ukraine. An unprecedented level of cohesion and unity has been seen, not just with NATO and further military aid to Ukraine but also with the establishment of targeted joint sanctions intended to punish Russia. The coordinated sanctions are heavy hitting, ranging from export bans of high tech equipment (namely semiconductor equipment from the US), import bans for various Russian exports along with incoming flight bans from Russia. More telling has been the unified consensus to freeze out of certain Russian banks from the international SWIFT financial identification/messaging system and the Treasury Department sanctioning the Central Bank of Russia , thus imposing restrictive measures that prevent Russia from deploying its international reserves which total nearly $650B. At this point, not a single G7 bank will be able to buy Russian Rubles. With that said, consequences have been quick as the Russian Ruble collapsed to its lowest level ever, now at 107 to the $USD while interest rates have more than doubled to 20% overnight. Global companies have decided to rid themselves of Russian assets (most notably BP divesting its 20% stake in Rosneft and we expect Shell to divest its stake in the Sakhalin Project). As we go to print, the Russian stock exchange did not open today in anticipation of massive declines. The fact that Vladimir Putin put his nuclear armed forces on alert speaks volumes to his isolation and wreaks of desperation.

We are glad we started unloading our Russian assets earlier in February. Of note we highlight that we cut by 80% our stake in Sberbank, the largest Russian Bank and have also cut by 70% our stake in Austria’s second largest bank, RaiffeisenBank owing to its status as the largest western bank with exposure to Russia. Note that despite the Russian markets being halted today, the share price declines have been dramatic (declines of 50%+) since the invasion (let alone since the sanctions were agreed upon over the weekend). We believe that Putin has completely miscalculated at all levels - on the battlefield, with Europe's resolve and on the severity of sanctions. Now isolated and considered a pariah, western companies are shedding their exposure to Russian assets. With Russia now in a bind and desperate for cash injections, it seems like the only bidder at this point will be China, who will most likely step in to buy vast mineral and O&G acerage in Siberia. And in due time, we can foresee a physical Chinese presence in Siberia, a huge resource rich area with little population and infrastructure, strategically located just north of the Chinese border.



Sberbank now trades at an unprecedented 0.3x P/B while Raiffeisen Bank is at 0.4x. This comes as CEE peers (Komercni Banka, OTP, Erste Bank, Pekao and PKO) trade at an average of 0.6x P/B, while Western European peers on the continent (Credit Agricole, BNP, Deutsche Bank, Santander, ING Group and Intesa Sanpaolo) trade at an average of 0.8x. Sberbank now trades at levels not seen since Russia's invasion into eastern Ukraine in 2014.

Lastly, we also cut by 60% our exposure to X5 Group, the largest Russian food retailer. Note that at this point, the vast majority of our Russian exposure is simply from Polyus Gold. Though still affected by the general market sentiment, the fact that it is a gold producer provides somewhat of a cushion. Not that our new declined weightings in Russia are not a temporary trading call but rather a new investment outlook which we will maintain until actual change will be seen from within. This means until regime change.


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