The consensus view is that Russia is not a growth story. We fully agree. Over the next three years, we expect annual sustainable free cash flow growth to be close to zero. When companies do not see many growth opportunities, they normally return cash to their shareholders or pay off debt.
On the 27 January the US Treasury Department excluded Rusal, En+ and EuroSibEnergo (ESE) from the special designated nationals (SDN) list. The regulator took this decision on 19 December last year. Within 30 days the US Congress had the chance to block this action, but failed to so.
“Russia is always cheap” is common notion among investors. At first glance it appears to be true. Over the last decade the average price/earnings (P/E) ratio discount for the MSCI Russia index to the MSCI Emerging Markets index was 50%. Russian equities were never close to broader emerging market (EM) equities on a P/E ratio basis.
The US has added several Russian entities and individuals to its sanctions list, causing a market sell-off. Among blacklisted companies are three public ones: Rusal, the alumina producer, En+, the holding company, and carmaker GAS, which are indeed controlled by Oleg Deripaska. US Treasury imposed ban on ownership of any equity and debt instruments issued by these three companies. Thus, investors might have feared the alike measures to be taken against other public Russian companies.
The presidential election will be held in Russia on 18 March and, in our view, it is almost certain that Vladimir Putin will win in the first round.