Putin Russia Has Most Profit, Worst Emerging Market Value

By Ye Xie and Halia Pavliva

Photographer: Alexander Zemlianichenko Jr./Bloomberg

Ice covers valve control wheels connected to pipe work at OAO Gazprom's Bovanenkovo... Read More

The weakening ruble is proving to be a silver lining for stocks that account for the majority of sales on the benchmark Micex index. (INDEXCF)
The currency’s 23 percent decline against the dollar this year is increasing the revenue of Russian exporters as they convert dollar sales into local currency. That has helped lift the average profit margin of companies from OAO Gazprom to OAO Surgutneftegas to a two-year high of 17 percent, a record compared with 7.8 percent for emerging markets. Micex companies generated about 53 percent of their revenue from outside Russia, weighted by their market value.
“The Russian market is dominated by
exporting companies and those benefit a great deal from the ruble devaluation,” Vladimir Tikhomirov, chief economist at BCS Financial Group in Moscow, said by phone on Oct. 28. “The trend is here to stay for some time.”
Even with the improving profitability, Russian stocks still suffer the worst valuations in developing nations as President Vladimir Putin’s incursion into Crimea in March compounded investors’ concern about corporate governance in the former Soviet nation. The international sanctions imposed in response to Russia’s aggression have contributed to the ruble’s tumble which has become a boon for exporters.
The ruble has set new record lows almost every day since September as oil prices plunged and Russia’s $2 trillion economy teetered toward recession following the sanctions tied to the conflict in Ukraine.

Gazprom, Surgut

The Micex index jumped to a one-month high yesterday, trimming its decline this year to 4.3 percent, as the ruble weakened to 42.8496 per dollar. The Russian stock gauge trades at 4.9 times projected 12-month earnings, a 59 percent discount to the MSCI Emerging Markets Index.
The profit margin of companies in the Russian benchmark increased from about 12 percent at the beginning of the year, while the measure for the MSCI Emerging Markets Index dropped from 8.4 percent, according to data compiled by Bloomberg. The margin for Russian companies is on average 51 percent higher than their developing-nation peers since 2003.
Moscow-based Gazprom, which supplies about 30 percent of the European Union’s natural gas, reported a 13 percent increase in its second-quarter profit from a year earlier on Oct. 14 as the ruble weakened. Its profit margin increased to 17.3 percent from 14.3 percent in the first quarter.
Shares of Surgutneftegas, a Russian oil producer, gained 14 percent over the past three months on speculation that a weaker ruble may lead the company to increase its dividend. Surgutneftegas has more than $30 billion of cash, mostly in dollars. The profit margin of the company rose to 58 percent in the first half of 2014, from 42 percent a year earlier.
“The ruble plunge is a double win for Russian energy exporters, it inflates their revenue and cuts their cost in dollars,” Alexei Kokin, analyst at UralSib, said by phone from Moscow on Oct. 28. “It’s because of a such deep decline in the ruble Russian oil companies look so attractive.”