Emerging Markets : Putin’s Comments Unnerve Investors




Headline risk in Russia returned with a vengeance over the summer as global oil major BP struggled with its Russian partners over control of its TNK-BP oil company joint venture. After an extended battle, the head of the company, a UK citizen, in late July left Russia as authorities declined to issue him a new work visa, following what he called a campaign of “sustained harassment” by the company’s local partners to force management out. The key undercurrent of the struggle over TNK-BP is whether the company’s assets will wind up in the hands of state gas monopoly Gazprom or state oil company Rosneft. BP will very likely lose control of an entity that currently accounts for a quarter of its global oil production.

Prime minister Vladimir Putin provided additional drama—and another reason for international investors to wonder how much in fact Russia has changed in recent years—when in late July he publicly criticized steel and coal producer Mechel and its chief executive, Igor Zyuzin, for charging domestic customers more than foreign customers. Putin’s five-sentence remark resulted in a 38% decline in the company’s NYSE-traded shares, shaving $6 billion in value; the Russian stock market fell 5% the next day in sympathy. Further comments concerning Mechel the following week by Putin resulted in fresh declines for the shares and the Russian equity market overall, which, after being an oasis of outperformance in the first half of the year, entered bear market territory (down 20% from recent highs) in late July. The specter of a repeat of the Yukos affair, in which the Kremlin in effect shut down the country’s largest oil producer, looms large in the minds of many investors.

In mid-July Moody’s upgraded Russia’s sovereign debt rating, citing the country’s strong balance sheet and an upbeat political outlook, underscoring the continued strength of the Russian economy.

A study by PricewaterhouseCoopers showed that Russia will overtake Germany to become Europe’s largest automotive market in terms of vehicles sold, following a 41% surge in car sales in the first half of the year. Sales of foreign cars were up 47% during the period.



Kim Iskyan