A souring of relations between Russia and the West and the impact of sanctions mean the outlook for the Russian economy is poor. Anyone looking to gain tactical exposure to this negative trend could consider going short of the investment trust JPMorgan Russian Securities (JRS) which invests in a basket of Moscow-quoted stocks. But all investors should consider carrying out a health check of their portfolio to consider where their companies may be exposed.
Although Russia has taken a step back in the short-term with an end to military exercises on the Ukrainian border (11 Aug) it still has a significant troop presence in place and is engaged with tit-for-tat sanctions with the US and Europe. The downing of passenger jet MH17 over Ukrainian airspace led to a significant escalation in tensions (17 Jul) and on 24 July the International Monetary Fund downgraded Russia’s gross domestic product growth outlook from 1.3% to 0.2% for 2014 and from 2.3% to 1.0% for 2015.
On 7 August Russia banned food imports from a number of Western countries in response to tougher penalties. Given close trade links the tensions are expected to have a material impact on continental European economies – the German headline DAX index is down 9% from its June peak.
In terms of UK quoted companies the oil sector probably has the most direct links to Russia. Industry giant BP (BP.) has a near 20% stake in Russian peer Rosneft (ROSN) as part of its exit from the TNK-BP joint venture in 2012. Its direct financial exposure comes in the form of the annual dividend which is next due in July 2015. RBC says if BP were to forego this payout it would have an impact of just 4p per share with a 19p per share hit if it were forced to exit its position entirely.
As we discussed last week (see Agenda, Shares 7 Aug) we see the Russian impact as more acute in sentiment terms, particularly in combination with the ongoing uncertainties over the Gulf of Mexico oil spill. Royal Dutch Shell (RDSB) is partnered with Gazprom (OGZD) on the country’s only liquefied natural gas project and small cap JKX Oil & Gas (JKX:AIM) has both Ukrainian and Russian assets.
For some companies like Russian commercial real estate play Raven Russia (RUS) and listed private equity firm Aurora Russia (AURR) the clue is in the name but other firms with exposure might be less obvious to casual observers. They include high street stalwarts Marks & Spencer (MKS) and WH Smith (SMWH). The former derives 4% of its operating profit from its 41 Russian stores while the latter won a contract to sell newspapers at railway stations across the country in July 2013.
DIY-concern Kingfisher’s (KGF) chain Castorama generates around £500 million in annual revenue in Russia while FTSE 100 drinks can maker Rexam (REX) sources around 6% of group sales from its Russian business. Chief executive officer Graham Chipchase tells Shares the impact of sanctions is likely to be negligible as its operation in the country is largely self-contained but admits a prolonged economic downturn would be detrimental. Events company ITE (ITE) is active in Ukraine and Russia and in 2013 Russia accounted for more than 60% of its revenues.