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Russian steel and mining companies will be the biggest losers when Vladimir Putin returns to the Kremlin, amid speculation the new regime will boost their taxes to fulfill social spending promises, analysts say.
With policy makers planning to cut levies on some oil products to boost output of Russia’s biggest export earner, metals and mining companies are a “risk sector” as Putin may raise the industry’s taxes to make up for the shortfall and to fund programs such as affordable housing, higher pensions and salaries for state employees pledged during his presidential campaign, according to Chris Weafer, chief strategist at Moscow- based investment bank Troika Dialog.
Futures expiring in March on Russia’s RTS (RTSI$) Index rose 0.1 percent to 171,440 in U.S. trading, as the Bloomberg Russia-U.S. 14 Index (RUS14BN) of Russian companies traded in New York slipped 0.4 percent to 110.86 yesterday. OAO Mechel (MTL), Russia’s biggest coal producer for steelmakers, lost 1.6 percent, while Polyus Gold International Ltd. (PLZLY), Russia’s largest producer of the metal, fell 1.1 percent to $3.51 in U.S. trading.
“The extractive industries always finance the budget and a large part of those social programs,” Ilya Kravets, a research analyst at ED Capital, which manages almost $100 million in assets, said by phone yesterday in New York. “The oil industry has the highest taxes, the rest of the extractives have slightly lower tax rates. There may be an increase in taxes across all types of extractives to compensate for the oil industry’s potential decrease in taxation.”
Putin, who won a third term as president on March 4, vowed to boost pensions and salaries for state workers and the military during campaigning, pledges that will contribute to a 4.8 trillion-ruble ($162 billion) increase in spending through 2018, according to Capital Economics Ltd. A proposal to reduce the export duty on extra-heavy crude to stimulate output could become law by July 1, Deputy Finance Minister Sergei Shatalov said on March 6.
Mechel (MTLR), OAO Magnitogorsk Iron & Steel (MAGN), the oldest of Russia’s eight main standalone steel mills, and OAO Novolipetsk Steel, Russia’s largest steelmaker by market value, may be some of the companies taxed under the mineral extraction tax, according to Kravets. Mechel has risen 19 percent this year.
United Co. Rusal (486), the world’s largest aluminum producer, dropped 1.3 percent to HK$6.12 in Hong Kong trading before being suspended. Victor Vekselberg resigned as the company’s chairman after disagreeing with management’s decisions and saying the company faces a “deep crisis.”
Oil companies that have invested in large-scale new projects, like Rosneft Oil Co. (ROSNEF), Gazprom Neft JSC (GZPFY) and TNK-BP, BP Plc’s Russian venture with a group of billionaires, will get bigger export duty cuts “to stimulate production,” Kravets said. Gazprom Neft declined 0.1 percent to $26.68 in U.S. trading yesterday. The stock has gained 14 percent this year. The shares slipped 2.3 percent to 158.45 rubles, or the equivalent of $5.35, on Russia’s ruble-denominated Micex Index.
Putin delayed utility-price increases due in January until July during the run-up to the March 4 election. The utilities sector is a “real battleground,” as the government is “unlikely” to raise tariffs soon after the election while such companies as Moscow-based state-owned electricity exporter OAO Inter Rao Ues (IRAO), require funding for their extensive capital investments, Weafer said.
“The companies in this sector are low-valued relative to international peers because of the concern over the utility tariffs but I wouldn’t be buying them right now expecting the tariffs position to be changed or restored quickly,” Weafer said by phone from Moscow.
Utility companies may have to wait up to a year before the government increases tariffs, Weafer said. OAO RusHydro (RSHYY), Russia’s largest hydropower producer, fell 1.5 percent to $4 in U.S. trading yesterday. RusHydro retreated 0.5 percent to 1.18 rubles, or the equivalent of 4 cents, on the Micex.
The 30-stock Micex retreated 0.1 percent to 1,604.26 yesterday in Moscow, while the RTS (RTSI$) rose 2.2 percent to 1,714.12.
The Economy Ministry proposed state companies pay 25 percent of profit under International Financial Reporting Standards as dividends, Vedomosti reported on March 11.
“In the context of the delay in the government’s privatization plans, the more normal market requirements will be introduced for the state companies, the better,” said Slava Rabinovich, Moscow-based chief executive officer of Diamond Age Capital Advisors, which manages $20 million in Russian equities.
OAO Transneft, Rostelecom (RTKM) OJSC, OAO Sberbank and OAO Gazprom are among the companies the proposal relates to, Luis Saenz, chief executive officer of Otkritie Inc., said by e-mail yesterday. Rostelecom, Russia’s biggest fixed-line phone provider, rose 0.5 percent to $29.59 in U.S. trading. The Micex shares gained 0.8 percent to 145.43 rubles, or the equivalent of $4.91. One ADR equals six ordinary shares.
“Rosneft already pays 20 to 25 percent, this won’t heavily impact them,” Julia Novichenkova, gas and oil analyst at Uralsib Financial Corp. in Moscow, said by phone. “For Gazprom, this is not such a big sum that would affect their finances. For the oil industry, the impact won’t be significant.”
Crude for April delivery added 0.5 percent to $106.90 in electronic trading on the New York Mercantile Exchange. The contracts declined 1 percent to $106.34 yesterday. Brent oil slid 0.5 percent to $125.34 on the ICE Futures Europe exchange, while Urals crude, Russia’s chief export blend, lost 0.1 percent to $123.63, falling for the first time in four days.
ADRs of OAO Mobile TeleSystems (MBT) slipped 1.8 percent to $17.74 in U.S. trading as the company said revenue growth will slow over the next four years.
The Moscow-based company, known as MTS, expects revenue to probably climb 5 percent to 7 percent through 2015, after gaining 9 percent last year to $12.3 billion, Chief Executive Officer Andrei Dubovskov said yesterday. Fourth-quarter revenue slid to $2.98 billion from $3 billion a year earlier, Dubovskov said.
MTS (MTSS) was little changed at 227 rubles, or the equivalent of $7.67, on Russia’s ruble-denominated Micex Index. One ADR is equal to two ordinary shares.
Mechel said in a statement yesterday it got a license to extract iron ore in “several promising deposits” in two areas of the eastern Siberian Republic of Sakha.
The company received licenses for researching, investigating and extracting iron ore in the Sutamsky area and in the Sivaglinsky deposit, both located in Sakha, according to the statement. Mechel estimates iron ore reserves in the 740 square kilometer Sutamsky license area at 1.35 billion tons. The areas are near Mechel’s Elga coal field, its largest project.
The Standard & Poor’s GSCI index of 24 raw materials fell 0.4 percent to 704.27 yesterday, retreating for the first time in four days. Copper, nickel and aluminum declined on the London Metal Exchange.
Yandex NV (YNDX), Russia’s most popular Internet search engine, declined 2.3 percent to $22.94 in New York yesterday as its weekly search-market share dropped to the lowest since at least August 2010, while Google Inc.’s portion increased, data compiled by Liveinternet.ru show.
Yandex’s share of the Russian search market declined to 59.1 percent in the week through March 11, the lowest in data going back to August 2010 of Liveinternet, an Internet-service provider and researcher. Yandex’s share was 59.3 percent the previous week and averaged 59.3 percent over the past four weeks, the data showed.
Google’s (GOOG) share of Russian searches rose to 26 percent from 25.7 percent, compared with a four-week average of 25.6 percent, according to the Liveinternet data.
The Market Vectors Russia ETF (RSX), a U.S.-traded fund that holds Russian shares, declined 0.8 percent to $32.46. The RTS Volatility Index (RTSVX), which measures expected swings in the index futures, fell 2.8 percent to 32.74 points.
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