* Russia's oil reliance causes concern
* Long-standing corruption remains, say strategists
* Investors look to other emerging markets, Japan, U.S.
* But some see value in Russian equities
By Megan Davies
MOSCOW, April 18 Foreign investors weary of
unfulfilled reform promises under Vladimir Putin have been
fleeing Russia-focused funds this year, clouding prospects for
the country's fragile equity markets.
So far this year, $1.2 billion has been pulled from
Russia-focused equity funds - 8 percent of estimated
Russia-dedicated assets - on concern over a slowing economy,
Russia's exposure to falling commodity prices and a lack of
progress on reforms to make a murky business environment more
With Russia's oil production now at post-Soviet records and
rivalling that of Saudi Arabia, that might suggest more money
sloshing around the economy will underpin company profits and
push up equity values. But those abundant petrodollars may be
removing some of the incentive for the kind of business-friendly
reforms that comfort foreign investors.
"It seems to be an ongoing process of people gradually
moving out of Russia... I think investors have got all the
warning signals," said Steven Dashevsky, founder of Moscow-based
investment firm Dashevsky & Partners, who expects to reduce the
weighting of around 20 percent held by Russian equities in his
In his first major speech to investors since returning to
the Kremlin, President Putin said last June he would press ahead
with sales of non-strategic state assets, fight corruption,
reduce red tape, strengthen property rights and cut Russia's
reliance on energy exports.
Nearly a year later, investors see few improvements to
Russia's legal system and scant sign that widespread corruption
has abated. Privatizations are moving slower than hoped.
An ongoing trial of anti-graft blogger Alexei Navalny and
the posthumous trial of whistleblower Sergei Magnitsky appear to
some to reinforce the impression of a country ruled by might,
Recent treatment of minority investors has done nothing to
In the buyout of TNK-BP by state-controlled oil
producer Rosneft, Russian tycoons including Mikhail
Fridman sold stakes for a total $28 billion. The rump of listed
shares has shrunk by 35 percent since it emerged that there was
no plan to buy minority shareholders out, meaning they would not
benefit from the takeover.
Veteran investor Mark Mobius, executive chairman of Franklin
Templeton's emerging markets group, said the TNK-BP buy-out "is
the kind of issue that gives pause for thought on the behalf of
investors coming to Russia".
Speaking at an investment conference in Moscow, he warned:
"The recent case of TNK-BP is probably very instructive because
you had these ... oligarchs leave with billions of dollars,
while minority investors are now sitting in a very risky,
Mobius is still enthusiastic about Russia and said he had
about $1.2 billion invested in Russian equities. He said that,
overall, he had made money in the country and would still like
to add to his Russia exposure.
Many other investors are cutting theirs, some of them
concerned that a lower oil price may push the country into
recession following a growth downgrade in April.
Maarten-Jan Bakkum, emerging market strategist at ING
Investment Management in the Netherlands, said ING's funds had
reduced their Russian positions in the last three to five months
and could cut them further.
"We don't have a big position in Russia. Last year we were
overweight, but Russia has been disappointing," he said. "I find
it very hard to play Russia in an environment where commodity
prices are moving very fast and Russia is very sensitive to the
According to fund data provider EPFR, there were inflows of
$153 million into Russia-focused funds overall in 2012, but $793
million exited in the final quarter. There have been eight
straight weeks of outflows from Russia-dedicated funds.
"In the past, the Russia growth story was one thing that
Russia investors could hang their hat on," said Erik DePoy at
Gazprombank in Moscow. "Well, that growth story is not so
Russia is not the only large emerging market to suffer as
investors focus more of their attention on Japanese stocks and
U.S.-based loan funds.
But Russia has seen net outflows this year while others in
the BRIC group of countries - Brazil, Russia, India and China -
have seen inflows if Russia's share of large global funds is
included beside Russia-focused funds, according to EPFR.
Russian equities now trade on a 12-month forward
price-to-earnings ratio - which compares share prices to
forecast earnings - of 5 times, while Turkey trades at 11 times
and Mexico at 16.3 times, according to one trader.
That suggests Russia represents good value, yet trading
volume has declined. The nominal dollar value of the MSCI
index's Russian constituents traded daily so far this year was
40 percent less than in full-year 2012, according to one
"The most concerning thing is that when you see the market
picking up you don't see a pick-up in volume, so there's a lack
of conviction," said Peter Westin, Chief Equity Strategist at
Aton, a brokerage in Moscow.
Selling has come from exchange-traded funds (ETFs) as well
as actively managed funds, analysts say. ETFs typically have big
weightings in large stocks such as Gazprom, Lukoil
and MTS, said one trader. Stocks with large
foreign ownership tend to be those listed in London,
particularly miners such as Evraz and Polymetal
, the trader said.
The Market Vectors Russia Fund, one of the largest
ETFs focused on Russia, is down 14 percent this year.
Fund performance has also struggled. Average returns for the
funds covered by Thomson Reuters fund research firm Lipper over
the last three months are at a negative 4 percent.
While some are selling, others see an opportunity.
Sam Vecht, head of BlackRock's Emerging Europe equity team,
believes investors are making a mistake by chasing emerging
markets that have performed better than Russia in recent years,
and has been topping up his Russian investments.
"Valuations are stupidly cheap," one London-based hedge fund
manager said of Russia. "I've never seen stuff so cheap there.
People must be putting a really high discount factor because
companies may be raided or because of corruption."
Yet if the fortunes of Russian equities are about to turn,
the evidence is slow to appear.
"There is a general sense of fatigue about the Russian
market," said Gennadiy Babenko, equity research analyst at
Renaissance Capital in Moscow.
"People say that you should buy now because its cheaper, and
it will improve in the future," said Babenko. "But it is not