Snapshot: Russia

Gazprom earned $32bn last year and is the largest extractor of natural gas in the world. In a world of overpriced companies it looks startlingly cheap trading at just 2.7x earnings. It is indeed cheap in comparison to the multiples of other energy companies, but the comparison is false as Gazprom (and indeed most Russian energy companies) are not at all like their western peers.

Firstly they pay very little in dividends (a low payout ratio). Despite the low valuation the dividend yield is only 5.7%. BP’s is 4.9% for comparison. If the management had value generating uses for the cash then reinvesting it is defensible, even desirable. But the majority owner of Gazprom is the Russian government so other shareholders can have little confidence that the profits will be attributed to them.

Which brings us to the second problem: what exactly is it that you own? You do not own the cashflows because sanctions restrict these. Even without sanctions ownership of the cashflows is at the discretion of the Russian government. If the oligarch of choice becomes yesterday’s man Russia has the capacity (and the form) to expropriate the assets. You have no access to a seat on the board however much you invest, but then again siting on a board that is subject to a discretionary legal system may provide much less control than envisaged.

If Russian equities display none of the qualities that other equities do, it is inappropriate to classify them or value them as equities. The shares are neither cheap nor expensive because they are not shares.