Page 68 - bne_Magazine_February_2019

68 I Eastern Europe bne February 2019
BA: How can you compete with the big boys, the Wall Street banks, most of whom are already in Moscow?
KC: A big part of the competition is barely alive, both fortunately and unfortunately. On the one hand this makes the competi- tion relatively easy. However we would prefer much healthy competition but
the market is shrinking. There is a much smaller pie for everyone. What we have seen on research side is the big brokers can no longer justify having research
in Moscow. The flow has gone down substantially. The number of analysts and sales people that work on accounts was too high a few years ago, but now lots of brokers are shutting down in Moscow and cover the Russian space from London and other locations. But that is good for the local brokers. We have a better under- standing of the local markets – including the politics, which is very important.
BA: The Russian market is completely out of fashion and oil prices remain volatile, which makes it risky and unpredictable too.
KC: The volumes in the Russian market are $1bn a day. It’s still a lot. The market is not going to die. Even if it falls by 50% that half a billion in daily turnover some- one needs to execute it. There will still be a job for us, or someone like us.
The Russian market is unique. It is not really an emerging market. This a big
theme for me, because it is not really emerging from anywhere at this point. There is no decoupling of Russia from oil and it is ultimately dependant on oil and the budget (which is also dependent on oil) and other exporters like metal and mining companies.
But this gives Russia a unique advantage as among all the other emerging markets Russia has the lowest dependence on foreign capital. Whenever foreign capital leaves other emerging markets they
have a problem and can fall into reces- sion. For Russia as long as oil is high we are good. And this makes Russia a safe haven. The Russian dividend yield right now is about 7%. It's the highest in all emerging markets.
This creates a very solid foundation for real profits for the investors into Russia. If the Russian market halves assuming unchanged oil then the dividend yields would not be 7% but 14% – it would be a crazy opportunity for investors from all over the globe.
BA: Why are dividends so good in Russia? Is it because the owners of companies now take their money out of their companies with dividends and are willing to share with investors?
KC: In Russia it’s not just because the businessmen suddenly decided to share profits. The origin of the dividend yield is mostly if you look at the highest pay-
ing sectors, which is metals and mining, the reason is because there is nowhere to invest. They earn lots of profits now but they understand that if they invest into production it will ramp up in three or four years from now. But we don't know what is going to happen in three or fours from now.
Imagine you are a Russian oligarch.
You have uncertainty about the fund- ing. Uncertainty about the markets. The uncertainty of the political and sanctions risk. Also being a metals oligarch, you have risk that your products won’t reach the market. There are all sorts of trade barriers. Other markets are not happy with lots of steel coming from Russia and China. It’s like a perfect storm now. So despite the fact they are earning crazy money, now there is nowhere to invest. So they pay dividends.
Most of the investments in the metals and mine industry were loss-making – huge losses. So the owners don't see any opportunities in Russia on a big scale, which would kill the cashflow suffi- cient to stop dividends. And they don't want any western exposure because all of them lost money. The only one that made money was Norilsk Nickel thanks to a stake in a gold field.
bne Podcasts
The revival of Russia’s cinema industry
Ben Aris in Moscow
Russia’s cinema business is grow- ing three times faster than the real economy, but it's a bumpy ride. In 2018 Russian movie-goers set
a new record with 56mn visits to a cinema to generate a box office take of RUB13.5bn ($200mn). With one Rus- sian in three having a night out in front of the silver screen, the growth of the business is fuelling a revival in the whole
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media sector where Russia has a long and prestigious pedigree.
But the sector is still in its adolescence. Following the collapse of the Soviet Union that atomised the cinema business, even the five biggest chains combined still only account for a third of the box office. Moscow cinemas in the country remain stand-alone affairs and
more have become intimately wrapped up with the development of big malls in the regions.
Revolutionary cinema
The Oktyabr cinema on Novy Arbat in central Moscow is an icon of the busi- ness. Established in Soviet times, it is the largest in the country and the flagship movie theatre of Karo, the third largest