Khodorkovsky Pardon Won’t Reverse Putin’s Stock Rout
While Mikhail Khodorkovsky has gained his freedom, he won’t get back the $36 billion oil company that was taken from him and minority shareholders a decade ago. The memory of those losses lingers for investors who pulled $3.5 billion from Russian equity funds this year.
Russia’s benchmark Micex stock index gained less than 1 percent yesterday, after President Vladimir Putin announced the pardon, and just 0.3 percent today following his release. The arrest of the former Yukos Oil Co. owner 10 years ago had sent the Moscow index down as much as 15 percent.
“Anyone changing their perception of Russia on the back of this Khodorkovsky pardon would be naive in the extreme,” said William Browder, the founder of Hermitage Capital Management, who shut his Russia fund in March after being tried in absentia for tax evasion. “The investment climate in Russia has been thoroughly destroyed in the last 10 years,” said Browder, who denies the charges.
Khodorkovsky’s case came to represent investors’ concerns about the rule of law in Russia, where human rights and corporate governance have spurred the biggest outflows this year from equity markets since 1996. Pacific Investment Management Co. to Swedbank Robur and Hermitage say that while Putin’s move is positive, more fundamental reforms are required to lure capital.
The Bloomberg Russia-US Equity Index of the most-traded Russian stocks in New York halted a five-day rally yesterday as the Market Vectors Russia ETF (RSX), the biggest U.S. exchange-traded fund that holds Russian shares, dropped the most in a week. While the Micex Index climbed as much as 1.5 percent yesterday after Putin said he would free the former billionaire, the rally was cut in half by the close.
Khodorkovsky, 50, was imprisoned on charges of tax evasion, money-laundering and oil embezzlement. He maintained his innocence, saying the cases against him were retribution for financing opposition parties, an accusation that the Kremlin has denied.
Khordorkovsky was released today following a pardon from Putin, Russia’s Federal Penal Service said on its website. Khodorkovsky had a fortune of $15 billion in 2004, according to Forbes magazine.
Khodorkovsky’s lawyers said no comments should be considered valid until they meet with their client, according to a statement on their website. Before such meeting takes place, “it cannot be commented on whether a request on a pardon was made, by whom and for what reasons,” according to the statement.
Faced with more than $400 billion in capital outflows since 2008 and the slowest economic growth in four years, Putin is seeking to reverse a loss of investor confidence by freeing his country’s most prominent prisoner before his scheduled release in eight months.
“The bigger question for the market is whether the Russian government is ready to embrace a broader set of political and structural reforms to escape a trap of low growth and growing discontent,” Masha Gordon, who oversees more than $2.5 billion in assets as London-based head of emerging-market equities at Pimco, said by e-mail yesterday.
Khodorkovsky’s company Yukos was dismantled and sold at auction, mostly to state-run OAO Rosneft, to cover tens of billions of dollars in back taxes after his imprisonment. The company’s market value peaked at $35.7 billion in October 2003.
Putin’s decision follows this week’s approval by Russian lawmakers of an amnesty that includes the 30 Greenpeace crew facing hooliganism charges for an Arctic drilling protest. Two members of the all-female punk band Pussy Riot imprisoned for hooliganism for a protest against Putin will be offered freedom under the amnesty, according to their lawyer.
Russian stocks trade at the cheapest valuations among 21 emerging-market economies monitored by Bloomberg, with the average multiple on the Micex (INDEXCF) at 4.5 times forward earnings, less than half the 10.4 level for the MSCI Emerging Markets Index. The Bloomberg Russia-US Index fell 0.2 percent to 99.01 yesterday while RTS futures closed at 143,640.
Redemptions from Russia-dedicated equity funds hit $3.52 billion in 2013 through Nov. 29, the most since the EPFR Global, a Boston-based research firm, started tracking flows in 1996.
Khodorkovsky’s pardon comes two months before Russia prepares for the Winter Olympics. Russia is hosting the Feb. 7-23 games in Sochi, a resort town along the Black Sea that is 800 miles (about 1,300 kilometers) from Moscow. It’s spending $48 billion on roads, hotels, airports, stadiums and train lines, about seven times more than the amount spent on any previous Winter Games.
The Market Vectors ETF fell 0.9 percent yesterday to $28.65, dropping for the first time in six days. The RTS Volatility Index, which measures expected swings in the index futures, fell 8.2 percent today to 16.41. The Micex dropped 0.2 percent to 1,494.46 by 5 p.m. today.
“There is still a lot to be done to improve the sentiment,” Elena Loven, who helps manage more than 1 billion euros ($1.4 billion) in Russian stocks at Swedbank Robur, Sweden’s second-largest lender, said by e-mail yesterday. The news of Khodorkovsky’s pardon “came unexpected for the investors,” she said.
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