Why it’s hard to ignore Russia

Q: Novatek, an independent gas producer in Russia, is close to breaking the Gazprom monopoly on the gas export market. Will Gazprom fight that?  

Surprisingly, it hasn’t yet. What’s interesting is that the Russian MICEX Index is heavily populated by oil names, but these companies tend to carry a very heavy tax burden. They are basically all running to stand still, drilling to replace the decline from existing wells while net production remains flat.

The gas market is a different animal. Novatek is Russia’s largest independent gas producer and “one of the best-run global emerging market oil and gas companies,” says UBS. The company has grown its domestic market share in leaps and bounds to the tune of about 20% per annum. It has developed smaller fields where Gazprom has not been successful. In the last three years, Novatek doubled reserves and some of those fields were formerly Gazprom fields.

In addition, Novatek is venturing into an inherently profitable LNG project with China located on the Yamal peninsula. According to UBS, the Yamal project might be able to “unlock significant long-term production upside for Novatek, partially liberating it from its dependence on Gazprom’s pipeline network.”

The media has been focusing on China’s deals on an inland pipeline in Siberia with Gazprom, yet there’s a huge discrepancy in price. China wants to pay only $3 per million British Thermal Units (mBtu), but Russians want to charge $12 per mBtu.

While the Chinese want a stake in both areas, as well as some flexibility, Novatek is a clear winner so far. For the first time in Russian history, the Gazprom monopoly will be broken. This is a big deal for an independent company, as it allows Novatek to become “an energy player of genuine global standing,” says UBS.

Q. So, if you put your money in Russia, what about political stability?

A key to investing in Russia is to focus on domestic areas of the market that are profitable and growing. While China’s urbanization gets a lot of attention today, in the case of the Soviet Union, urbanization happened back in the thirties. Russia has a middle class and its GDP per capita is much higher than that in China.

Within domestic markets, one promising company is Mobile TeleSystems, which provides mobile and fixed line voice and data telecommunications services for Russian customers. So far this year, the stock has climbed 16%.

Russian internet companies, such as Yandex and Mail.Ru, have also done spectacularly well in 2013, significantly outperforming the overall Russian Index. While overall Russian stocks are down, Yandex, the “Google of Russia,” rose about 60% and Mail.Ru increased 20 percent.

 

Search engine company Yandex has seen success lately, as it’s been able to defend its 60% market share against Google, a fierce global competitor. And Mail.Ru, which is a Russian Internet company focused on social networks and gaming, currently captures about 96% of Russian Internet users on a monthly basis, and 74% on a daily basis, according to JPMorgan.

In addition, Mail.Ru may likely to pay a 10% dividend on the proceeds of the Facebook sale, which it had successfully invested in prior to the IPO.

It’s a longer interview, but worth checking out. See the video clip now.

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About the Author
Frank Holmes

Frank Holmes is CEO and chief investment officer of US Global Investors. This first appeared in his Frank Talk blog. For more updates on global investing from Frank and the rest of the U.S. Global Investors team, follow on Twitter at www.twitter.com/USFunds or like on Facebook at www.facebook.com/USFunds. You can also watch exclusive videos on what research overseas has turned up on the U.S. Global YouTube channel at www.youtube.com/USFunds.

US Global Investors, Inc. is an investment management firm specializing in gold, natural resources, emerging markets and global infrastructure opportunities around the world. The company, headquartered in San Antonio, Texas, manages 13 no-load mutual funds in the U.S. Global Investors fund family, as well as funds for international clients.

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