Bargain hunting in Russia

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Good Morning. Choppy markets again yesterday, amid lots of talk about the great hawk Jay Powell. We still think that the market response to Powell’s words tells you more about the market (jittery as hell) than about Powell (mostly his usual self). There is more to this story than the Fed. Email us: and

Russian values

Here are some stocks that look really, really, really cheap (data from S&P CapitalIQ):

All of these multibillion-dollar companies have double-digit dividend yields, double-digit revenue growth, and price/earnings ratios below 10. Some of them look frankly absurd — Gazprom, say, with 40 per cent growth, a 17 per cent dividend in the year ahead, and a P/E of 3 (the dividend may turn out to be even higher than that, if oil prices stay high).

Now, what has created these somewhat otherworldly valuations is, to generalise, the combination of a rising oil price (good for Russian economy and its corporate profits) and the crisis on its border with Ukraine (bad for Russian asset prices). Here is a chart of Russia’s Moex equity index against the crude oil price in roubles. Notice the unusual but not unique divergence at right:

Those who have been hanging around stock markets for awhile will know Russian stocks have looked very cheap before. What is unusual is that they are as cheap now as they were a decade or so ago — before the country’s financial reconstruction, in which it slashed external debt, built foreign currency reserves, and accumulated current account and budget surpluses. An oil-driven economy is especially attractive now, given high global inflation, and Russia’s particularly so, given its very hawkish monetary policy.

The question is whether Russian stocks can get cheaper still. The question can be broken into two parts. One: what is the chance the situation on the border turns into an even bigger mess? Two: how much of a mess is already priced into stocks?

The corresponding argument from Russia bulls has two parts as well. One: Moscow is genuinely concerned with its own security, and has neither domestic support for nor geostrategic interests in an annexation of Ukrainian territory. If the US and Nato cool it, offering assurances about missiles and a pause in Nato’s expansionary aspirations, de-escalation would follow.

Two: even if things do get worse, financial sanctions against Russia are likely to be too weak to threaten its economy, unless they stopped the country from selling its oil and gas abroad — which would hurt Europe as much or perhaps more than it would Russia.

Jacob Grapengiesser, who runs about $4bn in eastern European equities for East Capital, summed up the first argument up in a call from Moscow yesterday:

If we speak about worst-case scenarios, there are two. One is an invasion of Ukraine where Russian tanks cross the border and take a large territory. That is very very unlikely: there is not support for this among the Russian people. There was support for the annexation of Crimea. Of my friends in Russia, maybe 10-15 per cent have Ukrainian passports — there are lots of friendly ties, with family in one place or the other. It’s like Norway and Sweden. So I would write that scenario off.

The other is some sort of an accident — someone fires 20 rockets and it spirals out of control and it is hard to backtrack. I don’t think it is likely and Putin is the kind of guy who could stop it. It is not likely, but it is a risk.

The most likely scenario is a slow de-escalation. Russia and the US reach some kind of agreement that, maybe, no missiles are placed in Ukraine and Ukraine’s Nato membership is not on the table for now. The agreement is maybe not public, but Russia is satisfied.

I asked Putin two months ago [at a conference]: shall we be afraid of Russian troops entering Ukraine? It was a long answer but . . . he is truly concerned that there could be Nato missiles based in Ukraine. He said: since you live in Moscow, you should be worried too, as it would only takes the missiles 10 minutes to get there; I’m thinking to the security of the country

Whitney Baker, who runs the emerging markets research shop Totem Macro, summed up the second argument as follows:

Russian banks have more liquid dollar assets than dollar liabilities coming due, and a call on the huge FX assets of the sovereign. Corporates and households are long dollars too … throughout the economy there is a dollar surplus. From a balance sheet perspective, Russia has enough ammo to deal with virtually anything and remain solvent. 

It’s hard for something worse to happen than what is already priced in.

Financial sanctions are not going to be effective economically. Suspension from Swift [the global interbank payments system] would cause friction but ultimately can be got around … Russia doesn’t have much external need to clear dollars except for oil and gas (which it can choose to sell to China or price in other currencies). But sanctioning Russian oil and gas is the Kamikaze option for Europe.

One of the biggest questions . . . is literally whether [foreign investors] would continue to be able to own Russian assets. But again this doesn’t matter economically much to Russia or most Russian assets, because foreign ownership of Russian assets is negligible relative to GDP.

Even if secondary trading of Russian assets were banned for international investors, Baker said, they would likely be given a window to sell — and the price impact might not be terrible, given the low international ownership.

Unhedged is not in the business of assessing geopolitical risk. But if the situation on the border cools, someone is going to make a lot of money in Russia.

What sank Facebook’s crypto dreams

We are not crestfallen about this news:

The Facebook-led Diem cryptocurrency project is preparing to sell its assets, as the social media giant admits defeat in its once-sprawling digital payments ambitions.

The Diem Association, which was launched by Facebook in 2019 and is supported by 25 businesses and non-profit groups, is planning to wind down, according to several people familiar with the discussions.

One person said the buyer of its technology was California-based Silvergate Bank, for $200m.

Facebook’s Diem project has shape-shifted so many times that we can hardly fault readers for losing the thread. Here is a postmortem.

Many tactical missteps paved the path for Facebook’s flop — from a half-baked association of backers to the residual stink of Facebook’s privacy scandals. But there was only one big strategic error: threatening governments’ monetary sovereignty.

Diem was launched in 2019 as Libra, with the ambition of disrupting the kludgy cross-border payments industry. Backed by fiat currency and Treasuries, Libra would run on a permissioned (partly centralised) blockchain and let users pay one another across borders and currencies. Scale would let Libra push down exchange fees.

Regulators lashed out fast, warning the digital currency could run foul of laws against money laundering and terrorist financing. This criticism was fair, but ignored the deeper problem — the prospect of a private Central Bank of Facebook. As then-French finance minister Bruno Le Maire wrote in the FT:

Would a regulatory response be able to address all these risks? The answer is no, because Libra is asking states to share their monetary sovereignty with private companies. In fragile countries where many don’t have access to a bank account or a stable currency, people could simply stop using the national currency and turn to private currencies instead. Some countries may end up surrendering their monetary sovereignty and control over their economy.

At the heart of such fears is the monetary trilemma: the economic principle that countries must pick two of monetary policy independence, free capital flows and a fixed exchange rate. All three cannot be maintained. Eurozone countries, for instance, have ceded monetary policy to the European Central Bank to adopt the euro alongside free-moving capital. Countries trying to buck the trilemma have failed.

Libra, if successful, would’ve made this policy choice even harder. It would become near impossible to enforce capital controls, turning a trilemma into a dilemma. As the economists Pierpaolo Benigno, Linda Schilling and Harald Uhlig argued in 2019:

Our result shows that introducing a [Libra-like] currency implies a further restriction, when it becomes a perfect substitute for the local currencies. Either the monetary policy of the central banks can no longer be independent or central banks risk the crowding out of their own currency.

To translate, either you accept Facebook’s implicit monetary policy or your currency starts going out of circulation. This is not just an academic question. One source relayed this anecdote to Unhedged:

I was at a [People’s Bank of China] forum where one of the regulators spoke about how he was concerned that maybe Libra could start being used domestically . . . He made it very clear that they had no intention of letting it get any traction in China.

They had some experience of demand for bitcoin surging in 2015 and 2016 when there were downward pressures on the renminbi. It was clear that some of the surge at the time was coming from China. And so bitcoin was seen as a way to evade capital controls, and there was a concern that Libra could be used in exactly the same fashion.

Once Facebook had thoroughly spooked regulators, none of its attempts to shed Libra’s baggage — changing the name to Diem, moving the HQ from Switzerland to America — could assuage them. Even a fundamental design change was not enough.

The world is moving on from Diem. Governments across the world are working on central bank digital currencies that could soon meet the very real need Facebook saw. If there is any lesson to take from the Diem saga, it is that central banks better get CBDCs right. They cannot stave off the competition for ever without a digital offering of their own. (Ethan Wu)

One good read

With all that’s happening in Ukraine, this week’s coup in Burkina Faso has not gotten enough attention. The Economist explains why jihadis are gaining ground in west Africa — and how Russia is capitalising.

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