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The News

Today, Sistema dropped by some 40% because the boss of Sistema, Vladimir Yevtushenkov was put under “House arrest” following money laundering charges in connection with the Bashneft acquisition.

Going back to my initial Sistema posts (part 1, part 2), let’s look back at the original investment thesis. One fundamental assumption for me was the following:

Is a Russian stock really “investible”

This is a big question for me. A couple of months ago, I wrote a post why I would not invest in Greek stocks (mistake !) or German-Chinese companies (score).

Honestly, a Russian stock is clearly in general much more a “speculation” than a German or French one. Compared to Italian stocks however, I am not so sure anymore, as the EMAK and ASTM example clearly showed that Corporate Governance for instance in Italy is not that much developed.

The two most relevant questions in my opinion are:

a) Are the managers fraudsters or thieves ?
b) Can someone else easily interfere and take away assets etc. ?

At that point in time, my opinion was that:

It looks like that Sistema is at least on neutral to good terms with Putin. In the case of the Indian Mobile subsidiary for instance, Putin put the problems of Sistema on the table when he visited India in 2012.

and

This sounds like a guy who knows how to maneuver (so far) within the harsh Russian political and business climate. So the risk should be a lot lower than for instance for Pharmstandard, but clearly, a dispute with government (see Rosneft/Bashneft) or a more powerful oligarch could change this real quickly.

Well, it looks like that the core foundation of my thesis is not valid anymore. Putting someone under house arrest to me looks already like a significant escalation. To add insult to injury, one of my readers alerted my already end of July:

Seb
26. July 2014 10:26 (Edit)

Hi,
there is something brewing with regards to Sistema’s shareholding in Bashneft. The chairman, Vladimir Evtushenkov had to appear in front of the Investigative Committee in relation to the “the theft of shares of oil and energy companies in Bashkortostan”. Sistema’s Shares in Ufaorgsintez and Bashneft are now restricted from being traded.

I guess, the Bashneft SPO which was planned later this year, will not go ahead. There is even a chance that Sistema could be forced to give up their shares in Bashneft. I feel that the political risk for the company has increased a lot so that I decided to sell my Sistema stock at a nice profit. What’s your opinion on that situation?

I personally thought at that time that they will somehow sort this out but it doesn’t seem to go away easily. Rosneft (and Putin) seem to want Bashneft (and the dollar cash flows) badly and what Putin wants, he gets at some point in time.

What to do now ?

For me the answer is clear: My core assumption has turned out wrong. I do not feel comfortable to price the political risk in this scenario and the only consequence for me is to sell first and ask questions later. Speculating on a rebound would be the other possibility, but this is too much speculation for my taste. In my experience, selling fast is often better in those cases.

Additional remarks on Russian stocks /Sberbank

As some readers might rmemember, I still have a postition in Sberbank and I used to own Pharmstandard for a short time. For now the score is 2 down, one still open for my Russian investments. Not a very good one which shows clearly that both, there is a lot to learn and that the market itself could be rigged against outside investors.

For the time being, I will keep my Sberbank shares but I need to think hard if I can justify investing into Russian stocks with such a personal track record.

I have also underestimated the escalation in Ukraine, where I thought that this will be settled without huge noise at some point in time. Doesn’t look like that and Sberbank could be one of the casualties along the way if the sanctions escalate.