By John Helmer in Moscow
Moscow has been having much the same week for the past four months – everyone down at the pier tossing streamers, and waving goodbye, as the flagship investment funds toot their horns and pull away, to sail swiftly over the horizon.
It’s cold comfort to the flag-wavers of the Moscow mining and metals sector that the flow of funds into and out of comparable emerging markets – China, India, Brazil, Africa, other Latin America — has now begun to sail in the same direction as the Russian trend. Back in October, the weekly fund flow charts showed the withdrawal of capital from Russian energy and hard-rock resource companies was less dramatic than the flow of funds out of other emerging markets. But then from mid-December to mid-February, China, India and Brazil became a positive destination for investment again. With the exception of just a couple of weeks in February, when a pickup in the Russian RTS stock market attracted a modest inflow of cash, the Russian trend has been continuing loss of capital – and a concomitant drop in the RTS aggregate index of almost 20% over the past three months.
In percentage terms, the Russian equity market has said goodbye to more money than the markets of China, India or Brazil. The $330 million of accumulated net outflow from Russian funds since the first week of November compares with $210 million from Indian funds. Brazil has accumulated a net inflow over the period of $306 million; China has received a net inflow of $30 million.
The course of the bigger Russian golds looks like an exception. Polymetal (PMTL:LI, PMTL:RU), the St.Petersburg-based silver specialist that is no longer owned by frontman Suleiman Kerimov, is up 168% in the three-month period. Polyus Gold (PLZL:RU), still being carved up in the fight between shareholders Vladimir Potanin and Mikhail Prokhorov, is up 118%. Internationally listed juniors, with producing Russian gold assets, have turned on a mixed show. Peter Hambro Mining (POG:LN) is up 150%; Highland Gold (HGM:LN) is down 14%; Zoloto Resources (ZR:CN), down 25%; High River Gold (HRG:CN), almost flat. Virtually all the explorers who lack production, like Silver Bear Resources (SBR:CN), are down, or at best flat. The gold internationals with Russian mine production or capital exposure have also been mixed. Kinross (KGC:US), with a significant share of its global growth supplied from the Kupol mine in Chukotka, is gaining equity value. Barrick’s (ABX:US) minority stake in Highland Gold is too small to make a market difference.
On Thursday [February 26], President Dmitry Medvedev tried to swing the market flow back towards Russian mining.
Just three others were in the room, the Kremlin spokesman told Minesite – Vladimir Potanin, controlling shareholder of Norilsk Nickel (MNOD:LI, GMKN:RU), Russia’s largest mining company; Vladimir Strzhalkovsky, Norilsk Nickel’s chief executive, and Oleg Deripaska, a 25% stakeholder in Norilsk Nickel, whose United Company Rusal, an unlisted bauxite, alumina and aluminium producer, has tried to pull off a hostile takeover of Norilsk Nickel, and achieve a reverse listing at the same time.
Those absent, confirmed by the Kremlin, include Alisher Usmanov of the unlisted Metalloinvest iron-ore and steel group; Alexander Voloshin, the Norilsk Nickel board chairman nominated by Vnesheconombank (VEB), the state bailout bank; Sergei Chemezov, the state appointee running Russian Technologies, a state mining, metals, and conglomerate; and Igor Sechin, the deputy prime minister in charge of the resource sector, whom Medvedev put in charge of restructuring Norilsk Nickel and Rusal a month ago.
The outcome of the Kremlin get-together has been confirmed by sources close to Potanin, according to the standard that history is written by winners. And Potanin has achieved a major victory, since Medvedev has made plain that he will not countenance any of the proposals that have been aired in public for creating a mega-mining champion on the basis of Norilsk Nickel. Usmanov has been promoting at least one of these schemes; Chemezov has been involved in at least two.
Deripaska has again been told, this time by Medvedev, the only political ally he appeared to have left in Moscow, that there will be no saving Rusal from its debts in a state-directed merger with Norilsk Nickel. Usmanov’s debt problems have been banished altogether.
For Potanin — who first rose to oligarch status by pulling Kremlin strings to take control of Norilsk Nickel in privatization auctions funded by government money — the achievement should relieve market fears that have delinked Norilsk Nickel’s share price from commodity nickel, and also from the regular course of the RTS index. Norilsk Nickel’s share price is now freer to claw back some of the lost value. Speculation that it will do so has already prevailed over the stagnant performance of the nickel price. Before Medvedev invited Potanin through the winner’s gate of the Kremlin wall, Norilsk Nickel’s share price was up 9% on the month. It gained 7% in late Thursday trading, and is already up in early Moscow and London trading on Friday, as this is being written.
Roman Abramovich, who controls the Evraz group (EVR:LI) of steelmills, iron-ore and coal mines, is already being funded by Prime Minister Vladimir Putin with state loans to pay his domestic tax bills, and save his US and European assets from forfeit to international banks. Naturally, Abramovich hasn’t wanted to see his control diluted in Potanin’s favour by consolidation into Norilsk Nickel. Medvedev has saved him from that fate. Whether Putin and Sechin intend to let Abramovich keep his foreign assets intact remains to be seen.
Whether Chemezov will achieve a long-held held ambition to take steelmaking assets from oligarchs like Abramovich, or the Mechel group owner, Igor Zyuzin, is another unknown, which is weighing on market sentiment.
The collapse of domestic steel demand has proved to be one of the most obvious failures of both of Medvedev and Putin; even before the global crash began last year, they were confidently declaring that they would ensure substantial state funding for infrastructure construction and manufacturing, and thereby sustain demand for raw materials like coal and steel, for corporate cashflow and investment, and for equity price stability.
What has happened instead is that the bailout money has gone in the same direction that the Russian oligarchs always dispatch their cash – abroad. So far, Medvedev and Putin have had nothing to say about that. Indeed, Medvedev agreed to let his press spokesman be as misleading as possible in reporting what the meeting on the fate of Norilsk Nickel was all about.
The 6-line Kremlin announcement claims that “issues of support of the iron and steel industry in the conditions of global financial crisis were discussed. Separately, there was the issue of protection of the interests of the workers of the enterprises of the sector.”
It’s quite possible that Medvedev and his colleagues intend this week’s demonstration of a market-oriented approach to Norilsk Nickel will galvanize the emerging market funds anew, and bring the fund boat back to Russian mining and metal stocks. It’s more than possible this will be the outcome in the short run. But if anyone thought cynical Soviet speak was dead, Medvedev’s official account of what he decided with Potanin puts the lie to that.