Bizness Lunch

Two of my new colleagues took me out for lunch today to an Italian restaurant near the office. I learned quite a bit about the Russian equity markets, asset management, and my new firm.

The whole universe of publicly traded stocks here numbers somewhere south of 200 companies. We talked about the degree of concentration in the market, and its implications for liquidity. The majority of these stocks trade only rarely and some of the smallest of the small caps only trade once a week – if at all. The bid/ask spreads are huge, until a clearing price somehow emerges. In fact, liquidity is such an issue that it forces funds to hold rather large cash positions lest redemptions force some irrational selling to raise money. Alfa Capital’s newest fund, for example, has a stipulation to counter that problem – redemptions will be honored 3 months after the initial request to cash out.

I talked with my colleagues, Pavel and Kostya, a lot about how this market differs from what I’ve experienced in the US – a large, liquid market with lots of information available equally to all participants. I’ve had similar discussions in NY about what type of efficient stock market we have, if at all. Compared to here, I’ve got to say that the NYSE/NASDAQ looks like an advanced alien life form of perfectly rational beings.

That being said, the index here is up some 12% in 4 days. Oil prices are certainly a boon, but broader news in the economy and market is providing other types of tailwinds. In the telecom space, recent news on long-awaited privatization plans has spurred action, and industrial production and consumer spending figures are boosting other sectors. Positive revisions to government surplus estimates, as well as the initial estimates and nature of next year’s spending packages, are providing hope that current petro-dollars are going to be reinvested intelligently back into the macro economy.

They told me a bit about what research is like in the environment of politician/manager/owners that want publicly raised capital but don’t want to deal with any investors. Here’s a great story. Our CIO went to Bashkortostan, a regional republic in Russia, to investigate some investment idea and an upcoming privatization. He was there to do his due diligence on whether the assets the company said it had actually existed – a rather raw level of research to begin with. Well, the president of the republic – a major shareholder in the concern – heard that an American investor had shown up to poke around a little. He called the management of the company and told them that under no uncertain terms were they to talk to him. The CIO’s previously arranged meetings and field trips all dissolved that day. (By the way, today it was announced that all those oil assets have been sold at a discount to the country's largest telecom company. It's widely believed that the telecom is acting as a financial intermediary for the Kremlin, and will eventually sell the oil assets to the state-owned oil giants.)

Pavel and Kostya maintain that the lack of information makes traditional research activities rather pointless. They are quite adamant about not needing to make financial models, in particular. According to them, profitable action in the market here is driven by information and rumors about who is accumulating, and what that person plans to do. I’ll take their word for it – they understand this environment far better than I will anytime soon. However, I tried to illustrate for them the reasons why it’s important to have financial models and the deeper understanding of a company that building a model creates. After all, with such a small market the funds are going to end up owning the same stocks over and over – and that can only be exacerbated by their current high levels of turnover. They kind of didn’t buy my argument.

Anyway, we had a pleasant lunch – Pavel and Kostya are both really nice guys and have sort of stepped into the role of looking out for me. Pavel is from St. Petersburg, and did his MPA at SUNY-Albany before coming to Moscow and getting into finance. Moscow and St. Petersburg are kind of like NY and LA – the stuff of frequent comparison and jokes. I asked him which things one city says about the other are actually true. He thought a little and said that Moscovites consider people from St. Petersburg to be a bit slow. He agreed – but attributed it to forethought. In St. Petersburg, they think Moscow is all useless hustle and bustle. Indeed, he said, people in Moscow people rarely tend to think out an action before immediately doing it. As an example, he pointed out the terrible traffic and horrendous driving evident on any street in Moscow.

Kostya is a native Muscovite. His parents worked in the foreign ministry, though, and he spent a bit of his childhood and a lot of his school holidays visiting his folks at their postings. Unfortunately, he noted, they were all in Africa (which he bordered on calling “crap countries” a la Borat) so he didn’t think it was much of a positive experience.