The country is currently underging a period of rapid change on three fronts: on the macro level spurred by the falling oil price; in the new geopolitical environment amid international sanctions and on a company level, argues Michael Levy, lead manager for the Baring Russia Fund.
Following the collapse of communism, the “old” Russian business environment where many Russian corporations were controlled by the state, and built to benefit the state, such as Gazprom, is now increasingly giving way to “new Russia”, explained Levy.
This transition does, however face a number of issues, including international sanctions, slower GDP growth, higher inflation and a weakened currency, but Baring is of the view that the Russian authorities are managing them well and there are silver linings.
For example, the international sanctions have led to import substitution, which in turn has increased competitiveness for a variety of Russian companies, noted Levy. He mentioned three Russian companies that will do particularly well in the future: Yandex, Magnit and MD Medical Group.
Every disadvantage has its advantage
Yandex is actually profiting from Russia’s increasing international isolation. The limited presence of internet giants such as Facebook and Google in Russia has enabled the company to capture up to 60% of Russia’s internet ad market. It has also developed its own version of the taxi-app Uber, according to Levy.
Second, Magnit, a food retailing company, is expected to benefit from long-term growth opportunities as retail structures mature. “Through its logistical capability, they have become Russia’s number one food retailer, in terms of geographical coverage, and the company continues to deliver the strongest profitability amongst Russian retailers,” said Levy.
However, Levy is far from the only manager investing in Magnit, which is the only listed food retailer in Russia. All 14 Russian equity funds in the Financial Express database are invested in the company, and 11 of those have it among their top-4 holdings. The company’s share price has tripled in the past four years (in roubles), meaning it has been one of very few Russian companies that have provided a positive return to euro-based investors over that period.
As a consequence, Magnit is now the fourth-biggest company in terms of market capitalisation listed on the Moscow stock exchange.