Outsiders tend to view Russia as Vladimir Putin’s personal kingdom, which it is for certain purposes, like poisoning dissidents or skimming oil revenues. But Russia is a big place (140 million population), with lots of smart, entrepreneurial people. The coronavirus pandemic has boosted some of the smart, entrepreneurial things they do like everywhere else. Investors may want to take note.
Take grocery store chain Pyaterochka, which accelerated from 600 to 30,000 daily online deliveries during the pandemic year. That information comes courtesy of McKinsey & Co., who one suspects boasts Pyaterochka as a client. But 2020 financials from the chain’s parent company, X5 Retail Group (ticker: FIVE.UK), flesh out the story. Digital sales quintupled and net profit jumped 27%. Not bad for a stagnant economy in a plague year. The shares’ reaction to this performance seems modest: They’re up 22% over the past 12 months and off 13% year-to-date.
Pyaterochka/X5 is not the only consumer-facing Russian innovator to leverage the pandemic in a big way, or the only one offering a dip to buy on now that global tech sentiment has turned risk-off. Yandex (YNDX), the Google of Russia that is gunning for super app status, doubled net income and increased revenue by a quarter last year. Its e-commerce and streaming businesses mushroomed while search remained dominant. The high-flying stock has corrected 13% over the past two weeks. Pure-play e-tailer Ozon Holdings (OZON) has also been losing altitude. Its shares doubled in three months following its November IPO, then also nose-dived 13% over the past month. Discount brick-and-mortar merchant Fix Price (FIXP.UK) was less fortunate in its IPO timing. It went public in London March 4, and hasn’t done much since. Even Russia’s superstar, TCS Group Holding (TCS.UK), the parent for pioneering fintech Tinkoff Bank, is showing a little softness. Shares have slumped 8% since mid-March, deflating their 12-month gain to a mere 367%.
New Russian issues in the wings later this year could include Sovcombank, which aims to be a sort of Tinkoff for the hinterland; cyber security unicorn Positive Technologies; and Svetafor, a driving school chain that incorporates virtual simulations. (The name means “traffic light.”) Ozon’s e-commerce rival Wildberries will have to come to market sooner or later to keep up.
This is not a buy call on any of these names. The point is Russia is emerging from the long financial winter that followed its 2014 invasions of Ukraine, and becoming one more hunting ground for companies of the future, despite depredations of its political leaders. Just like China, India or Brazil. Like most emerging markets these days.
Sort of. Some Russian depredations are in a class by themselves from investors’ point of view. Lost in the bigger news around Alexei Navalny last month, was the start of U.S. capitalist Michael Calvey’s Moscow trial —or one should say “trial”— for fraud. Calvey happens to be the longest-standing, most successful, and until lately most enthusiastic foreign private equity player in Russia. His Baring Vostok Capital Partners helped launch Yandex and two dozen other tech pioneers over 25 years.
He’s the kind of guy who would be getting a knighthood in any normal country. Instead, Russia arrested him two years ago because he crossed a Kremlin C-lister, described by the Financial Times as a “protege of one of [Putin’s] economic advisors,” in a dispute over who owned a failed bank. Sovcombank just stepped in to buy the failed bank in question, which is called Vostochny, which might signal an end to this farce. Or might not. “People involved fear the case has taken on a life of its own because of the reluctance of prosecutors to admit mistakes,” the FT writes.
Emerging markets leaders around the world commit lots of evil acts. But this is next-level stuff in terms of actively driving money and talent away.
Nevertheless…. Russia for centuries has grappled with the tension between a brilliant creative intelligentsia, to borrow the local term, and an obdurate, corrupt, brutal state bureaucracy. Obdurate bureaucracy has usually carried the day, unfortunately, but the creative minds do squeeze some extraordinary achievements in between. What’s new now is that their energy is directed at business, and bearing fruit there despite all obstacles. Once global tech investors catch their breath a bit, they should include Russia in the next opportunity set.