How Russia's Corporate Landscape is Impacting Dividends

January 26, 2022

A combination of factors is changing the corporate landscape in Russia. Dominated by state-owned enterprises for years, there has been an uptick in technology firms in the economy in recent years. The weightage of the technology sector on the Moscow Exchange (MOEX) doubled in 2020, as oil prices plunged to record lows. The country’s IT sector represented 8% of the stock market, which was close to the European average but still small compared to countries like China and the US.

At the same time, there has been a noticeable shift in the propensity of the youth towards the internet. Russia’s state-controlled broadcast media now faces competition from online activists, social media stars, and YouTubers. YouTube’s prominence has grown among the 18-44 age group in the country, viewed by 82% of them.

Vloggers are becoming more popular than television anchors. Even anti-corruption campaigner, Alexei Navalny, publishes his videos targeting President Putin and the corruption in his party on YouTube. The most famous video after his arrest in January 2021 has over 121 million views.

A Change in the Dividend Landscape?

The current political undertones suggest that Russia might finally be coming out of its state-bound shackles in terms of technology use and information dissemination. Increasing access to information among the youth has the power to change political narratives. This will impact state-owned and Kremlin-backed firms like Gazprom, Sberbank, and Evraz, which consistently pay dividends.

On the other hand, technology firms tend to focus on growth rather than dividends. They prefer to reinvest profits back into the company. The 3 dominant tech companies globally, Facebook, Amazon and Google, have never paid dividends, despite a combined cash balance of more than $290 billion at the end of 2020.

Technology Firms Face Barriers in Russia

So, are the oil and gas heavyweights in Russia worried about the increasing penetration of technology firms? Highly unlikely.

President Putin’s government is trying everything in the book, from legislation and intimidation to new surveillance technology, to gain control over social media. But this needs cooperation from US-based technology firms like Facebook, Twitter, and Alphabet. So far, the 3 companies have expressed their views against the Roskomnadzor blocking online public conversations.

As a result, in December 2020, the Russian parliament passed a law that imposes hefty fines on online companies that refuse to ban “objectionable” content against the government. A law passed in the same month gave the Roskomnadzor unlimited power to restrict or fully block certain websites.

Moreover, as of January 1, 2022, Russia is forcing global IT and internet firms that have more than 500,000 daily users in Russia to open representative offices or legal entities in the country. This will impact companies like Facebook, Twitter and TikTok, which will not only have to spend to set up base in Russia but also get permission from the US SEC, being listed on US exchanges. According to estimates, foreign companies could end up spending anywhere between $13 million and $32 million in complying with these laws. Failure to comply would lead to penalties, money transfer restrictions, and even outright bans.

Will increasing use of the internet change the way companies operate in Russia? It might, over the long term, but not in the immediate future. While the youth is pushing for westernisation / modernisation (or should we say fuelling a counter-culture), President Putin’s vote bank consists majorly of the middle-aged and elderly. They are not too keen on the anti-corruption discourse. Only 11% of Russians in the 40-54 age group, and 8% of those above 55, approved of Alexei Navalny's political activities in 2021.

Moreover, the expansion of the Russian market into the non-oil and gas sectors is unlikely anytime soon, due to many factors including corruption and the economy’s poor flexibility. This means oil and gas giants like Gazprom need not worry about state support. What they should worry about are the Nord Stream 2 project, Russia’s ambitions in Ukraine, and NATO’s expansion.

Impact of US Intervention in Nord Stream 2 Project

A natural gas pipeline under the Baltic Sea between Russia and Germany has been stirring geopolitics since 2020. Nord Stream 2 has sparked tensions in the White House and beyond, regarding the Kremlin’s leverage over the European energy market rising once the pipe is operational. The EU had never really approved of the project but was overruled by the German government. Intensely supported by former Chancellor Angela Merkel but viewed more cautiously by her successor Olaf Scholz, much hangs in the balance for Russia, especially if the US is successful in convincing Germany to impose sanctions.

The US, worried over Europe’s increasing reliance on Russian energy exports, has an agreement with Germany, according to which the latter will impose sanctions against Russia, should it attempt to use energy as an economic weapon or commit aggression against Ukraine. This will be catastrophic for the Russian economy, particularly Gazprom.

The pipeline is Gazprom’s decade-long effort to diversify its exports to Europe, as the region reduces its dependency on fossil fuels.

Russia’s total gas exports have declined considerably from a peak of $69 billion in 2008 to $25 billion in 2020. Over 73% of Gazprom’s gas exports were delivered to the 27 EU members in 2019, which amounted to a total cost of $18 billion in 2020. At the same time, EU imports from Russia totalled $2.3 trillion, which is 0.8% of its total imports. Gas exports were 5.4% of Russia’s total export, which it can’t direct anywhere else. So, Gazprom is extremely dependent on the EU, whereas the EU can source gas from anywhere. Western Europe gets gas from Qatar, African countries, Norway, and Trinidad. Gazprom provides mostly to eastern and central Europe.

A sanction on this project would be a huge blow to the Russian oil and gas sector, the backbone of the economy. This could also alter the corporate landscape at the cost of the economy.

The Kremlin fears Ukrainian democracy, as it goes against Putin’s claim that westernisation is not possible in Orthodox Slavic Russia. Moreover, if Ukraine modernises, it will become attractive to some Russian youth, who might want to emigrate there to lead a more westernised life. This would include Russian companies too, especially those open to paying dividends based on merit rather than just loyalty to the Kremlin.

Woodseer’s Accurate Dividend Forecast Data

It remains to be seen whether President Putin will go down the China route in censoring the country’s internet or adopt an alternative approach. With growing pressure from the Russian government, large IT and media companies might reconsider the Russian market’s importance for their business, before making future decisions.

Banning popular platforms might also bring in street protests as it did in the case of Telegram in 2018. If Russia becomes aggressive towards Ukraine, and the US manages to strengthen the NATO Alliance, the Kremlin won’t hesitate to retaliate. An insecure Kremlin would act out of fear and desperation, causing regional instability and hurting its companies and economy.

Woodseer Global’s highly accurate, and hybrid dividend forecasting model can help both traders and investors navigate this ever-changing geopolitical climate. Russia is unlike most countries, making forecasting its market performance challenging. Woodseer’s algorithm+analyst methodology offers accuracy at scale for forecasting dividends of Russian companies.

Get in touch to learn more about our detailed dividend estimate data.

With thanks to Matthew Riding