Running in Place

Apparently mice like to run on wheels.

Some researchers at the University of Leiden in The Netherlands decided to find out whether rodents in the wild like to exercise. They set up a running wheel in their garden next to a dish of food pellets and chocolate, and trained a motion-sensitive infrared camera on the scene. Over the next three years over 200 thousand animals—mice, rats, shrews, and even frogs—took turns on the wheel. Sometimes they couldn’t wait: one large mouse sent a smaller mouse flying when it climbed on the wheel and started running in the opposite direction.

Is this what’s happening in Russia right now? The Russia-China gas deal should be a huge plus for Putin. After all, Russia has the resources; China has the exports; providing 1.3 trillion cubic feet of natural gas annually to fuel China’s factories should be a slam-dunk deal. It assures Russia a market and provides clean energy to China. Bankers should be lining up to provide financing.

Only, not. Gazprom, the Russian gas monopoly, is so inefficient with its capital investments that this cash-rich business turns out cashflow-negative. Add to this the regular accounting restatements—$100 billion in equity write-downs, some years—and you don’t have an investor-friendly company. It’s no surprise that Gazprom trades at a little less than three times reported earnings, and well below “book.”

So Vladimir Putin is considering recapitalizing the company, using his country’s foreign-exchange reserves to buy newly issued shares. Gazprom could then use these funds to pay for new production and pipelines for the China deal. A government recap would be just the latest example of politics and corruption preventing Russia from developing its resources in an efficient, commercially sensible manner. Instead, state funds are ploughed back into state-controlled cronies to support geopolitical dreams.

Thus we see a country in the wild climbing onto the bailout hamster wheel: a whole lot of running going nowhere.

Douglas R. Tengdin, CFA

Chief Investment Officer

By |2014-06-13T09:22:36-04:00June 13th, 2014|Global Market Update|Comments Off on Running in Place

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