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. Last Updated: 07/27/2016

THE ANALYST: Poor Management Destroys Sberbank, Tatneft, MGTS




Scrolling down a list of the most liquid Russian shares compiled by the United Financial Group brokerage, one finds a miniature slaughterhouse in the column marked YTD, or Year-to-Date. The numbers gathered for 1998 are phenomenally abysmal; if they could sink any further, shares would literally have a value of zero. As it is, the entire market is made up of penny stocks. According to a list compiled by United Financial Group, the three that have fallen the farthest - Sberbank, Tatneft and Moscow City Telephone - reflect the age-old wisdom that the markets never lie. This trio of companies represents the ugliest corporate shares in Russia. Though the factors differ in each case, all investors should ostracize shares of these three companies to the leper colony of equity. The reasoning is twofold: rotten management, and no prospects that the rotten management will improve.


Take, for instance, Sberbank. Most people realize it but few have bothered to say it straight: Sberbank is not a bank at all but Eastern Europe's largest state-owned hedge fund with over 30,000 retail outlets to lure money out of investors' (not depositors') pockets. The fund manager, the Central Bank of Russia, is basically violating every law and regulation on the books by running this high-risk financial operation that has placed billions of dollars into a variety of junk bonds and pyramid schemes at the behest of incompetent bureaucrats who wanted to call themselves bankers. Before the August crash, half the bank's assets were in GKOs, and more than $2 billion was dumped into a variety of MinFin bonds, regional paper and agro-bonds, all of which are now worthless.


Only 15 percent of Sberbank's assets were in loans, and at the end of last year 20 percent of its loan portfolio (probably maintained only to justify the second syllable in its name) went to municipal and state organizations. Even more bizarre was the bank's decision to buy 118,000 preferred shares of Transneft in July 1997, an idiotic investment move which cost the bank tens of millions of dollars for equity that is now hard to value. Generally, Sberbank lacks transparency, and always remains that way, considering that the government will want to conceal the degree of mismanagement. It is worth noting, however, that the Central Bank is the only fund manager in the world that can print cash to bail itself out of its countless lousy investment decisions.


Tatneft is the victim of parasitism, pure and simple. Now the world knows the ulterior motive behind all the pomp and circumstance in 1996 and 1997 when the company was heralded as a premier blue-chip stock: The government of Tatarstan was grooming a cash cow. Tatneft provides over 40 percent of regional budget revenues, and Tatar bureaucrats who control the company essentially were under orders to borrow as much money as possible on international capital markets to support the region's economy and the government's pet programs. "Let's all get rich on Tatneft," was the regional motto.


Alas, Tatarstan did a wonderful job. The company piled on almost $800 million in debt in 1997 alone, and now has over $1 billion of the stuff on its balance sheet. Tatneft was forced to make sizable loans to the regional government (now broke), and subsequently lost some $60 million on the bond market. With oil prices touching historic lows, Tatneft will probably gross only $1.7 billion this year, and it will take years before the company is ever able to recuperate - if recuperation can ever be achieved.


Finally, there is Moscow City Telephone, or MGTS, the presidential campaign financier. Although it is the largest telecommunications operator in the country, with over 4 million subscribers, MGTS' share price has imploded by a record-smashing 95 percent, and rightly so. In a suspicious twist earlier this year, a majority stake in the company was transferred from the Moscow Committee of Science and Technology, a city-owned organization, to AO Sistema, a secretive outfit that has links both political and economic to Moscow Mayor Yury Luzhkov. Any growth potential for the stock has thus been eliminated; MGTS is already losing money on household calls, and any profit will be lost in the impenetrable labyrinth of Sistema. And since Sistema's owners typically display an ornery reluctance to show their real faces or be forthcoming with investors, it is safe to say that they have no concern for shareholders of MGTS. What Sistema does care about, though, is getting Luzhkov elected to the presidency, so MGTS' available cash will be utilized accordingly.


Regarding Sberbank and Tatneft, some doubting Thomases may retort, "It is not the fault of these two companies that they are in such miserable condition. Their managers have to take orders from higher up." But this is precisely why these stocks should be avoided like the Black Death: As an investor, all the voting shares in the world won't give you any influence over decisions that are made by the Central Bank or the government of Tatarstan.