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March 16, 2022updated 17 Mar 2022 10:57am

Russia: Stock investors not penalising companies for staying or going

International companies still in Russia appear to be prioritising profits over ethics or possible reputational damage. Stock prices have given them no reason to act otherwise.

By Adrian Murdoch

  

Lorenzo Simonelli, chairman and CEO of Baker Hughes, one of the few companies to retain its Russian operations as of 16 March following the invasion of Ukraine. (Photographer: F. Carter Smith/Bloomberg)
  • Some 380 international companies have announced their exit from Russia, while just 37 remain, according to the Yale Chief Executive Leadership Institute.  
  • Major equity markets have fallen since Vladimir Putin invaded Ukraine, but corporate announcements on staying in or leaving Russia seem to have had little impact on individual stocks. 
  • Some companies staying put, such as oil services providers Baker Hughes, Halliburton and Schlumberger, have seen their share prices rise since the Ukraine invasion. 

The number of international companies with operations in Russia is small and continues to shrink daily. At least 380 foreign corporates have announced their withdrawal from the country since President Vladimir Putin’s invasion of Ukraine began on 24 February, with just 37 still remaining as of 16 March, according to a database compiled by the Yale Chief Executive Leadership Institute. 

Russian ‘remainers’ include companies like French hotel group Accor, which has suspended new business but is maintaining its existing properties; food businesses such as Cargill and Mondelez, which are scaling back non-essential activities but remain in the country; while others, typically industrial firms, have made no statement at all on their Russian operations (see chart below).  

Russia’s fast-growing isolation via sanctions has made it far harder to do business with or invest in the country or its entities or organisations – even if one is willing to accept the reputational damage of doing so.   

The major rating agencies all downgraded Russia to junk status this month (Fitch to B, Moody’s to Baa3 and S&P to CCC–). And Russian equities are to all intents and purposes “uninvestable”, said Dimitris Melas, MSCI’s head of index research, at the end of February. The firm has backed the statement with action in the past week by removing Russian stocks from all its indices. 

The price of Russian equities listed abroad has accordingly collapsed. (The Moscow stock market remains closed.) 

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Given the level of opprobrium levelled at Putin, and the speed with which companies and governments have moved to isolate Russia, many might expect investors to penalise heavily businesses that retain operations in the country. 

Limited rating and stock price impact

However, whether Western companies have chosen to stay in Russia or leave – or announce no decision either way – appears to have had little obvious impact on their equity valuations. 

Moroever, the war has so-far had a “very limited effect on corporates” in terms of their ratings, said Olaf Tölke, head of corporate ratings at Berlin-based rating agency Scope Group, during a webinar last week (10 March). 

Take tyre makers. Tokyo-based Bridgestone on Monday (14 March) said it was suspending all manufacturing in Russia from 18 March and freezing new investments in and all exports to Russia with immediate effect. 

Germany’s Continental had already announced a similar withdrawal. As Capital Monitor reported last week, on 9 March, chairman Nikolai Setzer said Continental was suspending production at its Kaluga plant in western Russia, adding: “We’ve made this decision as a result of the war.” 

Milan-based Pirelli, however, has said only that it was considering the potential impact on local operations linked to import and export to and from Russia of raw materials and finished goods. The Italian group added that it expects revenues this year in Russia to be around €890m ($977.5bn), though it did not disclose what it earned in 2021.  

Over the past month, Continental and Bridgestone stocks have fallen 21.7% and 16.9% respectively, while Pirelli’s have dropped 17.9%, as of 16 March. 

In a note to clients on 11 March, Tim Rokossa, global head of automotive research at Deutsche Bank, ascribed Continental’s especially poor stock performance to management rather than the conflict. The company’s chief executive and new chief financial officer have “no real outlook”, he wrote.  

'Lag factor'

Suresh Mistry, head of ESG and impact reporting and co-founder of UK asset manager Alquity, puts the lack of stock price reaction to statements about Russia at least partly down to a “lag factor” – namely, pent-up demand following Covid-19 pandemic constraints in the past two years.  

“There’s a lag between reputation [damage] and an actual financial hit,” says London-based Mistry.  

Alquity has written down to zero the positions it had held in two Russian companies – a discount retailer and a software business – and Mistry says it will not be investing again in Russia any time soon.  

Suresh Mistry, head of ESG and impact reporting and co-founder of Alquity, says there's a lag between reputational damage and an actual financial hit. (Photo courtesy of Alquity)

Of course, the level and type of exposure that a company has to Russia will be a factor. The impact on retail consumer brands will be different from that on industrial companies. 

Industrial sector sales will not be affected by a reputational hit, for instance, “because the orders are already in the pipeline”, says Mistry. That is especially the case if a company is supplying a product that people cannot get elsewhere, he adds. 

Another factor potentially affecting the share prices of companies with business in Russia is the post-pandemic demand for heavy industry. 

“We’ve seen quite a big [economic] recovery from 2020,” Scope’s Tölke says. “Companies are in relatively very good [financial] positions to weather some storms in the short term.” 

Russia companies sitting pretty

Take Houston-based Baker Hughes, one of the world’s largest oil field services companies, which has given no indication of its plans regarding its Russian operation. Nor did it not respond to a request for comment from Capital Monitor

Baker Hughes’ reluctance to make any hasty moves is understandable in commercial terms. Its stock is up 24% since the invasion of Ukraine following a 5% rise in annual revenues last year. The company does not disclose what percentage of its profits come from Russia, though they are estimated by analysts at J.P. Morgan to be around 10%.  

And only in June last year, Baker Hughes unveiled an agreement to buy renewable energy from Finland’s Fortum to power its facilities and operations in Russia. At the time, Lorenzo Simonelli, the chairman and chief executive of Baker Hughes, said the company was "a long-term strategic partner for the Russian energy sector, with thousands of employees and a number of manufacturing and service facilities spanning the region”. 

It seems clear that the likes of Baker Hughes and rivals Halliburton and Schlumberger – others to have remained in Russia and whose share price are also up since 24 February – have so far chosen to prioritise profits over ethics. 

Whether that will come back to bite – or indeed boost – them in the longer term is unclear; as is the ultimate likely impact of withdrawing or staying put. No wonder the signals from investors seem confusing – uncharted territory tends to have that effect. 

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