Russian equities have fallen in biblical proportions in the wake of the Russian-Ukraine war. Names like Gazprom (OTCPK: OGZPY) and Sberbank (OTCPK: SBRCY) are down 70, 80, 90% or more. Many are priced for complete annihilation. The VanEck Russia ETF (RSX) is a popular vehicle for investors looking for Russian exposure. I recently stopped out of my long position and purchased a few puts. Today it is unclear what the NAV is actually worth. With so much uncertainty I’m not ready to reinvest.
How Did We Get Here
The conflict in Ukraine is a culmination of years of strife between NATO powers and Russia. I’m not an expert in international relations and geopolitics but I follow enough to understand the macro picture.
In February, Vladimir Putin made a statement during a press conference that I think is very profound:
I want to stress this one more time. I’ve been saying it, but I very much want you to finally hear me and deliver it to your audience in print, TV, and online. Do you realize that if Ukraine joins NATO and decides to take Crimea back through military means, the European countries will automatically get drawn into a military conflict with Russia? Of course, NATO’s united potential and that of Russia are incomparable. We understand that, but we also understand that Russia is one of the world’s leading nuclear powers and is superior to many of those countries in terms of the number of modern nuclear force components. There will be no winners. And you will find yourself drawn into this conflict against your will. You will be fulfilling Article 5 in a heartbeat, even before you know it. Mr. President [Macron], of course, does not want this and I do not want it. Which is why he is here torturing me for six straight hours.
Public opinion in Ukraine was strongly in favor of joining NATO as late as January 2022. The Ukrainian government voiced intent to join NATO until recently. Today, President Zelensky is backing away from the idea. Partly this is because Ukraine is not satisfied with NATO’s response to assist the country in the war.
What’s At Stake
I earlier wrote that I thought the war would end sooner than most expect. I continue to think it will end soon. The reason I expect peace is because the world needs Russian and Ukrainian commodities and the lack of commodities is causing major problems for voters of NATO countries.
Sanctions against Russia and its exports are causing shortages of oil, natural gas, grains, fertilizers, and metals globally. This has culminated with the US ban of Russian oil. Brent, wheat, and nickel have been particularly hit hard with soaring prices.
Europe imports about 40% of its natural gas from Russia. Prices have already doubled since the start of the war. Because of natural gas prices, and the reduction in fertilizer exports from Russia, fertilizer prices are debilitating farmers in Europe and the US and impacting production of food commodities.
Now, the FAO is warning that 20-30% of Ukraine’s farmland could go unharvested in 2022 and that the war is expected to cause another 22% increase in global foods prices.
To generalize, Russia wants a neutral Ukraine. Ukraine wants Russia to leave. NATO countries want to buy Russian and Ukrainian commodities. To me, this is a recipe for a ceasefire.
RSX, what is it worth?
Many investors have taken to the RSX fund for Russian equity exposure. The fund seeks to provide investors with exposure to Russian equities by investing in a diversity of sectors. Energy and materials make up the majority of the fund, which I find appealing because commodities have been performing so well with the backdrop of global inflation.
The largest holdings in the fund are trading at historical low valuations. Most are below a P / E of 3.
The issue is that NAV has eroded significantly and there’s no telling where it is now. According to the fund’s website the current NAV for RSX is $ 0.30 per share. The last closing price was $ 5.65 per share. You can see from the chart below that for a while share price followed NAV but started to diverge around February 26, which is when trading of its holdings began to be suspended in different markets.
The reason that NAV has declined so dramatically is the fund is assigning par value to equities that have been suspended from trading. You can see from the chart below that as of 3/10/2022 only three equities were not valued at par.
|Market Value (US $)||% of Net Assets||NAV Per Share|
|Veon Ltd||13,619,567||Stock||$ 4,860,823.46||16.70%||0.3569|
|Polymetal International Plc||204,209||Stock||$ 406,586.11||1.40%||1.9910|
|Vtb Bank Pjsc||33,438,675||Stock||$ 334,386.75||1.15%||0.0100|
|Evraz Plc||266,000||Stock||$ 282,482.39||0.97%||1.0620|
|Gazprom Pjsc||22,886,069||Stock||$ 228,860.69||0.79%||0.0100|
|Rosneft Oil Co Pjsc||16,922,345||Stock||$ 169,223.45||0.58%||0.0100|
|Surgutneftegas Pjsc||15,805,736||Stock||$ 158,057.36||0.54%||0.0100|
|Sberbank Of Russia Pjsc||11,512,504||Stock||$ 115,125.04||0.40%||0.0100|
|Mobile Telesystems Pjsc||7,426,519||Stock||$ 74,265.19||0.26%||0.0100|
|Magnit Pjsc||6,131,826||Stock||$ 61,318.26||0.21%||0.0100|
|Mmc Norilsk Nickel Pjsc||5,291,784||Stock||$ 52,917.84||0.18%||0.0100|
|Inter Rao Ues Pjsc||625,132,010||Stock||$ 47,720.00||0.16%||0.0001|
|Tatneft Pjsc||3,573,912||Stock||$ 35,739.12||0.12%||0.0100|
|Severstal Pao||3,409,691||Stock||$ 34,096.91||0.12%||0.0100|
|Vk Co Ltd||2,338,938||Stock||$ 23,389.38||0.08%||0.0100|
|Novolipetsk Steel Pjsc||2,227,246||Stock||$ 22,272.46||0.08%||0.0100|
|Phosagro Pjsc||2,131,566||Stock||$ 21,315.66||0.07%||0.0100|
|Lukoil Pjsc||2,063,982||Stock||$ 20,639.82||0.07%||0.0100|
|X5 Retail Group Nv||1,970,269||Stock||$ 19,702.69||0.07%||0.0100|
|Ozon Holdings Plc||1,881,257||Stock||$ 18,812.57||0.06%||0.0100|
|Yandex Nv||1,754,686||Stock||$ 17,546.86||0.06%||0.0100|
|Tcs Group Holding Plc||1,390,470||Stock||$ 13,904.70||0.05%||0.0100|
|Polyus Pjsc||1,155,875||Stock||$ 11,558.75||0.04%||0.0100|
|Novatek Pjsc||745,294||Stock||$ 7,452.94||0.03%||0.0100|
|Alrosa Pjsc||44,100,290||Stock||$ 3,366.43||0.01%||0.0001|
|Moscow Exchange Micex-Rts Pjsc||23,250,212||Stock||$ 1,774.83||0.01%||0.0001|
|Rostelecom Pjsc||18,499,769||Stock||$ 1,412.20||0.00%||0.0001|
|Raspadskaya Ojsc||4,043,436||Stock||$ 308.66||0.00%||0.0001|
|Transneft Pjsc||27,240||Stock||$ 2.08||0.00%||0.0001|
|Irkutsk Electronetwork Co Jsc||7,410,870||Stock||$ 7.41||0.00%||0.0000|
Before this change in NAV calculation, losses to NAV were exacerbated by a significant devaluation of the Russian Ruble to the USD. Since RSX suspended trading the Ruble has fallen another 6% against the USD.
One issue when valuing these equities is that the Russian Stock Exchange closed before other exchanges suspended trading. Below is chart with Gazprom as an example. The Russian Exchange price, in black, suspended prior to the UK and US exchanges in blue and orange. Many equities continued to fall in the UK and US markets after Russia flat lined. This is problematic because many of the equities in RSX are only traded on the Russian Exchange. Therefore, their last closing price is very likely higher than their actual value today.
Shortly after the war began the Russian stock market suspended trading and recently extended the halt until March 18. On March 2 the RSX fund announced that it was suspending the creation of new shares. Then, trading of RSX shares was halted on March 4. It is difficult to know what the NAV will be when trading resumes.
I have calculated what NAV is based on the last closing prices of each equity, whether that was on exchanges in Russia, the UK, or US, adjusted for currency exchange. According to this data the NAV per share for RSX is approximately $ 5.99. The actual NAV, if markets were trading today, is certainly lower than this because the situation and Ruble / USD has degraded since markets halted. Based on what has occurred, my best guess is that NAV is $ 5-5.15 per share or less.
I fear that RSX is heading toward liquidation. The volatility has already resulted in the liquidation of the Direxion Daily Russia Bull 2X ETF (RUSL). If the fund avoids liquidation and we achieve peace the NAV could recover in a matter of days.
If the fund liquidates stockholders will likely take a loss. Unfortunately, these kinds of things have a tendency to happen at the most inopportune time.
If it does not liquidate and the war ends, Russian equities will rise and NAV will attempt to recover. However, even after peace it can take months for the Ruble and Russian equities to rise. After Russia invaded Crimea in February of 2014 the Ruble and RSX dropped in unison for over a year.
I will not consider buying RSX when trading resumes until the conflict is resolved and an accurate NAV can be determined. Even then, I’m very disinterested in the financial services part of the fund because I expect the financial turmoil in Russia from sanctions and inflation to persist after peace.