Russian Equities Weekly 14-18 September, 2020: Concerns about possible oil and metals extraction taxes increase

Russian equity market dynamics

Last week, the Russian equity market underperformed the broader emerging markets (EM) index. This was mainly due to the impact from global EM sector factors coupled with the differences between Russian and EM index structures. Russia-specific factors did not play any important role.

We downgraded a fair price for the Russian market by around 5% due to likely tax increases for several large companies.

  Week YTD
MSCI Russia 10/40 TR in USD 0.4% -13.5%
MSCI EM index TR in USD 1.6% 1.2%
Excess return -1.2% -14.7%
Due to Russia specific factors* -0.2% -1.3%
Due to difference in sector structure* -1.0% -13.5%
Key commodities**
Oil 8.6% -36.2%
Gold 0.2% 28.8%
RUB/USD -1.0% -18.0%
RUB/EUR -0.9% -22.2%
* See details of methodology in the report
** Energy weight in the MSCI Russia 10/40 is 32%, Gold producers weight in the index is 11% (weights are as at the end of August 2020)
Data as of 18 September 2020
TKB Investment Partners (JSC) calculations; Bloomberg


Upside/downside to fair price 11%
Data as of 18 September 2020
TKB Investment Partners (JSC) calculations

Main Russian news

Russia’s Ministry of Finance (MoF) proposed to increase the mineral extraction tax (MET) and to make some changes to excess profit tax for oil. The main amendments include:

  • Elimination of oil tax breaks for high-viscosity crude oil and depleted fields. This system would be replaced by an excess profit tax (EPT).
  • The list of the regions falling under EPT taxation will be expanded and will include North Caucasus, Sakhalin, Orenburg and Samara regions.
  • The MET on certain base metals and ores, such as iron ore, nickel, copper, will be increased by 3.5-fold starting from 2021. PGM (Platinum Group Metals) are not part of the deal.

The MoF expects to generate around RUB240 bn (~USD3.2 bn) in additional revenues for the budget from tax amendments. We believe that changes are very likely to be approved.

Russia’s key macroeconomic indicators were mixed in August. Industrial production improved in the extraction segment, mostly due to higher oil output under the second phase of OPEC+ agreement. The manufacturing segment declined mainly in industries focused on the production of non-essential goods. Retail sales improved in the non-food segment due to COVID-19 related lockdown restrictions being lifted, but sales fell in the food segment. Rosstat published real wage growth data for July which showed an increase of 2.3% YoY.

Indicator Growth YoY
July 2020 August 2020
Industrial production -8.0% -7.2%
Manufacturing -3.3% -4.1%
Extraction -15.1% -11.8%
Retail sales -1.9%* -2.7%
Food -2.0%* -4.1%
Non-food -1.7%* -1.2%
Real wages not available 2.3%

*Data revised by Rosstat

The Central Bank of Russia (CBR) kept the key rate unchanged at 4.25%. Inflation acceleration was somewhat higher in recent months than the CBR expected. This was due to two main factors: an active recovery in demand after lifting the lockdown, and rouble weakening due to increased geopolitical risks. According to the forecast of the CBR, annual inflation will be at 3.7%-4.2% by the end of 2020 and at 3.5%-4.0% in 2021. At the same time, the regulator signalled that a cut of the key rate to 4% is possible at upcoming meetings.

Author: Marina Tsutskiridze, Junior Investment Specialist

Sources: Rosstat, Vedomosti, Bloomberg, TKB Investment Partners (JSC); September 2020

Russian Equities Weekly_21 September 2020
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