Air Union

AirUnion is a corporation formed by 5 major airlines in Russia to offers bonds. What they get is the best interest rates possible, what you get is the security of an offering backed by five established aviation companies. The security matures in 674 days and has a YTM of 11.94% with an effective YTM of 12.48%. The five companies that comprise this financing company include Domodedovskie Airlines, KrasAir, Omskavia, Samara, and Sibaviatransa. The aviation market is exploding in Russia with the expanding middle class using aviation instead of rail, be it for business or increasingly popular domestic vacations. Air travel will become increasingly popular and necessary in a country that has double digit time zones. The duration of the instrument is longer than we usually feature, reflecting our belief in the fundamentals of the industry and these companies.

Russian blue chips will go higher?

Why is the idea of the Russian government using the surplus to buy Russian blue chip companies stock on the open market a bad idea? The reasons are too numerous to mention in a short article such as this, but let me discuss one reason briefly. What makes a stock worth a certain price is the same thing that makes a house worth a certain price, someone somewhere will agree to pay that amount for the financial benefit of owning the asset. If you have enough money you can choose any neighborhood in the world and pay twice what current market rates are and you can bid prices up in the short-term. But as soon as you stop injecting money into the area, and don’t solve fundamental problems why the area is not worth the prices you are paying for it, the prices will crash, perhaps lower than where they started. Thankfully the government has started to examine this policy. There is no doubt that in the short-term they can and would bid up the prices of the RTS mega-cap stocks but as soon as artificial liquidity is halted from being poured into the market, it will undoubtedly snap back. As we have pointed out before, if you want to help the energy companies, stop taxing them to the point of providing a disincentive for reinvestment. Things will not get any easier as billions of dollars of new issues in stocks and bonds debut on the market each month.

This week’s bond pick is from Masterbank, a medium sized banking concern centered in and around the lucrative Moscow region. It has a YTM of 11.47%, maturing in 349 days. 349 days is of course around election time and with the rest of the economy humming along and the fact the government will not allow anything much to happen around election time, this is a safe bet. We feel long-term there are issues concerning the financial industry that must be addressed, but in this time period, this bond will be a nice fit for many portfolios. The bank mostly specializes in retail, with some business banking in their business mix as well.

Is fondness America the new trendy style to emerge from Europe? Candidates with an unabashed fondness for the U.S. have won recent elections in two of the largest economies in Europe, France and Germany. They defeated candidates with a passionate distaste for everything American. While America of course was not the central and only issue in the election, Schroeder in Germany attempted to stoke anger against the world’s only superpower to propel himself towards victory-needless to say it didn’t work. Looking at the relationship between America and Russia, for the leaders of both countries determined that a relationship of conflict serves both their internal political interests. Looking at other countries in Europe, one wonders if candidates such as Ivanov and Medvedev might not be such prisoners of ideology and pursue a more pragmatic if not warm relationship. There is no way to tell until after the election but let’s realize the current policy of friction is not a result of a titanic battle of ideology, like it was in past generations, but a result of personalities, and these change with elections. Looking at the impressive pace of investment with American capital flowing into Russia and Russian companies purchasing American companies, we can only wonder what is possible if friendly relations become the norm.

Could be a good buy?

Spartak-Kazan is our featured bond this week, maturing in 255 days, (before the presidential elections) and having an APY of 12.93%. It is a large diversified footwear manufacturer located in Kazan, located in Tatarstan, Russia. It has over 4,000 employees and manufactures over 7 million pairs of shoes every year. Spartak is active not only in the manufacture but in the distribution and retail of the product as well. It could benefit from the government crackdown on independent vendor sales, most of the shoes sold in those outlets were imported and there is an increase in Western style retail shopping in addition. The size of the company, stability of the shoe industry, medium-term nature of the bond, and attractive rates make this a good and safe value in our opinion.

The increased government spending..

I am taking the contrary view as to whether the Russian government is reverting to central planning in the proposed spending of windfalls from taxes on oil exports. For nearly twenty years Russian infrastructure, from schools to roads, from railroads to ports, have been allowed to rot and become inefficient and dysfunctional. We can see another emerging market hamstrung in growth because of infrastructure problems, I am referring to India. So, if only a percentage of dollars are spent effectively, there should indeed be dividends that will benefit the Russian people and investors alike. These are not just bridges to nowhere or “porkbarrell” spending, we’re talking real needs folks. The increased government spending will likely result in additional government spending, this is going to be one of the factors leading to an increase of currency in circulation, strength of the Ruble, and increase in interest rates. We are closely monitoring the situation on a daily basis but don’t predict it will have a destabilizing impact on the economy in general, in fact most sectors should benefit. Of course our investors based outside of Russia are not affected by the negative consequences of mild inflation but will benefit by an increase in the strength of the Ruble and rising interest rates.