3 Russian actions that may never recover from recent sanctions

Unfortunately, the ongoing conflict between Russia and Ukraine is claiming too many unfortunate victims. Investors who couldn’t get out of the battered Russian stocks before international exchanges abruptly suspended trading in Russian stocks can still hope to get out one day once trading resumes.

However, the harsh, painful and crippling global sanctions imposed on Russian entities, its oligarchs and key industries could harm any prospects of near-term capital loss recovery, as many of the stocks affected may never recover to pre-war highs.

Currently, investors have no way to trade Russian stocks, as Moscow has shut down the local stock market. It blocked sales by foreigners, global stock exchanges where Russian stocks were traded suspended all trading in the country’s stocks and financial assets, and index providers removed assets from key indices.

It is always possible that some Russian companies will still find alternative export markets after losing access to North American and European territories – this is to be expected. However, funding channels will be more difficult to navigate. A coming recession will further hurt their local sales, and companies may need to offer price incentives to win new business and make friends with a few potential supporters.

That said, a few names like steelmaker Mechel PAO (NYSE:Montreal) had little exposure to rabid markets. Mechel achieved only 15.3% of its annual sales in Europe and Turkey. Perhaps he could find alternative markets after an EU ban on Russian steel.

The same cannot be said for many Russian actions caught directly or indirectly in the sanctions net. I will touch on three such companies whose shares may never fully recover while sanctions are in place.

  • Sberbank (OTCMKTS:SBRCY)
  • Gazprom PJSC (OTCMKTS:OGZPY)
  • PhosAgro (OTCMKTS:PHOJY)

Russian stocks: Sberbank (SBRCY)

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Sberbank is a banking giant majority owned by the Bank of Russia. It is the country’s largest bank by assets and had a significant international presence – until a bank run triggered by international sanctions changed that.

That all changed in February when international sanctions included an unprecedented exclusion from the SWIFT payment network for several Russian banks, including Sberbank. Pandemonium ensued and the bank experienced a run on its deposits as customers rushed to withdraw funds and the exit of VISA (NYSE:V) and MasterCard (NYSE:MY) services from Russia have harmed its business.

Sberbank shares last traded down 95% year-to-date as the Russian banking giant announcement its withdrawal from the European market on March 2, 2022. The group’s subsidiaries “faced an exceptional outflow of funds” and “several security concerns regarding its employees and offices”.

The bank could no longer provide liquidity to its European banking subsidiaries and bankruptcy proceedings will follow as the assets are put into liquidation. That said, the bank retained ownership of its Swiss subsidiary which it said continued to operate as normal and had sufficient capital to continue operations.

Sberbank will report the full impact of the loss of its European business later in its first quarter results and says Sberbank Europe accounted for just 1.3% of the group’s net assets.

It has been spared for now, but a possible removal of SWIFT payment systems would hurt the bank’s ability to continue serving international customers and its ability to operate globally.

The bank had just sold its branches in Bosnia and Herzegovina, Croatia, Hungary, Serbia and Slovenia in November 2021, as it reduced exposure to Central and Eastern Europe. And now it has totally lost its European division.

Gazprom PJSC (OGZPY)

oil stocks: stacks of oil barrels

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Gazprom PJSC is the Russian company largest listed company by annual revenue. The integrated oil and gas company is majority-owned by the Russian government. Gazprom is one of the main gas suppliers to EU countries and has major gas pipelines throughout western Russia to Europe.

Although the Europeans have been slow to ban supplies from the company due to a current reliance on its gas. However, Germany dealt the company a blow when it decided not to approve a recently completed project. Nord Stream 2 pipeline who had sunk billions to build.

Gazprom held a majority stake in the new pipeline and, due to German sanctions, rumors swirled in the market that Nord Stream 2 was considering filing for bankruptcy. Major pipeline partners, including Shell, are no longer involved in the project and its fate looks grim.

Ultimately, after years of investment, Gazprom and its partners will not be able to profit from gas sales through the 767-mile pipeline.

US authorities have also sanctioned Nord Stream 2 AG, the company in charge of building the pipeline. Nord Stream 2 is now a distressed and stranded asset.

Additionally, Europe is most likely in the market looking for alternative supplies for its oil and gas needs at the time of writing. The Russian oil and gas giant could find itself losing long-term customer contracts in 2022 and beyond.

Perhaps the Chinese market could be opened up to Gazprom products. However, the recent sanctions have caused lasting damage to Gazprom’s funding lines, credit ratings and probably its international pricing power.

Russian stocks: PhosAgro (PHOJY)

Closeup of Small Green Farm Toy Tractor Loading Money Coins, Farmer Machinery Icon, Agriculture Business Concept (Harvest Finance)

Source: Max_555 / Shutterstock.com

PhosAgro, listed in London, is a Russian company that produces and distributes fertilizers on the world market. Its main markets are Russia and Europe.

The ordinary shares of PhosAgro are majority controlled by Mr. Andrey G. Guryev and his family, while Vladimir S. Litvinenko owns about 21% of the company’s shares. The two billionaires are considered too close to the Russian president.

The majority of PhosAgro’s annual sales are international exports. Export sales for 2021 accounted for 73.7% of total annual revenue. Exports to Europe and North America accounted for 48% of total exports for 2021 or more than 35% of the group’s total annual sales.

To remain cost competitive, the company owns its logistics operations through ownership of freighters, ports and railroad cars. Global sanctions are hurting its operations.

To buy a lifebuoy, PhosAgro announcement on March 18, the reduction of its stake in a Cypriot subsidiary Phosint Limited to 5%. Prior to this material change, PhosAgro held a 100% stake in Phosint. Negrinio Limited, a company registered in Cyprus, acquired a 95% stake in Phosint and no further details were provided.

It’s unclear how much the acquirer paid for Phosint, but the company could have lost a major subsidiary due to international sanctions. Earnings results should exclude the operations of this former subsidiary going forward (the business has shrunk).

PhosAgro is also going through a leadership crisis after losing its CEO Andrey A. Guryev and three other board members to resignations this month.

A credit rating downgrade to speculative as a result of a weak country rating will also increase the cost of doing business and reduce margins in the future.

Although the sale of a subsidiary focused on international sales could alleviate some of the difficulties, the valuation multiples of PhosAgro shares will not recover as quickly.

As of the date of publication, Brian Paradza did not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.

Brian Paradza is an investment enthusiast who received the CFA Charter in 2019. A strong believer in long-term, fundamental-based investing, Brian learns from gurus like Warren Buffett, but recognizes the human behavioral tendencies that lead to “ madness” in the short term. You may find him curious as he examines tech investment opportunities, cannabis, blockchains and the new asset class of cryptocurrencies.

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