Reduced dividends going forward
Despite new coronavirus spikes in countries like the US and Germany, the Russian market was calmer in June. Carnegie Rysslandsfond rose 1 percent without any major drama. OPEC+ cooperation has so far benefitted oil prices, but this has a very negative impact on industrial production in the oil-producing countries.
“The cuts and the low prices obviously affect oil sector company earnings, so the second-quarter results will look very bad.”
In May, for example, oil and condensate output in Russia fell 17 percent to 9.4 million barrels per day. By the end of the month, Russia had reduced crude production to the daily 8.5 million barrels stipulated in the OPEC+ agreement. The cuts and the low prices obviously affect oil sector company earnings, so the second-quarter results will look very bad. For example, Lukoil reported a loss of USD 692 million for the first quarter, even though cash flow was still positive at USD 830 million.
A major reason for investing in Russia has been the high dividends, but the corona crisis means these will decrease. We expect dividends this summer to be about 20 percent lower than last summer. And banks are postponing distributions until October.
Despite the fall in oil prices, Russia still has a current account surplus. The May surplus was USD 5.4 billion, and for the first five months it was USD 28.9 billion. Russia’s balance sheet remains strong.
Inflation continues to fall and is now clearly below the central bank’s 4 percent target. The central bank reduced interest rates by 100 basis points to 4.5 percent in mid-June and is signalling that further cuts are likely.
President Putin has launched a major economic programme to help the economy out of the corona crisis, including a tax hike from 13 percent to 15 percent for the highest earners.
There was a major environmental incident at one of Norilsk Nickel’s Arctic facilities when 21,000 tonnes of diesel leaked into a nearby river. It is claimed it will take 10 years and cost up to USD 1.4 billion to restore the environment. The fund has no exposure to Norilsk Nickel.