26 June 2020
24th Annual Virtual Investor Conference in Moscow. Day 2 Highlights

Please note that session recordings are fully available on the conference landing page moscow2020.rencap.com and on our YouTube channel both in English and in Russian.

Panel discussion: COVID-19 impact on commodity markets

Lord Barker, executive chairman of En+ Group

En+’s business has proved resilient with very limited operational disruptions in the metals and power segments despite the pandemic. Management expects a 2.5mnt contraction in global aluminium demand in 2020. Our power business has been stable. En+ expects around 1mnt of aluminium production globally to close because of low prices. The company’s aluminium operations are in the lowest quartile of the cost curve and could benefit from higher prices due to the industry’s supply curtailments. Management is excited about the London Metal Exchange’s (LME) plans to launch low carbon aluminium trading, which could strengthen Rusal and En+’s competitive position even further. Rusal is the biggest producer of low carbon aluminium through its integration into En+’s hydro power.

Dr Alya Samokhvalova, deputy CEO, Petropavlovsk

Petropavlovsk believes it was one of the first to react to COVID-19 – given its proximity to China – as it implemented a prompt and comprehensive response, with the health and safety of employees remaining the key objective. On-site operations were never stopped and the group’s long-term strategy of reliance on local supplies has helped, with the supply chain virtually uninterrupted. Being a gold producer, Petropavlovsk is a direct beneficiary of the recent volatility, seeing a surge in both the demand and price of gold from the beginning of the year, and especially over the past few months. The company believes the environmental, social and governance (ESG) trend, especially the social aspect, has been amplified by the pandemic.

Mark Gyetvay, CFO and deputy chairman of NOVATEK

NOVATEK believes demand in the gas industry was more directly affected by seasonal weather-related factors and lower prices rather than COVID-19 lockdowns. As a low-cost producer, NOVATEK believes it will be able to survive through a prolonged period of lower prices. It highlighted the dramatic impact the gas industry has had on the reduction of carbon with the shift from coal to gas energy supplies, but emphasised that in moving out of lockdown, it will have to find solutions that are driven sensibly from investors and consumers to try create a greener environment.

Anton Berlin, marketing director at NorNickel

The impact on metal demand from COVID-19 has been considerable and NorNickel believes we have not seen the bottom just yet, with expectations for double-digit declines in 2020. Given the lack of consumer confidence, even with help from the government, the company does not believe we can expect a quick recovery. There was a surge in nickel and platinum group metals (PGM) demand in April and May, but it is now slowing down. Supply disruptions in the PGM space were quite material due to South Africa’s lockdown, whilst in the nickel space, Indonesian facilities increased their nickel pig iron production, successfully offsetting any supply disruptions. Whilst the automotive sector has been hit hard, NorNickel believes that people still aspire to own cars, with the recovery in demand just a question on timing and that battery electric vehicle development was set back by the pandemic. However, it maintains its constructive long-term stance driven by regulations and increasing consumer demand.

 

Panel discussion: Russia beyond oil & gas: Stayers and sprinters of the Russian economy

Speakers: John Boynton – Chairman of the Board, Yandex, Oliver Hughes – CEO, Tinkoff, Elena Ivashentseva – Senior Partner, Baring Vostok Capital Partners, Svetlana Demyashkevich – CFO, X5 Retail Group

Consumer and business activity recovery in Russia

According to Oliver Hughes, following the initial drop in late-March / early-April, there was a gradual recovery in activity, and as of last week it was back to pre-crisis levels in almost all categories (international purchases is an exception). X5 saw strong trading in April and May and has not observed any trading down yet. Moreover, consumers are trading up, in part due to a shift from restaurants to food retail. No-one knows what’s ahead, and falling income levels are likely to weigh on 2H (food reached 55% of spend). What happens in autumn will be important post the initial excitement of easing lockdown measures, so the consensus is that it’s better to stay cautious at this stage, despite the encouraging start of a recovery.

Long-term implications of COVID-19

The panel’s speakers mentioned three key trends: 1) working from home has proved to be viable, and businesses are probably not going back to offices in the same way as before; 2) digitalisation had already been under way before COVID-19, but the pandemic will be a big accelerator of the shift to online. E-commerce, food delivery, online video / literature, fintech are all beneficiaries; and 3) communication between businesses and the government has improved, with the relationship ever more cooperative.

Implications of ultra-low rates environment

Oliver Hughes said there has been a revolution in Russia in terms of retail brokerage over the past couple of years (~2.5mn accounts now at Tinkoff). Low rates mean people will be more likely to make more investments, and this is good for the economy and growth. On the lending side, the slower loan growth environment due to regulation is good in terms of the shift towards more secured lending, so there are benefits too. On the non-banking side, cheap capital is good for innovation, John Boynton believes. Maybe it also means that weaker players can survive for longer, but it is more important that smaller teams with big ideas have access to capital as this is the main segment driving innovation.

Convergence of online and offline

The boundaries between online and offline are becoming blurred. Historically ‘online’ was perceived just as a channel for traditional businesses – this has changed, and the trend will continue. John Boynton said ecosystems are becoming more and more powerful, making it more difficult for niche companies to compete, so there are more partnerships to come, although Yandex’s experience with the Y.Market JV showed that control and flexibility are also important. With higher digitalisation, there is also convergence between predominantly offline markets. For example, Svetlana Demyashkevich said food retail and restaurants have formed one sector now as customers care less about how the food is delivered to them. Going to a restaurant, ordering online, visiting a store, cooking or purchasing ready-to-eat meals are all becoming more equal options to a consumer than in the past. Traditional companies are rapidly developing their online expertise, and it’s not impossible that X5 might expand beyond food one day, although this should be considered carefully and would depend on customer needs.

IT talents and entrepreneurial spirit – reasons to invest in Russia

According to Elena Ivashentseva, entrepreneurial spirit and the high quality of IT developers are among the key reasons to invest in Russia vs other emerging markets. The success stories of Yandex and Mail provide a ‘network effect’, motivating young talents to try and build tech start-ups. There is plenty of IT talent in Russia, but the competition has been heating up too. Oliver Hughes said that competing vs dollar salaries used to be an issue, especially in 2014-2015, but now the competition is also high locally, so you need to have a strong brand and working / learning environment to be able to attract good people, especially if you’re not a pure tech company. Good collaboration with government and the trust that investors have been developing with Russian companies over the years also help attract money into the country, according to John Boynton, and Yandex’s $400mn public equity raise earlier this week, which was significantly oversubscribed, is a good example of investors being excited about Russia. Please check the recording of the event if you would like to hear John Boynton’s funny story from the 1990s on the topic of Russian IT talents.

Value of brand

Elena Ivashentseva believes that having a strong brand remains highly important for the success of any business. The value of the brand might have even become higher as a lot of mid-sized brands have disappeared, with a huge gap in recognition between leaders and losers. Communication with customers has also changed a lot as it has become much more personalised and more affordable to all types of businesses. The nature of a strong brand has changed and to be a winner you need to be focused on customer needs, rather than just advertising efforts. The rapid growth of private label consumption at grocery stores is a good example of value to customers being more important than an ability to advertise your product on TV. Yet, there are still different views on what is the best brand strategy. For example, for Yandex, brand is highly important and having all products named ‘Yandex.[name]’ has worked very effectively for the company. On the contrary, Tinkoff does not think about brand too much and is rather focusing on the products and services it needs to have in its super app to attract and retain more customers.

Next megatrend

All of the speakers on the panel agreed that ESG is going to be a huge trend, with a lot more focus on conscious consumption and environmental issues. Client-centricity will continue to be important, according to Svetlana Demyashkevich, and leveraging big data to make products more attractive to customers will be a theme, Oliver Hughes added. Finally, John Boynton stressed there is still a long way to go in terms of the shift to online and digitalisation of the economy, and this will be increasingly driven by large companies and in the context of ecosystems.