Why are the shares of stock market darling Magnit heading for junk?

One of Russia’s top two retailers, Magnit, has always been one of the most popular stocks among investors in Russia. But this week, it was relegated from the top tier of the Moscow Exchange securities — entering in its third tier — after violating exchange rules. Investors suspect the company of deliberately reducing its own value in order to buy out foreign investors, who account for almost 50% of the retail giant’s shareholders.

• Magnit was established in the late 1990s and experienced incredible growth in the 2000s. By the 2010s, the retail chain was the top asset on the Russian market and was popular among foreign investors. In 2012, Magnit temporarily overtook Carrefour — the world’s second-largest retail chain — in terms of capitalization. At its peak in 2014, the company was valued at $30 billion. However, in the mid-2010s Magnit faced a management crisis, and its founder, the iconic self-made Russian entrepreneur Sergei Galitsky, sold the company. The new owner was state-owned VTB bank, which invited well-known businessman Alexander Vinokurov to join the company as a partner. Vinokurov, among other things, is the son-in-law of Russian Foreign Minister Sergei Lavrov. You can read more on that story here.
• The war has had no impact on Russia’s leading retailers, particularly in the low-cost sector. Magnit’s biggest rival, the X5 Retail Group, had excellent results in 2022. A source close to Magnit told The Bell that the company’s annual report would be at least as good. But it is impossible to know for sure — not only has Magnit yet to publish its annual report, in the summer 2022 it was unable to hold a meeting of shareholders to elect its board of directors.
• This is a flagrant violation of corporate governance and market transparency. This week, the Moscow Stock Exchange responded by relegating Magnit’s shares from the first tier to the third. Shares in the company fell 5%, and that’s no surprise — the charters of most funds prohibit any operations involving third-tier companies. If the violations persist, then the company will be removed from the Moscow Exchange altogether. At that point, another swathe of funds will dispose of their shares and the former blue-chip investment will move into the category of speculative securities.
• In some sense, the violations that devalued Magnit are directly linked to the war in Ukraine. The fact is that Magnit has a very large free float — 67%. Moreover, almost 50% of the company’s shares are held by investors from “unfriendly” countries who have been unable to participate in trading since Feb. 2022. Under Russian law, non-residents are not barred from voting at shareholder meetings. However, in practice, they cannot give any instructions due to the collapse in relations between the West and Russia, as well as the fear of breaching sanctions.
• Meanwhile, there is an alternative explanation (which has gained traction among investors). A financial market source who has long followed Magnit told The Bell that the real reason for the company’s violations might have nothing to do with restrictions on foreign shareholders, but rather with company policy. Less transparency around Magnit depresses its share value, and the lower the company’s market value, the cheaper it is to buy out foreign investors. The Bell’s source described this strategy as “close to foul play” — among Magnit’s shareholders, there are 70,000 Russian citizens.

Why the world should care

During times of war and sanctions, it’s no surprise that a publicly-traded Russian company would seek to squeeze out foreign investors for the benefit of its Russian shareholders. But in the case of Magnit — a stock market darling and rival to global giants — shares might now be reduced to junk. Perhaps it will be a symbol of the transformation of Russian business.