How Not To Trade Lukoil And Russian Stocks (OTCMKTS:LUKOY) (2024)

To start off with, before the comments come rolling in, it's important to separate our fury for Putin from the people of Russia.

If polls are to be believed, only 38% of Ukrainians blame the Russian people for the war. While honest polling in Russia may be impossible to obtain, what we can conclude is that a large portion, perhaps even a majority of Russian citizens, oppose the war. Before we demonize all Russian companies, know that there are countless anti-war citizens who depend on them for jobs.

Furthermore, I don't think destabilizing the country with the world's largest stockpile of nuclear weapons is a good idea for anyone. If you think Putin is crazy now, imagine how much crazier he may get if the country collapses.

Even though Russian energy was the one sector initially exempt from sanctions, it soon became obvious that the securities of Gazprom, Rosneft, and other state-owned entities would eventually be targeted. What wasn't obvious is that Lukoil would be, too.

In fact, the brokers themselves seemed to have been confused too by the sanctions regarding non-state owned entities.

Charles Schwab, E-Trade, Ally Invest, and Bank of America/Merrill Lynch banned the buying of Lukoil (OTCPK:LUKOY) at or around the same time they banned other prominent Russian companies like Gazprom (OTCPK:OGZPY) and Sberbank (OTCPK:SBRCY). However others did not, including Interactive Brokers and TD Ameritrade, even though the latter is owned by Schwab. For almost all of these brokers, the blocks were without notice. Many even implemented the blocks intraday.

What is (or was) the appeal of Lukoil?

I am not a trader. In fact, a good three-quarters of what I buy is with the intention of never selling or at least, holding for a minimum of 5-10 years. That said, when there is so much inactivity in a portfolio, it makes you antsy to be doing something.

I have found a good solution for that is trading a trivial amount. Only one or two positions at a time, each ranging from 0.01 to 0.1% of the portfolio. The returns, even when homeruns, don't move the needle. Still, it fulfills one's urge to play the game.

Almost always, any position I trade has to be a name I'm okay with getting stuck with, if the floor falls out. Such was the case with Lukoil.

Prior to this year, I had never pulled the trigger on Lukoil, but did come close twice; once in 2015 after the oil crash and again in 2020 during the COVID crash. Ultimately I stuck with the safer integrated stalwarts like Exxon Mobil (XOM), Chevron (CVX), and Suncor (SU), the best downstream like Phillips 66 (PSX), midstream like Kinder Morgan (KMI) and Enbridge (ENB), and a few Europeans like Shell (SHEL) and Total (TTE). I ended 2020 with about a 25% weighting in energy and kept it until late last year. Outside of Europe and Canada, Lukoil was the only other international play I seriously considered as it was the "safest" Russian play. This is what I liked:

1. More so than all other names mentioned so far, Lukoil pays most of its cash flow out in dividends. As such, you are constantly taking chips off the table the longer you own it.
2. It is not state-owned, at least not officially. That doesn't mean it can't be seized at any time but at least for now, it's technically a private business.
3. Presumably any large business in Russia must be on good terms with the Kremlin in order to operate, but that doesn't necessarily mean we should assume all Russian companies are aligned with the agendas of Putin. So far, Lukoil is actually the only major Russian company to publicly call for Putin to end the war.

A unique case study in trading

Up until the brokers all banned the purchase of Lukoil, the intraday activity was fairly consistent. It would go something like this; open down by 40-50%, bottom mid to late morning and then, close down "only" 30-40% for the day. The best purchases though were during the first few seconds of market open, as there would be market sell orders which would gap down significantly below the print you would see by 9:31 am.

After the first half-off sale happened on Lukoil, going from the $90s just 2 weeks ago to the mid $40s, I decided to buy a few hundred shares near the intraday lows and unload them on the rebound. On the fourth time of doing this, there was this surprise:

Yes, we were accustomed to the half-off sales after each trading day, but this was the first one we got intraday (and it was on top of the half off sale from the day before). Believe it or not, this was not due to any news. It was because a major broker suddenly blocked buys on this name without notice.

Were these buys being blocked for weeks, months, or indefinitely? Without knowing, I exited the trade for a loss at $9.70 without much hesitation. Getting stuck with it wasn't my concern. Rather, it was what cascade of selling this would cause, for all the traders not ready to hold the name like I was.

Sure enough, the price kept plummeting.

When only sells are allowed, it's a negative feedback loop which drives the price in one direction; down. I cannot think of an analogous situation like this in my twenty some years of investing.

Yes, there are times when it seems like everyone is selling and not buying a stock but here, that's literally the case. Almost the entire US market is blocked. I say almost, as US residents with foreign brokerage accounts may still be able to trade, depending on the country they're based. Likewise for foreign residents whose brokers offer US trading. Obviously, someone is buying all of these shares that US owners are dumping.

A new lesson

Buffett has famously said:

I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.

Now we have a new, related lesson to keep in mind, particularly with foreign stocks. What if the stock market closes, but only on the buy-side?

Other than weighting the positions appropriately, or perhaps hedging with puts if available, there isn't much you can do to prevent large losses in that situation. Because if only selling is allowed in one or more major markets, of course the price will plummet.

What next?

Forcing energy companies like BP (BP) to divest Rosneft (OTC:RNFTF) for pennies on the dollar and Americans to practically give away their shares in Lukoil is helping someone, but it's likely not helping Ukraine.

When the Russian stock market re-opens, their sovereign fund has already committed to spend up to $10 billion buying shares. That may not sound like much but remember we are talking price declines of 95-99% or more in many of these names. On the London exchanges, the declines are even worse than the ADRs and pink sheets here in the US.

Russia's $10 billion stock market bailout may be more like the equivalent of $500 billion to $1 trillion in buying power, if comparing to prices just before the invasion. In other words, we (individual shareholders and energy companies) may be helping Putin by selling - instead of holding - our immensely undervalued Russian energy assets.

Could he seize them instead? Absolutely. But not much difference between that and selling for 95% off. At least if he outright seized them, he would shoot himself in the foot by permanently scaring off future capitalism in his country.

It has been reported that the shunned Russian oil exports may be scooped up by China at fire sale prices, while here in the US we pay record prices at the pump. The same has been speculated regarding Russian stocks, as being purchased by the Chinese right now, though such claims remain unsubstantiated rumors for now.

Thinking it over, I wish I had held onto my measly few hundred shares of Lukoil. Nothing to do with money. Rather, because I don't like the idea of offering shares up to Putin and China for pennies on the dollar.

I prefer to buy long term winners when they have short term problems. You may call them falling knives, I call them being on sale. Most of what I buy is with the mindset of never selling, or at the very least, holding several years. With a long to very long term horizon, volatility doesn't bother me too much.I've been investing for over 20 years now, through 3 major bubbles (dot com, GFC, and the present). I saved up $500, the minimum deposit required to open an UTMA brokerage account, in middle school. I convinced my grandpa to co-sign the account, despite the fact that he nor anyone else in my family owned stocks or any other investments (aside from CDs).Investing has been my foremost interest for as long as I can remember. While classmates may be reading Harry Potter, I was into Security Analysis and the like. Although I grew up trying to emulate the Buffett style, I morphed into more of a Munger mindset. Today, probably Mohnish Pabrai would best reflect my philosophy of favoring undervalued, while not outright ignoring generational growth opportunities.I have been self-employed my entire life and for the last several years, have been investing full time. Prior to that, for 6 years I ran an online business in the credit card space. I started it the same month Bear Stearns went under and despite my poor timing and the fact that all my customers (banks) were in trouble, I maintained profitability every quarter and never took any outside investments or loans. Eventually I sold it to a publicly traded internet company.While running that business, the cash flow coming from it afforded me the opportunity to make high risk, high reward investments in private biotech companies. Two went public. Life sciences is a great interest/hobby of mine but because it evolves so rapidly and requires immense amounts of continuous due diligence, it is something I now only do on the peripheral of my portfolio. While the vast majority of what I buy may be considered boring, I do make investments in some highly speculative stocks.Lastly, while I mostly agree that you generally lose more money preparing for a crash than you do in an actual crash, I like to keep a healthy cash allocation on hand for those opportunities when everyone else is panicking. For those funds I prefer munis and in fact, have been betting on long duration for nearly a decade now. Contrary to the prevailing mindset this last decade, there's far too much debt to sustain higher rates for any meaningful amount of time.I have been on Seeking Alpha for at least a decade but did not start writing on here until 2020, due to boredom during covid. Even more than parking, I despise paying for investment research. As such, I will only write about one article on here every 30 days, which is the minimum required to maintain SA Premium access. I would rather slit my wrists than charge you for my content, so you won't see a marketplace service from me.Raised in Michigan, live in Manhattan Beach, CA.