Russian Sanctions lifted this year? Special situation

Central and Eastern Europe Fund (CEE)

SSGE fund write-up

26/01/2025 (Now opened up to public 09/03/25, but all analysis based on Jan 2025)

Market cap USD 77m

The Central and Eastern Europe Fund, Inc. is a closed ended equity mutual fund launched by Deutsche Investment Management Americas Inc. It invests in the public equity markets across Central and Eastern Europe across diversified sectors. The fund was formerly known as The Central Europe And Russia Fund, Inc. The Central and Eastern Europe Fund, Inc. was formed on March 6, 1990 and is domiciled in the United States

Background

This fund has Russian stocks that are currently valued at zero. The idea behind the investment is to benefit from peace between Russian and Ukraine and the removal of sanctions against Russia. This will enable the Russian equities to gain full value and a sharp increase in share price of the CEE fund.

Why I like this business:

· If Russian holdings received a full market valuation then the Net Asset Value (NAV) would go up $46m or an increase in NAV of 66%. However that is based on current market values of the Russian holdings which are down c. 50% since the war. Russian equities are likely to get revalued up as well. So it wouldn’t be surprising to see $90m of Russian equity value are a NAV increase of 129%

· P/E ratio is currently showing at 4.3, however this doesn’t take into account the dividends that are being received. Due to sanctions the dividends are currently being paid into the Russian National Settlement Depository (RNSD) as part of the sanctions against Russia. If you take into account Russian earnings (I estimate them to be c. $2.5m pa.) the P/E ratio of the fund should be around 2.6 P/E.

· The dividends accrued from Russian stocks over the war that are held in the RNSD I estimate to be worth c. $7m.

· Currently the fund is trading at a 5% premium to NAV. However this doesn’t take into account the value of the Russian equities. I have estimated the current value of the Russian equities plus the RNSD dividends at c. $52m. Taking this into account the discount to NAV is currently 75%

· Majority of equities are Polish, with banking and mining the largest sectors. All of these are on low valuations due to the war. And a peace treaty and removal of sanctions is likely to be a catalyst to increase equity valuations in Eastern Europe as well as Russia

· I suspect the war is likely to come to an end this year, potentially in the next few months for the following reasons:

o Economic – Russia is now facing high interest rates and inflation, as well as labour shortages. Economy has been fine up until the end of 2024, but now Putin is worried about the impact the war is having on the economy

o Trump may impose further sanctions if a peace treaty is not agreed

o The territory Russia now occupies connects Russia to Crimea which is a big strategic win for Putin, and he may use that to save face and claim victory with a peace treaty

Risks

· Downside risk I’ve estimated to be c. 30%. If a peace treaty suddenly looked a long way off, then the stock price might retreat to around $10 from the current $12.50. But the PE ratio is so low already and the current value is based on European equities, that it is difficult to imagine much more of a drop than that.

· The war could continue for an indefinite period, so the IRR will be uncertain, and it could trade sideways for a long time.

Why the opportunity exists:

· It’s a small fund with only $77m market cap, so not accessible for most institutional investors

· It has traded sideways since the war, only spiking by 30% recently since Trump won the election and claimed that he would resolve the war

· The war could continue indefinitely, and many aren’t comfortable allocating capital to a situation where the upside may happen potentially many years in the future

Summary:

Trading at a massive discount to NAV when you include the value of the Russian equities.

PE incredibly low when taking into account the Russian equities.

Big upside of c. 150% ($30+ price target) if peace is negotiated and Russian sanctions removed, and Russian equities are revalued.

The downside is limited due to low valuations of the fund as a whole, excluding Russian equities.

May take a long time for this investment to pay off, and is currently giving only a 3% dividend yield.

Research

This fund was mentioned by Capital Valour an anonymous investor on X.com that I’ve been following for several years and admire greatly.

I’ve undertaken independent valuations on the Russian equities.

Not a recommendation

This is a very rough outline of the investment thesis for those that want to look into it further.

Nothing here’s is investment / tax advice just sharing an interesting business I found. Do your own due diligence.

This is a high risk investment. Especially given the binary nature and small market cap size. This is not a recommendation and not financial advice.

I have a significant holding in this business as do those who invest in my investment vehicle.

Thanks,

Joe and Swapnil

Find us on X, DMs open:

@Joevalue and @swapnil00456809

Swapnil SinghSpecial Situations Global Equities is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.