Stockbrokers at work (Photo by: MosNews)
Vladimir Kuznetsov, director of equity finance for the Finam Investment Company in Moscow, has submitted more commentary on recent trends in Russia's stock market.
On one hand, Mr. Kuznetsov notices articles in the Russian business media advising investors to curb their enthusiasm about Russia's equity markets. On the other hand, Mr. Kuznetsov sees increasingly fierce competition between international stock trading exchanges to float Russian IPOs.
To make Mr. Kuznetsov's contributions and other posts with financial information about Russia more accessible to our readers, we have created the new Finance category of Russia Blog.
-The Editors
The recent painful correction of stock markets worldwide has triggered some criticism of Russia’s IPOs in the Russian business media. On March 9, the Russian Agency of Political News published a lengthy piece of commentary arguing that a stock market in its classic definition does not exist in Russia. The author argues that basically there are no private, individual investors in Russia. In 2005-06 they counted for just 3% of the total stocks owned by Russian issuers. Thus there is no actual money from the Russian population in the stock market. Furthermore, the authors of the APN article cite the statistic that 95% of all market trading is conducted by the top ten leading companies.
These claims lead me to cite the 19th century American satirist Mark Twain, “There are lies, damned lies and statistics”. The fact is we can interpret these numbers in many different ways, even while admitting that there is some truth in them. Nonetheless, in my opinion, APN’s commentary is extremely sly in its description of Russian IPOs.
Click on the extended post to read more.
Growth of transactions on Russia's MICEX index
To demonstrate why Russian companies still prefer to float their shares in the West rather than at home, the author of the APN article claims that:
(a) For Russian companies, listing shares outside the country is very convenient for hiding the volumes and money raised in order not to attract too much attention. Every professional trader in Russia knows that this is not true.
(b) There are insufficient resources on the Russian stock market and investors are reluctant to disclose that they have money. Maybe this is partially true, but it is a well known fact that today investors have lots of money to invest in Russia. The real issue is - where are the quality products to invest in? For an example of disappointing IPOs, see 2006 results for the domestic floats of Raspadskaya ($459 million) and Magnit ($368 million). This remains a very controversial issue.
In its report from March 9, 2007, Market Watch quotes Evgeny Gavrilenkov, chief economist at Troika Dialog in Moscow saying: "Basically, there's not enough money. There are around 1,200 banks in Russia and most of them are very small. That makes it almost impossible for them to lend billions of dollars."
(c) The APN article claims that is very convenient to sell a Russian company via the foreign "daughter" corporation, and this way the investment capital becomes liquid and therefore useful much quicker. Once again, this is half true. According to RTS data, in 2006 there were 16 domestic IPOs in Russia, and just eight IPOs for Russia-domiciled and only five for foreign-domiciled Russian companies.
How Many IPOs Are Likely?
That's enough of my comments in response to the APN piece. Let’s get back to the Market Watch report I quoted earlier. It cites Martin Cocker, a senior partner at Deloitte in St. Petersburg, saying that there could be as many as 700 or 800 companies in Russia and the former Soviet republics hoping to go public in the next few years. The Roman philosopher Cicero once said that, "While there is still life, there is hope”. But in my opinion, these IPO numbers are far too optimistic. Everyone here in Moscow agrees that there are about 60 major companies in Russia mulling an IPO. Let’s project that same rate over the next three years, which nets about 200 Russian IPOs for 2007-2010. There is no way that a handful of companies from the former Soviet Republics will make much of a difference.
More interesting numbers were reported this week by the headhunting group Heidrick & Struggles study: more than 100 Russian businesses report that they are considering or preparing an IPO, with 40% of these companies contemplating floating shares overseas. These numbers are easily obtained from the numerous IPO-related Web-sites that are proliferating on the .ruNET (the Russian Internet). For example one of these finance sites (http://www.quote.ru/stocks/ipo/) lists more than 120 companies, but the majority these companies have already declared their intentions. Thus, UFG's estimates of 60 IPOs for this year are far more realistic.
Emerging Exchanges Provide Russian Companies with More IPO Options
While reading this Market Watch story I had a very strong feeling that this is a subtle advertisement on behalf of LSE AIM. AIM is good, but what about Russia’s other junior markets?
Logo for Europe's EuroNext exchange
In the last year, international equity traders have witnessed growing competition between alternative investments markets. More than a year ago, no one had ever heard of the Euronext exchange. Now at every one of the events we attend (including the upcoming 3rd Annual Russian IPO Congress) we see representatives from the same teams: AIM, Euronext, Deutsche Boerse; and more recently, representatives of the Hong Kong and Singapore Exchanges. That means that very soon we will witness real competition (like the story of a 'war-zone' level of competition between the Warsaw and London stock exchanges, described by a fellow finance blogger here).
Germany's Deutsche Boerse exchange (Photo by: Business Week)
According to some reports Euronext is very actively taking part of AIM's pie (especially with the small- and medium-sized enterprises known as SMEs), and with advent of the newcomers from Asia we may see an interesting rivalry that will eventually profit Russian companies. And strange as it may seem, we do not see Canada's TSX Venture Exchange (TSX-V) active in Russia. We have learned this week the astounding story of TSX-V’s recent success. *Since the beginning of 2002, all the major American indices have posted relatively modest gains. The Dow Jones Industrial Average has tacked on 22.5%, and the NASDAQ and S&P 500 have gained 22.3% and 22.2% respectively. But Canada’s *TSX-V claims a 202.5% increase! Along with this, some of the individual companies listed on the TSX-V have posted fantastic gains:
- CV Technologies Inc. - up *9,301.3%* in less than three years;
- Energy Metals Corp. - up *5,858.3%* since September 2003;
- Laramide Resources Ltd. - up *7,403.1%* since May 2004;
- Exxel Energy Corp. - up *7,217.7%* in less than one year
I think that we will see more people from Toronto in Moscow very soon, if they are not be too pre-occupied with their success at home.
Improving Corporate Governance in Russia
Another recently released report that attracted comment in the Russian press this week was issued by the international headhunting firm Heidrick & Struggles. It notes that the Russian companies floating on international stock exchanges raise 20% less than their Western counterparts because Russia’s standards for corporate governance are lower. It also shows that investors would pay up to 38% more for shares in Russian companies with good corporate governance. This is a very good argument for the Russian entities engaged in corporate governance, like Russian Institute of Directors or the Institute of Corporate Law and Corporate Governance.
Click here to read Mr. Kuznetsov's original post on the Equity Financing in Russia blog. The views expressed here and on his blog are Mr. Kuznetsov’s personal opinions, and do not necessarily reflect the views of his employer.
