Nine Commandments for Doing Business in Russia
Director of Equity Financing, FINAM Investment Company, Moscow
Recently Alfa Bank research issued new papers analyzing the Russian stock market. These reports feature several key points relating to IPOs and investments in Russia. The first point made by Alfa Bank analysts is that today everyone understands that we have entered into an "IPO buyers market" where Russian issuers have to curtail offering prices, or issue an IPO in a new sector that is not yet well-represented.
This year the Russian stock market is estimated to hold more than 10% of all assets listed in Global Emerging Markets (GEMs), up from 6.3% in 2006. The major reasons for this trend are the numerous Russian IPOs and placements of new equities. The Russian federal government remains the biggest single investor in Russia's stock markets, and 2/3rds of all transactions are completed by partially state owned enterprises. However, the number of private equity holders continues to grow with the expansion of the market.
Russia's IPO market will approach the $30 billion dollar mark by the end of this year. According to a report by PriceWaterhouseCoopers, the combined value of these Russian IPOs is equivalent to the value of 297 European IPOs listed on the London Stock Exchange in 2006. Current projections call for accelerating IPOs scheduled to raise capital toward updating Russia's electric power infrastructure, which has been straining to keep up with surging demand from the expanding Russian economy. In addition to utilities, agriculture remains one of the most promising sectors for long-term investment in Russia.
President Vladimir V. Putin speaking in Novosibirsk
It is true that the IPOs issued in recent months by Rosneft and Sberbank were in large part supported by a select group of Russian billionaires and the major companies that are owned by these patrons of the "national champions". It is also true that prominent Russian businessmen live up to nine commandments or ground rules formulated by President Putin:
- Avoid politics
- Pay taxes
- Abide by the law
- The wealthy should direct their wealth towards the development of Russia and support the plans of the State
- Companies in strategic sectors (such as energy and mining) should support the government's plans for the development of Russian industry
- Companies in extractive industries should move from exporting natural resources to processing in order to increase the value added profits of exports. (For example, Lukoil, a company that has been fully private for fifteen years, has declared that it will refine more Russian crude domestically to export refined products).
- Foreign strategic investors are allowed to invest in strategically important companies or projects, but no more than 49% (i.e. Sakhalin Energy, TNK-BP)
- For sensitive companies this number is 25% max (this would include Russian aerospace and companies involved in national defense)
- International companies that wish to invest in Russia and offer Russian firms reciprocal investments in their home countries are preferred as partners by the government
Nuclear power plant sites in Russia
All of these "rules" were reiterated in points made by President Putin in his most recent State of the Nation address. While some foreigners may find this proposed economic course to be nationalistic, there may be an opportunity for investors to capitalize on Putin's speech by investing along the lines of his address. This would include opportunities to profit from the government's ambitious plans to construct dozens of new nuclear power facilities over the next thirty years. Some Russian companies listed in the revitalized nuclear power industry include: Machine Plant Electrostal, NZHK, Priargunsk, Energomash and shares in Izhorsky Trubny Zavod that have yet to be consolidated by the former OMZ.
In the shipbuilding sector, President Putin's address has led to greater interest in Russia's long-neglected Baltic maritime industries. In the booming construction sector, there are established leaders such as Open Investments, EPH, Glavmosstroy and the large steelmakers MMK, Evraz and Mechel.
The Market's Participation in the National Agenda
This week a conference was held in Moscow that discussed the realities of the Russian stock market:
- FFMS (Federal Financial Markets Service) Head Oleg Vyugin reiterated the need for an established, centralized regulator of Russian securities markets. He called for more government activities to consolidate the market and establish an infrastructure that is inviting to foreign investors. Russia's current stock exchanges will inevitably consolidate or become specialized. At this moment, Russia has two vertically integrated exchanges, the MICEX and the RTS, which are running independent clearing houses and depositaries and claiming the status of a central depositary. Such institutions may only co-exist if they are offering different products to their clients.
- Troika Dialogue Group President Ruben Vardanian called for practical steps to improve all aspects of the Russian stock market -- as the vital ingredient in a process of establishing Moscow as a key world financial center. Domestic regulations remain clumsy and lead to more expenses -- that is why Russian companies currently choose to list in London.
Hundreds of State-Owned Enterprises To Be Privatized by 2010
A new wave of privatization is starting in Russia, triggering a new phase in a 15-year old process. This process has proven disappointing and the government's plans for 2006 were not executed as Russian investors hoped they would be. However, the government has recently approved in principle a new draft plan for a new round of privatization through 2010. The plan calls for privatizing over 590 Open Joint Stock Companies (OAO) and transform these OAOs into 629 new entities, which we be called "Federal State Unitary Enterprise - FSUE") .
In 2007 the government's list will likely be joined by twelve new FSUEs and 95 OAOs. The big problem for these plans is that the most attractive state-owned companies have already been sold off. Nonetheless, some analysts believe that there are a few state owned enterprises left that could command investors' attention.
Currently the government owns 6,533 FSUEs, and is a shareholder in 3,997 OAOs. Government representatives continually stress that the most strategic enterprises will remain in its custody. When analyzing the list of proposed companies it is obvious that there are some successful and profitable ones in it. Many scientific research institutes, regional machine tool plants, and exhibitions remain extremely unattractive to Russian investors and remain excluded from the privatization list. Even so, some of the most attractive companies left on the privatization list include Technopromexport (known as Tenex outside Russia) the largest state contractor building power plants in Russia and abroad - Tenex is already preparing for an IPO in London; Murmansk Sea Fishing Port; Machinoimport; and LENFILM -- a St. Petersburg film studio.
The most interesting part of the government's privatization plans from the investor point if view is establishing integrated state holdings with the participation of private investors. These holding companies are already common in Russia's aerospace and shipbuilding industries; with partial listing of equity on stock exchanges due in the near future.
Foreign Banks Continue to Expand in Russia
After the news of the last month's acquisition of Absolut Bank by a Belgian banking group, another player from this part of the world comes to Moscow. This time the entrant is the Franco-Belgian banking group Dexia. The French and Belgians come through their Turkish subsidiary DenizBank, and will establish a network of retail banking branches in the partly Turkish-owned Russian supermarket chain Ramstore. It is estimated that the bank will invest some $50 million into this venture in its opening year.
Both European and Japanese auto manufacturers are establishing new banking operations in Russia in order to provide credit to Russian consumers. Toyota Bank registered its business on April 4, 2007 and is expecting to receive a license from the Russian Central Bank. Toyota, which will soon surpass General Motors to become the largest automaker in the world, is building a manufacturing plant near St. Petersburg. Similar announcements have already been made by Germany's BMW Group and DaimlerChrysler. Sales of Toyotas and BMWs in Russia soared in 2006 by 58% and 42% respectively.
Moscow to Emerge as a Leading Center of Global Finance by 2017
The world's economies are entering a "new global paradigm," with Moscow due to emerge as one of the world's leading financial centers by 2017, Chris Baxter, chairman of Renaissance International, said at the Russian Economic Forum in London. In 10 years' time, Moscow will become one of the top financial markets, surpassing Frankfurt and Paris, and joining global financial peers in London, New York, Tokyo, Shanghai and Mumbai. Baxter said he expected the MICEX to match the world's major markets by 2017.
Recent Developments in Russian Stock Markets
- About 150 Russian companies intend to hold initial public offerings in the next two years, which could bring in $30-50 billion, the President of the Moscow Interbank Currency Exchange announced at the recent Russian Economic Forum.
- OMX has started its marketing campaign in Russia. This week a Russian magazine published an overview drafted by a Swedish law firm that highly praises OMX and promotes its listing there.
- The president of one IR Moscow based firm predicts an influx of companies from the CIS countries (including Kazahkstan) to Russia with IPOs on MICEX and RTS.
- In a very strange and unprecedented move for VSMPO Avisma, the world's largest titanium producer, has announced that it is switching its accounting system from the U.S. GAAP to the Russian accounting system. Analysts consider this an indication that the company has decided against an IPO on a foreign exchange.
New Russian IPO Candidates
R Telecom, a telecommunications company -- IPO plans for 2009.
Euroset, a mobile phone retailer -- IPO plans for the first quarter of 2008
TransContainer, the transport container subsidiary of Russian Railways, will pursue a step by step road to an IPO with private placement of 10-15% of equity (2007), in 2008 launching an IPO on the RTS and MICEX (20-25%) exchanges
Corbina, a telecommunications carrier -- IPO in Moscow, London and/or New York in 2008.
On a Personal Note...Thoughts on Russia Finance Blogging
Three months have passed since I started this experiment of blogging about Russia's financial markets. Every week I notice that the number of hits to my blog, Equity Financing in Russia, has increased. In fact in the last month there has been a 36% increase in the number of visitors, with an average of 26% daily growth.
Looking at the log of my stats counter I find that I had many visitors from corporate networks:
Agefi, AIUG Brunswick Capital Management, the Associated Press, Aton Moscow, Bear Stearns Security, Bigdough, Bloomberg, CA IB International Markets Ltd., Chadbourne-Parke, Citadel Investment Group, Citicorp Global Information, Credit Suisse Group, Deutsche Bank, the U.S. Department of Commerce International Trade Administration, EBRD, Energis UK, Farallon Capital Management, Glencore International AG, Global Sage Ltd, Goldman Sachs, Google Inc., Hagstromer & Qviberg Fondkomis, Hemscott PLC Company, International Finance Corporation, the International Monetary Fund, Johns Hopkins University, JP Morgan, Kazimir Partners UK, Lehman Brothers, London Stock Exchange, M-M-Planet-Retail, Microsoft Corp., Morgan Stanley Group Inc., Nasdaq Stock Market, Netscape Communications Corp., IBM E-business host network, Octagon Capital Corp., Oliver Wyman & Co., OTP Bank Hungary, Oxford University, Pacific Crest Securities Inc., Petra Holdings LLC., Radio Free Europe, Raiffeisen, Real Estate Board Of New York, Regus Management Limited, Salomon Inc., Sandler O'Neill, Spencer Stuart, St. Louis University, T. Rowe Price International Inc., The George Washington University in Washington D.C., The World Bank Group, UBS-London, Unity Bank, VTX Services SA, Welch Capital Partners LLC, Westhouse-Securities-LLP, White and Case
A nice list, isn't it? Does this mean that the information I provide is helpful to the world financial community? Should I end it, or start thinking about some venture that capitalizes on this existing opportunity? To be or not to be? Let us go on for a while...
You can read the original post at Vladimir Kuznetsov's blog, Equity Financing in Russia. The views expressed in this post and on his blog are the personal opinions of Vladimir Kuznetsov, and do not necessarily reflect the views of the FINAM Investment Company. To read more Russia Blog posts about Russian capital markets, click on the finance section or type www.russiablog.org/finance in your web browser.