Russia's Market Cap Exceeds $1 Trillion
Director of Equity Financing, FINAM Investment Company, Moscow
Russian Finance Minister Alexei Kudrin at the G-8 Summit last year in St. Petersburg
Last week Russian Finance Minister Alexei Kudrin spoke at the Russian Duma about the phenomenal growth of Russia's financial markets. The total value of Russian companies has now exceeded $1 trillion; Russia is ranked 13th in the world in market capitalization. About 70 companies are planning IPOs this year.
Last week also featured a historic breakthrough for the Russia Trading System (RTS) stock exchange. For the first time Russia's second largest stock exchange began to trade its own equity. Although it was only a small trade -- about 100 shares sold for $300 each -- it highlighted the exchange's market capitalization, which is valued at around $480 million.
The rebound in global equity issues since 2002
Source: Deutsche Boerse website
In another historic first, the first representative office for a foreign stock exchange was opened last week in Moscow. Deutsche Boerse held a series of events in Moscow to commemorate this opening, drawing a big crowd of German VIPs that included the Mayor of Frankfurt, top managers from Deutsche Boerse Group and some major German investment banks. One of the goals is expanding DB's services to a growing number of local customers and to maintain contact with Russian authorities and capital market institutions.
As I mentioned in my previous post ("Global Companies Turn to Europe for IPOs"), German financial institutions are highly visible in Russia, and Deutsche Boerse signed a memorandum of understanding with the Moscow Interbank Exchange (MICEX) last year. The Russian press noticed that by enhancing its presence in Moscow, Deutsche Boerse is expected to provide some competition for Russian IPOs to Russia's stock markets, the NYSE-owned Euronext, and the London Stock Exchange. There are currently 56 Russian companies listed on the Deutsche Boerse exchange, and one of the officials told the press that DB is now in discussions to list IPOs from Russia's oil and gas, pharmaceutical, energy, information technology and biotechnology sectors.
Deutsche Boerse arrives in Russia at an interesting time. Here in Moscow, we are all closely watching the story of the NASDAQ/OMX and their entrance to Russia through IXSP. Another issue is the tightening of the London Stock Exchange's listing rules. So, while these situations continue to develop, Deutsche Boerse is putting boots (or wingtips) on the ground in Moscow.
Last week Russia's Kommersant business daily published a big review titled "IPO Breakthrough - Western Traders Begin Jockeying for Russian Issuers" that is worth reading. However, Kommersant's analysis fails to include some other players that are active here too: Euronext, and the Asian exchanges from Hong Kong and Singapore.
Rostelecom Delisting from NYSE
One of the hottest topics among Russian stock watchers this week was the intention of Rostelecom to delist its ADRs from the New York Stock Exchange. This is the second Russian company (the first was Tatneft) to delist from the NYSE. According to Rostelecom's spokesman, the decision is to be made this month. There are several reasons for this decision, but Russian financial analysts point to two major ones:
With the liberalization of Russia's telecommunications market, Rostelecom is faced with the necessity of undergoing a thorough audit of its structure from the top down to the end-user companies. This requirement was the result of the U.S. Sarbanes-Oxley Act (SOA) and sure enough, this law has led to a great deal of added costs for our American friends. (One of Kommersant's correspondents wrote this week that during the Russian Corporate Governance Conference held last May in the United States, Senator Paul Sarbanes was very cheerful and proudly waiving pages copied from his legislation -- but Russian companies were not happy at all about his bill).
The other reason the company has decided to del-iist is that there are now virtually no Rostelecom ADRs still trading on the NYSE. According to the company's press service, the NYSE only accounts for 5.2% of the company's equity traded worldwide. In recent years, investment funds bought about 35% of the company's stock; but most of Rostelecom's major trading transactions are now done on the MICEX.
However, other Russian telecoms traded on the NYSE have no intentions of delisting. Vimpelcom, the holding company for Russia's no. 2 cellular provider Beeline, has had its ADRs traded on the NYSE since 1996. Last month Vimpelcom announced that its operating cash flow and income increased by more than 80% in 2006. The company is one of thirty Russian "blue chip" stocks included in Van Eck Global's Russia ETF, which began trading on the NYSE last month under the symbol RSX (Van Eck's listing partner is the Deutsche Boerse).
FINAM table at the Moscow Derivatives Expo in October 2006
Update on Investing in the Russian IT Sector
Here at FINAM, in the past several months we have felt an increasing trend movement towards venture financing in Russia. Germany's Der Spiegel newspaper printed an article titled "Tech Startups Come of Age". The article reported that the Luxembourgian venture fund Mangrove Capital Partners and the Russian ABRT have announced the creation of a joint investment program in Russian IT startup companies.
This week I had an extensive discussion with the bureau chief of Business Week in Moscow about the financing of Russian venture companies. As I mentioned in a previous post, the FINAM Investment Company is listing some Russian IT assets on the MICEX. We are looking to sell equity stakes of the FINAM-IT mutual fund. In fact we are not so much looking to make an immediate impact, but rather to test the waters with the Russian and international investor community. As Demosthenes, the famous Greek statesman, once said: "Small opportunities are often the beginning of great enterprises."
I may add to this one interesting observation about international investors' changing attitudes towards Russia. We are now in the very active stage of our road- show (in very close collaboration with the MICEX -- we are the first issuer to be listed in its Innovation and Growth Sector).
In recent years there has been a strong differentation emerging among investors when it comes to Russia. Investors here on the ground are really enthusiastic and give FINAM a good response when we talk to them about the opportunities to invest in this country. However, there has also been very limited interest from many financial groups in London, and sometimes I receive rather rude replies when I introduce myself as a Russian citizen.
This week our road show is in London, and we will try to talk to some people in person to gauge their interest. I discussed the road show with a top manager of Renaissance Capital and he told me that most of these people are really unaware of what is going on in Russia right now and are missing a huge opportunity.
By the time these people will realize it -- this opportunity will be gone, and Russia's wide open financial marketplace will be more settled, and less profitable. As a well known proverb states: "There are three things that you cannot regain: a spoken word, a shot arrow and a missed opportunity".
Russia Creates Fuel & Energy Commodity Exchange in St. Petersburg
It is expected at the 11th annual Saint Petersburg International Economic Forum a memorandum of understanding will be reached with the New York Mercantile Exchange (NYMEX) to establish a Russian Fuel & Energy Commodity Exchange. This partnership will be involved in trading Russian oil. It is expected that by the end of the year the first REBCO oil trading will take place. The Exchange is being created under the auspices of the Ministry of Economic Development and Trade of the Russian Federation and the Central Bank of Russia.
St. Petersburg - the next great center of global oil trading, along with Dubai?
Nissan and GM to Open Plants in St.Petersburg Region
Last week it was also announced that Nissan is planning to commence manufacturing at its plant in Russia by the end of 2009. This represents the continuation of an earlier signed agreement. Initially only one model will be assembled for sales in Russia, but some export options are being considered too. General Motors will start operating its third plant in November 2008 ; this $115 million plant will produce the Chevrolet Captiva sport utility vehicle and a yet-to-be-named compact car beginning in October 2008, with a total annual unit capacity of 60,000.
New Russian IPO Candidates
CIT Finance Bank -- Planning a MICEX listing next summer
Bank "Saint Petersburg" -- another possible Russian IPO in 2008.
Corbina Telecom - up to 25% of its stock will be issued through an IPO in Moscow, London or New York in late 2008.
Kaspersky Labs -- Russian security software company -- reportedly is planning an IPO within the next two years
North West Oil Group -- possible IPO on the NASDAQ, AMEX or LSE AIM.
Polyus Geologorazvedka, or Polyuz Gold -- this newly established company will be preparing for IPO
The Rosweb group of companies -- IPO at the end of 2008.
United Aircraft Building Corporation -- the large Russian aerospace consortium created by the government by combining the Mikoyan Gurevich, Sukhoi, Tupolev, Irkut, Yakovlev, and Ilyushin design bureaus, will issue an IPO in 2009-2010. Besides defense aicraft, Sukhoi is rapidly moving into the growing international market for business jets.
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 are reproduced here solely for educational purposes. 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.