RBS and Renaissance Capital Bank to establish Russian Joint Venture

Royal Bank of Scotland (LSE:RBS) and Renaissance Capital Bank are planning to jointly establish an investment bank in Russia. The bank will be owned 50/50 and is expected to commence operations by the start of 2008.

Merrill Lynch: Russian Stocks Top Performers in Emerging Europe-Middle East-Africa

Last week Dow Jones reported that Merrill Lynch (NYSE:MER) released a research report (June 21, 2007) on Emerging EMEA (Europe, the Middle East and Africa) that shows Russian stocks at the top of ML’s list of preferred equity strategies for the EMEA region.

Ernst & Young Report - Russian IPOs Driving Growth in European Markets

This week E&Y released "Globalization: Global IPO Trends Report 2007" that is one of the best current overviews of what is going on the world marketplace for IPOs. Globalization is the driving force behind IPO trends throughout 2006 and the first quarter of 2007. The growth of cross-border trade has obliged local exchanges to become more liquid and stringent in their listing requirements. According to the survey, most IPOs are held domestically because companies have most of their client base inside their home countries — 90% of the world’s companies choose to list in their respective primary markets. Russia continues to drive growth in European markets. Some major points of the report are:

• Growth-hungry investors hunt for higher returns abroad, especially in emerging markets.

• As global capital expands its horizons with more world-class financial centers, Hong Kong and London are luring the top global IPOs.

• Global bourse rivalry has led to the transatlantic NYSE/Euronext merger, and more international exchange alliances are expected soon.

• Europe’s IPO markets rose to an all-time high in 2006, and remain high-flyers in 2007, bolstered by beefy deals, cross-border listings in London, and highly active private equity groups.

• As the region’s high-growth story, Russia is a major driver of European IPO activity.

• London has become the top listing destination for cross-border issuers seeking relatively quick and easy capital.

• Europe’s junior exchanges, including London’s AIM, the Euronext’s Alternext, and Deutsche Borse’s Entry Standard, are humming with small-cap activity.

• The ballooning growth in European private equity is leading to more IPO exits, and sizeable public-to-private transactions.

The report notes that more international investors have begun to set up branch offices in Moscow to enable local capital fundraising, especially with smaller deals.

“Regardless of where a company lists, in London or in Moscow, 80% of the buyers will be the same, mostly the large international names, and all are set up to buy shares both locally and internationally. There are only a handful of international names that still require London listings to buy Russian shares,” notes Anton Cherny, Managing Director and Head of Equity Capital Markets at Renaissance Capital. But another expert - James Klein of the Capital Markets Group, Ernst & Young, Russia - says that most investors would still rather go through London, because Russian exchanges still lag far behind London in terms of being able to quickly execute orders, costs, and transparency.

Oleg Vyugin speaks to a group of students in Amsterdam
(Photo by: Federal Financial Markets Service)

Former FFMS Head Oleg Vyugin – A Merger Between RTS and MICEX?

Almost simultaneously with the release of E&Y report, Russia’s Vedomosti Daily published a detailed overview of the Russian stock market by Oleg Vyugin, the former head of the Federal Financial Markets Service (Russia's counterpart to the U.S. Securities and Exchange Commission), who has now accepted a position as Chairman of MDM Bank. I believe that there is no other expert in Russia who knows this subject better. Now that Mr. Vyugin is out of government service, he is free to express his personal opinions to the public.

It seems that these two reports were released to coincide with each other and expressed the same type of thinking. One of the key ideas, expressed by Mr. Vyugin is that over the last 10 years, the Russian stock market has undergone profound changes. In particular, the assets of the Russian companies have become attractive even for the most conservative international investors.

Unfortunately, both Russian exchanges’ technologies are still at an older level, and are not adequate for today’s major foreign players. Moreover, instead of thorough evaluation and introduction of new solutions in technology, both major Russian exchanges are involved in a fiercely competitive struggle within one and the same exchange instrument areas for the same clientele. This distracts the Russian exchanges from the genuine development tasks that would make them more competitive with other stock exchanges on the rise around the world. This “game of insane rivalry”, as Mr. Vyugin calls it, plays right into the hands of the established London Stock Exchange since it “willingly receives with success a lined up succession of Russian issuers, gaining commissions that otherwise would be used to develop Russian exchanges”.

According to Mr. Vyugin, the fundamental reason for the stagnancy of Russian stock market data infrastructure is inadequate levels of corporate structure and management. And the obvious solution is to make the assets of the stock exchanges themselves available to the public through IPOs or sales to strategic private investors. Several international stock exchanges may have a strategic interest in improving this Russian infrastructure.

Mr. Vyugin's views were supported to a great extent at the meeting of the MICEX Stock Exchange Committee, where Vladimir Milovidov, Vyugin’s successor as FFMS Chief, made his first public appearance. The meeting was attended by top Russian bankers and stock exchanges officials. The key issue of discussion was the competitiveness of Russian stock markets and ways to increase it. The projected scenario in the view of the FFMS is a merger of Russia’s RTS and MICEX.

More Russian IPOs Coming Up in Autumn 2007

The IPO market is about to witness a constant inflow of new transactions from Russia. This was expressed once again by Anton Cherny of Renaissance Capital, in an interview with RBC-TV. Q1 and Q2 IPOs resulted in certain investor weariness, but autumn will be the time for another big influx. Cherny thinks that these new players will be companies from the finance and real estate sectors. Regarding anxiety over the 2008 presidential elections in Russia, he noted that this psychological factor would greatly affect international investors investing in Russia’s most highly politicized sectors, i.e. energy. Russia’s rapidly growing sectors that are in predominantly privately owned would not be affected.

More Bullish Views of the Russian Economic Boom

Last week the Economist Intelligence Unit ViewsWire released the report “Russia's Booming Economy - It's Not About Just Oil and Gas: "…in the context of the near stagnation of hydrocarbons output, Russia’s growth performance is surprisingly robust and well above the long-term trend rate. “

Last week I recommended that our readers check out a notable article in Newsweek International by Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management. The key quote from this article: “Investors who have looked beyond the sensational headlines in the international media have made extraordinary gains in Russia. China and India may have registered faster growth rates, but companies catering to domestic demand in Russia have been able to achieve higher profitability, as the reduced hype surrounding Russia has resulted in less intense foreign competition on the ground compared with the opportunity presented by the economic boom. “

Volvo, Renault to Build Trucks in Kaluga Region of Russia

The Volvo Group (NASDAQ:VOLV) is investing a total of $135.9 million in an assembly facility. The new factory in the city of Kaluga will have a capacity to build 10,000 Volvo trucks and 5,000 Renault trucks per year. It is scheduled to be completed in 2009. It is interesting to note that the demand for used trucks from Western Europe has been strong in Russia (about 5,000 used Volvo trucks were imported in 2006). Volvo Trucks recently invested $14.5 million in a wholly-owned service facility strategically located just south of St. Petersburg on the expressway to Moscow.

The Grandaddy of U.S. M&As is Coming to Russia

The Ernst & Young report that I mentioned above briefly notes that the Russian private equity market is very much underdeveloped. “Currently, Russia’s private equity industry is under development — it’s not the traditional private equity industry seen in the West, and there are no leveraged buyouts,” says Anton Cherny, of Renaissance Capital. “But there are quite a few local and international players who are happy to take on private risk, and buy into unlisted assets.” Cherny considers the Russian universe of private investors to be wider than in the West. These private investors are not traditional leveraged buyout shops, but include hedge funds, venture capitalists, asset managers with private equity “arms,” and in particular, Russia’s oligarch industrialists and their investment vehicles who have billions in private equity concentrated in their hands.

This fact was quite nicely illustrated by one major announcement last week. Two co-sponsors: JER Partners, the global real estate investment arm of the J.E. Robert Companies, and Alfa Capital Partners, the Moscow-based real estate investment group affiliated with Russia’s Alfa Group, announced the final closing of the Marbleton Property Fund.

The Fund will concentrate on investments across all property sectors in Russia and Ukraine and will purchase existing properties as well as participate in new developments. The European Bank for Reconstruction and Development is the anchor investor for the Fund. Other limited partners who have joined the Fund include institutional and private investors from around the world. Marbleton has completed agreements for transactions in Moscow and St. Petersburg and has several exclusive rights transactions underway. The Fund was commenced in 2005 and since then has grown from $200 million to $321 million in assets under management.

Raiffeisen Investment AG and Lazard Ltd (NYSE: LAZ) announced a joint cooperation agreement to create a merger and acquisition (M&A) advisory service for Russia and the Central and Eastern Europe (CEE) region. This is beneficial for both sides: Lazard is receiving “the keys” to a booming Russian market and Raiffeisen Investment hopes to boost its activities, which so far have been really modest (for Q1 2007 it has deals of $ 150 million). According to their corporate announcements, this new joint venture would look into creating new deals worth at least $ 200 million.

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.