Is the U.S. Seeking Capital
from Russia's Stabilization Fund?
Director of Equity Financing, FINAM Investment Company, Moscow
U.S. Deputy Secretary of the Treasury Robert Kimmitt
"The next globalization battle lurks over the horizon, but you can already guess its contours. It will be shaped by two revolutions in finance and business: the growth of vast government-controlled investment funds abroad and the muddled progress toward shareholder democracy in this country." This quote is from an article ("The Next Globalization Backlash. Wait Till the Kremlin Starts Buying Our Stocks" by Sebastian Mallaby) published on June 25, 2007 in The Washington Post.
On this topic of state-owned institutional investors, it is worth noting the recent trip to Moscow by U.S. Deputy Treasury Secretary Robert M. Kimmitt. The visit was not well- reported in the Western media, and even less is known about the results of Mr. Kimmitt's discussions with his Russian counterparts. Only a brief interview with Deputy Secretary Kimmitt was published by Russia's RBC-Daily on June 25.
According to the RBC Daily article, these high level discussions centered on the U.S. Treasury Department's desire to see more of the Stabilization Fund of the Russian Federation invested in America. In his statements, Mr. Kimmitt expressed the idea that the U.S. economy is a good target for Russian investments.
Like the recent Chinese acquisition of Blackstone Group stock, Russian entities investing in American equities will likely stay below the 10% threshhold that would trigger Congressional review
As of June 1, 2007 the stabilization fund, established by the Putin Administration a few years ago has a hedge against global oil price volatility and inflation, has accumulated $116.8 billion . Next year the fund will be spilt into two parts: the Reserve Fund and the Fund for Future Generations. It is widely assumed here in Russia that both funds will diversify by being broadly invested outside of the country.
As you may have read in Mr. Mallaby's article, sovereign funds worldwide are now abandoning their longstanding (and conservative) strategy of investing in U.S. Treasury bills. Sovereign investors are now seeking higher yields through investing in global companies - a good example is the Chinese government's recent purchase of 10% equity in the Blackstone Group (NYSE:BX).
This interesting story leads me to ask a few questions: was this the issue that Secretary Kimmitt discussed in Moscow? Is the Bush Administration concerned about a protectionist backlash from the U.S. Congress when a Russian state-owned firm or fund announces a major investment in America?
It will be interesting to see if The Wall Street Journal and The Economist, both of which criticized the U.S. Congress for blocking the Dubai Ports World deal in 2006, will apply the same free trade editorial policy to the acquisition of equity or infrastructure in America by a Russian-state owned company.
Martha Stewart toured the Russky Standart vodka distillery on her TV show
Martha Stewart Loves Russia
Martha Stewart, the founder of Martha Stewart Living Omnimedia Inc. (NYSE:MSO), is very close to launching her Martha Stewart Living magazine in Russia. The home-ec entrepreneur recently aired an episode of her show filmed at the Russky Standart vodka distillery outside St. Petersburg, with Roust Group CEO Rustam Tariko as her guide.
This week RBC Daily reported that several Russian market players received proposals on cooperation with Stewart's company. Russian experts believe that this effort might be successful, but Ms Stewart is not well known in Russia. However, if she would be able to attract some Russian celebrities to her show, that might add more popularity. Stewart was highlighted in Russian press in April this year when she visited the Baikonur Kosmodrome in Kazahkstan to see off Charles Simonyi, a software engineer and developer of Microsoft Word who paid between $20 million and $25 million for his 13-day space tourist trip to the International Space Station.
Martha Stewart (left) and Charles Simonyi (center) at a gala event
Merrill Lynch Report on High Net Worth Individuals:
Russia Joins India, Singapore with the Highest Number of New Millionaires since 2005
This week the financial services groups Merrill Lynch (NYSE: MER) and CapGemini released the "World Wealth Report 2007". The report says that that number of millionaires in the world increased by 8.3% in 2006, with about 9.5 million individuals worldwide now estimated to have a net worth exceeding one million dollars in financial assets. The club of "High Net Worth Individuals" (HNWIs) expanded more in 2006 (11.4% over 2005) with Singapore, India, Indonesia and Russia producing the greatest number of new millionaires.
The number of Russian high net worth individuals (HNWI) increased by 15% in 2006
OMX and Russia
OMX (NYSE:OMX) is stepping up its activities associated with Russia. Last week two events shaped news about the Scandinavian company. Trading in EnergyO Solutions Russia AB ("EOS") was commenced at First North, OMX's alternative investment market. First North is a new investment company that started its operations just a few months ago and holds in its portfolio significant assets of Russian electricity companies. The prospectus of the company gives a very good overview of the Russian utilities sector and its current situation.
The second event was the "Dual IPOs in Moscow and Stockholm for Mid-Cap Russian Companies" conference that was held in St.Petersburg with the support of the Swedish Embassy. Unfortunately I learned about this conference too late to attend but from the advertising materials I understand that it featured several quality presentations of possibilities for Russian companies to raise capital in these AIMs.
Russian Banks Increase Assets
Last week the Bank of Russia announced that the total amount of assets held in Russian banks grew 11.1% to 15.599 trillion rubles (approximately $599.11 billion) in the first quarter of 2007. The aggregate capital of lending agencies rose 19.3% to 2.019 trillion rubles (approximately $77.74billion), boosted by the Sberbank (RTC:SBER) IPO in Q1. The number of credit institutions exceeding 5 million euros in capitalization reached 59.2% of the total number of lending agencies operating in Russia as of April 1, 2007. This number was up from 56.9% as of January 1, 2007.
A TransAero airliner on the tarmac in Berlin (Photo by: BerlinSpotter.de)
Russian IPOs Update
Transaero Airlines -- as the first step to the planned IPO, the company closed a private placement deal by selling 4% of its equity.
Technosila - electronics retail chain -- as the first step for planned IPO issued CLNs for $100,000.
Inter RAO UES - Russia's state-owned electricity import and export operator -- IPO in 2008
Kamaz (RTS: KMAZ) -- possible IPO for $300 million in the second half of 2008.
ST Region Group - major construction company -- LSE IPO in MaY 2008 with the hope to raise $ 1 billion
Irkutskenergo - one of the largest power generating companies in Russia -- IPO in 2008
Neloaks gold mining company -- possible IPO on LSE AIM this autumn
KuibyshevAzot - a chemical company -- planning an IPO at the beginning of 2008.
Almaz-Antey, a leading vendor of air defense systems -- IPO sometime in 2009-2010
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.
Re the post from Vladimir Kuznetsov.
Global trade imbalances is a worry. Will history repeat itself - collapsing international trade was a worry 70 years ago and a devastating world war resulted (Russia alone lost over 20m).
In order to prevent a repeat, the international community assessed the reasons for WW2 and then concluded that international checks on national finances were necessary for stability - and these were introduced at the Bretton Woods conference. But the safeguards lasted only 20 years, because they were no longer thought a priority.
[President Putin emphasises] that the doors in Russia are open for carrying out the most ambitious joint projects. . . It has become increasingly apparent of late that the existing organisations are not always up to the measure in regulating global international relations and the global market.
Putin and Bush Meet in Kennebunkport
Russia seems keen to help with a new global financial architecture. But there are few mechanisms to encourage this.