The Growing Global Clout of Sovereign Funds
Director of Equity Financing, FINAM Investment Company, Moscow
President Putin and Chinese President Hu Jintao have both built up national sovereign funds
In a previous Russia Blog post ("Is the U.S. Seeking Capital from Russia's Stabilization Fund?") about U.S. Deputy Treasury Secretary Robert Kimmitt visiting Moscow, I briefly discussed the issue of sovereign funds. The growing clout of governments as institutional investors was a hot topic last week in the international news media. While I have neither ability nor the desire to discuss the issue in depth, I do have a few observations.
The Economist has produced an interesting chart (see the extended post) for its July 14, 2007 issue that shows where Russia's Stabilization Fund ranks among sovereign funds worldwide. The Economist's numbers were calculated by Morgan Stanley and reflect the position of sovereign funds as of March 2007.
Click on the extended post to read more.
Source: The Economist
A more recent estimate of sovereign fund assets was released in May 2007 by Stephen Jen, global head of currency research at Morgan Stanley. The American government's attitude towards the growing role of sovereign funds in statement by Acting U.S. Treasury Department Under Secretary for International Affairs Clay Lowery. According to Mr. Lowery, sovereign wealth funds "raise broad, strategic issues for the international financial system".
Last week the International Herald Tribune examined the situation in Europe and cited the German government's concerns over increasing investment in the European Union by state-owned companies from Russia and China. The title of the IHT article? "Europe Looks At Controls On State-Owned Investors".
Morningstar Raises Outlook on Russian Telecoms
Following up on my earlier suggestions ("Investing in Russia's Growth Sectors") about which sections of the Russian economy foreigners should be investing in, I have reproduced an excerpt from an article published by the financial rating firm Morningstar confirming the benefits of owning Russian telecom shares.
"We also think that the political risk of investing in the telecom sector is less than in the oil and gas sector. That said, political risk still makes these firms riskier bets than telecoms in other markets; Russia's penchant for disrespecting property rights warrants a speculative risk rating and a large margin of safety before investors should consider buying." This is in line with my previous recommendation that investors buy shares in Russian construction companies, railroads and telecom.
My contention that there is still plenty of room for growth in the Russian construction industry is supported by the data on mergers and acquisitions (M&As) in this sector for 2006 recently released by mergers.ru. In 2006 there were 109 transactions with a value of $ 1.939.5 billion, and an average transaction value of $ 16.8 million. Only four transactions were valued over $100 million; and acquisitions by foreign companies accounted for only 9% of the total. Russia's construction sector represented only 3% of the overall cost value for Russian M&As in 2006.
Former U.S. Senator and Republican presidential candidate Bob Dole (left) talks to Ambassador William Burns (center) and Russian tycoon Oleg Deripaska (right) during a reception hosted at the Ambassador's residence on January 31, 2007 (Photo by: Embassy of the United States to Russia)
Another timely confirmation of my views I want to cite was last week's announcement that the European Commission (EC) has cleared a major new joint venture in Russian and CIS real estate. The consortium will include Deutsche Bank AG (DBK.XE), the Austrian construction company Strabag SE's (STB.XE) investment unit Strabag Invest GmbH, and Moscow real-estate consultant Dmitri Garkusha, with the goal of developing large scale real-estate ventures in Russia and the CIS countries. This joint venture will finance and develop "major real- estate and infrastructure projects" not only in Russia, but also in the former Soviet republics of Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Uzbekistan and Ukraine.
The Russian metals magnate Oleg Deripaska owns 30% of Strabag, which is planning an IPO before the end of this year. Mr. Deripaska was a key supporter of Russia's successful bid to host the 2014 Winter Olympics in Sochi.
Renaissance Capital Tops Russian Investment Banks
Renaissance Capital outranks every other bank, international or local, in Russian equity capital markets in the first half of 2007, according to separate rankings produced by independent data providers Dealogic (SEA:DL.) and Thomson Financial (NYSE:TOC).
Both surveys name Renaissance Capital as the leading investment bank in Russia for both value and the number of ECM deals carried out in the first six months of the year. This news follows a string of other independent rankings in which Renaissance Capital has consistently emerged as the dominant international emerging markets investment bank, including becoming the first ever emerging market-based bank to break into the top 10 rankings of bookrunners for European IPOs. Renaissance moved up to sixth from its previous 20th ranking at this time in 2006, according to Dealogic.
Among the major ECM transactions Renaissance Capital has led on this year are the $8 billion IPO of Vneshtorbank (VTB), as well as IPOs for MMK, Integra, Sitronics, Volga Gas, Dixi, Nutritek and Rosinter, with several additional secondary transactions and private placements. In total Renaissance Capital has advised 12 ECM transactions in the first six months of 2007, with a combined value of $12 billion.
Gazprom Media to Buy RuTube?
Gazprom Media is the latest in a long line of Russian media groups to invest in the Internet. Last week it was reported that Gazprom Media is now in discussions regarding acquiring the video-exchange portal RuTube (a Russian clone of YouTube). Gazprom Media will pay a steep price as a late arrival to the Internet party. According to FINAM's estimates, RuTube is highly overpriced. It is has also been reported that in 2008 the holding company's budget had about $ 100 million for Internet acquisitions.
Campbell's Soup Comes to Russia
In the wake of Starbucks (NASDAQ:SBUX) decision to enter the Russian market, Campbell's Soup (NYSE:CPB) is another newcomer to Moscow. This week the company announced that in October its products are to be sold in Moscow -- with beef, chicken and mushroom varieties. Campbell's Soup is known to Russians today through Andy Warhol's artwork rather than the supermarket, but many analysts think that the company could be successful with an aggressive marketing campaign.
Although Campbell's incumbent competitors are already widely distributed in the supermarkets and small shops (Gurmania by Mars; Knorr by Unilever) I think that Russian consumers would welcome this new choice. Traditionally Russians have consumed more soups than any other people in the world, and most of them (like borscht) are homemade. But in recent years the younger generation, which often feels too busy to cook, is buying more and more of these products.
Finally, one last highlight from last week - Russia's Interfax news agency released some analysis of the Russian stock market -- "An Ideal Model for the Russian Stock Market in Mid-term" which is worth reading.
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.