Director of Equity Financing, FINAM Investment Company, Moscow
Starbucks has finally come to Moscow, but what's next?
The phenominal growth we are now witnessing in Russia can and should be compared to the much more hyped boom in China. Although Russia's stock markets did react to the subprime volatility emanating from American credit markets, the Russian economy is not nearly as vulnerable to shocks originating from abroad as it was just ten years ago, when the devaluation of Asian currencies and the near-bankruptcy of the Yeltsin government devastated the ruble. Clearly that was then, this is now. The New Russia has shrugged off the recent corrections in both the U.S. and Chinese stock markets to continue what has been a record-shattering year for IPOs and foreign investment.
A few weeks ago the Russian Federal State Statistics Service produced a report indicating that Great Britain was the largest investor in Russia, investing $15.0 billion in the first half of 2007. Ironically enough, the vast majority of this new investment -- approximately 80% - came in the second quarter of the year, when a diplomatic row erupted between London and Moscow over the Alexander Litvinenko case. In spite of Moscow's refusal to turn over its citizen Andrei Lugovoy, or London's refusal to extradite the exiled oligarch Boris Berezovsky, politics did not seem to affect business at all. Most of the major UK investments for H1-2007 went into the wholesale and retail sectors.
Vimpelcom and MTS are issuing bonds to expand their telecom networks in Russia
Last month Hexam Capital Partners announced that Russian fixed investment growth had reached 27.2%, a 15-year high. According to Hexam, some of the fastest growing sectors are banking, utilities, construction, and telecommunications. Earlier this week, Reuters reported that Russia's top cellular service provider, MTS, will issue over 15 billion rubles ($586 million) in bonds. Vimpelcom, the nearest rival to MTS, has already issued a similar amount number of bonds to finance its rapid expansion.
In July 2007 the multinational auditor Deloitte surveyed over 100 employees at 45 investment companies operating in Russia and the CIS. Deloitte concluded that Russia has become an inviting environment for direct investment funds. In 2006 the assets under the management of direct investment funds working in Russia was $ 6 billion -- three times the level of 2003. Investment bankers operating in Russia were polled by Deloitte on which Russian sectors they believed would produce the best returns in the near future, and here is how they responded:
- 28% believe that the best growth sectors are mass-media, high tech and telecommunications;
- 18% are picking financial services, healthcare and pharmaceuticals;
- 9% believe that infrastructure will produce the best risk-adjusted returns
According to Deloitte, the average annual returns for direct investment funds in Russia are between 30% and 35%, as compared to the average of 25% for global emerging markets.
Here are some other recent news stories from the Russian financial and business world:
An artist's concept of the 787 Dreamliner in Aeroflot colors (Source: Boeing's Fleet Buzz Blog)
Boeing Partners with Russian Titanium Company for Dreamliner
In news that may be of interest to Russia Blog's readers in the U.S. Pacific Northwest, Boeing (NYSE:BA) and Russian titanium producer OAO VSMPO-Avisma (RTC:VSMO) have formed a joint venture to produce titanium forgings for Boeing's new 787 Dreamliner. Ural Boeing Manufacturing (UBM), a 50-50 JV, will be based at Verkhnaya Salda in the Urals, and will start operating in late 2008, when Boeing completes the purchase of equipment to be installed at the plant.
Earlier this year, during the St. Petersburg Economic Forum, Boeing announced a $3 billion contract to begin delivering twenty two 787 Dreamliners to Aeroflot. This came after Boeing signed a deal to build five new 747 freighters for the Russian air cargo carrier Volga Dneper Airlines in March 2007. VDA regularly uses Soviet-built Antonov 124 transport planes to deliver jet engines from the General Electric plant in Cincinnati to Seattle. Russia Blog readers who regularly commute on Interstate 5 in south Seattle have probably noticed these big jets parked at Boeing Field.
International Paper Launches Joint Venture with Ilim Holdings S.A.
Back in Russia, International Paper and Ilim Holding S.A. have signed a definitive agreement to form a 50:50 joint venture, the largest foreign-domestic alliance in the history of Russian forestry. The joint venture will operate as the Ilim Group (Ilim). International Paper will purchase 50% of Ilim Holding, S.A., for approximately $650 million.
A key element of the proposed joint venture is a long-term investment program in which the JV would invest, through cash accumulated from operations and some additional debt, approximately $1.5 billion in Ilim's four wood mills over approximately five years. This unprecedented investment in the Russian pulp and paper industry would be used to upgrade equipment, increase production capacity, and allow for new high-value uncoated paper, pulp and corrugated packaging product development in the country.
T. Rowe Price Acquires Shares of AFK Sistema
In the second quarter of 2007, T. Rowe Price Global Investment Services (NASDAQ:TROW) acquired global depository receipts (GDRs) equivalent to 1.24% of the authorized capital of OJSC Sistema-HALS, a subsidiary of AFK Sistema (RTD:AFKS). With this acquisition, T.Rowe now owns a 1.84% stake in Sistema-HALS. At the same time T.Rowe has increased its ownership of Russian online media company Rambler (SEA:RMG), which operates rambler.ru.
Dutch-Israeli Investment Bank Acquires Chunk of Sovcombank
Vancouver B.C.-based Centrasia Mining Acquires Kola Peninsula Deposits
Canada's Centrasia Mining Corporation (TSX VENTURE:CTM) (OTCBB:CTMHF) (FRA:C8M) acquired Rudprominvest, a company that owns licenses to develop three large copper-nickel deposits on the Kola Peninsula in Russia's Arctic. Half of the $25 million was paid in Centrasia stock.
Thyssen Krupp is opening new distribution centers in Russia
The service unit of Germany's ThyssenKrupp AG (FRA:TKA) is investing about 18 million Euros in the construction of two new warehouse, logistics and processing centers in Russia. One center will open in Sept 2008 in the city of Nizhny Novgorod, and the other will open in the St. Petersburg region in May 2009.
Also in August, Russia's Central Bank granted foreign banks permission to buy stakes of more than 20% in Russian banks. According to Central Bank First Deputy Chairman Gennady Melikyan, foreigners currently hold stakes in 188 Russian banks. As of July 1, overseas investors have increased their share in the sector's combined capital to 21.3%. This compares with 12.9% percent in 2006. In the first six months of 2007, the number of banks with 100% foreign capital grew from 52 to 58, and those with more than 50% foreign capital, from 13 to 19.
Japan's Daiwa Securities Coming to Russian Federation
New banks are coming to Russia almost every week. Just last week the Russian media reported that one of the biggest Japanese investment banks, Daiwa Securities SMBC, is opening an office in Moscow. It is interesting to note that Daiwa historically has been one of the leading Japanese IPO bookrunners.
In related news, old players who first came over during the Nineties are now expanding their presence in Russia. Lehman Brothers Holdings Inc. (NYSE:LEH) recently made two senior hires in Moscow, and plans to add sixty more people to its office, as part of ambitious plans to launch full scale investment-banking services in this country by the end of the year.
British Travel Agency Expanding Business in Russia
The major British travel agency Thomas Cook (LON:TCG) plans to investigate opportunities to beef up its presence in Russia, with a whole spectrum of options ranging from making acquisitions to setting up joint ventures.
Last But Not Least...Starbucks Comes to Moscow
Finally, in a story that was reported by the Seattle Times and many other American media outlets, Starbucks (NASDAQ:SBUX) will open two stores in Moscow before the end of the year. The first Starbucks opened today (September 6, 2007) on the Khimki Mega Mall, in the suburbs just north of Moscow City. The second is scheduled to open on Moscow's historic Stary Arbat, a promenade popular with Muscovites and tourists alike.
Vladimir F. Kuznetsov is the Moscow-based editor of Russia Blog. 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.