In Nicosia, Cypriots wave signs written in Russian and asking Russia for help
The gas reserves of Cyprus apparently do not sufficiently tantalize the Russian government, at least not enough to persuade Mr. Putin to lend the Mediterranean island some six billion Euros. The government of Cyprus has a new plan to give the big investors a haircut, but it still won't be enough (only about two billion Euros), and the EU is unlikely to approve it.
The Wall Street Journal today editorializes in favor of bankruptcy as the best option for the Cypriot banks, which is what probably should have happened to some US companies in 2008. After a 40 percent loss for large investors (accounts with $100,000 or more Euros), the bankrupt banks would be reorganized. Oddly, some Russian investors in Cyprus would have a big position in the new banks, not that that would be a huge consolation to them.
My Discovery colleague Yuri Mamchur thinks that the political/military temptation for the Kremlin is insufficient to justify the risk of a big loan to the insolvent Cypriots. I guess the gas reserves are in the future and the payout for a loan would be today, so no deal (at least not yet). Also, Yuri points out, the Russian oligarchs who will get the haircut are not the reason Mr. Putin is in power, so why save their tax avoidance schemes?
Today, one American dollar buys 32 Russian rubles. Most likely, this is not what Putin envisioned as the result of his economic reforms ten years ago.
Vladimir Putin can be personally credited with a lot of positive developments in Russian economy over the past ten years. Because of Vladimir, today, Russia has private land ownership, functioning banking system, credit system, next-to-zero government debt, and the rising middle class. However, as far as the world is concerned, Russia is still not the investors' dreamland. The little table of ruble-to-dollar exchange rate shows up on all Russian websites and TV screens, and it tells a not-so-good story. In the middle of America's worst financial crisis, the dollar is stronger than ever. Russian ruble, backed by barely any government debt and solid cash flows, is one of the least desirable currencies. When I left Moscow half a year ago, dollar could buy 26 rubles. In the past two weeks, that number has shifted to 32 rubles per dollar.
In the meantime, Russian websites and general population publicly make fun of Putin-Medvedev team and show dissatisfaction with the inability of choosing their own governors, Medvedev's failure to curb the corruption, and the growing wealth of bureaucrats. All the aforementioned problems were supposed to be short-term growing pains of the improving Russia. Instead, the pains became the norm. Why do world's investors chose the American dollar over the Russian ruble? Because American legal and court systems work, secretaries of states and governors earn a fraction of corporate CEOs' salaries, and a speeding driver means a speeding tickets, regardless of whether you're a star, a homeless, or a daughter of a former U.S. president. Maybe in the new decade, the (hopefully) new Russian leaders will take a closer look at Russia's corruption problem and society's needs. As they say, money will come later - it always does.
From Russia with Love? Will Russia Help with the Currency Crisis in Belarus?
By Jessica Cook
The question on the lips of the finance market is: 'will Russia bail out Belarus'?
The Belarus ruble, also knows at BYL, was originally instated to replace the Soviet Union ruble. The Belarus ruble has been notoriously unstable since it was introduced in 1992 and today, Belarus is still struggling to keep its currency stable. The moniker "the black Tuesday" has been daubed onto the recent devaluation of Belarusian currency and it is almost impossible to exchange your Belarusian rubles for foreign currency because: simple put, no one wants to touch it. Knee deep in financial crisis and struggling to keep its currency head above water, the world can only speculate what will become of the Belarus ruble and the financial future of Belarus itself, which is being forced to sell many of its assets to try and stopper its growing debts.
Because of its poor value, many British exchange outlets are currently wary to deal with the Belarus ruble at all. Belarus currency exchange offices are reported to have a noticeable increase in customers as people try desperately to protect their hard-earned savings by exchanging them to a more stable currency such as the euro or the dollar. Because of the rush for foreign exchange their government has been forced to tighten the legislation surrounding currency exchange. These new restrictions and the reluctance of the rest of the world to participate in a collapsing currency mean that it's almost impossible to exchange the Belarus ruble, in Belarus or outside of it, and Belarus foreign exchange locations are actually running out of other currencies to sell. The high number of people trying to exchange Belarus rubles for other currencies has led to a physical drought of other currencies due to the rising demand created by financial panic. To combat financial collapse foreign exchange offices have been limited so that they can sell only what they buy from clients. Because of the volatile nature of this currency, the government have also frozen the prices on certain foodstuffs but ordinary Belarusians are thought to be hoarding staples in case of future problems in a classic case of currency panic.
Russia - World's Largest, Most Stable Energy Exporter. Moscow - Home to Most Billionaires
A janitor cleaning the street next to an exotic race car in Moscow, Russia
With average salaries of the working class virtually unchanged over the past year, and still no paved road between the west side and the east coast of the country, Russian citizens are not sure if they should be proud by the fact that their nation's capital is home to 79 billionaires, most in the world. On the other hand, Russia's vast spaces and extreme temperatures would make the maintenance of a continental highway nearly impossible, and an average Russian has seen his income surge over the past decade. So, after all, countless Bentleys, Mercedes's, and Rolls Royce's in the streets of Moscow are nowhere near to cause a Soviet-October-style or Egypt-type revolution. People, on average, are happy.
With unrest in Africa and the Middle East, The New York Times (usually unfriendly to Moscow) calls Russia "the most stable energy exporter in the world." European and American investors lined up to strengthen Russia's financial well-being and billionaires' pockets: "BP cited Russia's relative stability compared with OPEC regions, when announced in January a $7.8 billion deal to invest in the state-owned Russian oil company Rosneft and jointly search for oil in the Arctic. Later that month, Exxon Mobil, the biggest American oil company, signed a deal with Rosneft to explore offshore in the Black Sea," reported the NYT. French energy giant Total cited Russia's stability two weeks ago when agreeing to buy $4 billion worth (about 12 percent) of a Russian independent natural gas producer Novatek, and join a liquefied natural gas project in the Russian Arctic.
Combined with Russia's status as a number-one world's energy exporter, facts are facts: Russia is home to a stable economy, balanced budget, satisfied population, fastest strengthening currency, and 101 billionaires. After all, Russia's snow and ice are friendlier than Arab sand and sunshine (and safer than the Wall Street's gambling).
Moscow River embankment on a summer night (Photo by Yuri Mamchur)
MOSCOW -- German Sterligov is well known here, but unlike Roman Abramovich, Oleg Deripaska, and other publicly flamboyant Russian billionaires, he is little known abroad. Sterligov neither sails the Caribbean nor drinks in London's Mayfair district; most of the time he lives a traditional peasant lifestyle deep in the Russian countryside with his wife and five children. In winter, their farm is accessible only by horse-drawn cart, and the nearest house is seven miles away. Sterligov's way of life makes a strong Russian Orthodox statement and amuses Moscow's public.
Sterligov made his fortune in the 1990s running a large barter business. He founded a mercantile exchange where Russians traded products they were unable to buy or sell for cash. He lived the luxurious life of a billionaire and owned properties in Moscow, London, and Manhattan. In 2004, after an ill-fated bid for Russia's presidency, Sterligov sold everything and moved to the countryside.
The United States is not the only country where the political leadership is attempting to throw its weight around with banks. Russia's system is different in many ways, but what seems to be familiar is Prime Minister Vladimir Putin's effort to strong-arm the banks to adopt policies he think would be most effective. What is interesting is that the banks are not taking the advice kindly. There is push back.
by Oleg Elshin
Executive Director, EastKommerts Investment Group, Moscow
A year ago I by chance witnessed a very unusual situation in a London street. Just next to the Bank of England around thirty Englishmen queued up outside a Northern Rock bank branch hoping to get their deposits back.
The event was indeed historical as it was the first classical bank run over 150 years in England. It is common knowledge that no bank ever survives and will definitely crash if all of its depositors, doubting the bank's stability, simultaneously demand to return their deposits. In the end only nationalization saved Northern Rock but its former shareholders lost everything.
I had such an interesting set of meetings last week. After long preparations and much organizational work, I finally had an opportunity to meet the CFO of a large industrial group with 10 factories spread across Russia.
While I could find little info on this group to prepare myself, one of our partners assured me that this was a very serious group with hundreds of millions of dollars in annual sales. They made big metal things with lots of electronics inside, nothing secret in their production, but you know, they had really serious owners behind this group "very well connected" as they say.
Russian Banks Beg for Bailout Money Since They Will Suffer Controls Regardless
A currency exchange kiosk sign shows the exchange rate of one dollar to rubles in February 2009. In summer 2008, half a year earlier, one dollar could be purchased for only 23 rubles.
Americans these days are used to banks trying to avoid federal bailouts because they have learned that bailouts come with onerous government management controls. But in Russia, the government puts strings on banks if they are perceived to be in difficulty, and the Central Bank does this without providing any backup money of its own other than modest protection for individual depositors.
The St. Petersburg Times reports that small banks attending the annual conference of the Association of Russian Banks begged lawmakers and state officials to amend the new law that requires them to increase their net worth to 90 million rubles ($2.6 million) by January 1, 2010, and to 180 ($5.2 million) rubles by 2012. But government officials apparently regard the new law as necessary, even if it seems harsh. Minister of Finance Alexei Kudrin said that while there are still "honest" banks in this small-cap category, there are also many banks "engaged in money laundering," banks that exist not to lend but to "protect the owners' or someone else's money." He predicted that by January 1 about 150 banks would not have enough capital to meet the requirements.
Innovation Opportunities Motivate Russian and American Investors Despite Economic Crisis
Watch the video and read more in the extended post
The economic crisis is in effect; however, investors on both sides of the Atlantic are awakening from the shock they experienced last fall, and starting to invest. According to Russia Today, Russia's president Dmitry Medvedev is a "tech-junkie." Medvedev is known to enjoy keeping up with the latest high-tech gadgets, and even has been seen wearing a James Bond-style watch complete with a camera, GPS navigator, radio and video player. He is believed to be a fan of Apple, reportedly owning an iPhone and at least three MacBooks. The leader's hobbies seem to translate into investment policies.
According to Canwest News Service, a state-owned Russian venture capital fund is poised to pump millions of dollars into Canada's fledgling nanotechnology industry. Later this spring, RUSNANO officials in Moscow will decide which firms or startups it wants to fund. RUSNANO's minimum investment in any of 100 firms will be $10 million U.S.
Also, Silicon Valley/Moscow-based Almaz Capital Partners announced its first $11 million of investments into two Russian-related hi-tech companies, Apollo Project and Parallels, Inc. Their target fund size is $100 million. Almaz has completed an initial closing of $55 million with $30 million from Cisco and $25 million from UFG Asset Management. Peter Loukianoff, co-founder and managing partner of Almaz Capital Partners, will join us at the World Russia Forum on April 27, 2009. Mr. Loukianoff is an internationally recognized expert on venture capital and entrepreneurship in Russia.
Russian businessmen and businesswomen at an entrepreneurs expo
In his recent Davos World Economic Forum keynote speech, [in January 2009] Prime Minister Vladimir Putin stated that excesses, irresponsibility and greed with governments asleep at the wheel formed a perfect storm to wreak havoc on global economies. The result has been an unprecedented fall in global demand, production, employment and wealth.
Putin welcomed dialogue from all to find solutions to the crisis and to chart the way forward. While it may seem that there are more important short-term crisis-management issues to deal with when Rome is burning, it still makes sense to think of the long-term future growth in Russia.
Russia has been hard hit by the global economic meltdown. How can this crisis present governments and entrepreneurs with opportunities to create new incentives for innovation?
The speed with which the economic crisis spread across the globe, devastating so many economies, surprised many. The catalyst for the crisis can be laid at the feet of creditors, but its rapid contagion from one country to another can be explained by the globalization of supply chains.
Business is entering its third stage of evolution -- what IBM chairman Sam Palmisano calls the "globally integrated enterprise." The first stage was the 19th-century's "international model," when corporations established sales offices in foreign countries with minimal economic impact on host countries.
Thomas Nastas Talks Innovation on Russia Today's Spotlight with Al Gurnov
Tom Nastas is an American venture capitalist based in Moscow
Last week I taped an interview in Moscow with the English-language 24 hour news channel Russia Today on technology and creating an innovation economy in the Russian Federation . My appearance on the Spotlight with Al Gurnov show aired on March 24, 2009.
Click on the extended post to watch the video and for links to my previous interviews on RT and previously published articles on Russia Blog.
Russian & Chinese Investment into U.S. Real Estate
Download the PDF version of the report Real Estate Market in Russia, China, and America: Trends and Opportunities
Russian fertilizer oligarch Mr. Rybolovlev is the buyer of the most expensive single-family home sold in America. The property, at 515 N. County Road on Palm Beach, sold for $95 million.
Summary of contents
- Overview of the current state of the U.S. real estate market
- BRIC economies and their growing importance in the global economy
- Russia's economic outlook and business prospects
- China's economic outlook and business prospects
- Opportunities for U.S. real estate companies
Overview of the current state of U.S. real estate market
The U.S. real estate market is currently going through one of the worst corrections in history as evidenced by a steep, declining trend of new home sales and rapidly growing real estate foreclosures.
U.S. Firm in Kiev: Ukrainian Banking System Might Collapse
An internal letter at an American company in Kiev, Ukraine, informs the employees that they will receive their two-month salary in advance, because... there might be no way to transfer funds a few days from now. The firm's financial analysts predict that it might become impossible to transfer money within the Ukrainian banking system. The message says:
"The Ukrainian economy is experiencing unprecedented challenges, and one of them is the potential for instability in the banking system. The failure of the Ukrainian banking system is not imminent, however, risks have increased significantly in recent weeks... Should the Ukrainian system not pass these tests, it might significantly affect the ability of businesses to transfer money in the system, including making the salary payments."
Russia and China's Financial Warning to the West Is Anyone in Washington Listening?
Russian Prime Minister Vladimir Putin meeting Chinese Premier Wen Jinbao in October 2008 (Photo by: Xinhua). Both governments are worried about the value of their dollar-denominated assets holding up during Washington's upcoming spending binge
The Western media have said plenty about Russian Prime Minister Vladimir Putin's remarks at Davos, Switzerland last January 28. Some observers claimed that Putin chose to blame capitalism for today's economic woes. Others, such as former U.S. President Bill Clinton, believe Putin offered an "endorsement of private enterprise" instead of more government intervention to bail out the sagging global economy.
Putin, however, was not attacking capitalism, but the haphazard series of Western government bailouts and interventions that have made it very hard to predict when global financial markets will stabilize. It is not clear to foreigners which American financial companies like Bank of America and Citigroup will be nationalized as "too big to fail" and which ones will be allowed to slide into bankruptcy, as did Bear Stearns and Lehman Brothers.
This article appeared in a smaller American newspaper, The Oregonian on February 15. On January 27 Vladimir Putin told Bloomberg that he wasn't "indifferent to the amount of the US federal budget deficit" because... "Russia has almost a half of its gold and currency reserves in the American economy." Today, the irony (and the appropriate consequence of the ridiculous investment strategies of the Russian government and oligarchs) is that Western companies owned by Russians will receive Kremlin bailout money ahead of Russians. In fact, the Motherland's businesses might not see the money at all...
Will Kremlin bail out an Oregon steel plant? By Richard Read (email@example.com)
Sunday February 15, 2009, 8:55 PM
During their recent heyday, Russian billionaires bought far-flung companies, London mansions, massive yachts and private jets. Few of the reclusive oligarchs loomed larger than Roman Abramovich. The owner of Britain's Chelsea soccer team is one of two controlling shareholders in Evraz Group, which bought Portland-based Oregon Steel Mills for $2.35 billion in 2007. Now some of the oligarchs, reeling from the global economic meltdown, are proposing a mega-merger -- including Evraz -- that would give the Kremlin a stake in the resulting Goliath and, hence, in Oregon Steel.
Deripaska, the Richest Man in Russia: "The Russian Economy is Turned Inside Out"
Oleg Deripaska (right, with Vladimir Putin) is the richest man in Russia and is a longstanding member of the Kremlin elite.
In late 2007 Oleg Deripaska reportedly surpassed Roman Abramovich, the flashy owner of the English Premier League Chelsea football club and former tycoon of the Sibneft oil company, to become the richest man in Russia. This year Mr. Deripaska's holdings and those of his fellow oligarchs have been sharply reduced by the global economic crisis, and in particular, the shrinking of worldwide capital markets that financed the expansion of Russia's largest companies. And yet, when Deripaska sat down with the Wall Street Journal reporter Greg White for an interview in December 2008, the oligarch remained bullish on the long term prospects for Russia. While the WSJ's editorial board has consistently taken a hard anti-Kremlin (and some would say, anti-Russian) line, its reporters continue to do excellent reporting on the Russian economy.
Click on the extended post to read an extensive excerpt from the WSJ article.
Russia and Ukraine: Facing Up to the Global Credit Crisis
Image by: Expert.ru
According to a recent Wall Street Journalarticle, Russian stocks on average are trading at slightly more than four times earnings on the MICEX and RTS stock exchanges. This level is down from thirteen times earnings at the market's peak. Overall, compared to fellow BRIC economies, Russia's stock market is down 72 percent off its 2007 peak, compared to 59 percent for Brazil, and 62 percent for India and China, according to statistics compiled by The Asia Times.
Lower commodities prices and the global credit crisis are hitting the Russian economy hard in the last half of 2008. However, unlike in 1998, when Russia's banking system and the savings of middle class Russians were wiped out, Russia has a huge stockpile of hard currency reserves to leverage as collateral in maintaining financial stability. The ruble has lost ground versus the dollar since hitting its peak in the early summer of 2008. However, the ruble has not collapsed into hyperinflation, as it did 10 years ago, and the Russian government is allowing it to depreciate against other world currencies. There are some signs that Russia can ride out the crisis -- if Western credit markets remain open to lending to Russian firms, and the West remains attractive to Russian and other sovereign wealth fund investments.
Russian Entrepreneurs Facing Tough Times in the New Russian Economy
The current economy presents unprecedented challenges for Russian entrepreneurs.
An opinion poll conducted by "Business Russia", a group that represents Russian medium-sized businesses, shows desperate results. These businesses are preparing to lay off employees, lower production output, and face reduced demand and higher interest rates.
65% of the Russian entrepreneurs polled do not expect to grow their businesses in 2009. They believe that sales will either stay at the same levels or will drop as soon as the fourth quarter of 2008. 39% percent of business owners surveyed are pessimistic. The main reason for these negative sentiments is a lack of liquidity for daily operations. At this moment, debt makes up 20% of the portfolios of 35% of the companies; for 30% of the companies the debt amounts to 21-40% of their total balance sheet. Most of the companies need more credit which is not available. Many Russian banks are raising interest rates or refusing to give them loans at all.
On Monday, October 6, the Russian market experienced perhaps the worst day in its history. Despite several trading pauses, total market losses equaled to 19 percent. Some Russian blue chip stocks lost nearly 40 percent. Declining oil prices didn't help the markets either. The dollar-denominated RTS index dropped to 867 points, while the ruble-denominated MICEX halted trading when its index dropped by 18.66 percent, closing at 749.66 points.
Russian companies saw their equity value evaporate on both Moscow and London exchanges. In London, shares of Russia's "Norilsky Nickel" lost 44.28%, VTB -- 36.18%, "Tatneft" - 45,23%, Â«UralkalyÂ» -- 47,78%, RosneftÂ» --39,77%, LUKoil -- 36,09%, Â«SurgutneftegazÂ» -- 31,25%, Ð¥5RETAIL -- 26,12%. In Moscow, "Norilsky Nickel" plummeted 37.67%, "Rosneft" -- 27.41%, Gazprom -- 24.42%, LUKoil -- 24.16%, "Surgutneftegaz" -- 22.92%, MTS -- 21.21%, Sberbank -- 16.32%, VTB -- 24.5%.
After nearly two days of mandatory vacation the Micex and RTS stock exchanges opened again and set a new all-time record for one-day growth. The RTS dollar index grew by 22.39%, reaching 1295.91 points, while the ruble index of Micex grew by 28.69%, reaching 1098.95. The exchange indexes almost leveled themselves out to the pre-crisis levels. The week of trading resulted in the lowering of the Micex index by 3.4 percent and the lowering of RTS by only 0.2 percent. However, Russian media point out that the growth was artificial and possibly due to high liquidity, a result of the Russian government's unprecedented actions. Media disagree with many Russian financial experts and warn that external factors might precipitate a loss of market value once again.
Interestingly, the stock exchanges had to halt trading briefly on two occasions Friday due to the extremely fast pace of buying. Traders had only three hours of actual trading Friday, yet they managed to set a record. In addition to the measures described in Russia Blog's previous article, the Russian Federal Service for Financial Markets prohibited trading of borrowed assets that weren't fully owned and it prohibited the "short" sales. In addition, the Russian government made a firm statement that its decisions on tax cuts in the oil sector are definite and final. Several private companies, including Lukoil, bought back their own stock.
All the measures and actions aside, experts and media believe that the rebound was mostly influenced by the overall growth of the world market rather than the domestic actions of the Russian government.
Market Failure in Russia: America's Problem, Nobody's Problem or Doomsday?
Russia and the rest of the world have both suffered a terrible week in their stock markets
A misleading calm prevailed in Russia this week after two days in which the Russian stock market crashed and another two days in which the market was closed. The recent plane crash in Perm, the worst in years, was bigger news in Russia than the sinking markets. Russia's news media presented plummeting share losses in a matter of fact manner, while wondering how the Russian government was going to respond to this harsh new economic reality. Markets remained closed on Thursday.
Russian markets fell 17 percent Tuesday, the biggest drop since 1998, bringing market levels to their lowest point since 2005. Gazeta.ru published these illustrative numbers at the moment of the unscheduled early closures of the dollar-denominated MICEX and ruble-denominated RTS stock exchanges: shares of VTB dropped by 32.5%, Sberbank (the largest bank by deposits in Russia) -- 20.9%, FSK -- 27.6%, Transneft -- 24.1%, Tatneft -- 15%, Lukoil -- 13.5%, Norilsk Nickel -- 8.2%, Severstal -- 8.7%, Gazpromneft -- 8.2%, etc.
When Russian troops moved into Georgia, foreign investors moved out and the Russian market plummeted. When U.S. troops moved into Iraq, foreign investors hesitated but the U.S. market barely blipped. Is this a double standard?
Not really. The difference lies in the way investor perceptions are challenged or fulfilled by the political decisions of a country's leadership. Investors create models about their investments -- how much they are promised at the point of sale and how much they are likely to get back in a variety of circumstances. These models can be simple, ranging from a conceptual understanding about a company and the environment it operates in, to a complex econometric simulation with all the macro indicators included. Investor models implicitly include uncertain factors, such as interest or exchange rate movements. Geopolitical decisions must also be included because investors need to know in advance the possible trajectories of government action.
The war in South Ossetia and Georgia, though appalling, resulted in fewer deaths and damage than originally reported. It is still not "over" and probably won't be for some time. Meanwhile, it definitely did serious damage to Russia's relationship with the West. In some ways, relations are worse than at any time since well before the collapse of the USSR--in other words, in roughly a quarter century.
We are going to say a lot more on this, and we are not inclined to be particularly laudatory to any of the players. The war has not made any country look good.
Meanwhile, before the war we wrote a report on Ten Reasons Americans Should Care About Russia. It follows, and, as you will see, it remains valid. Perhaps as tempers cool, people of good will can consider what is at stake; what there is to gain, and what there is to lose.
As it turns out, the Russian Central Bank still owns $50 billion in U.S. government-backed agency securities, including Fannie Mae and Freddie Mac, but this is short term (less than one year) paper, and the central bank will let the paper reach maturity and presumably move on to another investment. Russian sovereign holdings of U.S. agency securities are still dwarfed by the $400-$500 billion held by Chinese central banks.
Click on the extended post to read an excerpt from the Reuters story.
NYT: Russians Hold $75 Billion of U.S. Agency Securities The Consequences of Growing U.S-Russia Financial Ties That Bind
Russia's Central Bank does not hold Fannie Mae and Freddie Mac debt - but what about the rest of its U.S.-mortgage backed debt holdings?
Over a year ago I wrote about Deputy Secretary of the Treasury Robert Kimmitt's trip to Moscow ("Is the U.S. Seeking Capital from Russia's Stabilization Fund?"). In June 2008 RosBusinessConsulting reported that Mr. Kimmitt was in Moscow to ask the Kremlin and Russia's Central Bank to invest more petrodollars in the U.S. Mr. Kimmitt gave RBC an interview, but provided few details about his discussion with Russian Central Bank officials, so the report was largely ignored by the Western media.
At that time, American media outlets were more focused on the prospect of Arab and Chinese sovereign wealth funds acquiring equity stakes in U.S. companies, and the potential political backlash to such moves. Russian companies such as Evraz and Severstal have proven to be saavy about their American acquisitions, (so far) flying under the radar screen of an increasingly unpopular and protectionist U.S. Congress, which clearly has much bigger fish to fry now than worrying about what the Russians are buying.
Dealing with a Resurgent Russia A Review of Edward Lucas' The New Cold War
The Russians are coming West with money. Should we be scared?
There are some books that surprise you with their depth or give you a new insight on past, present or future world events. The new book by The Economist's Eastern Europe reporter Edward Lucas, The New Cold War: How the Kremlin Menaces Both Russia and the West does not fall this category. Rather, the book is largely a rehash of an argument anyone who has been paying attention to the Western media coverage of Russia over the past eight years will find familiar: after a brief flirtation with democracy under Yeltsin, the Russian people, led by their new Czar Vladimir Putin, are turning their backs on freedom in return for virulent nationalism and oil-fueled economic growth.
While many energy analysts were quick to dismiss these comments from a CEO representing an energy company with larger oil reserves than many OPEC countries, Mr. Miller's statement, combined with a comment from the Vice President of OAO Lukoil in April 2008 that Russian oil production might have peaked last year, could send world energy prices higher in the coming months. In the first quarter of 2008, Russia surpassed Saudi Arabia as the world's largest oil producer.
Click on the extended post to read excerpts from the articles by Bloomberg and Reuters.
We live in an age of accelerating economic convergence. The world's new economies --with Russia among the leaders -- will drive global growth and value creation in the early decades of this new century.
This tectonic shift is now firmly under way, but few have taken on board the far-reaching implications. For example, the world's largest businesses will be from new world economies and the world's most influential businesspeople will be Russian, Chinese, Indian and African. New world investment funds will dwarf their Western counterparts. The dollar will become only one of many reserve currencies. Moscow, Singapore, Shanghai and Dubai, will, alongside London, be where the majority of wealth is managed and traded.
Renaissance Capital, the leading investment bank in Russia and sub-Saharan Africa, kicked off its 12th Annual Investors Conference in Moscow this past Monday. The theme of this year's conference is "Russia: Power in Renewal". Renaissance Capital CEO Stephen Jennings published an article on the themes of the conference in the Monday edition of The Moscow Times, contending that emerging markets will soon invest more in eachother than in developed markets and that Moscow will join Shanghai, Singapore, Dubai, and London among the top seven global financial centers in the next few years.
In light of RenCap's growing influence role in Russia and many other emerging markets, Russia Blog decided to publish two background articles about its co-founders, Stephen Jennings and Alexei "Boris" Jordan. For its part, the The New Zealand Listener magazine (see extended post for text) reported in August 2007 that Mr. Jennings, a native Kiwi, is now a billionaire. If this claim is true, it would make him the richest Westerner and one of the wealthiest foreigners residing in the Russian Federation.
Click on the extended post to read the full NZ Listener article
Due to their involvement in the privatization vouchers and notorious "loans for shares" programs, Jordan, Gaidar, and Chubais all remain controversial figures in Russia. However, in a candid interview for the PBS series "The Commanding Heights" conducted in 2000 (see extended post), Jordan contended that Russian reformers had no choice but to rush to stay one step ahead of their entrenched opponents, the powerful Soviet industry bosses and their Communist allies in parliament. "The Commanding Heights" builds on this idea by presenting as history the notion that Yeltsin cut a Faustian bargain with Russia's budding oligarchs to win the decisive 1996 election. In return for oligarch money and media support against the opposition Communists, Yeltsin allegedly agreed to allow these businessmen to acquire control over vast complexes of natural resources (like Norilsk Nickel and Yukos) for pennies on the dollar of their fair market value.
Even with the painful but ultimately successful transition to a market economy, Jordan speaks with passion about the toxic legacy the Soviet system left behind on the health and morality of the Russian people. In "The Commanding Heights" interview, Jordan described how he arrived in Moscow with an almost missionary zeal to revive the Great Russia his parents had raised him to remember. Jordan's moral views continue to be expressed in his continued philanthropic support for the Cadet Corps, a Moscow-based charity for boys that promotes the "rebirth of spiritual, moral, cultural and military-patriotic Russian traditions in the system of education, instruction and formation of the new generation." At the close of his "Commanding Heights" interview, Jordan also expressed his support for President Putin's efforts to reign in the power of the oligarchs, comparing it to U.S. President Teddy Roosevelt's trustbusting in early 20th century America.
Click on the extended post to read Jordan's interview interview in the year 2000 for the PBS series "The Commanding Heights, based on the book of the same title by Daniel Yergin and Joseph Stanislaw.
Medvedev Blames U.S. for Global Financial Crisis Reuters Reports
Dmitry Medvedev speaking at the St Petersburg International Economic Forum on June 7, 2008 (Photo by Reuters)
ST PETERSBURG, Russia -- Russian President Dmitry Medvedev blamed "aggressive" United States policies on Saturday for the global financial crisis and said Moscow's growing economic muscle could be part of the solution.
"Failure by the biggest financial firms in the world to adequately take risk into account, coupled with the aggressive financial policies of the biggest economy in the world, have led not only to corporate losses," Medvedev told Russia's main annual event for international investors in St Petersburg. "Most people on the planet have become poorer."
Editor's note: The Russian government is investing to renew its leadership position in technology. In this first part in a series of four articles, venture capitalist Thomas Nastas discusses the role of governments in technology creation. This and subsequent opinion pieces published in Vedomosti are from Mr. Nastas' article "The Go Forward Plan to Scaling Up Innovation" published in The Harvard Business Review, Russian edition, June/July 2007 and Hungarian edition, October 2007.
While companies are responsible for innovation in their enterprises, the creation of knowledge based economies can't happen without the political will and investment of governments. Knowledge creation touches on so many of their duties like education, R&D, IP (intellectual property), policies in innovation, trade and investment and the enabling environment. Achieving political consensus on the mission and the funding to execute is controversial, so some governments take smaller but achievable steps to knowledge creation.
One strategy is to make more capital available for investment. The 'Yozma' fund-of-funds was an investment company with $100 million from the Israeli Government, $80 million for investment into the creation of new VC funds and the remaining $20 million for direct investment into Israeli technology companies. Yozma invested $8 million into a private VC fund with $12 million invested by Israeli and foreign investors. Yozma let fund managers 'buy-out' the Government's equity stake after five years.
Click on the extended post to read more of this article and to view the Russian version. You can read the original article in Vedomostihere.
Thomas Nastas is an American venture capitalist based in Moscow.
You can read Tom's profile in the Moscow Timeshere
Hungary, Brazil, Russia, India, China (BRIC), Chile and others are replicating the strategies that made Israel, the US, Korea and others so successful in the creation of knowledge economies. Do alternatives exist with less risk and better chances of success in taking a seat at the global table of tech developers?
This article was originally published in The Harvard Business Review's Russian and Hungarian language editions in 2007. To read this article in Russian, complete with text boxes, click here for a PDF version, here in Hungarian and here for an English translation.
Click on the extended post to read the rest of the article without text boxes. To read an abbreviated version of this article previously published on Russia Blog, click here.
Rankings Versus Reality: It's Time for Inside-the-Beltway Conservatives to Get Real on Russia
Last week, the Heritage Foundation, one of the largest and perhaps most influential think tanks in Washington, D.C., published its annual global rankings of economic freedom. While think tank reports seldom have as much impact as their authors would like to believe, this particular document was published in partnership with The Wall Street Journal.
The report claimed that out of 150 countries surveyed in 2007, Russia is now ranked 134th in the world in terms of economic freedom, allegedly slipping fourteen spots from its lowly 120th ranking at the end of 2006. Russia was supposedly less free than all of the other countries in the former Soviet Union, with the exceptions of Belarus and Turkmenistan. Russia is also said to be lagging far behind such surging economic powerhouses as Pakistan and Cambodia.
Innovation, small- and medium-sized enterprises, or SMEs, entrepreneurship and venture capital are ingredients in creating knowledge-based economies; witness the successes in California's Silicon Valley. Small economies countries like Israel and Singapore with little domestic demand for technology have developed unique approaches to exporting knowledge creation.
Russia is now investing to try to replicate the strategies that have been so successful for SMEs in Israel, Korea, Singapore and Taiwan -- the development of technologies for global markets. Do these strategies offer the best chances for success? Are there alternatives and, if so, how can Russia tap them to generate new wealth and prosperity?
Golden Telecom, Inc. ("Golden Telecom" or the "Company") (NASDAQ: GLDN), a leading facilities-based provider of integrated telecommunications and Internet services in major population centers throughout Russia and other countries of the Commonwealth of Independent States ("CIS"), announces today the closing of the acquisition of a 100% stake in LLC "New Telecom Technologies" ("NTT") in Krasnodar -- an alternative carrier providing communication services to business customers and carriers in the region...
The acquisition of NTT is part of Golden Telecom's successful regional expansion strategy. Golden Telecom already owns and operates sizeable local and intercity networks in Novorossiysk, Gelendzhik, Sochi and other cities in the Krasnodar region. In Sochi, Golden Telecom offers long-distance services, corporate networks and Internet access through Sochi Telecom, a telecom operator established in 1999 and acquired by Golden Telecom in October 2005.
Golden Telecom joins Rostelecom (NYSE: ROS) and Vimpelcom (NYSE: VIP) among the fastest growing publicly-traded companies in the Russian telecommunications sector.
Click on the extended post to read more Krasnodar business news.
Moscow skyscrapers along the Moskva River at night
In case you missed it due to all of the recent political news from Russia, here are several articles about the Russian economy and foreign investments in the country from December 2007:
Ignoring Global Credit Crisis, Economy Grows 7.6% in Q3
Monday, December 10, 2007
The economy expanded an annual 7.6 percent in the third quarter, better than expected, suggesting that problems on global credit markets have not had a major impact on the country.
Gross domestic product growth followed expansion of 7.8 percent in the second quarter and 6.8 percent in the third quarter last year, the Federal Statistics Service said on its web site Friday.
The data are not seasonally adjusted.
"The effect of the global credit crunch was less significant than some feared," said Yaroslav Lissovolik, chief economist at Deutsche Bank in Moscow. Capital investment and consumption were "strong and remained the main drivers of growth."
You can read the rest of this Bloomberg news story at the Moscow Times website. Click on the extended post to read more Russian business news.
The biggest story in Russian business this week is the UK-based Belgravia Investment Group's announcement of a $2 billion dollar joint venture to develop Russian business parks. The deal involves the Immo Industrial Group, a Belgium-based manager of industrial properties in Europe, and the Russian restaurant holding company Rosinter, which is best known for bringing Kentucky Fried Chicken to Russia.
The total size of the development will be two million square meters (21,527,820 sq. ft.) At least 44 industrial tenants have already leased space, and the Hilton Hotel chain has agreed to build hotels near all fifteen sites, including in Moscow, St. Petersburg, Novosibirsk, Rostov-on-Don, and several other cities. Rosinter will build Sushi Planeta, TGI Friday's and 1-2-3 Cafe restaurants to serve employees at the sites.
Elena Khisamova, Deutsche Bank Russia's acting Head of Equity Capital Markets, provided the headline of the day with her estimate that 200 Russian companies, representing an estimated $500 million in combined market capitalization, have the potential to launch IPOs in the near future. In addition to her remarks about Russia's rising smallcaps, Mrs. Khisamova added that in the first nine months of 2007, Russian companies have recorded over $22 billion in initial and secondary placements.
In her article, Illinois law student Eugenia Izmaylova frequently cites Bill Robinson, a Bellevue, Washington based attorney who has been practicing law in Russia and the former USSR since 1990. In particular, Ms. Izmaylova quotes Bill Robinson's thoughts on the development of intellectual property law in Russia since the collapse of the Soviet Union (a transcript of Mr. Robinson's remarks - along with commentary from his co-panelists at the Real Russia Project forum - is available for downloading in PDF format here)
Click on the extended post to read excerpts from the Illinois Business Law Journal article.
A banner ad for Russian cellular provider MTS near the Kremlin
For months, the transition to a new President next year has been a hot topic for speculation in both the Russian and Western media. While President Putin's surprise appointment of Viktor Zubkov as Prime Minister has dominated the news from Russia this week, business marches on. Today Mr. Zubkov's statement that he would consider a run for the presidency has drawn a lot of attention to the previously obscure technocrat. But what do Russia's top executives expect in the upcoming election year?
On September 10 and 11, 2007, Reuters hosted the Russian Investment Forum in Moscow. The list of speakers was a who's who of corporate Russia (click on the extended post to read more)
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.
In my Russia Blog posts I have written repeatedly about how the Russian construction sector is proving to be extremely attractive to global investors. Recent news reports confirm this view. In fact the U.K. Independent recently produced a short overview "A Global Property Boom: Russian Style" that describes what is going on in Russia.
"The place to be for booming commercial property development right now is Moscow. According to international property analyst Knight Frank, new developments of high-grade office space in the Russian capital have doubled since 2003, with a further 1.5 million square feet of space becoming available before 2011." As a Muscovite who has observed these tremendous changes firsthand, I can confirm this.
The Dow Chemical Company (NYSE:DOW) is expanding its presence in Russia. The company has maintained operations in Russia since 1974 and according to some reports, it currently employs about 90 people supporting its activities in this country. While starting a new construction materials business in Russia is somewhat risky, Dow Chemical's average annual growth rate (about 30%) makes it worth a go.
In January, Dow Chemical started building its first production facility in Russia. The plant, located at Kryukovo, outside Moscow, will produce polystyrene insulation boards for Dow Building Solutions, one of Dow's market-facing business units (this was nicely described in the Around Dow corporate newsletter).
There is a lot of material on the Internet about Russia's gold mining industry and different ways to invest in it. Here at Russia Blog, I would like to present one example of a Russian company that is mulling an IPO later this year on the London Stock Exchange (LON:LSE) Alternative Investment Market or Canada's Toronto Stock Exchange (TSE:X). This mining operation is not large, but it shows the potential for greater investment in Russian gold mining. Renaissance Capital's Pre-IPO Fund has already bought equity in the company. (RosBusinessConsulting recently wrote an article about RenCap's pre-IPO fund which you can read here).
In a post last month I mentioned that there are definite indications of interest from foreign banks looking for additional mergers and acquisitions here in Russia. It seems that July 2007 was a very active month for the Russian banking industry. On July 31, 2007, Vedomosti Daily published commentary regarding the acquisition of Russian and Ukrainian banks by foreign entities. The article was based on a study conducted by Dresdner Kleinwort showing that in Ukraine foreign entities own about 47% of national assets, while in Russia this number is just 10%. Here is a link to the table from the publication that represents the Russian side.
Cover of the July 2007 issue of Russia's Standard business magazine
The July issue of the Russian magazine Standard included a very interesting supplement -- the latest (as of July 10, 2007) arbor civilis of ownership in Russian telecommunications.
I happened to know a senior manager in this field, Leonid Konik, way back in the 1990s, when he started his project, ComNews. It is rather comforting to find out that he now runs a well-established and popular news project involved in telecommunications.
Anyway, the insert from Standard magazine shows who is who and what companies form the Russian telecommunications sector. I think that my readers may find useful the links to the websites that I am providing in the extended post.
Last weekend I took a nice stroll around rainy Moscow and noticed a new addition to the local landscape (see the photo above taken on Saturday, August 4, 2007). The ad says: "Every company has the right to IPO". Now, definitely something has changed in the minds of our financial consulting firms!
This ad was placed by the Otkritie Financial Corporation, which is nowhere near the top-ranked IPO underwriters and managers in Russia. However, the corporation has an extremely qualified Board of Directors that includes several prominent Russian businessmen.
Last week marked the first listing by a Russian IT company on the MICEX Innovative and Growth Companies sector index. The company is OAO Armada (RTS, MICEX: ARMD) - a Russian provider of information technology services.
Armada grew from the IT Department of RosBusinessConsulting (RTC:RBCI) group of companies in 2007. Between 2000 and 2007 the company operated under the RBC Soft brand. Armada's solutions portfolio covers all IT market sectors, including software development, IT services and hardware. In 2003, while still part of RBC Information Systems, RBC SOFT was rated 15th among Russia's top 45 companies in the Standard & Poor's Transparency Survey in 2003. Armada's client base counts over 700 companies operating in various economic sectors and governmental organizations.
On May 23, 2007, OAO Armada's shares were listed on the RTS and MICEX exchanges, and now the company has issued an IPO listing another 20% of its equity. According to some analysts the company will likely raise anywhere from $ 30 to $40 million.
Eleven Reasons to Buy Russia (Though Not Necessarily Today)
1. Russia has not had a single debt-funded leveraged buyout (LBO). Zero. None.
2. Russia does not have a single sub-prime mortgage bond. Russian banks continue their old-fashioned practices such as investigating borrower's declared earnings and requiring down payments of at least 20%. Though there has been some risky consumer lending, it is covered by the outrageous spreads they charge (above 50%!)
3. Russia has an insignificant trade relationship with the US, and is not exposed to the US consumer in any meaningful way. It is substantially exposed to the Asian economies which (so far) have shown no signs of slowing on US economic concerns.
A few weeks ago I read a piece published in Money and Markets titled, "Steer Clear of the U.S.: Look to Asia!" which I found interesting. Although the author is extremely bearish about American markets, I think that his basic advice to investors to diversify their portfolios internationally and to have strong exposure to commodities and hard assets as a hedge against global inflation is sound. And I would add Russia to his list of good places to invest for rapid growth.
Old Russia Meets Modern Russian Capitalism - An exhibit at the MICEX Stock Exchange Museum showing ads and the Moscow exchange building's numberplate ("Stock Exchange Sq # 1") at the beginning of the 20th century
Here are a few facts excerpted from a press release issued on Friday, July 27, 2007 by the Moscow Interbank Exchange:
As a result of daily trading at the MICEX on Thursday, July 26, 2007, the volume of transactions in securities amounted to 226.59 billion rubles ($8.92 billion dollars). This is a new record high for the MICEX, which was launched in March 1997. The previous record of 223.83 billion rubles ($8.74 billion USD) was registered on June 15, 2007. The MICEX logged over 232,000 transactions last Thursday.
The new IXSP stock exchange is coming to St. Petersburg - but when will it start trading?
In April 2007 ("NASDAQ Entering Russian Stock Market?") I wrote about the OMX Group's (STO:OMX) plans to establish IXSP -- a new Russian stock exchange that is targeted towards small to medium sized enterprises (SMEs). It seems that this process is accelerating. Now the IXSP has its own web-site -- a very nice but simple one, listing major ideas that the promoters are planning to execute.
Brazil, Russia, India and China are the four countries expected to outpace their emerging market peers over the next several decades...of the BRIC countries, Russia is probably the most volatile market and the one that has been off the radar of mainstream American investors the longest.
I think this is one of the most reasonable overviews of exchange traded funds that I have read in the last few months
In a previous Russia Blog post (Russia's Most Wanted: Experienced Investment Bankers), I wrote about more and more foreign banks coming to Russia and finding their own ways to enter the Russian banking system. Some of them pick the organic growth path of getting the licenses and starting from scratch. Other major foreign financial institutions prefer to acquire a Russian bank and build their business in this country from an existing foundation. Last week there were two news items regarding foreign banks' plans for mergers and acquisitions to enter Russia's banking sector.
Thomson Financial, one of the most trusted business information providers in the world, released its Equity Capital Markets Review this month for the second quarter of 2007. The Russian investment bank Renaissance Capital was ranked in 10th place in this survey, up from 29th place last year. Among the major equity capital market (ECM) transactions in Russia, RenCap has led all takers this year by raising $8 billion in an IPO for Vneshtorbank (the largest IPO worldwide this year), where RenCap acted as a joint bookrunner. RenCap has also acted as an underwriter on IPOs for MMK (see the extended post), Integra, Volga Gas, Dixi, Nutritek, Rosinter, United Bank for Africa and several other secondary transactions and private placements this year. Renaissance has advised 12 ECM transactions in the first six months of 2007, with a total value of $12 billion.
Click on the extended post to see a table from the Equity Capital Markets Review by Thomson Financial.
- Russia continues to deliver very solid economic data, and demonstrate that it is unlikely to stop expanding in the event of an unexpected fall in oil prices. Domestic demand is now the main driver of growth.
- Political risks associated with the transition to a new president in March 2008 are the biggest short-term concerns. President Putin has repeatedly vowed that he will step down in accordance with the constitution. Here at FINAM, we strongly believe there will be a smooth transition and we expect no major revisions to current policies.
- Steady improvements in living standards have provided the Kremlin with a strong mandate, and have provided the basis for more consumer demand. The policy of increasing state ownership of strategic sectors like aerospace, energy and metals is unlikely to change in the near future. This will cement the role of the "national champions" as the foundation of the country's economic system, even as private and individual investment continues to grow.
- Strong economic performance and positive sentiment on future economic development has strengthened Russia's ambitions to play a more influential role both internationally and in the near abroad. Periodic tensions in inter-CIS relations are likely in the coming years, particularly as Russia continues to eliminate special CIS prices for energy and other raw materials.
In April 2007 I wrote about Russian state capitalism, this curious hybrid of government-owned "national champions" in strategic industries operating alongside a booming private sector. In recent months some new developments have emerged and I want to pinpoint some new investment opportunities.
The trend towards public private partnerships (PPPs) is becoming more pronounced with every month. In fact, the MMD public relations firm recently released a report describing in detail what is going on in this area of the economy. Here are a few citations:
"Public Private Partnerships (PPPs) have become an integral part of a new national idea: creating a strong Russian state that defends its national interests, combined with strong Russian businesses [that are] competitive worldwide."
50% of Russians expect President Vladimir V. Putin to run for a third consecutive term, according to a poll released last week by Renaissance Capital. Just one in three voters believe the President's promise that he will step down after the March 2008 elections.
The Russian constitution currently forbids three consecutive Presidential terms, although it would not prohibit Putin from running for President again in 2012. Putin's youth (he will only be 56 next year) and recent statements that he would like to continue serving in public life has fueled speculation that "VVP" might return to politics after four years in a corporate position, perhaps as chairman of Gazprom.
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.
A few days ago the Moscow Interbank Exchange (MICEX) announced its operational results for the first quarter of 2007 that showed substantial growth on the year to year basis. I am taking the liberty of reproducing excerpts from this report with some illustrations. The graphics in the extended post are selected from "Investing in Russian Stocks and Bonds", a guide published in the June 2007 issue of Institutional Investor magazine by the MICEX Group (click here to download the full report in PDF format - you can also find a link to this report in the righthand column of Russia Blog).
Click on the extended post to read more about the phenominal growth of Russia's largest stock market.
A momento from the last golden age of Russian capitalism - in this case, a 1913 St. Petersburg railway bond selling on EBay
This is an update to my previous Russia Blog post about Russian Deposit Receipts (RDRs). Now all of the official obstacles in the way of introducing RDRs have been eliminated. Last week the Russian Ministry of Justice officially registered regulations setting forth the listing requirements for RDRs. Basically these regulations copy existing requirements for listing shares. Russian brokers have welcomed the end of this long process and are expecting big trading volumes.
Now is the moment for the first issues of RDRs which I believe will be coming very soon.
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.
Logo of EuroSet, the largest cellular retailer in Russia and the former USSR
The last twelve months have witnessed several interesting changes happening in Russian banking. In particular, I wanted to highlight the stories of two prominent Russian businessmen who have established their own banks to expand their business operations in innovative ways.
The first story relates to Euroset - the biggest chain of retail stores in Russia and the Commonwealth of Independent States (CIS) selling mobile phones. Its 2006 sales were around $4.6 billion. Euroset is 100% owned by Dutch Euroset Holding, which belongs to Yevgeny Chichvarkin and Timur Artemyev. Euroset has a very advanced web-site and its owner Yevgeny Chichvarkin is noted in the Moscow business community for his special style. For example, at a recent conference hosted by Renaissance Capital, Mr. Chichvarkin shocked the crowd by wearing a pair of casual torn jeans with holes that revealed his leg hair. Nevertheless, Yevgeny Chichvarkin is an extremely successful businessman and a talented manager who should not be underestimated.
Over the last year several pre-IPO funds have emerged as investment vehicles in Russia. Generally speaking, pre-IPO financing is a hybrid instrument that combines features of both Private Equity and IPO financing. Over 90% of all Russian companies that completed IPOs started with private placements, and pre-IPO financing is an extremely useful instrument to accelerate Initial Public Offering. The most acceptable candidates for such transactions are the ones that are considering IPOs, but lack expertise and/or resources to properly prepare an offering. Generally speaking, most of the pre-IPO funds have the following characteristics:
- Investment takes place between 24 months and 12 months prior to IPO
- The usual stake does not represent more than 2% - 20% of the equity
- Investments are in cash, in return for equity, with an agreed package of securities as a fall-back plan, should the IPO fail
- Control of the company is not one of the investor's objectives
Many foreign investors are now interested in buying equity in Russian companies, and many do invest. To spur further action and facilitate sound decisions, I have produced a small research effort that I think may be of some interest to potential investors in Russia. My research is based on official statistical data provided by Russia's Federal State Statistics Service. I have identified the most successful industries and summarized their recent performance in a table (click on the extended post to view this and the rest of the story).
In the last six months we have heard a lot of comments pointing to Moscow rapidly becoming one of the leading centers of global finance. Recently some impressive information was released at the 4th Annual Russian Securities Forum that supports this thesis.
Just three years ago the average daily trading volume on the Russian stock exchanges was about $600 million; in 2006 this modest number had reached $ 2.5 billion; and in Q1 2007 the total volume was almost $4 billion. A few years ago trading was evenly spread 50-50 between the Russian Trading System (RTS) and the Moscow Interbank Exchange (MICEX); now the MICEX share is 70%. The MICEX itself has changed drastically in the last few years.
In the last several years I have heard many requests for information about listing foreign companies in the Russian stock market. These requests have come from foreign holding companies for businesses operating in Russia and corporations with Russian assets. Some foreign holding companies were previously contemplating international offerings and listings, and wanted to capitalize on their brand name recognition in Russia by trading their stock in this country.
Now this oft-stated desire has finally become reality. A legal framework for the introduction of Russian Depositary Receipt (RDR) products came into effect in January 2007, but there were still several legal issues that prevented it from being implemented. This week the Russian Ministry of Justice registered three major regulations regarding RDRs and within a few weeks the final obstacle -- defining listing rules and trading procedures -- will be cleared.
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.
Last Friday Russia's Vedomosti Daily released an article ("Investment Banking - Sounds Expensive") which had some interesting numbers. It quotes the manager of one international headhunting firm: "there are lots of publications that create excitement for the issue -- we get many calls from New York, from people want to come to Russia. They think that you can get money for nothing here. On the contrary, the selection process is quite tough: there is a need [among the investment banks] for [people with] some experience of working in Russia, understanding the clients and international class."
The paper cites numbers for annual compensation at Russia's top ten investment banks:
- Managing directors/heads of investment banking divisions: $0.8-3.0 million
- Executive directors/ heads of back offices: $250,000-500,000
- Heads of asset management divisions: $0.6-1.2 million
- Heads of securities trading divisions: $0.6-1.2 million
- Directors of corporate finance: $0.5-1.5 million
- Heads of analytics departments: $0.6-1.5 million
Moscow's booming financial services industry can't find enough managers to meet demand
Russia's financial markets continue to see unprecedented growth and new opportunities. Recently PricewaterhouseCoopers estimated that within the next three years the volume of assets under private asset management worldwide will increase 30 to 50% annually. The National Association of Securities Market Participants (NAUFOR) reports that over the last six months the number of private investors in Russia increased from 350,000 to 500,000. This is the result of the recent "people's IPOs" -- the Sberbank (RTC:SBER) IPO attracted about 30,000 individual investors and 130,000 private investors subscribed to Vneshtorbank's (RTD:VTBR) intial offering. NAUFOR expects that by the end of 2007 there will be about 700,000 private investors in Russia. Other statistics support this prediction: in Q1 2007 Russian mutual funds attracted about 15.8 billion rubles ($ 600 million) -- a 50% increase over the first quarter of 2006.
These impressive statistics lead to an important question -- who is going to manage all of these new assets? I wrote earlier about "Russia's War for Talent", and the shortage of skilled financial managers in Russia seems to be getting worse every day. PWC reports in its study that only 26% of 43 polled investment banks believe that they will be able to fill all of their staff vacancies within the next three years.
It has been about six months since I started this project. When I was first contemplating posting my thoughts about Russian finance online, one of my colleagues, a noted financial analyst, told me that I would fail, because there would not be enough interest in Russian equity markets to attract attention to a blog.
So, it was a challenging idea for me --
(i) Would I be able to write regularly?
(ii) Could I select items of interest in the whirlpool of everything that is going on here?
(iii) Who was going to be my audience?
(iv) How long would the blog last and what would be the results?
Last week was full of events and significant news regarding Russia and investments. Renaissance Capital, one of Russia's leading investment banks, held its 11th annual investor conference titled, "Russia: Investing in Prosperity".
Last week I put up a post ("Former Secretary of State Colin Powell: America Needs a Strong Russia") quoting from speeches made by Renaissance Capital CEO Stephen Jennings and former U.S. Secretary of State Colin Powell. At the same event, the American Chamber of Commerce held two of its regular breakfasts for members. Deputy Secretary of the U.S. Treasury Secretary Robert Kimmitt and former U.S. Senator and Democratic presidential candidate Bill Bradley were the guest speakers for AmCham (you can read the Moscow Timesstory here). Basically all of these guests tackled issues related to investing in Russia, and most of them did so in a positive way.
Last week also saw the release of a whole array of interesting research papers and corporate surveys related to Russian financial markets.
IBMED uses synthetic (not embryonic) stem cells to treat a variety of illnesses
A few days ago I visited the Institute of Biological Medicine, the company I referred to in my previous post on this topic. The IBMED is the first company in Russia to receive a license to treat patients with stem cell therapy from the Federal Inspectorate for Healthcare and Social Development.
"We turn the clock back" -- that is the motto prominently displayed at the entrance to IBMED's new offices. The company has a small clinic and each of the patients gets a symbolic souvenir - a clock that runs backward -- to remind them of this motto.
It has been six months since Bloomberg produced a news story about IBMED. Last week, I arranged an interview between the Moscow bureau chief of one of the world's top business magazines and the IBMED's chief executive, Alexander Kovalenko. Mr. Kovalenko, a distinguished academician, philanthropist, and former public servant, agreed to speak to us about the goals of his company.
Part 3 -- A Brief Overview of the Russian Stem Cell Market
In Russia stem cell therapy technology is not as developed as it should be. This is the result of a weak regulatory environment and inadequate levels of investment. The market volume of stem cell therapies in Russia is much smaller than in the United States and in Europe. Human and animal stem cell transplantations are done in a select number Russian of clinics and medical centers aimed at the physical revitalization and rebalancing of hormones in the patient's body.
Americans thinking about stem cell research in the U.S. immediately recall the political controversy over the ethics of using embryonic stem cells. In Russia, however, the most widespread therapies are associated with the uncontroversial practice of cord blood banking -- that is, collecting stem cells from a newborn baby's umbilical cord.
The scarce statistical data available on this topic tells us that in 2005 only about 1,000 families in all of Russia used this service. Presently only ten Russian companies are officially licensed to provide these services. Basically these companies are small entities that have been established at different medical institutions. In Russia these companies are typically run by the individual doctors treating the patients and usually lack an internationally-minded business vision.
Click here to read the original post at Vladimir Kuznetsov's blog, Equity Financing in Russia. Click on the extended post to read more background on this rapidly changing topic (see the post above this for details).
Former U.S. Secretary of Colin Powell delivering his keynote speech (All photos by: Renaissance Capital)
Renaissance Capital, the leading global emerging markets investment bank headquartered in Russia, Is hosting its eleventh annual meeting this week with the theme "Russia: Investing in Prosperity". This event is by far the largest annual finance conference in the country -- with more than 1,000 leading investors, corporate executives and government officials attending.
Renaissance Capital is well known in Russia for meticulously planning high-quality events. This time it is being held in the famous Gostiny Dvor -- just a few steps from the Kremlin and Red Square. Everything at the conference was catered to investors' tastes - right down to the abundance of Internet workstations and Bloomberg terminals.
This year's speakers were also top notch:
- Former U.S. Secretary of State Colin Powell (keynote)
- BP PLC's Group Chief Executive Tony Hayward
- Deputy Prime Minister Sergei Naryshkin
- Minister of Finance Alexei Kudrin
- Minister of Telecommunications and IT Leonid Reiman
- Minister of Energy Victor Khristenko
- Head of the Audit Chamber Sergei Stepashin
- Head of the Federal Financial Markets Service Vladimir Milovidov
The Industrial and Commercial Bank of China is hiring in Moscow
Every week we learn about more foreign banks coming to Russia. In a previous post I mentioned Barclays PLC. Now it is time for the Chinese ICBC. Some time ago the bank announced of its plans to extended operations in Russia and focus on corporate banking. It applied for a license in 2005 and was expecting to start operations in 2006. Now in 2007 it becomes a reality -- ICBC's Russian recruiting campaign has been under way since February. Everyone remembers its global IPO of $22 billion last year. With 355,000 employees worldwide the bank can easily start operations in Russia, but many experts point to the fact that it may require at least three years to undertake full scale operations in this country.
Some time ago I wrote that in order to efficiently manage its operations in Russia any company, especially a bank, needs to have a team that is well-seasoned with domestic personnel. The financial services industry's awareness of this fact is reflected in the latest piece of business news from Russia. This week it was reported that JPMorgan Moscow lured the entire analytist team away from MDM Bank, including its director. This is a good illustration of what we here in Moscow call "the war for talent". There is a huge shortage of experts in investment banking, primarily in the top management category. And this deficit is increasing day by day.
"Russia is increasingly turning out to be a tale of two different countries. At one level, the state is becoming more assertive and is seeking to broaden its influence in the 'strategic' sectors of the economy...but the rest of the economy is caught up in one of the most powerful domestic-demand booms in the emerging-market universe."
"The divergence in performance between the natural-resources sector and the rest of the economy is evident in the stock market. Shares of banking, media and consumer companies remain on a tear and have in fact risen more than their emerging-market counterparts even this year. Meanwhile, stock prices of oil and gas companies have been drifting aimlessly over the past year, with a 'Russia' discount assigned to them, as investors fear further government intervention."
"But in sum, it is rather remarkable that Russia's economy has expanded an average 7 percent over the past five years, despite negative population growth and a per capita income of $7,000--a relatively high base compared with most other developing countries. That dynamic has made Russia an attractive destination for foreign direct investment, or FDI. This year about $30 billion in FDI is expected to flow into the country, with most of it headed toward the non-oil economy."
Click on the extended post to read more excerpts from this excellent Newsweek International article ("A Tale of Two Russias") by the head of emerging markets at Morgan Stanley, Ruchir Sharma.
From left to right: FINAM General Director Victor Remsha, MICEX President Alexander Potemkin, Russian IT and Technology Minister Leonid Reiman, and MICEX General Director Alexey Rybnikov (Photos by: Vladimir Kuznetsov)
Today the Russian Minister of Information Technology and Communications, Leonid Reiman, inaugurated the Innovation and Growing Companies (IGC) index of the Moscow Interbank Exchange (MICEX).
With the tolling of the trading bell, the FINAM Venture-IT Fund commenced trading-- and its first day proved to be a smashing success.
Within 90 minutes, all units of the Fund were sold for 501,000,000 RUR (about $20 million). The book was oversubscribed by 10%.
In reality -- for whom did the bell toll? For those investors that missed out on this opportunity. "Opportunities are never lost; someone will take the one you miss" -- this well-known quotation was confirmed today, as Russian investors placed their money in a new market.
Click here to read the press release from Business Wire. Click on the extended post to read more about today's milestone for Russian financial markets.
Russian President Vladimir Putin at the 2007 G-8 Summit in Heilingdamm, Germany: "We have no intention of trying to increase the number of state assets from beyond their present size"
The International Economic Forum held last week in St. Petersburg has proven to be a major public relations success for Russian business and government executives. The event fueled mostly positive news coverage around the world focused on Russia's growing economy. Even American newspapers like the Washington Post and the Wall Street Journal that are usually pessimistic about Russia acknowledged the increasing amount of foreign investment in this country.
Dr. Daniel Thorniley, the senior vice president of the group which which publishes The Economist (a magazine which has been harshly critical of the Kremlin) had this to say:
"If you do business in Russia, you will lose all your money because your Russian partner will steal it from you, and you will die, because he will kill you in your hotel bedroom... this is the CNN and Wall Street Journal view of how business in Russia is done, and it is 95% rubbish."
This week there have been many articles regarding investments in Russia and whether these will be affected by international politics. The heated rhetoric between Washington and Moscow, followed by President Putin's surprise offer extended last week at the G-8 Summit to host American missile defense radars in Azerbaijan added more fuel to the fires of media speculation.
Richard Shaw (QVM Group) posted an article titled "Investing in Russia: The Good News and the Bad" . While offering reasons to expect continued growth in Russia's economy, Mr. Shaw concludes by saying: "The big gains in the Russian stock market could well be more history than future. The political risks to your wealth in Russia are much greater now than they were perceived to be a few years ago."
The Motley Fool posted an article by Zoe Van Schyndel "Russian Bear or Bull?" that also ends on a sour note: "Russia is an emerging economy which, a decade ago, was nearly bankrupt. A lot has changed since then, but whether the opportunities in the Russian market are outweighed by the risks is a tough decision at this point. If oil prices stay at their lofty levels, this market is a safer bet, but if oil drops significantly, I wouldn't want to be anywhere near this bear."
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.
For a fistful of rubles...for a few rubles more...
Last week The Wall Street Journal published an article titled - "A Caveat for Emerging Markets" that warns of a possible crisis in Hungary, Kazakhstan, Russia, Ukraine, and Estonia brought on by excessive borrowing. I tend to agree with the American financial analyst/advisor Roger Nusbaum that "there are more people that call for a crisis than actual crises that occur" (you can read Mr. Nusbaum's thoughts on the Van Eck Global Russia ETF that began trading on the NYSE last month here).
Nonetheless, there are some political issues that foreigners should be aware of when they are considering investing in Russia.
Last week, Bloomberg released data on initial public offering (IPO) underwriters and their fees. For the first time since World War II, U.S. investment bankers are on the verge of earning less from IPOs than their counterparts in Europe. As American underwriters continue to charge double the going rate for European IPOs, the total amount of money raised in Europe this year is 78% greater than the value of U.S. offerings. IPOs in Europe have raised $37.8 billion in 2007, exceeding the $21.2 billion of new issues sold on U.S. exchanges.
The 2002 wave of corporate scandals in America resulted in heightened reporting and accounting controls in the form of Sarbanes-Oxley Act (SOX). A survey of public companies conducted by Foley & Lardner LLP last year concluded that the overall cost of being a publicly traded company increased 33% in the year after SOX was adopted, with an astounding 174% increase in compliance costs. As a result, many American companies are now looking to list in London or on the NYSE-owned Euronext exchange.
The last era when Russia was an emerging market - an ad from 1914 Source: A Fistful of Euros blog
The UK Financial Timesnoted last week that we have seen a dramatic increase in initial public offerings from emerging-market companies this year. During the fist five months of 2007, the total money raised represents half of the volume for all of 2006. There were 268 emerging market IPOs which raised a combined $53.8 billion. That compares with this time last year when 184 IPOs had raised $25.6 billion. The paper cites three reasons:
(i) ample liquidity in the financial system,
(ii) a strong appetite for risk among investors;
(iii) growing demand for new equity from fast-growing companies.
One of the current constraints on growth in Russia's booming economy is a critical shortage of experienced people with executive-level training. In Moscow, many middle or senior management positions that would normally be filled by fortysomethings in the United States, Western Europe and Japan are going to ambitious young Russians who know how to succeed in the Russian marketplace, but who often lack professional education for managing businesses at an increasingly global level. According to government statistics, only three out of every 100,000 Russians have an MBA, compared to 70 in the United States.
To address this glaring need, the Russian government has developed a high-priority national educational project. As part of the national education project, two new business schools, one located in Moscow and the other in St. Petersburg, opened their doors last year. Both projects are backed by the government, which would like to see Russian counterparts to Europe's Insead, and America's MIT and Wharton.
Several banks owned by major Russian oil producer OAO Tatneft are reportedly mulling IPOs
Last week saw more news reports on several Russian firms' plans for new IPOs and several interesting articles commenting on the Russian equity industry as a whole. These stories suggest that Russian issuers are looking for more effective ways to attract capital, both at home and abroad.
Before looking at the latest equity market developments in Russia, it is necessary to put them in a global context. The international accounting firm PricewaterhouseCoopers released their U.S. IPO Watch Report that shows that IPO activity in European markets declined during the first quarter of 2007. IPOs on European exchanges raised $13.3 (â‚¬ 10.6) billion, down 15% from $15.6 (â‚¬ 12.4) billion in the first quarter of 2006. Total volume declined 16% year over year from 164 to 137 IPOs.
Although London remains Europe's premier IPO market with 43% of IPO volume and 81% value for new listings, these numbers represent a sharp drop in volume and a slight decline in value compared with Q1 2006. London's decline can be attributed to less activity on the London Stock Exchange's Alternative Investment Market (LSE AIM). At the same time, U.S. IPO activity during the traditionally quiet first quarter hit a seven year high in terms of both volume and proceeds, with $12.1 billion raised through 64 IPOs, up from $11.6 billion from 54 IPOs in Q1 2006.
Last week Kommersant published a lengthy interview with Hiroshi Toda, Chief Operating Officer (COO) and International Operations Officer of Japan's Nomura Holdings, Inc.
The article presented an interesting Japanese view of the Russian stock market and the rapidly-developing investment banking industry in Russia. 2007 is not the first time Nomura has entered the Russian market. In the mid-1990s, the bank dealt with shares of Russian "blue chip" stocks. After the 1998 default, Nomura closed its offices in Russia, having lost $600 million.
This week we learned that multiple venture capital firms in Russia are issuing IPOs. The latest examples are: Tau Capital PLC, an investment company based in Kazahkstan. Tau Capital recently had a successful listing on the London Stock Exchange's Alternative Investment Market (LSE AIM). This venture was formed by a group of U.S. investment bankers who teamed up with financial experts from Kazakhstan to develop public and private businesses in Russia and Central Asia. Another example of this trend is the Russian buyout fund - Russian Strategic Growth Holdings PLC (a subsidiary of Russia's National Bank Trust and Trust Investment Bank), which plans to list on the LSE AIM this summer with the goal of raising at least $150 million.
Here at FINAM, we are raising capital domestically in Russia and hope that foreign investors will participate in our own efforts. Of course, our upcoming IPO on the Moscow Interbank Exchange (MICEX) junior market will be rather modest, but it presents a unique and challenging opportunity to investors.
A globe depicting the world's fastest growing economies in red (Hat tip: Jay Walker's Confused Capitalist blog)
This weekend Dow Jones published a news article ("Emerging-markets Fund Managers See Rebound For Russia, China") describing a report by Morgan Stanley Capital International on global emerging markets. While Morgan Stanley analysts noted that China and Russia have delivered lackluster stock market returns thus far in 2007, the report also states that:
- Russia faces political risks associated with the 2008 elections and remains heavily dependent on oil and gas prices, and is generally considered the cheapest buy of the BRIC (Brazil, Russia, India and China) emerging markets. However, Russia has better long-term growth prospects than most other emerging markets and is expected to outperform in the next 12 months.
- Russia's government and private sectors are investing oil and gas profits in updating the country's infrastructure and financial systems.
Last Thursday Russian Prime Minister Mikhail Fradkov signed an executive order relieving Oleg Vyugin from his position as director of the Federal Financial Markets Service. As of Thursday, there was no official confirmation of this move on the FFMS web page and Oleg Vyugin's biography was still posted on the site. However, Mr. Vyugin made some statements last year suggesting that he is looking for more dynamic work than supervising bureaucrats.
All Russian financial market experts agree that he did an exceptionally good job leading FFMS. Compared to March 2004, when Vyugin took office, this year an estimated 70% of all transactions involving Russian securities will be completed in Russia's stock markets. A far-sighted policy implemented by Mr. Vyugin (requiring 30% of listed transactions to be done in Russia) has brought a considerable number of Russian IPOs back home.
Venture capital first surfaced in Russia in the early 1990s. Venture capitalism began in Russia with a lot of help from foreigners, with the goal of giving the New Russia a mechanism for promoting the prompt development of both individual companies and the economy as a whole. During the Nineties, the European Bank for Reconstruction and Development (EBRD) established 11 regional venture funds in the country. At the same time, several funds were introduced with the participation of the World Bank's International Finance Corporation and American capital investors. By 2000, a number of experts and institutions (Russia's Information Technology and Communication Ministry, iKS Consulting, Troika Dialog Group, etc.) started producing reliable research data on venture financing in Russia, particularly in the IT sector.
The healthy influence of venture financing in Russia today is supported by these current statistics:
â€¢ For the last 7 years, the share of capital financing venture projects in the Russian Federation from Russian investors has increased up to 26%, while in 1998 this figure was only 3%.
â€¢ The average profitability of Russian venture capital projects has not been less than 11% per year since the market came into existence in 1994.
â€¢ At the end of 2005, the volume of the capital under management for all VC funds operating in the Russian market had reached $ 4.8 billion.
Click on the extended post to read more about the rapid development of information technology and the spread of the Internet in Russia.
Recently the Moscow Interbank Currency Exchange (MICEX) summarized its results for 2006 and some notable achievements so far this year. In 2006, the total volume of transactions on the MICEX in non-government securities, including operations in stocks, bonds and REPOs, grew 3.2 times and reached 20.38 trillion rubles ($ 754.9 billion) versus 6.40 trillion rubles ($ 225.6 billion) in 2005.
The daily average volume of transactions in stock assets reached 82.5 billion rubles ($3.1 billion) per day. In January-March 2007, the volume of transactions in non-government securities on the MICEX SE reached 7.82 trillion rubles ($297.4 billion), 2.5 times more than in the first quarter of 2006, while the daily average volume of transactions reached 137.2 billion rubles ($5.2 billion). In 2006, efforts to organize IPOs on the stock market began to bear fruit with seven major corporate IPOs, including Rosneft, Severstal, OGK-5 and some others, which together raised about 350 billion rubles (over $13.2 billion).
As of early 2007, 586 firms were providing access to trading for 265,000 investors (in 2006 134,000), including over 24,000 legal entities, over 230,000 individual investors, 2,000 non-residents and almost 8,000 institutional investors. In April 2007, the number of participants in trading reached 600 firms which serve over 326,000 clients. Of course, these numbers are still very small compared to the magnitude of the New York or London stock exchanges, but here in Russia, we are learning quickly.
Recently Alfa Bank research issued new papers analyzing the Russian stock market. These reports feature several key points relating to IPOs and investments in Russia. The first point made by Alfa Bank analysts is that today everyone understands that we have entered into an "IPO buyers market" where Russian issuers have to curtail offering prices, or issue an IPO in a new sector that is not yet well-represented.
This year the Russian stock market is estimated to hold more than 10% of all assets listed in Global Emerging Markets (GEMs), up from 6.3% in 2006. The major reasons for this trend are the numerous Russian IPOs and placements of new equities. The Russian federal government remains the biggest single investor in Russia's stock markets, and 2/3rds of all transactions are completed by partially state owned enterprises. However, the number of private equity holders continues to grow with the expansion of the market.
Russia's IPO market will approach the $30 billion dollar mark by the end of this year. According to a report by PriceWaterhouseCoopers, the combined value of these Russian IPOs is equivalent to the value of 297 European IPOs listed on the London Stock Exchange in 2006. Current projections call for accelerating IPOs scheduled to raise capital toward updating Russia's electric power infrastructure, which has been straining to keep up with surging demand from the expanding Russian economy. In addition to utilities, agriculture remains one of the most promising sectors for long-term investment in Russia.
Is the NASDAQ considering setting up an affiliated exchange in St. Petersburg?
Last week Russia's business media reported more exciting changes in the Russian IPO market. I have mentioned before how at the recent Third Annual IPO Congress, we received many suggestions from representatives about which foreign exchange is the best market for listing Russian IPOs. The real sign of growth here in Russia is that Russian companies now get to choose.
Last week saw more Russian business media reports about the mysterious new IXSP stock exchange. This time, the source was Russia's Kommersant business newspaper, which discussed the possible acquisition of OMX by the NASDAQ.
Last week Kommersant daily carried an article that discussed the revenues of investment banks now operating in Russia. It is interesting to note that according to the Russian finance website offerings.ru, there are 35 investment banks now involved in IPOs and mergers and acquisitions in Russia. Kommersant cites a research paper by Dealogic, according to which the top 5 Western investment banks earned $ 200 million in the first quarter of 2007.
One of the most interesting sessions of the recent Third Annual Russian IPO Congress was focused on the recent profound changes in the equity investment scene in Russia. Indeed, as Alexander Oslon, President of the Public Opinion Foundation, noted: last year was a turning point in the history of Russia. 2006 will go down in Russia's economic history as the year we witnessed the birth of consumer equity investing in the Russian Federation.
I am not sure whether the Russian news media will discuss it, but last week's conference was the first time when the managers of the leading stock exchanges in Russia came together in this new, perspective environment. Some of them are moving into new territory, but for others everything probably seems safely familiar.
Earlier this week we were introduced to three interesting articles, all of them posing the same question: is Russia's current model of development sustainable? Kommersant daily published a translation of Saturday's Financial Times piece titled, "NYSE is left in the cold as Russians flock to London" . A foreign policy blogger republished an article by Alexander Temerko, a former vice president of Yukos titled, "Russia: Buyers Beware".
Both of these articles question the road Russia is taking in its development. This path probably appears very strange to Western eyes, with state-owned "national champions" growing rapidly alongside burgeoning private entrepreneurship, but all of us should not forget Russian history. With all of the turmoil Russians suffered at the turn of the last two centuries, we are not qualified to do things the nice and easy way. Frank Sinatra sang: "I did it my way"; Russians may also prefer to say: "we do it our own way". To this end, I would like to introduce another paper that was published in the Vedomosti daily on Monday: "A Model for Development: The Trap of the State Capitalism". This paper is was produced by A. Abramov, a strategist at Aton Capital and two fellows from the Institute for the Economy in Transition, a Russian economic think tank. The article has been published on the Institute's web-site.
All three articles discuss the Russian economic miracle. All agree that while their evaluation of the Russian market may be negative in the medium to long term, international investors' enthusiasm for investing in Russia continues to grow.
The BRIC countries - Brazil, Russia, India, China - will account for the majority of growth in 21st century emerging markets
Last week (the 14th week of 2007) featured many discussions in the media regarding the growing role of new centers of investment activity around the world. The most recent trend of discussion started with an article by two managers at International Capital Strategies that was published in The Wall Street Journal on March 29 titled "Capital Warfare". Here are some notable observations from this piece:
- "A recent survey of financial professionals found almost two-thirds believed that London would consolidate its position as the global center of finance by 2015, 13% predicted Dubai, 10% pointed to Shanghai and fewer than one in ten gave a nod to New York. The U.S.-led unipolar financial era appears to be slipping away."
- "The U.S. faces stiff competition as an investment destination from resource-rich developing countries. "While the embrace of markets and capitalism by countries like China, Russia and even Vietnam represents a long-sought triumph over communism, the U.S. must nevertheless recognize the ancillary consequences of this victory. We now have to compete with them."
- "Russia has recently raised enormous sums without directly accessing U.S. capital markets or investors (i.e. Rosneft and Sberbank)
Goldman Sachs CEO Lloyd Blankfein sent a letter to President Vladimir Putin announcing that his company will soon expand its Moscow offices
Despite the negative news we frequently hear about Russia and the Russian economy, last week Russians received more positive signs from the world investor community. I mentioned earlier on my blog major investments by IFC and CISCO in Russia. This morning the news comes directly from Goldman Sachs. The multinational investment bank amazed us with a very unusual effort executed by its CEO, Lloyd C. Blankfein. Mr. Blankfein sent a letter to President Putin, and the Kremlin administration highlighted this letter in a statement on its official web-site. Here is a translated excerpt:
"Foreign correspondents point to significant growth in the magnitude of Russia in the world economy. This is noted in particular, by L. Blankfein, USA, head of Goldman Sachs, a company that is involved in global investment projects. He would like to discuss in Moscow key issues of world economic tendencies, as well as suggestions for the expansion of [Goldman Sachs] contacts with the Russian government and private partners."
London Stock Exchange and MICEX Promote Russian IPOs
Russia Blog contributor Vladimir Kuznetsov, director of equity finance at the Finam Investment Company, sends us his observations from the 2nd Annual Joint Capital Markets Conference held yesterday in Moscow.
In this post, Vladimir Kuznetsov, director of equity finance at the Finam Investment Company in Moscow, notes more foreign investment in Russia's real estate market and the release of two major reports on capital investment for modernizing Russian infrastructure. Mr. Kuznetsov also rounds up recent announcements from Russian banks, breweries, and food distributors about their plans to issue IPOs.
Morgan Stanley continues its drive for acquisitions of Russian developers. Morgan Stanley's Special Situations Fund III has recently acquired a minority stake in RBI development holding. According to experts, this is the biggest deal of its kind thus far in Russia -- some estimate it at about $200 million. This is the third transaction for Morgan Stanley in this sector, which previously acquired 10% of RosEvroDevelopment and minority shares in Moscow-based commercial real estate developer RGI International. Morgan Stanley recently announced that it plans to increase direct investments in Russia with a focus on Russian developers. For this purpose the bank plans to add about $1 billion to its fund.
In another real estate market development, it has become known that Starr Investments Russia, controlled by Maurice "Hank" Greenberg, the former CEO of American International Group Inc., will invest hundreds of millions in Russian real estate with a focus on prime office space, residential housing and hotels, all of it initially in Moscow.
Russian Government Proposes Regional Economic Hubs
Does Russia need its own version of China's Shenzhen boomtown?
Russia Blog contributor Vladimir Kuznetsov, director of equity finance at the Finam Investment Company in Moscow, sends us his comments on the news that the Russian government is proposing special economic zones for stimulating growth in the regions.
Today the Russian Ministry of Regional Development completed a draft program that envisions establishing eight so called "agglomerate centers" in the country. In essence these would be megalopolis-type clusters. This concept has been in development since 2005 and would strive to expand these cities to make them as attractive for new businesses and population growth as Moscow and St. Petersburg. One of the first priorities for such national projects is the development of transportation infrastructure.
In this post, Vladimir Kuznetsov, director of equity finance at the Finam Investment Company in Moscow, notes that foreign investors now have access to more information about investing in Russia's long-neglected regions thanks to a new investment guide issued by the Marchmont Capital Partners firm in Nizhny Novgorod. Mr. Kuznetsov also rounds up the news from this week in Russian financial markets.
About six month ago I met a rare paragon of entrepreneurship - an American businessman who does not live in Moscow, but in the detached city of Nizhny Novgorod. This week Kendrick White, managing principal of the Nizhny Novgorod-based firm Marchmont Capital Partners, announced the publication of the first Â¬volume of the Marchmont Investment Guide. This book is part of a very promising effort to open the "riddle, wrapped in a mystery, inside an enigma" of Russia's regions. "Many investors in Russia know only Moscow -- one of the most expensive cities in the world. But doing business in Moscow is not the same as doing business across all of Russia, as some regional administrations are far more progressive in attracting investors than others," says White.
Congratulations to Kendrick White and his team!
Click on the extended post to read more news from Russia's financial markets.
Vladimir Kuznetsov, director of equity finance for the Finam Investment Company in Moscow, has submitted more commentary on recent trends in Russia's stock market.
On one hand, Mr. Kuznetsov notices articles in the Russian business media advising investors to curb their enthusiasm about Russia's equity markets. On the other hand, Mr. Kuznetsov sees increasingly fierce competition between international stock trading exchanges to float Russian IPOs.
To make Mr. Kuznetsov's contributions and other posts with financial information about Russia more accessible to our readers, we have created the new Finance category of Russia Blog.
The recent painful correction of stock markets worldwide has triggered some criticism of Russia's IPOs in the Russian business media. On March 9, the Russian Agency of Political News published a lengthy piece of commentary arguing that a stock market in its classic definition does not exist in Russia. The author argues that basically there are no private, individual investors in Russia. In 2005-06 they counted for just 3% of the total stocks owned by Russian issuers. Thus there is no actual money from the Russian population in the stock market. Furthermore, the authors of the APN article cite the statistic that 95% of all market trading is conducted by the top ten leading companies.
These claims lead me to cite the 19th century American satirist Mark Twain, "There are lies, damned lies and statistics". The fact is we can interpret these numbers in many different ways, even while admitting that there is some truth in them. Nonetheless, in my opinion, APN's commentary is extremely sly in its description of Russian IPOs.
In this post, Vladimir Kuznetsov, director of equity finance at the Finam Investment Company in Moscow, explains why the Amsterdam-based Euronext exchange is becoming a popular venue for Russian companies listing IPOs. Mr. Kuznetsov also informs us about some controversies related to the recent Sberbank IPO and the stock market value of Russian food retailers.
Euronext is speeding up efforts to list more Russian companies on its exchange. This month we will see two appearances by Euronext executives at conferences in Moscow. I see the most attractive factors for Euronext IPOs as:
- No restriction on float value (like 20% in LSE)
- Companies listed on Euronext under global depository receipts (GDRs) and other depository receipt programs are included in this market index
- Alternext is a viable place for small- and medium-sized enterprises (SMEs)
Russia Blog has received another contribution from our reader Vladimir Kuznetsov, director of equity financing at the Finam Investment Company in Moscow. In this blog post, Mr. Kuznetsov analyizes the latest numbers from Merrill Lynch and the Russian Central Bank concerning the state of Russia's banking sector. As in the other major emerging markets, Russian banks are growing at a phenominal pace, but the consumer credit system has yet to fully mature and there are some non-performing bad loans. Mr. Kuznetsov concludes his piece by noting that Russian stocks are beginning to bounce back from the worldwide correction two weeks ago.
The latest reports on the Russian banking sector reveal some major pros and cons. On the positive side is a recent Merrill Lynch report declaring Russia's banking sector to be the most attractive option for international investors among the BRIC (Brazil, Russia, India, China) developing countries. Russian banks look the most promising in the mid-term and are projected to have the highest acceleration of credit and other services. Kommersant quotes the Merrill Lynch report's findings that Russian banks have the lowest cost to revenues ratio (40%) in BRIC, while Brazil has 47% and India 49% .
The Merrill Lynch report also points to extremely high administrative barriers for entering the banking sector as a major obstacle to foreign banks opening branches in Russia. Currently, only 18% of Russian adults have bank accounts, compared to 28% in Brazil and 50% in Turkey.
Financial Times: "Wall Street Becomes Bullish on the Bear"
The UK Financial Times newspaper recently published an article about Lehman Brothers, Goldman Sachs and other multinational investment banks determination to expand their presence in Russian equity markets.
Russia Blog has often noted the increasing contrast between the optimistic business and the dour editorial pages of many Western newspapers on the subject of Russia.
Click on the extended post to read the full FT article.
Kommersant's Business Guide has some new information about auditing in Russia
Russia Blog has received another contribution from our reader Vladimir Kuznetsov, director of equity financing at the Finam Investment Company in Moscow. In this piece, Mr. Kuznetsov analyizes why Russian companies increasingly choose local, internationally affiliated accounting firms to perform their audits over the so-called "Big Four" (KPMG, Ernst & Young, Deloitte & Touche, and Price Waterhouse Coopers).
During my last five years working with Russian companies, one of the most delicate issues was the necessity of presenting an audit statement according to international standards. This was the major obstacle in ANY transaction, besides the usual stuff (like consolidation, both legal and financial).
This week Kommersant's Business Guide features a "Financial Reporting" section with some nice numbers. I have written previously about EXPERT-RA ratings. Now Kommersant adds more details to the facts I reported earlier:
- Ernst & Young has 21% of the surveyed companies and is oriented towards the ones that are controlled by the government
Tracking the Russian stock exchange (Photo by: Kommersant)
Here at the Real Russia Project, we want to highlight news from Russia's maturing financial markets. To that end, we have requested that Vladimir F. Kuznetsov, director of equity financing for the Finam Investment Company in Moscow, contribute his insights to Russia Blog. Mr. Kuznetsov has travelled to the U.S. to brief American investors, including a visit to Atlanta, Georgia. Mr. Kuznetsov's blog, Equity Financing in Russia, began as a newsletter for investors and has now grown into a blog. We are pleased to repost his latest article here.
- The Editors
For the last several months we've seen a lot of discussion about the newly created alternative investment markets -- the RTS START and the MICEX IRK (that stands for Russian "Innovation and Rapidly Growing") listed companies. Many newsmen like to stress that this is the Russian AIM and try to make a lot of comparisons. However, I would agree with the notion that is spelled out at the Federal Financial Markets Service (FFMS) website : "it is not correct that Russia is establishing the market of AIM type... AIM is different, what we are doing is more close to the stock bonds...what we do is suggest to small young companies that have no history, but have consultants and the right business plan, is to borrow the money from the market in the form of an IPO".
Russia Hedge Funds Top List of Single Strategy Performers in 2006
Holiday season shoppers on Moscow's Tverskaya Street Photo by: Charles Ganske
This week world stock markets took a beating after China's Shanghai exchange lost 9% of its value in one day, and Russian stocks were no exception. Leading Russian companies like Rosneft are heavily invested in expanding their trade with China.
However, this temporary setback shouldn't discourage investors who take the long view of the Russian economy. As Vladimir Kuznetsov, director of financing for the FINAM Investment Firm in Moscow, pointed out before this week's global correction, Russia's stock market was up 92% this year. In comparison, the U.S. S&P 500 index grew by 13.6% in 2006.
Mr. Kuznetsov adds that major Western investment companies like Barclays Global Investors, State Street Global Advisors, Legal and General Investment Management are doubling the size of their stakes in Russia from 5% to 10% of their emerging market fund portfolios. Mr. Kuznetsov quotes J.P. Morgan analysts lauding the Russian government's plans to invest $185 billion in oil and gas revenues into new infrastructure, noting that, "Russia stands out among its peers in the BRIC (Brazil, Russia, India, China) markets."
Banking for the people - Sberbank has 62% of retail bank
accounts in Russia but only 29% of total savings
Sberbank, the largest retail bank in Russia, announced plans last week to become a publicly traded company, according to RIA Novosti news agency. According to the company website, Sberbank currently holds 62% of consumer bank accounts, 29% of total deposits and 50% of retail and 32% of the commercial loans in Russia. For the IPO Sberbank plans to sell 3.5 million shares worth an estimated $11.5 billion.
In Moscow and St. Petersburg, Sberbank's green signs are ubiquitous and there are branches and ATMs in almost every neighborhood.
Wall Street Journal: "Investors Credit Putin As They Pile up Profits"
Russian President Vladimir Putin
Today the Wall Street Journal's Guy Chazan confirmed what we've been saying here at Russia Blog since we released our special report "10 Western Media Stereotypes About Russia: How Truthful Are They?" last year - there is a growing gap between how American investors and businessmen perceive Russia and how politicians and pundits in Washington D.C. view the country. The former group sees the rise of the New Russia as an opportunity, the latter as a threat.
Chazan writes that in spite of the recent setbacks for BP and Shell in Russia's energy sector, many of America's largest emerging market funds are betting billions on continued strong economic growth in Russia. While pundits can make all kinds of predictions about where Russia is headed after President Putin leaves office next year, investment fund managers, whose jobs depend on making accurate forecasts, seem optimistic about Russia's future.
Click on the extended post to read the full Wall Street Journal article.
The new Triumph Palace in Moscow is now the tallest residential high rise in Europe
Moscow's frenetic push upward and outward is getting a substantial push from foreign investors, according to today's report from the Bloomberg financial news service. Much of the foreign capital invested in Russian bonds is coming from emerging market funds in the U.S. and UK, and is extending beyond the oil and gas industries into the construction, manufacturing and retail industries. Russia Blog has previously commented on Russian IPOs here and here.
Click on the extended post to read the full Bloomberg article.
Keeping the lights and servers on in Moscow board rooms
The Colorado-based Energy Biz Insider magazine has an excellent article this week on the challenges of setting market prices in Russian electric power and gas utilities.
Much of the controversy surrounding Russia's increasing clout in world energy markets revolves around the fact that state-owned conglomerates like Gazprom and Rosneft have the temerity to demand world prices for gas, starting with former Soviet republics like Ukraine and Belarus, but will only gradually introduce these rates in Mother Russia. However, as we have documented here at Russia Blog, Russians do not receive massively subsidized gasoline (unlike citizens of OPEC countries) and are paying about the same prices at the pump as Americans do for lower-quality petrol.
There are many legitimate reasons why sudden inflation from 1990s-style "shock therapy" in Russian domestic energy markets is to be avoided. Not only does Russia need capital to fund the replacement of dozens of Soviet-designed nuclear reactors, but old oil and gas fired plants must be replaced with new coal-fired facilities to free up more gas for export while Russia's power grid is upgraded to modern standards. All of this new infrastructure will require tens of billions in new investment, which is why RAO Unified Energy Systems and other Russian utilities are going public in the next eighteen months, listing shares on the London Stock Exchange.
Click on the extended post to read Energy Biz Insider Editor in Chief Ken Silverstein's article.
Largest Aluminum Corporation in the World Going Public Within 18 Months
Moscow -- On Monday, October 2, 2006, the largest aluminum corporation in the world was officially created. The Russian companies RusAl and SUAL and the Swiss trader Glencore announced the merger of their holdings and the creation of the united company Russian Aluminum. This newborn "baby" is the world's largest aluminum producer, easily surpassing giants like Alcan and Alcoa.
Russian Aluminum consists of the three: RusAl owns 66% of the shares, SUAL -- 22% and Glencore -- 12%. The new CEO of the company is former head of RusAl, Alexandr Bulygin, and the chairman of the board of directors is the former head of SUAL, Brian Gilbertson. The merger is being administered by JP Morgan and Morgan Stanley. The new Russian company will employ 110,000 people in 17 different countries. Annual production volume will reach four million tons of aluminum and eleven million tons of alumina, three and a half tons of the latter will be produced for export. In the next 18 months shares of the company will become public on the London Stock Exchange. The new Russian IPO will sell 20-25% of the company's stock.
This year the gains of the Russian Aluminum will be $10 billion. Full registration of the company will be completed by April 1, 2007; however the company will have to receive approval from the federal Anti-Monopoly Service of the Russian Federation and similar agencies in seven other countries. Some might say that the antitrust evaluation of the new-born giant will be rigged, however the chances of the company succeeding with its registration are very high. According to international antitrust standards, the company's size and market share will be compared to that of Alcan and Alcoa, and Russian Aluminum will only produce 400,000 more tons a year of aluminum than these firms.
Moscow -- Last week Severstal announced the issue of its first IPO. Before the end of the year 2006, shares of the company will be publicly traded on the London Stock Exchange. The current owner of the company, Alexey Mordashov, is planning to maintain control over his company even after it goes public.
According to the London Stock Exchange website, Severstal will place GDR on LSE for the regular shares of the company. The actual IPO seller will be Frontdeal Limited, a company registered in Cyprus. The banks coordinating the shares allocation are Citigroup, Deutsche Bank and UBS Investment Bank. The owner of the Cyprus offshore company which owns 38% of Severstal is Alexey Mordashov. According to publicly available information, through his holdings in many different companies Mordashov controls over 90% of Severstal.
Three of Russia's five IKEA stores are located in Moscow
This summer Russia surpassed Saudi Arabia as the world's largest oil producer, according to official production figures reported recently by the UK Financial Times, the New York Times, and several other Western media outlets. This surge in energy production has coincided with Russia's emergence as one of the world's leading emerging markets, attracting major investment funds such as Morgan Stanley Capital International and the Vanguard Group.
There is much more to the Russian economy, however, than just the oil and gas boom. While fossil fuels and raw metals will still account for majority of Russian IPO shares issued in 2006-2007, Russia's largest companies involved in auto and truck manufacturing, steelmaking, electric power grid, telecommunications, and retail are also opening up to foreign investors.
Click on the extended post to read the MosNews story about the next phase of foreign investment in Russia.
Rosneft CEO Sergei Bogdanichikov with his picture of Putin
As the war in the Middle East continues to dominate the headlines and drive up oil prices, the biggest news in global energy markets this week continues to be OAO Rosneft's initial public offering.
As Austin, TX based Strategic Forecasting notes, until two years ago, Rosneft was an afterthought in the Russian oil market, a state-owned pigmy next to the privately-owned giants Lukoil, Yukos (Mikhail Khodorkovsky) and Sibneft (Roman Abramovich). Then Mikhail Khodorkovsky tried to sell his company to several multinational oil companies while buying influence in the West, portraying himself as the champion of opposition to Putin. The Kremlin responded to Khodorkovsky's hubris by dismembering Yukos and banishing the oligarch to a Siberian prison, far away from the friends he thought he could buy on Capitol Hill. Now the same oil majors Khodorkovsky thought would protect him from the Kremlin are buying shares in the empire he built, based on assets the oligarch stole from the Soviet Union.
George Soros has some controversial history with Russia
Billionaire investor George Soros is continuing his very public campaign to keep major Western investors from putting money into Rosneft's initial public offering (IPO). Like its sister firm Gazprom, Rosneft is owned by the Russian state, and therefore owns assets seized by the Kremlin from Yukos.
Since acquiring Yukos' assets, Rosneft has made several bold moves. Last year, Rosneft and the Kremlin were criticized by the Wall Street Journal's editorial board for extending a job offer to Don Evans, President George W. Bush's first Secretary of Commerce, and a close friend from Bush's hometown of Midland, Texas.
Rosneft is hoping to raise $11 billion dollars with this initial public offering and bring in Western investors as minority stakeholders. Rosneft needs this capital to upgrade its aging network of pipelines and bring the latest extraction technologies into Siberian oil fields. Without this investment, it will be more difficult for Russia to expand production and help stabilize world oil prices.