December 20th, 2010

Kremlin Gets Blingy

Alrosa, world’s second largest diamond producer, is considering a stock market flotation in 2012. Currently majority-owned by the Russian government, Alrosa is closed to outside equity investors. Despite some optimism that greater foreign investment would translate to better corporate governance, Alrosa is preparing for their float by restricting the ownership structure. This is standard operating procedure at Kremlin Inc. As we have noted before, the Russian government keeps tabs on its investments even as it looks for fresh sources of capital outside its border by restricting percentage of shares a Russian company can list abroad.

With state capitalism firmly entrenched in Russia, Alrosa maintained its production volume even as other diamond producers have scaled back. Alrosa sells its excess diamonds to the Russian government, which owns a $1 billion diamond stockpile. This indicates that Kremlin officials might have other uses for Alrosa besides the float on a foreign exchange, as another channel for top-level corruption.

The verdict for the Khodorkovsky trial has been postponed until next Monday, December 27th and it looks like the market has already priced in his continued conviction. Russian stocks remain at a 30% discount to other emerging market stocks based on forward price/earnings multiples. That the government or oligarchs own 44% of Russian equities may indicate a not just a strong government influence in business but also a lack of enthusiasm among foreign investors for Russian companies. And since 2005 the 24 stock offerings of Russian companies have returned 13%, but remove gas producer Novatek and the return falls to less than 1%. No wonder investors are in no hurry to allocate capital to Russia.

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