March 22nd, 2011

Russia’s Slow IPO Market

Chris Weafer, Chief Strategist at Uralsib and frequent Russia analyst, commented on the slower than expected Russian IPO market. Despite analysts estimates of Russian issuance market at $20-30 billion, he surmises the revised estimate for all of 2011 to be in the $5-10 billion range. The government would like to move forward with a $30 billion three-year privatization program, but Weafer cautions total investments of only $6 billion.

The dreams of a global financial powerhouse in Russia is running up against the realities of its limits. Weafer explains the mismatched expectations this way:

Valuation remains both the key and the difficulty, a fact clearly illustrated when three of the four IPOs offered in February failed. Investors want a deep discount to reflect market risk and liquidity risk. Issuers still retain ambitions for premium ratings. Issues that offer exposure outside of extractive industries will fare better than more-of-the-same investments in extractive industries. Issues that raise money for expansion and debt reduction will fare better than those simply cashing out an existing owner.

Despite three out of four Russian IPOs failing to launch in the first quarter of 2011, there are more on the way including RusAgro in April.

Some investor wariness might have to do with the political risk in Russia. Since the UN sanctioned strikes against Libya, fissures between Prime Minister Putin and President Medvedev have become more public creating more uncertainty around the 2012 presidential election.

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