Fiona Rintoul ponders aloud in the Financial Times about whether now is the time for fund managers to look more seriously at investing in Russia. Her article gives a qualified maybe, with a whole host of negative factors to consider:
The political situation is uncertain, and the Russian stock market has been in helter-skelter mode lately. Moreover, the local fund industry is littered with the corpses of fund managers who came, saw and failed to conquer; companies such as Pioneer, Templeton, Crédit Suisse and Deutsche Bank have all at one time or another withdrawn with their tails between their legs.
Vladimir Kirillov
The last time Russia looked ripe for investment was 2007, right before the financial crisis hit. Many more pre-crisis ventures failed than succeeded. Wealthy Russians retreated to funds based in Zürich or London, and the regulatory framework since has remained an obstacle for international investors.
Vladimir Kirillov, chief executive of TKB BNP Paribas Investment Partners, has a warning to those looking to get in:
The Russian fund industry is interesting for international companies but only those that are ready to develop this business in the long term. We don’t advise companies to come in and catch up.
Read the full article here.
While the state of the Eurozone remains the most pressing economic issue on the Continent, post-recession Russia isn’t expected to accelerate its growth either, according to John Bonar of British-based Business Special Report-Russia, with the challenges that marked 2011 not likely to abate any time soon:
All the leading investment banks predict more-or-less the same thing for Russia in 2012: a poor and volatile first quarter of the year with growth, investment and stock markets picking up and gathering momentum in the second half of year, barring a train wreck in the rest of Europe.
Moscow rings in the new year. Credit: AP
Bonar reports that capital flight of roughly $6 billion a month is predicted through the first quarter, with some 150,000 Russians looking to emigrate to improve their economic standing.
Lack of investor confidence in Russia also means “there is little prospect of any significant Russian IPOs” on the London Stock Exchange until the second quarter or later.
Economists, Bonar notes, are anxiously awaiting the March 4 presidential election, which, although the winner is predetermined, will be more interesting given recent demonstrations across the country.
Reuters chief Russian financial correspondent Douglas Busvine writes that the price of Russian securities thought to have ties to Prime Minister Vladimir Putin, or to have profited the most under his economic policies, “have sold off hardest” in the days following this month’s rigged Duma election.
Russian companies mostly deeply in the red since Dec. 4 include gas firm Novatek, tied to Putin’s friend and oil trader Gennady Timchenko; potash miner Uralkali, which Suleiman Kerimov, backed by state banks, won control of this year; and gold mining company Polyus, in which Mikhail Prokhorov owns a major stake.
Busvine writes:
With the opposition crying foul over alleged fraud in the December 4 election, which cut the majority of Putin’s ruling United Russia party, investors have slashed their exposure to stocks whose prospects they see as tied to the stability of the regime.
Utilities stocks, like state-controlled Federal Grid Company, InterRao and RusHydro, are also underperforming, as analysts note that the Russian stock market is now trading at roughly a 40 percent discount to its emerging markets peers.
Read the full article here.
Russian search engine Yandex debuted today on NASDAQ at $25 a share over it’s $20 its pre-IPO estimate. However, political risk looms large over its future performance. And smaller companies seeking capital from international markets face a tough environment. Nadia Popova writes:
Foreign investors are also becoming increasingly sensitive to political uncertainty ahead of Russia’s presidential elections in 2012. What’s more, lacking ruble liquidity has pushed local investors to start selling their current holdings, all the while showing little interest in buying new stocks.”
Paul Gregory of the Hoover Institute cautions investors to remember the Khodorkovsky trial when looking to Russia for big returns:
Let us hope the Khodorkovsky case will not be forgotten outside of Russia. The Council of Europe, Freedom House, and Amnesty International have concluded that Khodorkovsky was charged and imprisoned in a process that did not follow the rule of law and was politically motivated.”
“Any company considering investing in Russia should think twice. Those companies who invested in good faith in Yukos lost everything. They were politically expropriated. Major international companies, such as Shell and BP, have suffered arbitrary treatment at the hands of Russian officials and have no recourse. Companies considering entering the Russian market are assured that such things will not happen to them. They should realize that anyone doing business in Russia could find themselves in Khodorkovsky’s shoes.”
Russia Helicopters is the latest Russian IPO to be postponed because of political risk. Unable to release required details about its military contracts, Russia Helicopters joins four other IPOs this year that failed to close. Yandex is the most ambitious Russian IPO since it chooses to list on NASDAQ and must follow US securities law. Its $1 billion IPO is expected to be completed later this year.
The trend in increasing political risk for Russian IPOs is on the rise and the Russian government becomes more entwined with businesses in Russia. Today, Prime Minister Vladimir Putin’s cabinet approved the appointment of deputy premier Sergei Ivanov’s son to replace a first deputy prime minister to head the supervisory board at Russian Agricultural Bank. With political appointments at the helm, it may be increasingly difficult for Russian companies to access international capital markets as investors seek returns with risk.
Russia is a land of big appetites. But it’s starting to look like investors’ hunger for risk has become “very dainty,” a trader at CF Global in London tells Bloomberg News. Indeed, Russia’s Micex Index is the first among benchmark measures in the world’s 20 largest equity markets to fall at least 10 percent from a recent peak, the common definition of a correction, since mid-March, Bloomberg reports.
Yandex, the Russian internet firm, is preparing for a $1 billion IPO on the NASDAQ but news about its IPO is mainly about the political and oligarch takeover risk in the prospectus as well as having to provide information for the FSB, Russia’s secret service, on contributors to well known whistle blower Alexey Navalny. Investors may flock to the IPO as Yandex is the sixth most visited website in the world.
However, they should take note that just seven months after Mail.ru IPOed in London in November 2010, Mail.ru’s founders sold their stake last week and the stock fell 20%. With pervasive government and oligarch intervention in business in Russia, accessing foreign exchanges and investors may be the only way for Russia’s entrepreneurs to recoup their initial investment.
In London, an injunction prohibiting the share-swap agreement between BP and Rosneft was issued indefinitely. The group Alfa Access Renova (AAR) had an agreement with BP as their investment partner in Russia. BP, still reeling from the Gulf Oil disaster looked to the deal with Rosneft to expand their exploration into the Arctic Circle. BP’s shares have gained 2.6 percent so far this year but still trade well below their value of before the Gulf Oil Spill. The injunction is likely to give AAR more leverage, and money, from any resulting BP-Rosneft deal.
WSJ’s Heard on the Street urged potential investors in Russia to study Kremlinology, the study of the murky underbelly of the Russian government. When BP made the deal with Rosneft, it no doubt received strong support from the Russian government since Igor Sechin is both chairman of Rosneft, deputy prime minister and close confidante of Prime Minister Vladimir Putin. Despite these close ties, the Kremlin has not used its muscle to lean on AAR to forgo their legal battles against BP and Igor Sechin is about to lose his chairmanship at Rosneft.
Despite these and other efforts by President Dmitry Medvedev to make Russia more enticing to foreign investors, critical factors remain:
The country needs to attract more foreign direct investment: It fell 13% to $13.8 billion last year, half the level in 2007. Gross domestic product growth could fall to 2.5% to 3% per year in the next 10 years, compared with 6% to 7% in the last decade unless annual foreign direct investment is ramped up toward $75 billion, investment bank Uralsib forecasts. The government wants foreign investors to participate in a planned $35 billion of state-owned company flotations in the next three years. Industries from farming to oil and gas also need foreign expertise to develop.
…so long as former Yukos boss Mikhail Khodorkovsky languishes in jail, many will be sceptical Russia’s legal system is truly independent. Political risk is the reason Russian equities trade at 9.1 times expected 2011 earnings, a 20% discount to their emerging market peers. It would take a brave Kremlinologist to bet on that gap closing.
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.
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.
