New Views on Investments in Russia

THIS POST WAS ORIGINALLY PUBLISHED JUNE 13, 2007

New Views on Investments in Russia

News media vividly discusses the results of the St.Petersburg Economic Forum. Regarding the hottest issue in discussions – the Russian state capitalism – First Deputy Prime Minister Sergei Ivanov reiterated President’s Putin statement to the newsmen at the G8 summit (“...in cases where we are establishing large state corporations, such as in the shipbuilding and aircraft manufacturing sectors, we are not nationalizing previously privatized enterprises but are simply bringing scattered state-owned assets under one roof, uniting them as a single corporation…We have no intention of trying to increase the number of state assets from beyond their present size. As I already said, in the case of the aircraft manufacturing and shipbuilding sectors, we are streamlining state assets and making them more viable, efficient and competitive, and we do not rule out the sale of stakes in these corporations in the future, IPO operations, but these future plans will then involve viable and competitive companies of European level and significance. We do not want to lose these sectors; we want to develop them and we want to do so with the help of private capital too.”). Mr. Ivanov stated that while creating big holdings the government intends to buy out their stock at the market price with possible future IPOs. Regarding foreign investments Sergey Ivanov suggested a new idea: “your technologies in return for our market”.

There are some new announcements that show the desire of Western financial community to work in Russia:
- Goldman Sachs Group Inc. plans to expand its Moscow office to 100 employees by adding 25 more bankers
- Deutsche Bank AG, (already about 800 employees in Moscow) plans to add consumer lending to its operations in Russia to benefit from demand for loans and financial services

- Barclays Capital Plc is likely to open a Moscow office this year

VEDOMOSTI DAILY published today the results of the poll that was conducted by the Foreign Investment Advisory Council (FIAC) “Image of Russia in the View of Foreign Investors” . One of the key results is that those who are already working in Russia have a better attitude to the country as opposed to those who are only mulling to do so. That completely supports the idea of my yesterday’s post. The Russia-based investors: 47% of polled think that Russian is moving in the right direction, while 25% consider it wrong. Potential investors – 26% and 33% respectively. Over 50% of working in Russia consider investment in the country more profitable as compared to other emerging markets. Potential investors are different – only 18% think so. 39% of working in Russia think that country risks in Russia are higher; with 59% potential investors consider Russian risks bigger than in other emerging markets. As the result of the survey FIAC suggests that investors and government officials should inform their peers of advantages of doing business in Russia.

A commentary was published today by the Australian expert Chris Mayer “Russian Stock Market on Fire, No Longer as Dependent on United States” that analyzes the market in Russia. It end with “investors should not discount the importance of the Russian market and other overseas stock markets. Increasingly, investors will want to pay attention to what happens in Moscow or Dubai or other once-backwater investment arenas.”

Bankers Feeling Better in Europe than in the USA

THIS POST WAS ORIGINALLY PUBLISHED MAY 30, 2007

Bankers Feeling Better in Europe than in the USA

Bloomberg released data on IPO underwriters and their fees. For the first time since World War II the US bankers are on the verge of earning less from initial public offerings than in Europe. As American underwriters continue to charge double the going fee rate on European IPOs, the total amount of money raised in Europe so far this year is 78% greater than the value of U.S. offerings. Many companies look to list in Europe. IPOs in Europe have raised $37.8 billion so far this year, exceeding the $21.2 billion of stock sold on U.S. exchanges. And it is natural: the Enron events resulted in heightened reporting and accounting controls in the form of Sarbanes-Oxley (SOX) legislation. A survey of public companies concluded that the overall cost of being public increased 33% in the year after SOX was adopted, with a 174% increase in compliance costs.
Bloomberg cites that fees in Europe range from 1% to 5.4%, and as I mentioned earlier (The Beauties of Russia for Investment Banks and Bankers) VTB IPO’s fees were 1.6%. This all compares to 7% average US fees.

It is interesting to compare Bloomberg’s data on IPO coordinators ratings with the Russian ones.
Bloomberg states for the global:
1. UBS AG
2. Goldman Sachs
3. Merrill Lynch & Co

European:1. Goldman Sachs
2. Deutsche Bank
3. Citigroup and JPMorgan.

ReDeal in collaboration with PWC published 2006 rating of underwriters and coordinators of Russian IPOs:
Underwriters:
1. Dresdner Kleinwort Wasserstein
2. Deutsche UFG
3. Morgan Stanley

Coordinators:
1. Morgan Stanley
2. Deutsche UFG
3. Dresdner Kleinwort Wasserstein

So, the presence of German investment banks is clear and visible. As I noted in my previous post there is an increasing attention of global investor community to the Russian stock market. It is obvious from the table that non-resident investors rush to Russia. And this week it was once again confirmed by the MICEX that the trading volume of Russian ADRs on MICEX is bigger than in London.
So, we do feel that Russia is making its good input in the growth of European stock market.

Russian IPOs – Review of the 20th week of 2007

THIS POST WAS ORIGINALLY PUBLISHED MAY 20, 2007

Russian IPOs – Review of the 20th week of 2007

Global Market DevelopmentsThere are some news reports that I guess have an effect on the Russian IPOs plans and the Russian equity industry as the whole. With this knowledge we may plan and suggest to the Russian issuers new and more effective ways of raising capital:
PricewaterhouseCoopers released their US IPO Watch Report that shows that Q1 2007 IPO activity on European markets declines. IPOs on European exchanges raised $13.3 (€ 10.6) billion, down 15% from $15.6 (€ 12.4) billion in Q1 2006. 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% of value, these numbers represent a sharp drop in volume and a slight decline in value compared with Q1 2006. London's decline is attributable to less activity on the AIM. At the same time US 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.
Interesting enough it was concurrently reported that the London Stock Exchange bumped up its 2006 annual dividend by 50% after operating profits more than doubled to £174.2 million. The LSE's revenues were up a fifth at £349.6 million.

There are new competing threats to LSE gaining their momentum: Project Turquoise, a consortium of seven global investment banks, Plus Markets is a UK start-up, Project Boat, set up by investment banks, which plans to offer competing services in trade reporting.

Companies in the US raised more money through deals involving private placements than initial public offerings last year, demonstrating how issuers are increasingly shying away from the scrutiny and expense of the US public market. Public equity offerings on the three largest US stock exchanges – the New York Stock Exchange, Nasdaq and the American Stock Exchange – raised $154 billion in 2006, while offerings involving 144A private placements raised $162 billion. It seems that many international companies look at private placements as the best way to raise capital in the USA. According to the statistics Nasdaq receives 10 times as many applications to register placements than it does for offerings – thus the exchange is in preparations to launch an automated market dedicated to such private placements. There is also another effort in its development that strives to enhance private placements transactions – the Unified Markets.

Russia Developers in the Global Stream of Money RaisingPIK Group, a Russian developer company joins its global peers (Vector Hospitality Plc, Realia Business SA) in an effort to raise $8.8 billion in the three biggest IPOs. PIK is working with Deutsche Bank AG, Morgan Stanley and Nomura International. These are the largest IPOs in European real estate up to this date. Another IPO this month AFI Development Plc, a Russian property company, brought $1.4 billion on May 3. PIK's stock offering, in a range of $25 to $31 a share, would value the company at $14.1 billion, making it Russia's biggest property company by market value. The developer will offer new and existing shares and list them in Moscow and London.

The Beauties of Russia for Investment Banks and BankersThe Russian press reported that recent VTB IPO brought nice fees to its managers. While the total fees are about 1.6% (as compared to average 2-2.5%), everyone feels that they are good enough. VTB allocated $3.2 billion to the fees, while Citibank, Deutsche Bank and Goldman Sachs are to get $ 30-37 million, Renaissance Capital (the placement coordinator in Russia) - $7 million. Renaissance managers were smart enough and issued (in collaboration with Royal Bank of Scotland) the VTB stock certificates – that will bring additional $2 million in certificates’ commission fee (0.25%).
Another worthy piece was produced this week by Bloomberg. “The Russian market has attracted U.S. securities firms led by Goldman Sachs Group Inc., Merrill and Lehman, which are on a hiring binge as they compete with local rivals Renaissance Capital, Troika Dialog and Alfa Bank for the most experienced staff.” Thus the authors claim that Moscow bankers get $7 million payday, double New York average. Compensation for bankers in Russia rose by about 25% in 2006, exceeding the 15-20% increase in the U.K. It is interesting to read, especially for US investment bankers that think about going to Moscow.
One note on Goldman Sachs says that “Lloyd Blankfein will meet with businessmen and politicians in Russia for the second time this year when he attends the St. Petersburg Economic Forum in June. He sat down last month with First Deputy Prime Minister and presidential candidate Dmitry Medvedev. Goldman plans to double its staff in Moscow to 70.”

Banking Sector NewsNOMOS bank decided against IPO and signed an MOU with PPF Group N.V. with the goal of establishing one of the biggest universal banking groups in Russia. PPF Group N.V. operates in Russia Home Credit and Finance Bank which is one of the notorious banks as to the popular customers’ ratings trying to sack consumers’ money through hidden interest rates (those of you who read Russian may find many stories on this on a popular “peoples’ bank rating” pages). Maybe the new group will be more civilized? One of the major reasons to skip IPO, according to many experts, is the fact that NOMOS bank does not have adequate retail structure, thus impeding the possibilities to attract more investments.
NOMOS bank was to be the first Russian private bank to go public. Immediately this vacated slot is filled by one of the top regional (Tatarstan) banks - Ak Bars. The press reported that the bank is actively working with investors both in the West and in the East, particularly in Hong Kong and in Singapore. A notable fact is that Troika Dialog’s owner - Mr. Vardnayan - is on Board of Ak Bars. TATNEFT is the biggest shareholder of the bank; according to the INTERFAX rating it is number 19 in the Russian banks list as to their assets. Experts think that Ak Barks may make IPO with P/BV multiplier equal to three due to its regional location; that may raise $ 500-$600 million with 20% float. Among other private banks that are mulling IPO is Zenit Bank that is also owned by TATNEFT.As the strive of foreign banks to expand operations in Russian continues, a Russian subsidiary of HSBC has received a license for operations with individuals in Russia (provide deposits, loans, mortgages, credit cards and asset management). The bank plans to set up its own retail network by the end of 2007, however many experts believe that HSBC will eventually prefer to buy a Russian bank. Indeed, establishing owned network is time consuming (more than a year) and expensive (about $ 350,00 - $ 400,000).

MICEX Mulling IPOOn the annual shareholders meeting of the MICEX one of the most discussed issues was the way to attract financing required to cover operational risks. According to the MICEX’s officials, although the question of IPO was not on the agenda, the idea is vital and there is a possibility of the stock exchange’s IPO within the next 5 years. The MICEX’s management is going to seriously address the issue within this year.

Another Privatization DriveAs I wrote earlier we are now experiencing a new wave of privatization efforts. This week a new evidence emerged - Russia plans to privatize half of its stock of railway trucks in a sell-off expected to raise $2.3 billion. According to the Transport Minister Igor Levitin a company holding half of Russia's rolling stock, or 260,000 rail cars, would issue shares in 2007 or next year. This is another elaboration on the previously reported plan to establish a single subsidiary company and attract from $2 to $4 billion.

Good-bye Mr. Soros
As we know that Mr.Soros failed to implement his long-standing plans for Russia we do welcome the latest news that he (Soros Fund Management LLC) sold his 0.35% stake in Vympelcom and 1.3% in Wimm-Bill-Dunn. That’s a good piece of news, as everyone knows that Soros and his people did nothing good to Russia – I wrote about it earlier.

New IPO Candidates
- IFC Metropol Canada – possible first Russian IPO on TSX

- An integrated company created around Sovkomflot comp and the Novorossiisk Shipping Company - IPO in 2008
- OJSC ROSINTER RESTAURANTS HOLDING, restaurant company in Russia and the CIS – IPO in Russian and USA
- Vitrina A, advertising agency – IPO in 2008 after establishing a holding company (ThisWayGroup – TWG) with Retail House and Brandflight
- The Russian Strategic Growth Holdings Plc, a Russian buyout fund of Russia's National Bank Trust and Trust Investment Bank – AIM listing this year hoping to raise $ 150 million