THIS
POST WAS ORIGINALLY PUBLISHED APRIL 02, 2007
RUSSIAN IPOs – WHAT’s AHEAD – LSE and MICEX INTEGRATED REASONING
Today MICEX hosted a conference in Moscow - 2nd Joint Capital Markets Conference "IPO and Beyond. New Capital Market Products on the horizon" organized by the London Stock Exchange and MICEX Stock Exchange. You may look at the list of participants and speakers at this link, and here I would like to summarize some of the reports. BTW, its is heavily attended – about 300 people are present.
At the beginning MICEX CEO Mr. Rybnikov stressed that currently we are witnessing explosive growth of the Russian stock market, i.e.
- population is starting to participate in stock market activities
- growth of numbers of IPOs
- growth of number of traded securities
- changes in infrastructure
MICEX Chairman, Mr. Potemkin, stressed the following ideas for the development of MICEX:
- expansion of the base of the exchange by means of attraction of SMEs and provision for these companies of possibilities for active trading
- further development of new initiatives (like junior market)
- gradual transformation of MICEX into some sort of information bureau for the issuers
- further development of infrastructure.
Mr. Gibson-Smith, the Chairman of the LSE elaborated on the development of Russia-UK capital markets relationship in a rapidly changing world. He pointed to the keen interest of investors to the Russian issuers (20 of them in AIM only). Mr. Gibson-Smith used a nice language about teaching the Russian companies “to raise capital on the right terms”. I guess, that means the scope of MICEX and LSE cooperation. He also noticed the changes in the Russian securities markets – a shift from natural resources to consumer sector, retail, machinery and technology.
Closely related to LSE’s Chairman was the speech by Antony Brenton, HM Ambassador to Moscow. He was rather emotional and noted that he “is impressed by the dynamism of the fast growing financial sector in Russia”. There are 13 more IPOs of Russian companies expected in 2007. What I liked a lot – the use of superlatives, like notable “speed and enthusiasm how the U.K. adapted to globalization” – that is in the sense that U.K. regulators were very efficient with their decisions on listing requirements for LSE. Sharing the corporate governance standards is one of the things that both countries benefit from LSE/MICEX cooperation. Interesting remark was regarding the influence of the U.K. financial services provided for the Russians – in this way the Russian financial sector will follow the British one.
Sure enough, one of the key note speakers was Mr. Vyugin, Head of Federal Financial Markets Service (FFMS). Some statistics for 2006:
- 6 companies offered common stock;
- 7 companies made dual listings;
- 2 companies used Depositary Receipts;
- 3 companies made “exotic listings” – through SPVs.
Mr. Vyugin made some meaningful disclosures: last year was the advent of institutional investors in Russia, primarily of different funds – there are 642 active funds operating in Russia now. This is 50% growth over the year. According to Mr. Vyugin that is an extremely important fact – the national stock market development mostly relies on the status and condition of institutional investors. There are three different types of investors in Russia: (i) 35% invest in DR; (ii) 65% - in common stock; (iii) very few do both. The liquidity of the Russian stock market is very high due to activities of institutional investors. Mr. Vyugin pointed to the “reasonable” situation in the Russian stock market: the issuers have access both to Western and domestic investors. That leads to good competitiveness and possibilities to get advantageous deals. He summarized that there is a good institutional base for the development of the Russian stock market.
Really cognitive were the remarks of Alderman John Stuttard, The Lord Mayor of the City of London. I guess 99% of the audience had the first chance to see a live Alderman. He started with some amusing remarks about his Sunday’s tour of the Kremlin where he found some good Elizabethan silver collection; at the same time he noted that his badge (an impressive metal thing on his neck) is also 400 years old silver of Russian origin. A new wave of perceptive statistic was produced:
- in 2006 367 companies were listed in London that raised £29 billion;
- there are 242 foreign banks in London
- 50% real estate buyers in London are Russians- there are 242,000 executives in the City that are non-UK passport holders
Substantial part of Alderman’s remarks was related to regulatory issues. He reminded about well-known Sarbanes-Oxley Act, mentioning that US SEC is not politically independent as regulatory authority. “Light type of regulation is applied in the U.K. But this is not soft touch – a lot of companies are fined almost every week for violations”.
Mr. Ulukaev, First Deputy Chairman, Central Bank, among other things noted that 2006 saw a very fast inflow of private capital to Russia; with $ 41 billion in 2006, as compared to ZERO in 2005. This is due to the fact that there is a good investor appetite and a good offer for that capital. While in 2006 the majority of the inflow was associated with loans, Mr. Ulukaev predicts that in 2007 this will be structured with IPOs and private placements. According to his estimates only two sectors (banking and energy) may attract up to $ 35 billion.
An interesting presentation was made by Tom Troubridge, Chairman, Listing Authority Advisory Committee (also an employee of PWC). Just one note from it:
“A la carte menu approach to regulation”.
I would like to take your reaction step by step.
1. representation of French holders: indeed I do not represent French bondholders. I am putting forth what I believe to be their view. In 1999 a French governement survey counted 320.000 of them (I estimate them to be in fact nearly 400.000) and I have not heard of a single one who said he considered Russia had honored its debt. But I have heard of thousands who claim that Russia has not.
2. Comparisons between Russia and other countries mentionned in my alert come verbatim from the quoted WORLD BANK report, available on their website.
3. To my knowledge the USA have never defaulted on their governement debt. Hence, I do not advise against investing in the US.
4. French bondholders want their money back from Russia (I think I can say I am speaking for them when I say this); you and I know there is some serious legal justification for this claim, which is anything but frivolous and will not simply go away. I think now is the time for the Russian Federation and French bondholders to work together and settle it so that it stops poisoning our relations. It could be considered over a period of time; despite the cautious views of the WORLD BANK everybody knows Russia is a powerful country with a great potential, a small part of which could be allocated to paying French citizens back for their enormous contribution to your railroads, utilities, industry, and finances a century ago. Spread out over time this does not need to be a painful process.In the meantime I believe potential investors in your country should be aware that your country has a track record of not paying her debts, and that the Russian Federation actually has an undisclosed liability which I estimate to be in the area of US$80 billion, and that it may well be called with accrued interest in the future.
The rating agencies have not factored this possibility into their accounts.
I would be interested to know what your (reasonable) views are on my proposal.
K.
P.S. Although you may be aware of the genesis of our dispute, you or your readers might be interested to read the following text which illustrates the French position. It can also be found and commented at www.ladetterusse.canalblog.com/archives/2007/03/25/4360504.html
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HISTORICAL BACKGROUND .
In 1882 Germany signed a mutual defence agreement, the Triplice, with Italy and the Austro-Hungarian Empire, in order to discourage aggression from France who, the Germans suspected, wanted to recover Alsace-Lorraine which had been seized by Germany after the latter's victory in the 1870 Franco-Prussian war.
France was therefore keen to strike a military alliance, on Germany's Eastern flank, with Russia; France's proposal came as a windfall for Russia who had been excluded from the Triplice, whose public finances were in disarray, and who could no longer access the German financial market, since the German Chancellor considered Russia was ripe for bankruptcy. The grounds for a military and financial Franco-Russian alliance were obvious; it was secretly formalised in 1891, signed by Tsar Alexander III in 1893, and flourished throughout the 1890's and early 1900's.
French public finances had yet to recover from defeat in the Franco-Prussian war (France had been made to pay 5 billion "Francs-or" to the victors, in addition to the cost of the "armed peace"), and the Cabinet knew it lacked the means to finance Russia. But it also knew the French public to be an intensive saver, and decided to tap its resources.
Disregarding the fragility of Russia's finances, French politicians, followed by the major banks, such as Crédit Lyonnais or Société Générale, and journalists, put all their influence behind the placement of Russian bonds to the French public. Between 1897 and 1903, 30 % of Crédit Lyonnais's profits came from Russian affairs (Suzanne Berger, Raphael Dorman, Helen Starbuck, Massachusetts Institute of Technology, " The first globalization, lessons from the French "
The French investors were usually workmen, modest civil servants, farmers, shopkeepers, but also wealthier individuals such as doctors, lawyers, land owners... a complete cross-section of French society, which is why so many French household are, to this day, familiar with the ' Emprunts Russes '.
Some invested their entire wealth in these bonds, a seemingly rash decision; but after all, hadn't France's highly trustworthy central bank Banque de France, the ultimate financial rock, accepted to become the Russian Finance Ministry's official representative in France? Weren't politicians and posters claiming throughout the country that " Lending to Russia is lending to France "? A few, not so keen on the alliance, fell victims to violent campaigns in the press, like Finance Minister Joseph Caillaux whose wife Henriette called on the office of Gaston Calmette, the director of Le FIGARO who had published her husband's intimate correspondence, to shoot him six times at close range with her newly acquired Browning automatic.
The financial press could have questioned both Russia's ability to honour the growingly massive debt and the wisdom of funnelling such vast amounts out of France, but its journalists were being paid with cash coming directly from the Russian embassy - and sometimes from French banks, with active French government assistance - to report favourably on Russian finances and economic conditions. Following Russian losses to Japan in 1904 and the 1905 revolution, prices for such journalism rose sharply. In 1904 Arthur Raffalovitch, Russia's paymaster and a financial writer himself, had already complained to Witte and Sazonov, the Russian Ministers of Finance and Foreign Affairs, and even to Kokovstev, the Prime Minister, on the "abominable venality of the French press" which was costing him so much. Some men spoke up, like Charles Dumas, a député, but on August 6th 1906 The Times of London wrote on the terrible state of Russian finances and the large sums paid to hide the situation in the eyes of French investors ( Suzanne Berger, Raphael Dorman, Helen Starbuck, Massachusetts Institute of Technology, ibid.).
Major public relations operations were undertaken to bolster the opinion of the French public. Paris built of one of its most beautiful bridges (of which it has many) to link the Grand Palais to the Esplanade des Invalides on the other side of the Seine. Named Alexandre III after the signatory of the alliance, its first stone was laid in 1896 by Tsar Nicolas II to celebrate the alliance, amidst an unbelievable flurry of ' Fêtes Franco-Russes ' and banquets throughout the capital, and indeed the country. When the Russian fleet visited the naval base at Toulon the authorities went so far as to commission several songs, including a Franco-Russian version of the ' Marseillaise ', the French national anthem! Some of the lyrics, to be sung to its tune, ran as follows:
Let us go forth, sons of the nation
The Russians are here !
Before our eyes, are raised the brilliant standards
Of a beloved sister ,
Can you hear, the march upon our land
Of these proud and worthy sailors ?
They come to shake our hand
And loudly stake their claim to brotherhood !
Citizen ! In all our numbers, we run to meet them.
Let us run ! Let us run ! And send out joyful cries toward the heavens !
French savings piled into Russian bonds.
Whereas there had only been two Russian bonds ever issued in France prior to 1889 (one in 1822, the other in 1867), Russian government bonds were issued in 1889, 1890, 1891, 1893, 1894, 1901, 1906, 1909; in addition, innumerable Russian railway and other private sector bonds (all covered with a Russian government guarantee) were issued in 1889, 1893, 1894, 1901, 1903, 1908, 1910, 1912, 1913, 1914, the proceeds of which financed 65000 kms of tracks, the 7500 kms trans-Siberian railway, chemical, electrical, mining projects etc. Meanwhile, main cities such as Moscow or St. Petersburg put up their real estate as collateral to issue their own bonds to the French public to pay for tramway lines, telephone networks, sewerage and water grids, etc.
In 1917, 75% of Imperial Russia's foreign debt was held by the French public (bearing in mind that France's population was less than 40 million, while Russia's was over 110)!
New issues had been floated until 1914 by which time the war broke out, and the military aspect of the alliance was brought into play. It served its purpose to some extent, Russia diverting German resources from the Western front until the Bolsheviks, exhausted from having wrenched power from the Tsar in 1917, asked Germany for a separate peace treaty (Brest-Litovsk), which was signed early in 1918. German signature came at a price: among other things, they demanded remittance of 94 tons of Russian gold.
In 1919 the Versailles Treaty settled the conditions for peace between the Western Allies and Germany, and declared the Brest-Litovsk treaty null and void. Therefore, the gold should have been returned to the Bolsheviks. But the Allies were in no hurry to recognise them (indeed some Allies were discreetly fighting them), and furthermore in 1918 the Reds had repudiated Tsarist Russia's debt, so that interest and capital payments on the bonds, which had been interrupted since the beginning of the war, did not resume. As a consequence it was decided to keep the gold in the vaults of the Banque de France for future allocation.
Subsequently it was allocated as follows, with the specification that the French and British shares were to be set against outstanding Russian debt to both countries (today France claims this gold was a German payment for war damages):
USA: 24.3 tons
Great Britain: 34.7 tons
France: 35 tons.
The United States never ratified the Versailles Treaty, so that their gold was split up between France and Great Britain, bringing both countries' share to approximately 47 tons (present market value: $ 955 million each, January 2007).
What exactly happened to the "French" gold after it disappeared into the vaults of the Banque de France? This has never been satisfactorily explained, although according to Francois Trucy, Sénateur, Républicains Indépendants, it was still there in 1997 ( Sénat débats 20 décembre 1999 ).
Although no payment was ever made on either interest or capital of Tsarist bonds after 1914, they remained continuously both listed and quoted on the Paris stock exchange until 1996 when, without the bonds being struck off the list, their quotation was temporarily suspended at the request of the French government, pending an agreement (which materialised in 1997) between the states of France and the Russian Federation on outstanding pre-1945 debts between the two countries.
Today, more than ten years later, the bonds are still suspended, while the official justification for their suspension ceased to exist in the year 2000.
Conservative estimates on the capitalised value, as of today, of outstanding Russian bonds issued in France run around $ 80 billion.
For comparison purposes, note that when the Russian Federation repaid in full its outstanding debt to the Paris Club in the summer of 2006, and subsequently claimed to be debt-free, it actually paid $ 23 billion.
CURRENT DEVELOPMENTS .
As mentioned above, the Bolsheviks repudiated the Tsarist debt in 1918.
For French holders, a glimmer of hope appeared in the Franco-Soviet Treaty of October 29th 1990 signed by Presidents Gorbachev and Mitterrand. Its article 24 recognised the existence of the debt by " " making provisions for the repayment of Tsarist debt " ( L'Humanité, October 30th 1990 ). Unfortunately this treaty was never ratified, and was superseded by another Franco-Russian Treaty, signed by Presidents Yeltsin and Mitterrand on February 7th 1992; its article 22 was less precise, and therefore less favourable to the French:
"Article 22 - The French Republic and the Russian Federation undertake to reach an agreement, rapidly if possible, on the settlement of disputes raised by each party relating to the financial and material aspects of assets and interests of private individuals and corporate bodies of both countries".
It is important to remember that the parties to this treaty are the two governments, not private individuals or corporate bodies. Therefore, despite Russian claims to the contrary, private individuals are in no way bound by this treaty or any other subsequent agreement claiming to use it as a stepping stone.
On November 26th 1996 and May 27th 1997 France and Russia signed first a memorandum and then an agreement "on the final settlement of reciprocal real and financial claims originating before May 9th 1945". Again, the parties are governments, not private individuals or entities.
The main points of the agreement (May 27th 1997), which explicitly refers to the February 7th 1992 Treaty, are as follows:
1. Each party will refrain from serving or supporting any claim whatsoever, made in its name or in the name of private individuals or corporate bodies, originating before May 5th 1945. This covers in particular:
- Claims made by the French party in the name of holders of Tsarist bonds.
- Claims made by the Russian party in representation of prejudices linked to the 1918-1922 intervention (n.b.: French assistance to the white Russians) or to hostilities during this period.
- Claims made by the Russian party relating to the portion of gold which, after having been remitted by the Russian SSR to Germany further to the March 3rd 1918 Brest-Litovsk Treaty, was allocated to France by virtue of the June 6th 1919 Versailles Peace Treaty.
2. As a complete and final settlement of all these claims the Russian Federation remits $ 400 million to the French party.
3. The French party accepts exclusive responsibility for the settlement of those financial claims which it will no longer support further to the terms of the agreement.
By the year 2000 the $ 400 million mentioned in #2 above had been paid to the French governemnent and redistributed to the bondholders who underlined that although they were accepting them as a down payment, they in no way considered the debt to be extinct (by the year 2000 the total capitalised outstanding amount due was estimated to be $ 50 billion).
Since 1918 several entities have been formed to represent French bondholders' interests. Recently, the most credible has been Association Française des Posteurs d' Emprunts Russes (AFPER) born in 1994 from a dispute within a previous entity (GNDPTR).
Under the chairmanship first of Gérald de Dreux-Brézé, now of Pierre de Pontbriand, AFPER pursued an extremely active policy, successfully opposing several Russian attempts to launch a mutual fund (FCP EuroBank Long Terme CEI) or modern Russian bonds on the French financial market, which probably was a contributing factor in bringing the Russians to sign the 1997 agreement. Following the dismal amount offered via the agreement, AFPER resumed its harassment policy, with much less success however because further to the 1997 agreement the French market was now open to Russian issuers, and the French government was also free to openly state that it no longer supported French claims; in fact, not only has it stopped supporting them, but it has actively hindered the judicial process for AFPER in all French jurisdictions since then.
On October 29th 2002 the world's largest sailing ship SEDOV, operated as a training vessel by Murmansk University for the account of the Russian Federation, precipitously left Marseilles under cover of darkness at 2:15am after having had to cancel planned official receptions; the French intelligence body 'Renseignements Généraux' had warned the Captain that AFPER was about to serve an impounding order on the ship.
On July 10th 2003 AFPER served an impounding order on 240 pieces of artwork which were on loan from the St. Petersburg Hermitage Museum to the Musée des Invalides in Paris. The request was rejected by the French court, but caused much annoyance in Moscow.
Many other legal actions have been launched, without success as stated above, although they have served a purpose in that the judgements now confirm the existence and validity of the debt. In 2005 Pierre de Pontbriand decided to halt the harassment policy and concentrate on the single purpose of bringing to an end the unjustified suspended quotation of the Russian bonds on the Paris Bourse.
While all members of AFPER support the idea of reopening access to quotation on the stock exchange (it is a major legal issue), many believe a harassment policy, should be resumed, particularly since France is entering a presidential election year (there are estimated to be approximately 400.000 bondholders in France). Some believe the 1997 agreement provides grounds for them to present our $ 80 billion claim to France (see #3 above), and also that more should be done to recover the present value of the 47 tons of gold. Lastly, they believe non-French avenues should be explored.
At present, the way forward is under review.
In the meantime,
The Russian Federation is still in default on 80 billion USD and this claim will be pursued by French bondholders until it is settled.
January 2007.