In recent years, London has been the preferred option for Russia/CIS companies in search of capital, which means that, either through ordinary shares or depositary receipts, it's now possible to gain access to dozens of companies with primary assets in the former Soviet states, whether they're global energy heavyweights such as
A major concern is the prospect that these companies could be disproportionately affected by Europe's ongoing economic woes, which means 2012 could be an unnerving time for anyone with a stake in the Russia/CIS region. From midway through 2008 to the following February, Russia's RTS index lost a staggering four-fifths of its value - the decline was more than double that of the major European indices.
The collapse of the oil price was obviously a major factor given the index's heavy weighting towards energy stocks, but the Russian economy was also forced to contend with an accelerated flight of capital at a time when external finance had all but dried up. As export earnings from energy and metals went into sharp decline, Moscow had to draw heavily on the nation's foreign capital reserves in order to meet state expenditure, while purchasing power shrank as the ruble depreciated by 35 per cent against the dollar.
Who's the boss?
It's not only the volatility of the market that is a problem for investors. A frequent source of chargrin for fund managers targeting the region is opaque business practices and insular corporate culture. There is also frustration that attempts by institutional shareholders to exert external pressure for corporate reform are often stymied by the comparatively low levels of free-floating shares. Indeed, two companies - precious metals producer Polymetal Intl., and Evraz, an integrated steelmaking and mining company, part-owned by Roman Abramovich - were added to the UK's FTSE 100 index at the tail-end of last year, with respective free-floats of 51 and 28 per cent. Many have questioned whether it is appropriate that companies with this type of corporate profile should be included in the UK's benchmark index.
The issue of lax corporate governance still provides a major disincentive for investment in the region. Alas, two decades after the dissolution of the Soviet Union, the notion of political patronage dies hard. Though many of the larger listed entities are at pains to extol the virtues of a new-found corporate 'glasnost', the reassurances don't always tally with the deeds. One of the most heavily criticised companies in this regard is
Nevertheless, if you want to avoid residual political influence, you could always consider some independent growth plays in the region. One such company,
Another Aim-traded entity,
Admittedly, the Russian economy is now better insulated against any global economic reversal because of lower internal rates of inflation and credit growth, together with a more flexible exchange rate mechanism. And Russia's state budget has recently returned to a surplus. However, it's probable that valuations for Russian/CIS companies could unravel again if European industry hits the skids. So, if you've been actively considering a foray into these markets, it would be wise to keep your powder dry till the likely effect of the European downturn on energy prices becomes apparent.
by Jon Edwards, Deputy Head of Primary Markets - Emerging Markets, London Stock Exchange
London has long been the home for Russian companies looking to list internationally. Over 100 Russian companies have chosen to list and trade in London as a means to grow their businesses, giving them access to the world's deepest pool of international capital and investor expertise. Some of Russia's largest and most successful companies trade on the London Stock Exchange, including Gazprom, Lukoil and Rosneft.
In 2011, despite difficult market conditions, we have seen Russian companies continue to launch successful IPOs. Companies like Polymetal, which was the first Russian company to enter the FTSE 100, and Evraz which made the move to a premium listing last year, are demonstrating a trend of Russian companies working hard to achieve the highest possible regulatory standards and looking to FTSE admission to help engage investors and drive growth.
Second only to money raised by UK companies last year, Russian companies in 2011 raised more money at IPO than firms listing from any other international region and there continues to be a strong pipeline of companies waiting to float. Firms are coming to market from a wide variety of sectors, not only from natural resources and mining but also agriculture, infrastructure and retail.
For those companies listing GDRs rather than shares, the launch of the International Order book (IOB) 10 years ago for professional investors has led to Russian companies accounting for 90 per cent of trading on what is now the world's most liquid order book for GDRs. This liquid secondary market undoubtedly contributes to the success of the primary market, helping to attract high-calibre and high-growth Russian companies to London.