All eyes will be on media and IT company RosBusiness Consulting later this month, which is looking to launch a pioneering share offering on the Russian equity stage. If the planned domestic IPO is a success, market watchers hope it will prompt fellow Russian corporates to issue equity on the bouyant Moscow bourses. Guy Norton evaluates its chances.
These are stellar times for the Russian equity market, with the Russian Trading system (RTS) index recording an 81% rise in 2001 and posting a 35% gain in the first quarter of this year. But the question, as is so often the case in Russia, is will the good times last? For once, the answer seems to be yes.
Despite the fact that microeconomic fundamentals are likely to come under pressure on the back of slowing economic growth in Russia, Roland Nash, head of strategy at Renaissance Capital in Moscow, says that the most important factor behind the rise in the RTS has been the positive inflow of funds into the equity markets from both domestic and international accounts.
"For the first time in Russia's post-Soviet history, the markets are facing the double whammy of net domestic inflows and growing enthusiasm from international global funds," he says. "In this context, it will be a brave fund manager that will step away from the market, despite the rocketing RTS of recent months."
Investment banks are reporting new money coming into the Russian equity market almost daily and not just from speculative hedge funds. "It's not hot, dirty money, but fast, smart money coming into the markets," says Guven Giray, co-head of equities at Alfa Bank in London. "What we've been seeing this year is that investors who haven't been active since 1998 are now buying Russia again."
There is a similar message from Johnny Beveridge, head of equities at Renaissance Capital in London: "In the early part of this year we have seen significant inflows from global equity funds, with the selling of stocks in mature western oil companies in favour of Russian companies like Yukos and Surgut."
He adds that while Russia continues to be viewed principally as a commodity - oil, gas and metals stocks account for over 75% of the RTS index - there is growing interest in restructuring plays such as regional telcos and energy companies. "Investors are looking to broaden their exposure to Russia as they become more confident in the restructuring process going on in the country."
One of the factors that has helped fuel offshore interest in Russian stocks has been the vast improvement in corporate governance since the Russian financial crisis of August 1998.
Once renowned for abusing minority shareholder rights, companies such as oil concern Yukos are now being praised for delivering true shareholder value. "We are seeing increased differentiation between those corporates taking corporate governance seriously and those just paying it lip service," says Beveridge. Having cleaned up their act, companies like Yukos have more to lose than gain from reverting to the robber baron tactics of the 1990s.
"The cost of corporate governance is now much higher. When Yukos was trading at 10c it wasn't important, now Yukos is at $8 it is," says Stephen O'Sullivan, head of research at investment bank United Financial Group (UFG).
As a result of its vastly improved corporate governance, Yukos has gone from being a $1bn to a $17bn company in just two years. Virtue, it seems, does bring its own rewards. "In order to monetise their positions, owners recognise the need to do the right things," says Kirill Stein, vice president, corporate finance at Alfa Bank.
To encourage other companies to follow suit, the Federal Securities Commission (FSC) in Russia introduced a corporate governance code at the start of April. Although voluntary in nature, the code is likely to be an important yardstick for measuring how serious companies are about delivering returns for shareholders.
"We believe that, given that concerns over corporate governance issues have been dogging the Russian market for years, the approval of the code is an extremely positive step," says Alexei Moisseev, senior economist at Renaissance.
Improving market performance is leading to increased new issue activity on both the foreign and domestic market front. The strong performance of the equity markets has encouraged a resumption of new issue activity on both the domestic and international front. While fruit juice and dairy products firm Wimm-Bill-Dann stole the limelight in February with its international share offering on the New York Stock Exchange, media and IT outfit RosBusinessConsulting (RBC) is hoping to make similar headlines with a domestic initial public offering this month.
The IPO, to be lead managed by local investment bank Aton Capital, will involve the float of 10%-15% of RBC's equity capital and will mark the first time a Russian company has issued shares directly on to the two Russian stock exchanges, the Russian Trading System (RTS) and the Moscow Interbank Currency Exchange (Micex).
"This represents a landmark transaction for the development of capital markets in Russia," says Peter Halloran, Aton's executive chairman. "For the first time a Russian company will raise capital using the domestic market rather than relying on foreign markets."
If RBC's pioneering IPO is well received it is hoped that it will encourage other high tech companies to come to market. "We believe many others will follow in our footsteps," says German Kaploun, RBC's president.
Founded in 1992, RBC started life as a news agency but has since branched out into being an information technology services provider.
Yuri Rovensky, RBC's general director, believes that although a minnow in global terms, the company offers investors an attractive opportunity to diversify away from the oil and gas stocks which dominate the Russian markets.
Importantly for the Russian exchanges, a successful offering could go some way to improving investor interest in the domestic bourses, which continue to be overshadowed by New York and London in terms of offshore appetite for Russian stocks .
"I hope that the company here in Russia will be as successful with its IPO as the offering we saw recently for Wimm-Bill-Dann in New York. And if that does happen many other Russian companies will realise that Wall Street is not the only place where capital can be raised successfully, " says Ivan Tirishkin, president of RTS.
Cormac Lynch, head of investment banking at Nikoil in Moscow, believes that for small companies such as RBC, launching an IPO in Russia is a much more realistic route for sourcing capital than an international equity offering.
"Domestic IPOs, provided they are done in a transparent, western-style manner, are a positive development for the equity market," adds O'Sullivan at UFG. But Rory Scott, head of equity capital markets at ING in London says Russian companies still need to look abroad to attract international institutions. "Local listings on their own don't offer the level of due diligence you need to generate international investor interest," he says. *