Business not as usual
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Emerging Markets

Business not as usual

Thanks to its oil, Tatarstan has long been one of Russia’s wealthiest regions. But as reserves run down, the government is scrambling to diversify the economy – and improve its relationship with foreign capital

By Julian Evans


Thanks to its oil, Tatarstan has long been one of Russia’s wealthiest regions. But as reserves run down, the government is scrambling to diversify the economy – and improve its relationship with foreign capital


As the EBRD governors prepare to gather for their annual meeting, the bank’s president, Jean Lemierre, has made clear the symbolic significance of the choice of host city, Kazan, capital of the Russian region of Tatarstan. “We are moving to the regions. In 2006, three-quarters of our new commitments in Russia were outside Moscow and St Petersburg,” he tells Emerging Markets.


Tatarstan is one of the success stories among Russia’s regions, with a budget balance among the strongest of any regional government. However, its wealth is built heavily on the regional oil reserves, and especially the revenues from local oil company Tatneft.


To boost diversification and reduce this dependence on hydrocarbons, Tatarstan’s prime minister Rustam Minnikhanov has been touring the globe to raise the region’s international profile. Just recently, he was in Leipzig, meeting potential German strategic investors like Siemens. The week before, he was breakfasting with international media magnate Rupert Murdoch and Mexican president Felipe Calderon in Davos. Late last year, he was meeting foreign portfolio investors at the London Stock Exchange.


The meetings were part of a government drive to open up the economy to foreign investment. The region is set to provide around £6.5 billion in capital markets transactions over the next few years, including a possible £2.5 billion in London-listed IPOs, most likely drawn from the banking and downstream  oil processing sectors.


Tatarstan has one of the richest industrial bases in Russia, and with Tatar incomes growing more rapidly than the national average, local residents are leading participants in Russia’s consumer boom – Kazan now has more square metres of shopping centre per capita than Moscow, or even London. The region is home to some of Russia’s most significant companies, such as Tatneft, the fifth-biggest oil company in Russia; Nizhnekamskneftekhim and Kazanorgsintez, the two biggest petrochemical companies in Russia; Ak-Bars Bank, the tenth biggest in Russia; and Kamaz, the biggest truck manufacturer, which makes the trucks Minnikhanov races in the desert.


Unusual


These industrial jewels are still in the hands of the regional administration, to an extent that is unusual in the Russian economy. This is the legacy of a special deal that the regional government struck with the federal authorities in 1992 during Boris Yeltsin’s presidency. The mainly Muslim region came close to declaring full independence from Russia, but the region’s president, the asute Mintimer Shaimiev, managed to broker a compromise deal that gave the region an uncommon degree of autonomy over its economy.


This enabled Shaimiev to protect the region from the wave of liberalization and privatization that swept through the rest of Russia, and to keep the region’s companies in his administration’s hands. His protege, Minnikhanov, is now the chairman of the board of most of these companies.


Today, however, the administration is trying to open up the economy to attract foreign investment, both through multi-billion-pound debt financing deals and through IPOs of state-owned companies.


The strategy is partly a response to external competitive pressures. Kendrick White, the CEO of Marchmont Capital Partners, a private equity firm that specializes in investing in Russia’s regions, says: “Regions like Tatarstan used not to have the incentive to do much self-presentation and to try and seek out investment. This is changing as companies from Moscow and multinationals reach out into the regions. Now regional firms have to adapt and modernize to survive. So, where two years ago I was pleading with local firms to let me invest, now the local firms are much more hungry for capital.”


For example, Tatarstan used to have some of the biggest oil deposits in Russia. It will extract its three billionth tonne of oil this year. But now the easily-extracted oil is running out, and local firms are trying to attract investment to build new refineries, to add more value to the oil they have left.


Tatneft, for example, is building a new £3 billion refinery, which will use £2 billion in western project financing, to be arranged this year by BNP Paribas. The project is being managed by Foster Wheeler’s engineering division, whose CEO, Umberto della Sala, says: “This is one of the biggest projects of its kind in the world.”


Banks’ push


Local banks are also looking to attract western capital, to compete with Moscow and foreign banks as they come into the region, and to try and expand across the rest of Russia. The region’s biggest bank, Ak-Bars, is looking to launch an IPO soon, with the aim of expanding its branch network to become a top-five bank in each of Russia’s regions.

Other Tatar banks have succeeded in attracting western equity investment already. Spurt Bank is about to sign a deal to sell an equity stake to the EBRD, whose involvement may encourage other investors, while Akibank sold a minority stake to Swedish investment fund East Capital.


Nevertheless, as elsewhere in Russia, Tatar companies listed in domestic markets have faced accusations that they do not always protect minority investors’ rights. For example, petrochemical company Nizhnekamskneftekhim recently attempted a £700 million share issue, which would have diluted minority investors’ stakes by about 10 times. Eric Kraus, manager of the Nikitsky CIS fund, says the deal was “reminiscent of Russian corporate governance practices of the 1990s.”


To the relief of investors,  the Russian financial markets regulator disallowed the share issue in March 2007, but the episode demonstrated that Tatarstan still has room to improve its relationship with foreign capital.

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