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The Coming Out Of Corporate Russia


It has been a shaky time for business in Russia lately, what with the dismantling of oil company Yukos and the trial of its former CEO, Mikhail B. Khodorkovsky. But reports of the death of Russian capitalism have been greatly exaggerated. Russian companies are lining up to make their public trading debut on stock exchanges both at home and abroad. And there are plenty of foreign investors eager to snap up their newly issued shares.

In the past six months alone, eight Russian companies have gone to market with initial public offerings, half of them on international stock exchanges, with a total value of $3.1 billion. That's three times the combined value of all Russian IPOs over the past decade, according to Moscow investment bank Renaissance Capital. And the flood of share issues from Corporate Russia shows no sign of receding, thanks to backing from big global investment banks eager to bring them to market, including Morgan Stanley, Credit Suisse First Boston (CSR), and UBS (UBS).

EvrazHolding, Russia's largest steelmaker, is set to join the club of joint stock companies in June, offering 10% of its shares, worth an estimated $600 million, on the London Stock Exchange. That will follow hot on the heels of a $598 million issue in May by Pyaterochka, Russia's largest supermarket chain, also on the London exchange. "Investors still have an appetite for risk. Because of the opportunity, they've moved on beyond the Yukos issue," says Peter O'Brien, vice-president at Morgan Stanley (MWD) in Moscow, which has advised several of the biggest IPOs.

Ever since 1996, when VimpelCom (VIP), Russia's No. 2 mobile- phone operator, did the very first Russian IPO -- on the New York Stock Exchange -- investment bankers have waited impatiently for a wave of Russian share issues. But the moment when Russia's new companies started issuing shares seemed like it would never arrive, as economic and political turmoil in Russia derailed plans for a quick succession of offerings. Russia's second IPO didn't happen until 2000, when Mobile TeleSystems, another cell-phone company, went public. It then took two more years for the third IPO, by food processor Wimm-Bill-Dann, in February, 2002. The first share issue by a private company on a local stock exchange -- that of media company RosBusinessConsulting -- didn't come until April, 2002. A stampede it wasn't. Until now.

"THE VERY BEGINNING"

Why the sudden rush? Bankers say that the winding down of the Yukos affair is only part of the explanation. In fact, the sudden wave of IPOs is more the result of longer-term trends such as the rapid maturation of Russia's economy, the development of a thriving business sector outside the energy industry, improved corporate transparency, and a pressing need for cash to maintain the momentum. "Obviously the big reason for this is the need for finance," says Andrey Bliznyuk, head of investor relations at Sistema, a Russian telecom holding company, which did the country's largest IPO, worth $1.56 billion, in February. "If you look at what's happening across the Russian economy, there's growth, M&A activity, and people need to finance that."

To be sure, Russia's market is still in its infancy. The country lags behind many other emerging markets in the total number of IPOs; it has launched fewer than Poland. And there are lingering concerns among investors about corporate governance practices, the rule of law, as well as Russia's uncertain political direction. Indeed, at the climax of the Yukos affair in December, Wimm-Bill-Dann's stock price was 40% under its 2002 issue price, and it is still 13% below today. But these concerns aren't expected to stymie the surge in new issues. "You have to look at this as the very beginning," says Steven Berger, a partner at PricewaterhouseCoopers Russia.

Indeed, there is no shortage of foreign investors willing to risk a portion of their capital on the new wave of Russian IPOs -- if only to diversify away from the oil-and-gas concerns that have dominated the business landscape. Companies outside that sector are less subject to energy price swings and, tellingly, domestic politics. "It's a very positive thing," says Aivaras Abromavicius, fund manager at East Capital, a Swedish asset-management company with $1.5 billion invested in Central and Eastern Europe. "It allows investors to get exposure to sectors which they didn't have exposure to before -- and these are the fastest-growing sectors."

Equity finance has become increasingly attractive to corporate Russia for a number of reasons, including the fact that many companies have taken on debt in recent years. The Russian corporate bond market is now worth around $30 billion. IPOs are viewed as a prudent way to raise cash while avoiding taking on more debt. Sistema's public offering, for example, followed two international bond floats, worth $350 million each, in 2003 and 2004. Traditional bank loans, meanwhile, are hard to get on favorable terms because of Russia's still underdeveloped banking sector.

While they are eager to have the funds, Russian companies are careful not to cede managerial control, typically listing just 10% to 30% of their shares. Even so, in order to prepare an IPO, companies have to meet stringent reporting and disclosure requirements, which are meant to reassure minor- ity shareholders.

BETWEEN CHILLS?

The supply of IPOs is especially strong in consumer-oriented sectors such as retail, telecoms, and food processing. Supermarket chain Pyaterochka, which was founded just seven years ago, is already Russia's second-largest retailer, with revenues of $1.1 billion last year. Its mushrooming network of 235 stores in Moscow and St. Petersburg led to sales growth of 45% last year. Revenue is forecast to grow by 30% to 40% annually over the next three years as Pyaterochka moves into underserved areas.

IPOs are also becoming popular in the metals industry, a sector once notorious for its murky ownership. Unlike the oil industry, which was restructured in the 1990s, big metals companies such as EvrazHolding have just emerged following intensive consolidation.

Of course, another corporate showdown between the Kremlin and a prominent Russian company could chill the market. But for now, investors seem more than willing to take a bet on Russian capitalism.

By Jason Bush in Moscow


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