Subject: RE: JRL#132-Experts: The Risks--And Rewards--Of Investing in Russia
Date: Tue, 12 Jun 2007
From: "Andrei Liakhov" <andrei.liakhov@nortonrose.com>
CNBC has done the investment community a large disservice by putting together a group of highly biased people with no first hand (save for Citi's analyst) knowledge of what really goes on in Russia and what the investment climate is like.
One only has to look at the London Stock Exchange's both Official list and AIM to understand that what they say is grossly wrong.
In the last 2 years the Russian IPO and M&A markets outstripped those of the USA (excluding the 2006 ATT merger with Bellsouth) and EU by the number of deals and by their average value. The FT published figures for the IPO LSE market for 2006 show that CIS related IPOs exceed British IPOs by almost 3 times by value (£65 billion and £19 billion respectively) continuing the trend set in 2001/2002.
The value of Russian M&A only (excluding Yukos related deals) exceeded £89 billion in 2006 (primarily due to the continuing consolidation in the aviation, metals and mining industries) although this figure is unlikely to be exceeded in 2007, primarily due to:
(a) the new competition legislation having been put in place at the end of 2006;
(b) natural drop in M&A activity in the extraction and aviation sectors following creation of the Unified Aircraft Company and consolidation of Siberian air carriers and in the metals industry;
(c) problems with the Russian banking sector (both structural and liquidity) which make any M&A in this sector very complicated despite the obvious need for consolidation; and
(d) lack of large targets for sale and difficulties in acquiring companies outside the CIS even where such acquisitions would have made a perfect business sense (refusal to sell Unipetrol to Lukoil and Arcelor to RusAl are the most high profile examples).
However the Russian IPO market on the LSE will continiue to boom and is widely expected to surpass $80 billion this year.
Russian IPOs revived Frankfurt Stock Exchange and German companies are quieing to acquire Russian assets.
Russian private equity market is booming with 2006 having been its best year so far with the value of the deals exceeding $12 billion.
Stories like Shell's Sakhalin or BP's Kovykta has much less politics involved than the mainstream media and various spin doctors lead you to believe.
Rules do not change midflight as some are suggesting - Russian authorities simply started to enforce them and 99% of investors are happy to accept that. After 10 years of transition and relative disorganisation finally Russian authorities woke up to the fact that the rules need to be observed by everyone. Some chose to comply, some chose to object, go public with the story and seek to avoid compliance by invoking indefinitely strechable concept of investor protection. It is no secret, for example, that the Russian tax police went after EVERY oil company in Russia, but only Yukos chose to resist. Rosnedra checks compliance with terms and conditions of some 300-400 subsoil licences a year, but actually revokes less than 50. Every subsoil user, irrespective of its perceived political clout must comply with terms and conditions of subsoil use. If someone does breach these terms - the risks of revocation become real. This is what a lot of Western expat executives, particularly those who lived in Russia through gungho 90s find it difficult to accept. "Political protection" and political influence do not guarantee trouble free business. And as (in case of subsoil use) political protection is usually priced lower than compliance with ALL terms and conditions of subsoil use, quite a few Western businessmen just do not want to increase these costs.
However, one must bear in mind that the US firms are loosing as they were slow coming to Russia in the 90s and are still lagging far behind Europeans and Chinese who happily invest into Russian businesses without looking for any privileged status.
US business community is often involved in the slagging match with Europeans about Russia for a very simple reason - ENVY. One only has to remember highly derogatory remarks by NYSE Chairman about the quality of Russian IPOs on the London market which were a direct insult to all the professionals of the City of London. The reason is very simple - with Sorbonne Oxley NYSE lost its competitive advantage over European markets and is desperate to win the business back.
Since early 90s US companies sought to negotiate "special", privileged conditions of their investment in Russia. When such attempts were refuted, Russia was quickly proclaimed an unattractive country for US investment. And while US business are brooding over "risks", "corruption", "authoritarian state", etc, Europeans are happily making tons of money playing by local rules and retaining the integrity of an international business and helping to set better rules and business standards (just compare still voluntary Russian Code of Corporate Governance with the 2003 Combined Code... Or MICEX Listing Rules with the pre 2005 LSE "Yellow Book").
Comments like "it's difficult to find a major company which wants to invest in Russia" to anyone involved in Russian business sound like a complete and utter nonsense - on the contrary, it is impossible to find a major international which does not invest in Russia!
Comments like these are also a good evidence that paid journalism (aka "zakazukha") is not a unique Russian feature.