Investors eating up Russian shares, despite Yukos
July 7, 2005
PARIS (by columnist Angela Charlton for RIA Novosti) – Savvy Russian moguls have discovered a new fountain of cash that has nothing to do with Siberian oilfields or cheap privatizations. It’s called the London Stock Exchange.
The dismantling of Yukos and the conviction of CEO Mikhail Khodorkovsky proved miserable PR for investing in Russia. Yet estimates vary on how much – and whether – direct foreign investment has dropped because of Yukos. Meanwhile, buyers gobbled up $2.4 billion in shares in new Russian listings on the LSE this year. For all the international uproar over Vladimir Putin’s policies, investors are still hungry for a piece of the lucrative Russian market.
The Russian government, instead of rejoicing at this phenomenon, is moving to stem it. It wants to keep the profits of these Russian companies closer to home, and is threatening new rules that would require them to list in Russia before seeking capital abroad.
Why these contradictions?
Foreign investors have long been schizophrenic toward Russia. In the 1990s, they were skeptical that this former communist nation could ever play fair on the free market, but couldn’t resist Russia’s hefty potential. This combination of skepticism and optimism helped Russia through the 1998 financial crisis: The investors who fled scared Russia’s executives and policymakers into seeking funding and solutions at home, and the investors brave enough to stay helped the country recover confidence.
Post-Yukos, investors are redirecting their optimism. Instead of injecting capital into oil wells and factory renovations, they’re buying up Russian shares in London and New York. Trading in Russian shares made up nearly 60 percent of volume in international orders on the LSE last year – and that was before three major new listings in 2005.
These listings offer a legitimate and relatively safe way to invest in Russia, regardless of Moscow’s political climate. The companies must publish (relatively) acceptable accounts, and if they stray from clean business practices or come under pressure from the Kremlin, investors can dump the shares.
Russian oil, in these days of $60 a barrel, is an obvious draw but not the only one. The first three Russian listings on the LSE were energy companies (Lukoil, Gazprom and Tatneft), but the three that debuted this year were not: consumer service giant Sistema; retail chain Pyaterochka, and steelmaker Evraz. Another steel major, Novolipetsk, wants to be next, and several other non-oil companies are in line.
Russia’s securities market watchdog wants a new law by the end of this year requiring these companies to go public in Russia before listing abroad. This is partly a step to fight capital flight – which is on the rise according to everyone’s estimates – and proof that the Kremlin is no longer looking to foreign investors for confidence and shiploads of money. Russian companies are so coveted internationally that the LSE may even negotiate with Russia’s regulators about the new law to ensure that Russian listings don’t come to a halt.
Russian companies are feeling less diplomatic about the law. Russia’s markets are still so small, and the business climate is so politically charged, that the country’s more promising companies prefer to list internationally. Yukos’ international reputation was not enough to save Khodorkovsky from prison, but Russian executives still feel safer if they have a foothold abroad.
Putin is seeking to convince other world leaders at the G8 summit this week that Russia is open to investment despite the Yukos nightmare. Corruption, arbitrary application of the law and the government’s pursuit of Khodorkovsky suggest otherwise. But the appetite for Russian shares in London shows that some investors have faith in the Russian economy and the Russian consumer, regardless of how they feel about who runs the Kremlin.