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Investors Are Wary About Investing In Russia

The failure of the Russian Helicopters IPO to launch illustrates the mismatch between potential investors' valuations of some Russian companies and those of the companies themselves.

Russian Helicopters was poised for a bold maneuver: The state-owned manufacturer of choppers for Russia’s defense and arms sectors was about to secure $500 million in a London IPO. However, bankers concluded at the last minute last month that they couldn’t persuade even investors who’d been snapping up newly privatized Russian companies that the four-year-old whirlybird-maker, an amalgam of carry-over Soviet-era enterprises, was worth an imputed $2 billion.

Ah, but that was only because those investors hadn’t given the matter proper thought, declared Andrei Reus, the CEO of Oboronprom, the vehicle by which the Kremlin controls Russian Helicopters. “We believe,” he said, “that market participants will benefit from more time to reflect upon the true value and growth potential of our business.” And then, presumably, Russian Helicopters will circle back.

Communism or, for that matter, capitalism was never like this. Yet while pulling the deal was a setback for Russia’s $32 billion privatization program, and the past year’s spate of London offerings of Russian companies has slowed a bit, the phenomenon is far from over: Too many companies still need to go public as part of a Kremlin economic reform agenda that is meant to wean Russia from dependence on oil and gas exports.

Meanwhile, market forces have undiplomatically asserted themselves. Russian Helicopters’ failure to launch illustrates the “mismatch” between potential investors’ valuations of some Russian companies and those of the companies themselves, says Chris Weafer, an equity analyst at Moscow-based investment bank URALSIB Capital. Of five successful Russian IPOs in London through May, three had to substantially lower their fund-raising targets. Indeed, missed kicks outnumber goals. Along with Russian Helicopters, at least four Russian IPO offerings have had to be cancelled outright or at least delayed. 

Investors are nervous these days about paying too much of a premium to be exposed to Russia. Some 80 percent of its GDP is tied to commodity exports, making it vulnerable to a global downturn. The economy tumbled 8 percent after the old bubble burst in 2009.  Moreover, Russia’s capitalistic overtures are complicated, and often stymied, by an opaque, corrupt and still powerful political bureaucracy. What’s more, in this election year in Russia, there’s no clear indication who will emerge in 2012 as the ostensibly omnipotent president: current President Dmitry Medvedev, who is the more reformist and investor-friendly candidate, or Prime Minister Vladimir Putin, the conservative former president and Medvedev’s longtime mentor, who functions as Russia’s de facto and autocratic head of state. 

Putin, for instance, has final word on sale of major “strategic” stakes in Russian companies to foreign investors under the guise of a 2008 law. The Russian Helicopters IPO was reportedly postponed in part because Putin or his siloviki,  “strong guys” with security backgrounds like his, objected to disclosing military contracts to shareholders. Medvedev, as the junior partner in Russia’s ruling tandem (he was Putin’s lawyer in St. Petersburg days), must in effect obtain his ex-client’s blessing if he is to remain president, now that Putin is eligible by law to re-assume his old job (officially). 

For all the uncertainty, Russia remains selectively attractive to valiant investors. Companies such as aluminum producer UC Rusal and internet operator Mail.Ru raised $5.5 billion through London IPOs in 2010, and some analysts had been predicting that private Russian issuers would gather upwards of $30 billion on the London Stock Exchange this year.  Yet in this year’s first five months, there were only those four deals, which raised around $2 billion total: Pumps manufacturer HMS Hydraulic ($360 million); agricultural producer Rusagro ($330 million); real estate developer Etalon ($575 million); and Nomos Bank, which listed in Moscow as well as London ($718 million). 

Nonetheless, many Russian corporations, including mobile phone company Euroset, which had to postpone its $1.5 billion London IPO in April, are still keen to come out in London. For one thing, several ran up debt to fund rapid expansions leading up to the ’07-’08 financial crisis and now need to bolster balance sheets. Financing in Russia, where interest rates run 8 to 9 percent for corporate loans, is an expensive proposition, notes Tom Mundy, chief Equity strategist for Moscow-based bank Otkritie Financial Corp. And the timing would seem to favor Russian IPOs, in one big way. A thriving and stable Russian oil market facilitates investment in other sectors of the economy as well. Explains Mundy, “It’s difficult to place a [Russian] stock when the oil price is falling.” Soon to be standing in the queue: Russian Copper.

Not all recent Russian IPOs have lost at roulette. Sophisticated and profitable search engine Yandex, touted as Russia’s Google, raised $1.3 billion and surged 55 percent at its debut on May 24. But that offering was on Nasdaq, not London. Yandex, which caters to around 270 million Russian speakers, may well be a worthy enterprise, but it also no doubt got caught in the updraft of technology new issues. In general, Mundy’s point still holds: “The Russian government is very much behind getting foreign participation; the issue is whether foreigners want it.” 

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