Page 15 - IFR Opportunities in Russian capital markets

CHAPTER 01
ifrintelligence reports/Opportunities in: Russian Capital Markets
It was the second time in seven months that the Kremlin had botched an important stock issue: the historic Rosneft IPO in July 2006 worth US$10.6bn was actually more of a private placement after international investors shunned the sale because of perceived political risk. Oligarchs and international oil companies wanting to work in Russia also bailed out this IPO.
The nine commandments
These events are not one-offs, but part of the new paradigm Putin is developing to govern relations between big business and the state. Alfa Bank's chief strategist, Chris Weafer, has laid down the new rules in a tongue- in-cheek "nine commandments" for the oligarchs.
"A significant amount of the domestic sourced funding that supported both the Rosneft IPO and the recent Sberbank equity issue has almost certainly come from a large group of Russian billionaires and the companies controlled by them. It actually is a very neat mechanism for the state to use the funds owned by these people to help advance the state's industrial ambitions. Of course, so far these have also been profitable investments for those investors," says Weafer.
The oligarchs represent a very substantial pool of capital – of the order of US$40bn, according to some estimates – that the state is expected to tap into again as the IPO programme continues, and especially if international investors remain nervous about Russian companies as an asset class.
In 2000, at the first oligarch meeting, Putin laid down the first three laws:
1. Stay out of politics.
2. Pay your taxes.
3. Operate within the law.
In late 2003, at another meeting with business leaders, there were two new commandments added to the list:
4. Wealthy individuals should use their wealth to help improve Russia and in support of state objectives.
5. Businesses in strategic sectors should work to further the state's plan for industrial and economic development.
At the 2006 meeting with the Russian Association of Industrialists and Entrepreneurs – known as the RSPP in Russian, an organised lobbying group to represent big business interests to the Kremlin – Putin elaborated on rule 5 and also added a new commandment:
6. Companies operating in the natural resources sector should plan to shift from exporting unprocessed material and now invest in downstream processing, so as to increase the value-added segment of natural resource exports.
To the list above Weafer adds three more rules that have become apparent in the last year:
7. Foreign strategic investors are allowed to invest in strategically important companies or projects, but only up to a maximum of 49%.
8. For more ‘sensitive’ companies and projects in ‘strategic’ sectors, that limit is reduced to a maximum of 25%.
9. International companies that offer reciprocal investment opportunities outside of Russia will increasingly be favoured as strategic partners for the Russian state-controlled companies.
Undoubtedly we will see a 10th commandment sometime in 2007.
There is a role for foreigners in this paradigm and the newest commands relate to them as well as to big Russian business. A key part of this public-private partnership between the Kremlin and domestic business is to attract foreign know-how, management skills and, most importantly, access to new markets to the emerging Russian national champions.
Although the Kremlin was in the process of marking out which are Russia's strategic sectors at the start of 2007, foreigners will even be allowed to invest into these sensitive sectors, albeit as minority investors.
8