Page 82 - IFR Opportunities in Russian capital markets

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ifrintelligence reports/Opportunities in: Russian Capital Markets
There is already a precedent for this. During the worst of the 2004 mini-banking crisis, one of Russia’s well-known commercial banks started to have liquidity problems after nervous customers began withdrawing their money. The owners injected cash brought in from offshore accounts, but also raided their various retail operations for cash to pump into the bank – literally emptying the tills in their shops.
In its most recent report on corporate governance, Standard & Poor's (S&P) found that in 2006 Russian companies made only modest improvements to their corporate governance: S&P's trans- parency index rose from 50% in 2005 to 53% last year, which measures the performance of 50 big Russian companies.
Corporate governance issues
Once Russian companies wanting to IPO can clear the corporate governance hurdles imposed by international stock exchanges they stop making any more improvements. Still, this is a significant improvement on the opacity of Russian companies in the 1990s. It means that most of the leading Russian blue chips can already boast western standards of corporate transparency.
S&P also noted that the most improvement has been with disclosure of ownership. Yukos' owner, Mikhail Khodorkovsky, kicked this trend off in 2002 as the first Russian blue chip to fully declare who owned how much of the company, and saw his share prices soar as a result.
Still, there is plenty of room for improvement. The issue in Russia is not the level of transparency, but the number of companies willing to go down the corporate governance path: just under 90% of big Russian companies remain the private property of their owners. Last year 34% revealed their ownership structure compared to 28% in 2005, says S&P, but an equal number of owners are continuing to hide behind opaque company structures.
Progress towards better corporate governance is what you would expect to find in the most modern industries, which have high capital needs and produce low margins. In general, the telecoms sector is the most transparent and the engineering sector the least, while the most progress in improving transparency was made in the fast moving consumer goods sectors, such as food and retailers.
"In addition to the increased confidence that the YUKOS affair was a one-off case, the drive of Russian companies to meet the informational needs of international investors appears to be the main motive for improvements in ownership disclosure," S&P said in its Transparency and Disclosure report in November. "In many cases, this comes in connection with completed or planned IPOs. While the regulatory requirements associated with listings on international exchanges continue to set standards for disclosure, market-based disclosure incentives play an increasing role. This role is demonstrated by progress among companies that are not exposed to stringent regulatory requirements."
Local ratings agencies
There are two main ratings agencies in Russia. Interfax provides lists of bank information and rates banks according to assets, capital etc. However, the only true domestic bank rating agency is RusRatings, which was founded by the former Thomson BankWatch Russian manager, Richard Hainsworth and provides customers with in-depth western style ratings of the leading Russian banks.
Bond market development
The development of the bond market over the last five years has been a story of steady growth and diversification.
Big banks were the first buyers of bonds in 2001 but over the next few years they were increasingly joined by medium-sized banks attracted by the high yields; banks invested into the bonds which were earning negative real returns, as to leave deposits in cash loses even more money from inflation.
However, the diversification process stopped in 2003 when investors became worried by the worsening investment climate. This was the year the Kremlin arrested Yukos shareholder Platon Lebedev and it seemed as if the Kremlin was about to launch a campaign to re-nationalise the oligarchs' assets.
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