London Beats Moscow as Russian Listings Flee Failures of Medvedev’s Market
Russia’s largest gold company moved its share listing to London from Moscow in July, and the nation’s biggest phosphate fertilizer producer is considering the same change, a blow to President Dmitry Medvedev’s plan to turn the former Soviet capital into a global financial hub 20 years after the fall of Communism.
While companies in Russia, the world’s largest energy exporter, are reaping record profits from rising commodities, an increasing number of the nation’s biggest businesses prefer to list their shares overseas to avoid trading halts, local currency swings and regulations that are less stringent than Europe’s. Polyus Gold International Ltd. said it moved to London to gain access to foreign investors, while OAO Phosagro sees a primary listing in the U.K. capital as its “ultimate goal.”
Russian stock trading in London has outpaced volumes in Moscow for 13 straight months, with the gap reaching a three- year high of 50 percent in August, according to data compiled by Bloomberg. Medvedev has made finance a cornerstone of his plan to diversify the economy, while Prime Minister Vladimir Putin, the former president who announced Sept. 24 he will run for the office again in March, says Russia must avoid liberal “experiments.”
“We do prefer to access the London shares,” said Lewis Kaufman, a Santa Fe, New Mexico-based money manager at Thornburg Investment Management whose Thornburg Developing World Fund has beaten 87 percent of peers the past 12 months and owned London- listed shares of Russian gas producer OAO Gazprom as of July. “Russia’s ambitions in the capital markets area and broader willingness to diversify their economy are still some time away.”
Russia is ranked 123rd in the World Bank’s Ease of Doing Business Index, after Uganda and Ethiopia, and Transparency International rates Russia 154th on its Corruption Perceptions Index, below Libya.
Imprisoned former chief executive officer of Yukos Oil Co., Mikhail Khodorkovsky, is a reminder of the risks of investing in Russia. Yukos, once Russia’s largest oil producer, was bankrupted during Putin’s presidency in 2006 after the government claimed more than $30 billion in back taxes. Khodorkovsky was jailed for fraud and oil embezzlement, charges he said were linked to his financing of opposition political parties.
London-based BP Plc’s proposed $7.8 billion share swap and oil exploration accord with state-owned OAO Rosneft collapsed in May after Russian billionaire partners in TNK-BP, the U.K. company’s existing joint venture, won a legal challenge to block the deal.
BRIC Stock Sales
Russia is the only one of the four largest emerging markets where share offerings in London exceeded local equity sales this year, according to data compiled by Bloomberg.
Sugar producer Ros Agro Plc and Yandex NV, operator of Russia’s most popular search engine, led companies raising at least $5 billion selling shares in London and New York in 2011, according to data compiled by Bloomberg. That compares with the $4.6 billion financed through Moscow exchanges, the data show.
In Brazil, companies raised at least $10 billion from selling equity in local markets this year without any deals in New York and London, according to data compiled by Bloomberg. India’s local share sales exceeded overseas offerings by more than $6 billion this year, while the gap in China was about $50 billion, the data show.
Polyus Gold gained its U.K. listing in July after a reverse takeover by its London-traded subsidiary. Moscow-based Phosagro, the largest phosphate fertilizer maker in Europe, is “at the beginning of the process” of seeking a primary listing in London, Chief Executive Officer Maxim Volkov said in a Sept. 21 interview on Bloomberg Television.
FTSE 100 Goal
Evraz Group SA (EVR), Russia’s largest steelmaker by output, said on Aug. 3 it may move its primary listing to London from Luxembourg to allow it to qualify for entry to the FTSE 100 Index (UKX), made up of the U.K.’s biggest companies on the London Stock Exchange. Evraz’s market value of $6.9 billion is bigger than about 40 companies in the FTSE gauge, according to data compiled by Bloomberg.
The 30-day average value traded of 10 of the biggest Russian companies in London has been higher than the same companies’ Moscow-listed shares since August 2010, with the gap averaging 33 percent during the period, according to data compiled by Bloomberg. It hit 50 percent on Aug. 26, the widest since November 2008, the data show.
Medvedev said in June he plans to meet with the heads of international banks this month to discuss how to turn Moscow into a global financial hub. The transformation is “already taking hold,” the 46-year-old former corporate lawyer said during a speech in Moscow’s Red Square on Sept. 4.
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon and Goldman Sachs Group Inc. CEO Lloyd Blankfein are part of a 27-member panel Medvedev assembled this year to advise Russia on how to boost the financial clout of the nation’s capital. Medvedev said on Sept. 24 he may swap positions with Putin by taking over as prime minister.
Monika Schaller, a spokeswoman for New York-based Goldman Sachs, declined to comment on whether Blankfein will attend the meeting this month.Brian Marchiony, a spokesman at New York- based JPMorgan, declined to comment on Dimon’s plans.
Russia’s former President Boris Yeltsin dismantled seven decades of totalitarian rule and oversaw the breakup of the Soviet Union in 1991, laying the groundwork for an equity market that has grown to $760 billion, the 14th-biggest worldwide, according to data compiled by Bloomberg. A decade of rising oil revenue has made Russia the fourth-largest emerging economy, after China, Brazil and India.
At the same time, Russian equities trade at the lowest valuations in emerging markets after Yukos’s bankruptcy, Russia’s five-day war against neighboring Georgia in 2008 and the BP deal’s collapse eroded investor confidence in Russia’s corporate governance and the rule of law.
Earnings at companies in the benchmark Micex Index (INDEXCF) hit a record in August after rising more than fourfold since the end of 2009, according to data compiled by Bloomberg. Micex companies earned about $122 billion during the past 12 months, more than the $90 billion of net income reported by companies in Germany’s benchmark DAX index (DAX), the data show. The Micex is valued at 5.1 times reported profits, the lowest among equity gauges in 21 emerging markets tracked by Bloomberg.
While Russian policy makers made some progress improving transparency and regulation in recent years, Moscow still lags behind the “gold standard” of London, said Aaron Johnson, Ernst & Young’s IPO leader for the Commonwealth of Independent States, a grouping of former Soviet states.
Russia “is putting a lot of effort into this, but there’s still a ways to go before the platform will be on par with London,” Johnson said in an interview. “That’s why you see a lot of Russian companies still heading to London for their capital raising needs.”
The Micex index of ruble-denominated shares traded in Moscow has declined 19 percent this year, while the MSCI BRIC (MXBRIC) Index of stocks in Brazil, Russia, India and China, the four biggest emerging markets, sank 27 percent. The U.K.’s FTSE 100 has dropped 14 percent.
Companies seek listings overseas “because of the weakness of the local financial market,” Stanislav Voskresensky, Russia’s deputy economy minister, said in a Sept. 22 interview in New York. While reforms “can’t be done overnight,” policy makers are on the “right track,” he said.
Micex doesn’t require listed companies to report results using International Financial Reporting Standards, there are no minimum requirements for free float -- or shares available for trading -- and no rules preventing company executives from selling their stakes soon after the IPO, according to Ernst & Young’s Johnson. The level of detail on disclosure of risks and financial performance in share-sale prospectuses is “substantially higher” in London than Moscow, he said.
Investing in dollar-denominated global depositary receipts of Russian companies in London reduces the risk of foreign- exchange losses and unexpected bourse closures, according to Thornburg’s Kaufman, who helps oversee about $83 billion. GDRs also have easier settlement procedures, said Gareth Morgan, a London-based money manager at F&C Asset Management, which oversees about $156 billion.
The ruble weakened more than 30 percent during the global financial crisis three years ago and the Micex exchange halted trading more than 25 times as prices sank, according to data compiled by Bloomberg.
Most stock transactions in Moscow are settled on the same day, meaning investors must provide the cash or shares upfront, compared with two or three days for most large bourses in Europe and the U.S., according to Julian Rimmer, a trader of Russian shares at CF Global Trading in London.
GDRs of OAO Gazprom, Russia’s natural-gas export monopoly, traded at an average premium of 1 percent over the company’s Micex-listed shares during the past five years, according to data compiled by Bloomberg. OAO Sberbank’s London-listed equities surged as much as 11 percent higher than the stock in Moscow on Sept. 16 amid speculation Russia’s largest lender imposed a limit on the number of shares that can be sold as GDRs.
The biggest stock sale by a Russian raw-materials company since 2009 was United Co. Rusal’s Hong Kong initial public offering in January 2010. The world’s largest aluminum maker raised about $2.2 billion selling shares on the Hong Kong Stock Exchange, the first IPO by a Russian company in the city.
The planned merger between the Micex exchange, which handles about 70 percent of equity transactions in Russia, and the RTS, which dominates derivatives trading, by December will help lure investors to Moscow by making it easier to add new products and push for regulatory reforms, according to Ruben Aganbegyan, president of the Micex.
Regulators and the bourse plan to address two of the main concerns of foreign investors by creating a central depository and settlement procedures in line with the biggest exchanges, Aganbegyan said in a Sept. 20 interview in London.
While Russia’s bourses have taken steps to make trading easier, the government needs to improve regulation of the financial system and reform the domestic pension industry before it can become a financial hub, said Plamen Monovski, who helps oversee about $2.2 billion as chief investment officer of Renaissance Asset Managers in London.
Russian pension assets were about 3 percent of gross domestic product in 2009, compared with 14 percent in Poland and 74 percent in the U.K., data compiled by Renaissance Asset Managers show. A bigger pension industry will provide a “shock absorber” for Russian markets during times of global financial stress and help reduce volatility, Monovski said.
“Things like the mergers of exchanges that are being done, this is decoration, not really the essence,” Monovski said. “The Russian regulators really need to join the cohort of the countries that we think of as world class.”
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