Investors Return to Russia with Love, Again

They're flocking to new issues that are far from risk-free

After Russia's financial collapse in 1998, the country disappeared from the global financial map. Investors said they wanted no part of a nation whose government could so blithely default on billions of dollars in debt, as Moscow did that year. But that was then. In 2001, the Moscow stock market jumped 91%, and it's still climbing, while Russian bond yields continue to drop. Russia, surprisingly, is once again an investment draw.

Proof came on Feb. 8, when Moscow-based juice-and-dairy group Wimm-Bill-Dann (WBD ) raised $134 million on the New York Stock Exchange with an initial public offering for 25% of the company. Demand for the shares outstripped supply 5 1/2 times over. On its first day of trading, the stock rose 10%. "It really does seem that investor trust in Russia has returned," says Chairman David Iakobashvili. "We were hopeful, but we did not expect such high demand."

Wimm-Bill-Dann's big splash may grow into a wave of Russian offerings. A cross-section of companies, such as brewer Baltika, software purveyor Information Business Systems, and the country's biggest oil company, Lukoil, are also considering issuing shares on foreign exchanges this year. Others, including Russia's No. 2 cellular operator, VimpelCom, gas monopoly Gazprom, and Alfa Bank are sizing up opportunities to raise money through international bond issues. "Russia is now back on the radar screens of global investors," says Philip Poole, head of emerging markets at ING Barings in London. The bond issuers are looking to lure global investment funds at big U.S. houses such as Goldman, Sachs & Co. and Merrill, Lynch & Co. For now, European companies, especially Barings, Credit Suisse First Boston, and Deutsche Bank--are getting most of the underwriting business.

But are the swirling Russian markets safe for cautious investors? Bullish analysts insist that Russia is a different place from the chaotic business casino that rocketed, then fizzled, in 1998. President Vladimir V. Putin has introduced a measure of political stability, together with reforms that are pushing some Russian managers to forgo financial skulduggery and improve transparency. Russia is expecting its fourth straight year of economic growth in 2002. And growth has been driven not just by a domestic oil boom but also by vigorous consumer demand, which surged 10% last year.

Spurred by the good economic news--and by warmer ties between Russia and the U.S. following September 11--both domestic and foreign investors are venturing in. Daily trading volumes in Russian shares, though still far below pre-1998 levels, are rising--from $180 million in September to a recent peak of $300 million. And Russia's benchmark sovereign Eurobonds now have a smaller spread with U.S. Treasuries than emerging-market powerhouse Brazil. The Russian government helped drive down the spreads last year when it produced a budget surplus of $7 billion and reduced its heavy external debt. At the same time, foreign-currency reserves, at $36.5 billion, have reached their highest level in a decade.

In December, Moody's Investors Service upgraded Russian government bonds to Ba3 from B2, bringing its sovereign rating back to a level not seen since the 1998 default. Russia's top cellular operator, Mobile TeleSystems (MBT ), took advantage of the falling yields by issuing a $250 million three-year Eurobond in December at 11.25%. It was three times oversubscribed. A year ago, the yield would have been 16%.

But as ever with Russia, investors face risks. The most immediate for the country's still oil-dependent economy: that oil prices could sink further this year. Then there's always the possibility of a scandal involving one of Russia's poorly regulated companies.

For its part, Wimm-Bill-Dann took no chances with its IPO. In its prospectus, the company pointed out that its largest shareholder served nine years in a labor camp after a conviction for a violent crime in 1980. "We didn't want anyone to find skeletons in the cupboard," says Iakobashvili. "We feel a big responsibility, and we intend to meet that by being totally transparent." If others do the same, the Russian market may finally come of age.

By Catherine Belton in Moscow

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