Diamonds or a Bank: A Tough Choice in Russia

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website
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How could a small Russian bank get a better price for its newly offered shares than the world's largest diamond producer? The answer tells an interesting story about the way investors perceive Russia.

The two companies -- Tinkoff Credit Systems and Russian diamond monopoly OAO Alrosa -- both held public offerings of their shares over the past week. At first glance, Alrosa looked by far the superior bet. Yet the market was much more enthusiasticabout TCS.

TCS is Russia's 59th largest bank by assets, according to the website It was founded in 2006 by entrepreneur Oleg Tinkov, whose previous projects included a frozen food business and a brewery. With only one office, the bank focuses on Internet sales of credit cards, charging annualized interest rates ranging from 25 percent to 46 percent. It advertises aggressively on the Web, delivers the cards directly to clients' offices and homes, and uses other banks' networks to process payments.

The bank's Oct. 11 initial public offering, held in London, was wildly successful. Bids for the shares exceeded initial supply by 11 times, allowing owners including Tinkov and Goldman Sachs Group Inc. to sell more stock than originally planned. The price, at the high end of the expected range, gave the company a market value of $3.2 billion. That's almost 9 times the company's book value as of June 30, accordingto unaudited results for the first half of 2013.

Alrosa is the inheritor of the Soviet Union's diamond industry. Still controlled by the government, it overtook South Africa's De Beers in 2009 to become the biggest producer in the world. As of 2012, Alrosa accounted for 27 percent of world rough diamond production. It was still behind De Beers in sales, but rapidly catching up.

The diamond giant's Oct. 28 public offering, held in Moscow, was moderately successful at best. The price came in at the lower end of the expected range, giving the company a market value of $8.1 billion. That's less than 2 times book value as of June 30, accordingto unaudited financial statements.

Why would investors place such a relatively low value on Alrosa's business? It's not as if the small bank were in a more promising market than the diamond monopoly. Quite the contrary.

Diamond prices have recovered to pre-crisis levels. The major markets for diamond jewelry, such as China, India, the Persian Gulf, Japan and the U.S., are growing. Alrosa is well positioned to benefit: The company enjoyeda 33 percent operating margin in 2012, making it the planet's most profitable diamond producer.

Alrosa painstakingly planned its public offering. It took years to pick what it saw as the right moment. The organizers struggled to persuade government shareholders to sell. The republic of Yakutia in Eastern Siberia, where most Russian diamonds are extracted, agreed to sell a 7 percent stake only on the condition that its remaining 25 percent stake never be reduced.

TCS, for its part, is in an industry that looks set up for a crisis. The Russian Central Bank has expressedconcerns about the rapid growth of unsecured loans, especially non-performing ones. Bad credit-card debt increased 50 percent between January and August, prompting regulators to demand that banks boost their loss provisions. TCS, for example, has increased provisions to 11 percent of its outstanding loans -- a level some Russian bankers say is still too low.

"The poorest Russians are overleveraged, the Central Bank is tightening the screws, trying to cool down the consumer loan market," financial journalist Boris Safronov wrotein the daily Vedomosti. "Tinkov, however, managed to sell foreign investors -- the IPO was held in London -- the story of a growing bank in a growing market and the idea that Internet companies' ratios should be used to value his business."

A triumphant Tinkov mockedhis critics on Twitter: "Finally found the time to read all the 'department heads' and 'leading analysts' about our placement. Credibile est, quia inteptum est!" The Latin quote, though mangled, is recognizable as "It is impossible, so it must be true."

Some analysts attributed the IPO's success to the fact that its organizers, headed by Goldman Sachs, took their story to London. "If the bank placed its shares in Russia, the price would have been lower," Roman Tkachuk of Nord Capital toldRBC Daily. "Russian investors would have paid attention to TCS's risks as a credit organization."

Alrosa, by contrast, used the Moscow Exchange for its placement, in part to make a political point. Deputy Prime Minister Igor Shuvalov closely supervised the placement, and state-owned investment companies were asked to participate to ensure success.

"The deal created interest in the Moscow Exchange on the part of foreign investors," Alexey Germanovich, a director at state-controlled airline Aeroflot, toldRBC. "Shuvalov killed two birds with one stone: He made sure the price was not low and he carried out President Vladimir Putin's orders that Russian assets be sold at Russian exchanges."

Goldman Sachs was among the organizers of the Alrosa deal, too. As with TCS, most of the diamond company's shares went to foreign investors. The difference in valuations between the tiny bank and the mining behemoth shows that when it comes to Russian assets, foreign fund managers are more willing to bet on technology-related, entrepreneurial companies than on resource-rich, state-backed ones. The risk of working with the Russian government outweighs any credit risks Tinkoff might have. And, of course, investors are more willing to part with their money in London than in Moscow. The further they can stay from the domain of Russian regulators, the better.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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Leonid Bershidsky at