The Guardian: The Russians are coming – and bringing the threat of scandal to the City

EXTRACT: While most western investors remain upbeat about prospects for that country under the dynamic but authoritarian leadership of the premier, Vladimir Putin, there are worries about state wrangles with foreign investors such as Shell.

THE ARTICLE

· Controversy over Rosneft fails to deter investors
· Many in City are worried by the rush to float

Terry Macalister
Wednesday November 1, 2006

Russian companies are looking to raise £2.5bn on the London Stock Exchange by the end of this year, delighting some investors but renewing fears that the reputation of the City could be hit by a scandal.

Russia’s Wholesale Generating Company Five (OGK-5) became the latest to tap investors yesterday by pricing its shares at the top end of its projected range amid reports that the offer was six times over-subscribed. Russia’s biggest steel pipe producer, TMK, has also slapped a high premium on its global depository receipts (GDRs) being listed in London, putting it in line to raise nearly £500m.

And the Russian steel producer Severstal is expected to put a price on its planned initial public offering (IPO) next week with others – such as the pharmaceutical group Pharmstandard – waiting to go next.

The flotations offer bonanzas for the Russian government and other investors. It also means fat cheques for the City investment banks and lawyers helping with the launches.

But there is growing disquiet among a range of institutional investors, who worry about corporate governance standards and potential scandals surrounding Russian firms. Critics from some top British institutional investors approached the LSE last year calling for a tightening of rules on new companies coming to market but have made little progress.

Peter Butler, of the Governance for Owners investment house, said: “The City of London is storing up reputational problems because it just seems left up to individual investors to make their own minds up about new market entrants.”

The huge media controversy surrounding the IPO of the oil group Rosneft, which acquired its major prospects from its rival Yukos in unusual circumstances, was expected to dampen enthusiasm for Russian flotations. But the eventual success of that float – helped by share purchases by blue-chip names such as BP – seems to have raised the level of interest in London rather than diminish it.

OGK-5, which provides about 6% of Russian’s electricity from power plants in Moscow and elsewhere, priced its shares at 9 cents – at the top end of its 7.6 to 9.5 cent indicative range. This gave it a trading multiple of 20 times 2006 earnings compared with an average of seven for similar companies in emerging markets and eight for its peers in the west.

Dmitry Skryabin, analyst with the Aton brokerage, said this price could not be justified. “Those investors that are buying are doing so in the hope that strategic investors will pay a premium for the equity and push the price up,” he argued.

Away from the traditional Russian economic strengths, such as heavy manufacturing, oil and gas, there are new IPOs planned for pharmaceuticals (Pharmstandard) and property developers.

There are also flotations planned from companies in former Soviet nations, including the Kazakh state oil and gas group KazMunaiGaz, plus Kazahkstan’s biggest bank, Kazkommertsbank, and the diversified conglomerate Eurasian Industrial Association.

Artyom Konchin, at Aton brokerage in Moscow, says: “The LSE and [junior market] Aim platforms are fairly attractive and right now if anywhere is considered the best international place to list it must be London.”

Analysts at Alfa Bank predict that Russian companies hope to raise up to £2.5bn in total over the next two months alone and accept that it will be a serious test for investor sentiment about Russia.

While most western investors remain upbeat about prospects for that country under the dynamic but authoritarian leadership of the premier, Vladimir Putin, there are worries about state wrangles with foreign investors such as Shell.

The Co-operative Insurance Society, one of the UK’s biggest institutional investors, has expressed concerns about Russian and east European companies coming to London. It sidestepped the offer to buy shares in Kazakhmys, the Kazakh copper mining group, and Rosneft. Ian Jones, head of responsible investment at the CIS, says: “How on earth can you understand them? People investing in these are speculators, not savers.”

But not everyone agrees. Elena Shafton, who runs an east European fund for Jupiter Asset Management in London, believes Russian companies in particular have made big strides in upgrading their boardroom standards.

The improvements have been largely driven by the tax assault on Yukos, which ended up with that oil group being driven into bankruptcy and its founder being imprisoned in Siberia, she says.

“Many resource-based companies did not bother paying taxes in the past and engaged in transfer pricing but the Yukos affair made companies so scared that they changed their ways and improved corporate governance,” she says.

Russian firms are ultimately like many others, she says. Investors need to understand their accounts and management strengths, she adds, pointing out the strength of the local economy would bring more candidates for floats in London. She did not expect the media frenzy over Rosneft to put off investors. “Yes, there was negative PR but, no, it did not affect investors.”

The £5bn Rosneft privatisation was particularly controversial because of ongoing legal claims that it had “stolen” 70% of its enormous asset base from its rival Yukos but it is far from unique. The aluminium group Rusal, which says it wants to list in London before 2009, is now facing a bruising high court battle in Britain amid allegations of fraud and computer crime.

Russian companies do not have to follow the tougher combined code of corporate governance, which sets out requirements for disclosing executive pay and the appropriate structure of boardrooms. This is because the companies have issued GDRs rather than shares over here. GDRs have lower requirements for disclosure and corporate governance than shares.

Mr Butler believes the London Stock Exchange should clearly differentiate between those firms that do adhere to the combined code of corporate governance and those that don’t. But the London Stock Exchange seems in little hurry for change and rejects the arguments that it is chasing new business at all costs, saying “sufficient safeguards” are in place.

http://business.guardian.co.uk/story/0,,1936156,00.html

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