Stock market: The government has to work hard to attract investors


By Courtney Weaver in Moscow

Russian stocks are among some of the cheapest in the world, with an average price-to-earnings ratio of eight and plenty of headroom. Yet the country is still struggling to attract back the foreign investors who deserted the market a year and a half ago.

Foreign investments in Russia fell 41 per cent last year, a statistic Dmitry Medvedev, the country’s president, referred to as “saddening”.

Two years ago, western investors had begun to appreciate Russia as more than just a natural resources investment, but the crisis reversed that, says Jeffrey Costello, chief executive for Russia at JPMorgan. He says: “Because of the tremendous drop in GDP, Russia is once again considered an oil or commodities play…Its ability to attract lower costs of funding and expand its investor base is going to be challenging.”

Moscow is well aware of the challenge and in recent months has been trying to remedy the problem both on its roadshow for Russia’s upcoming eurobond and in its campaign to turn the capital into a global financial centre. The public relations offence is a sharp turnround for the Kremlin, which previously waited for western capital to woo it, instead of the other way round. They didn’t have to stimulate investment [before the downturn] because investors were already there,” says Andrey Goltsblat, managing partner at Goltsblat BLP, an international Russian law firm.

Now, in the wake of the crisis and corporate governance issues, the government has to work to attract investors that have turned their attentions to other emerging markets, such as Brazil or China.

“The further west you go, the less Russia is on people’s radar screens,” says Mr Goltsblat. “You go to the US and they see a couple of headlines on Russia a year and they’re usually negative. There are other places for investors to put their money.

“In 2007, the argument was that you paid a premium for Russia because there was growth. Now investors say: ‘I’ll pay a premium for growth, but I’ll pay a lot less because of Russia’s infrastructure and imbalances in the economy.’”

That argument has not been lost on Mr Medvedev who has spoken frankly about the country’s struggle to create an attractive investment climate, most recently at a meeting at the Kremlin in February, when he rattled off a long list of the market’s weaknesses.

Among them, Mr Medvedev named the nation’s “poor federal and local governance, ineffective law enforcement, corruption, economic crime, excessive administrative, technical, and information barriers, as well as high monopolisation”.

Mr Medvedev noted that Russia now ranked 120 out of 183 countries, trailing well behind even Belarus and Kazakhstan, which came in at 58th and 63rd respectively. “In other words we are in the bottom third of the list,” he said.

The usually terse Vladimir Putin, Russia’s prime minister, echoed Mr Medvedev’s words the following day, stressing that the government needed to “take additional steps to create an investment-friendly environment”.

Though western investors say the process will not be easy, the government’s markets watchdog has taken the first step, with legislation aimed in earnest at better protecting market participants’ rights.

The Federal Financial Markets Service said recently that it expected the state Duma would pass the first law against market manipulation and insider trading by the end of the parliament’s spring session.

It also said it was continuing to pursue companies that had acted illegally on Russia’s fixed income and equity markets.

The Service is also working to create a single depositary clearing house, as well as a law that would allow investors to file class-action lawsuits, a former sore point for bondholders during the crisis.

While western investors are complimentary of the Service’s overall efforts, they are critical on certain decision, such as the recent move to impose stricter limits on the amount of capital companies are allowed to list abroad.

Though the rule is intended to create liquidity on the domestic market, it could end up backfiring if companies decide to re-register offshore and skirt the legislation.

“What you’re doing as a regulator is you’re basically building a wall around the country and limiting your companies’ ability to access the international capital and the question is ‘why’,” says Irackly Mtibelishvily, chairman of banking for Citigroup in Russia.

Despite the listing changes, a number of Russian companies are slated to tap the capital markets this year, with UralSib, the Moscow investment bank, forecasting $6bn to $10bn in equity issuance in the next nine months.

One of the biggest initial public offerings has already been pulled after the company, Prof Media, received alternative forms of financing through a Rbs7bn ($237m) loan from state-controlled bank Sberbank.

Other companies looking to float abroad, bankers warned, would have to learn from the experience of UC Rusal, the aluminium group controlled by billionaire Oleg Deripaska, which floated in Hong Kong in January.

Shares in the company are trading about 10 per cent below their initial offering price after falling more than 10 per cent on their first day of trading and nearly 30 per cent in the following five weeks.

“Rusal did a lot of damage to corporate Russia,” says a western banker in Moscow.

“This was supposed to be a seminal event – a flagship IPO transaction – and it was a flop … So the next big deal better get it right.”

Contact details


If you would like to receive our legal alerts and updates highlighting current legal issues relevant to your areas of interest and providing expert commentary by our lawyers, please click on "Sign Up" and fill out the form.