Russian IPOs grow larger

MOSCOW. (RIA Novosti economic commentator Nina Kulikova) - Five years ago, most companies that carried out initial public offerings (IPOs) were from highly industrialized countries. But now more companies from emerging economies, especially Chinese, Indian, East European, and Russian ones, are floating their shares on exchanges.

Experts note Russia's strengthening position on the global IPO market. According to the Moscow Interbank Currency Exchange (MICEX), in 2005 Russian companies raised about $5 billion through IPOs on Russian and foreign exchanges, or about 70% of the total investment attracted by Russian share issuers since 1996.

However, the Russian IPO market is in its infancy compared to those in other countries. According to the financial services company Ernst & Young, the volume of capital raised by all IPOs worldwide in 2005 amounted to $167 billion, which puts Russian flotations that year at only 3% of the total.

But Ernst & Young's recent surveys show that the IPOs of Russian companies are among the most attractive to foreign investors.

Paul Murphy, a partner and head of Transaction Support at Ernst & Young, said: "The boom in Russian IPOs has already started, and we expect this trend to continue. We see a strong interest from foreign investors in Russian and CIS companies. The demand is driven by many factors, which include significant consumer market opportunities in this part of the world, the risk-reward equation relative to Europe, [and] opportunities in the natural resources sector."

According to the Federal Service for Financial Markets, Russian companies will sell about $20 billion worth of shares this year. Russian share issues on international exchanges have been motivated by the depletion of owner equity and budgetary funds, which were the traditional sources of capital during the previous phases of Russia's economic development.

Russian companies, many of which are undervalued, want to be adequately assessed on the market. Moreover, conditions on the Russian financial market have improved, national GDP annually grows by 6%, and companies' revenues are increasing, all of which offer better chances for IPOs.

The Russian diversified holding AFK Sistema, which operates mostly on the telecoms market, held the first significant Russian IPO, raising $1.56 billion on the London Stock Exchange in February 2005. Novolipetsk Steel (NLMK) also floated its shares on the LSE, earning $609 million, retailer Pyatyorochka attracted $598 million, and Russia's top steel producer, EvrazHolding, took in $422 million.

Russian state-controlled oil company Rosneft held its IPO after months of expectation in July 2006, when its shares started floating on the LSE and the MICEX. Rosneft raised $10.4 billion for 14.8% of its shares, posting the largest-ever IPO revenues in Russia and the fifth largest in the world.

More Russian companies from the non-commodities sectors are floating their shares. Foreigners still invest mostly in the oil-and-gas and steel sectors, but their interests are becoming more diversified. They are now eyeing the Russian banking sector, communications, and the food and chemical industries.

Russian issuers are not eager to list their shares on Russian exchanges, preferring western, particularly European ones. According to the information and analytical company, in 2005, 94% of Russian flotations in terms of money and 77% in terms of volume were held on the LSE.

The Center for Macroeconomic Studies at the audit company BDO Unicon explains that the LSE's popularity is due to its low IPO organization costs compared to American exchanges. Aggregate IPO listing costs amount to 3-4% of IPO revenues in London and 6-7% in the U.S.

Compared to Russian exchanges, foreign markets offer higher demand, better flotation conditions, and more transparent pricing.

Russian companies' interest in conducting IPOs abroad could also stem from their desire to protect themselves from the state, which has lately been taking a growing interest in business affairs, according to Alexander Shokhin, President of the Russian Union of Industrialists and Entrepreneurs. Some companies list their shares in New York or London so that the government, if it decides to rob them of the part of their business, will know how much it is worth, he said.

Although reasons for going public differ, the rapid movement of Russian companies onto international exchanges may have mixed results for Russia's securities market. In fact, the number of foreign listings is proof of the flight of Russian assets from the national stock market. The growth of Russia's economy will be hampered by the absence of a liquid domestic stock exchange, and an increase in the listing of Russian shares abroad could deprive the state of a vital financial tool.

The financial authorities are doing their best to encourage Russian companies to float their shares at home. They have approved amendments to legislation simplifying flotations on Russian exchanges. But the number of such flotations is unlikely to grow considerably in the near future, because businesses want not only to raise additional capital but also to promote their profile abroad, something which cannot be accomplished by listing on the RTS or MICEX. Therefore, Russian issuers will most probably conduct IPOs simultaneously in Russia and abroad.

Many Russian companies, including metals giant Severstal, large power-generating companies, and Russia's second biggest bank, Vneshtorgbank, are preparing to go public. The Russian IPO market is smaller than those in industrialized countries, but its future looks promising. Rapid economic growth, the movement of Russian companies into foreign markets and the acquisition of foreign assets will encourage the growth of the Russian IPO market, and they are already turning Russia into a global financial player.

The opinions expressed in this article are those of the author and may not necessarily represent those of RIA Novosti.

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