MOSCOW. (RIA Novosti economic commentator Nina Kulikova)
Russian companies are increasingly active with flotations on global exchanges. Many top officials, including President Vladimir Putin, said that 2006 was a year of IPOs in Russia. Yet it is unclear whether the trend will sustain and whether Russian companies will be able to continue their onslaught on international markets.
Only five years ago, few people in Russia knew what initial public offering meant. Since then, however, the expert community has regularly commented on the country's strengthening positions on the global IPO market. Last year, it held the fifth place for the size of placements. Russian companies raised about $17.5 billion through domestic and foreign IPOs in 2006 against some $5 billion in 2005.
Growing activity of Russian issuers on international exchanges is logical. In recent years, they have exhausted their traditional sources of financing, such as own and budget funds. Many Russian companies remain undervalued, and are interested in getting an adequate market value. As the Russian financial market has reached a new qualitative level of development thanks to GDP growth of more than 6% annually and as companies' profits have increased, they are now able to use IPOs more actively.
As a result, the Russian stock market is gradually beginning to carry out its main macroeconomic function: redirection of savings into investment. It is becoming a real borrowing mechanism for larger firms. The most remarkable IPO last year was Rosneft's flotation in Moscow and London. It raised over $10 billion for 14.8% of shares, making it the biggest IPO in Russia and the fifth biggest in the world.
Russian IPOs are attractive for investors who consider buying into companies on emerging markets. Russian stocks now have the highest growth pace in the world, and so does the Russian stock market. Last year, the cost of the country's leading companies grew by over 90%, and the stock market capitalization approached $1 trillion.
A survey by Ernst & Young says that a Russian IPO is one of the most attractive for foreign investors. "The boom in Russian IPOs has already started, and we expect this trend to continue," says Paul Murphy, a partner and head of Transaction Support at E&Y. Foreign investors see significant consumer market opportunities in Russian companies, the risk-reward equation relative to Europe and opportunities in the natural resources sector, he said.
Meanwhile, there are different opinions on the outlook for Russian IPOs this year. On the one hand, a number of issuers have announced their plans to float, but on the other, there are experts who view it as a race ahead of the new election period.
Analysts at Alfa Bank say that the Russian IPO market may exceed the results of 2006 within the first six months of 2007. Troika Dialog projects that this year's flotations will reach $30-$40 billion. Foreign experts agree with these forecasts. According to the British Department of Trade and Industry, Russian companies' IPOs in London last year amounted to $15 billion and are set to double in 2007.
However, a survey by Citigroup published last November predicts a decline in Russian IPOs this year. Company analysts say that Russian firms will not be able to raise more money than in 2006 and may even fall back to the level of 2005. The reason lies in the fact that the current mass sale of Russian companies is to a large extent caused by the desire to avoid risks of 2008, when the presidential election will be held in Russia, they say.
It remains to be seen which of the forecasts will come true. In general, there is every reason for 2007 to be even more successful than 2006, as several large companies plan to go public. The first one will be Russia's biggest bank, Sberbank, which is already accepting bids. Its stock will be placed on the domestic market only and is expected to raise $12 billion, which will be a new all-time high for Russian IPOs.
The country's No.2 state-owned bank, VTB, also plans to float in the first six months of 2007. Unlike Sberbank, it will place 50% of the issue in Russia and the rest abroad. The bank plans to float over 20% of shares and to raise about $4.6 billion.
In the metal sector, Polymetal - the biggest silver producer in Russia and No.5 in the world - is getting ready for an offering. Most of its stock will be floated abroad. The company is expected to raise about $800 million.
Underway now is the IPO of Sitronics, a dynamically developing Russian high-tech company, subsidiary of Sistema. Until now, the Russian IT sector has not traded on exchanges. But the flotation of Russia's largest microelectronics and electronic equipment producer will change the situation. The company hopes to raise about $500 million.
Russian generating companies also plan to hold IPOs this year. After the restructuring of the Russian generation monopoly, RAO UES, 15 territorial generating companies (TGK) are expected to start floating. It will allow raising at least $15 billion within the next few years, the company estimates.
All this promises a good IPO performance this year. There is a qualitative change in the trend: the industry structure of companies going public is now shifting outside the commodities sector. Although the oil, gas and metal sectors remain the most attractive for foreign investors, interests are becoming more diversified. The banking sector, communications, the food industry and the chemical industry are starting to generate interest. This can reduce the size of placements, as these companies are significantly smaller.
Although the Russian IPO market is very young, the country's fast economic growth and greater awareness of Russian firms abroad will spur its development, and have already made Russia a player on the world financial markets.
