IT IS PERHAPS appropriate that Sistema, one of Russia’s largest private companies, held its investors’ day in June at London’s Royal Academy of Arts at Burlington House. More than one observer at the Palladian mansion noted the similarities between the building, crammed with serious-faced young Russians charging around engrossed in their BlackBerries, and the opulence of St Petersburg.
More generally, the enormous contingent of Sistema staff, bank analysts and investors – many of whom were Russian – were a reminder that London is increasingly graced by well-heeled Russian expatriates: indeed, it is hard to walk down any of London’s smarter streets these days and not hear Russian spoken. The country’s elite has truly taken the city to their collective heart and its companies have flocked to the London Stock Exchange.
The growing affection of Russians for London and the willingness of London-based investors to invest in their companies has come under increasing pressure over the past year. Still, scarcely a day goes by without the announcement of a mega-IPO from Russia destined for London, but concerns about corporate governance and business practice in Russia have become the backdrop to each successive deal and investors have become ever more sceptical.
Moreover, the political detente between Russia and the west that followed September 11, 2001 is long gone. Europe and the US have become increasingly concerned about Russia’s use of the power to withhold or beef up the price of energy resources to bully its neighbours. And on the day that Sistema entertained investors at Burlington House, president Vladimir Putin raised the spectre of nuclear war in Europe as a consequence of the US plan to build a missile defence shield in Poland and the Czech Republic.
In particular, relations between the Kremlin and London have become strained following the murder of a former KGB spy in London and Moscow’s refusal to hand over the chief suspect, who is widely alleged to have acted with the tacit consent of the Kremlin. In July, the dispute escalated, with the UK expelling Russian embassy staff in protest and Moscow retaliating by expelling British embassy staff. There may be consequences for the easy flow of capital and people between the two countries.
A reluctant leader
Sistema was part of the first wave of IPOs from Russia that followed the listing of Lukoil in 2002 – albeit with a three-year lag. It floated in London in 2005, raising $1.2 billion, and has chosen the London Stock Exchange to list the majority of its subsidiaries, including real estate company Sistema-Hals, electronics manufacturer Sitronics and mobile telecoms group Comstar. The company has relished being a pioneer – although it has no plans to list further units – but has had to bear the brunt of generalized attacks on Russian companies for their perceived loose standards of corporate governance.
Vladimir Evtushenkov, chairman of the Sistema board, founder of the company in 1993 and owner of 63.1% of the shares – and one of Russia’s richest men, with a net worth of more than $8 billion by some calculations – gives the impression of not being especially happy to play the role of ambassador for Russian business and defender of its corporate governance standards. Described as having a dry sense of humour by those who know him, Evtushenkov, speaking through an interpreter, is terse and staccato in his responses, although, to be fair, he had spent much of the day repeating the same points in one-on-one meetings.
For example, asked what benefits Sistema and its subsidiaries have derived from being listed on the London Stock Exchange, Evtushenkov replies curtly: "None", before adding: "We received money that we needed for our development." Evtushenkov dismisses the idea that such an attitude could be perceived as insulting to investors, who might welcome more of an attachment to generating shareholder returns and increasing transparency. "Investors understand that being listed is not a panacea for a company’s success," he says, before back-pedalling somewhat.
"Being listed does bring a certain discipline and makes a company more transparent and behave according to international standards. It also makes high demands on a management team," he says. "But overall, it has both advantages and disadvantages." He believes that on the positive side it should result in a company having a more focused development strategy – although this is not immediately apparent in the case of Sistema, of which more later.
Evtushenkov’s brevity – he is known to adopt the same approach in conversation with investors as with journalists – might be interpreted by some as arrogance. But such aloofness can perhaps be justified by his company’s results. At the end of the first quarter of 2007, Sistema’s consolidated revenues were 44% higher at $2.7 billion than a year earlier and operating income was up by 87% to $728.5 million, with an increased operating margin of 26.9% and organic growth for the preceding 12 months of 38%. Even in the booming Russian economy – GDP growth is expected to be well over 7% in 2007 – those are impressive statistics.
What is Sistema?
Sistema pointedly describes itself as Russia’s leading consumer services company. But what does this actually mean? Asked to define what consumer services entail, Evtushenkov initially declines to answer – he merely shrugs and looks expectantly for the next question. When challenged, he offers nothing more than an assertion that consumer services are what Sistema is "in principal" involved in.
In reality, Sistema is a diversified conglomerate: it is primarily involved in telecoms, technology and real estate and has sizeable activities in banking, retail, media, tourism and radio, as well as smaller businesses in pharmaceuticals and medical services. Most recently, it has moved into the oil business, with acquisitions that have raised eyebrows among some observers.
Why Sistema is so reluctant to acknowledge its nature as a conglomerate is a mystery: after all, many of the west’s largest companies started out as disparate groups of companies with little or no synergy between them. Moreover, Evtushenkov is on record as saying that the disparate nature of many Russian companies stems from the chaotic privatizations of the early 1990s and that they will iron themselves out in due course.