Russia: Too many thrills, too few buyers

By:
Dominic O’Neill
Published on:

As growth slows, Russia needs to become less volatile as a market.

It is mid-November, and Moscow’s workforce is as active as it gets. The roads and metro are full to bursting. And the flow of shocking and sometimes surreal news is as strong as it gets, occasionally beggaring belief.

One of the biggest stories is a bidding round for the world’s largest potash company, Uralkali, whose chief executive has somehow landed up under house arrest in Belarus, after breaking with a cartel: seen as more reason for panic among minority investors.

Then, in one day, stocks in coal firm Mechel fall 40%, as its $9 billion debt restructuring lies unresolved. Rumours that creditors have driven the stock’s collapse to pressure its owner, though denied, illustrate common understandings of how the system operates.

Two days later, Tinkoff Credit Systems – whose IPO a few weeks before was eight times oversubscribed – falls by a similar proportion. The trigger is reports that parliament would outlaw marketing credit cards by post: seen as potentially thwarting Tinkoff, and yet another hope for the private sector.

Next week, the news keeps coming, as the central bank shuts a big retail bank, Master Bank – whose board has included a cousin of president Vladimir Putin and whose founder is reputedly a follower of early 20th-century mystic Nicholas Roerich, leaving the deposit insurance fund its biggest-ever bill.

Yet it is probably Tinkoff that does most to bring down hopes. Although it recouped value after a hastily convened investor conference call and press statement, after this experience more investors will shy away from Russian IPOs.

In October, Tinkoff’s IPO, and the $1.3 billion privatization of diamond producer Alrosa it preceded, fuelled hopes that retail and technology-related stocks (how Tinkoff was sold) – coupled with privatization, and moves to T+2 trading and Euroclearability – could bring a lift in 2014.

It didn’t take long for a prognosis to return for equity issuance roughly equal to this year: about $9 billion by late November, according to Dealogic. That is about the same as 2012 and 2010, slightly down on 2011. It is about a third of the 2007 volume and half 2006, if much more than 2004 and 2005.

Russian banks and companies need to raise more equity. It has been a record year for Russian Eurobond issuance. But another so-so year in the primary stock markets would fit into the view that Russia is stagnating: like the rest of Europe, only with less certainty.

While some stocks (such as telecoms) are booming, others (overleveraged miners) have sunk, and the median (typified by the oil and gas sector) is experiencing inertia. Last month, the government downgraded long-term annual growth expectations to 2.5%. Analysts expect negligible earnings growth in 2014.

Local markets could help. Russian pension funds are being allowed to increase equity allocations. But this will take time, and many think a law this autumn increasing oversight on private funds shows, if anything, less commitment to the building up of private pensions savings.

And while the Bric stats as a group are going out fashion, the reaction in Russia seems to be to give up, rather than redouble efforts to attract investors. Equity trading is dwindling, yet prices are volatile, as more foreign long-only funds lose interest.