Russia’s long-awaited privatization programme finally got underway again in July with the sale of a 10.9% stake in diamond producer Alrosa through a secondary share placement in Moscow.
The offering, which raised a much-needed R52.2 billion ($818 million) for the Russian state treasury, was immediately hailed as “a great success” by the Russian government and the two state-controlled banks managing the offering, VTB Capital and Sberbank CIB. But was it?
At headline level, the deal looked impressive. Demand outstripped supply by a factor of two to one, the discount to Alrosa’s existing share price was modest and the list of investors reportedly included some large Western players.
For the most part, however, the big names in global fund management stayed away. US investors, who took nearly two-thirds of Alrosa’s IPO in October 2013, accounted for just 5% of total orders this time around. Participation levels were also well below those seen in a $250 million share placement by Russian agricultural conglomerate Rusagro in April, according to people with knowledge of that deal.
“I was expecting significantly higher participation by US accounts in Alrosa,” says one equity banker.
Some suggested that Alrosa’s public-sector status and the fact that proceeds from the sale will go into Russian government coffers may have deterred fund managers who are wary of falling foul of sanctions legislation. Such considerations would not apply to Rusagro, which is privately held.
"Geopolitical risk is clearly a factor, which could play a role in less demand from US investors”
Another key differentiator between the Rusagro and Alrosa offerings was that the bookrunners on the former included two global banks, JPMorgan and UBS. By contrast, the parent groups of both the lead managers on Alrosa are themselves subject to western sanctions.
How much impact this has had on the ability of the investment banking arms of Sberbank and VTB to work with western clients is unclear. In the immediate aftermath of the Ukrainian crisis two years ago, it was widely reported that banks and asset managers in the US in particular were wary of any interaction with sanctioned entities.
Rival bankers suggest that is still the case; however, one US-based fund manager says attitudes in the industry are changing.
“When sanctions were first imposed and the government was making a lot more noise, we took the view that we couldn’t trade with Russian state-owned banks,” says Michael Reynal, emerging market portfolio manager at RS Investments. “The market consensus today is that trading with Russian banks is tacitly permitted.”
Even if that is the case, however, bankers question whether or not Sberbank CIB and VTB Capital can match the reach of their global rivals. Both have reportedly cut headcount in London and New York over the past two years.
ECM bankers said part of the problem was also that Russian banks’ relationships are still mainly limited to emerging market investors.
“For a company like Alrosa, you need to go not just to Russia specialists but also to metals and mining investors,” says one. “That is why it may have been a mistake not to involve foreign banks.”
Bankers on the Alrosa deal were adamant that additional US involvement would have made little difference to the pricing, noting that Middle Eastern, Asian and Russian domestic investors had stepped up to fill the gap left by global asset managers.
“Investors will be more keen after this to look at other deals from Russia, whether privatizations or from the private sector,” says Kvasov.
There is some scepticism, however, about whether increased demand from non-US accounts reflects genuine appetite for Russian risk. Around half of total orders are reported to have come from the state-owned Russian Direct Investment Fund and its sovereign wealth fund partners.
Meanwhile, Russian pension funds, which accounted for a large chunk of the 35% of demand from domestic sources, are often tied to large conglomerates controlled by local oligarchs.
As a US fund manager puts it: “From our perspective, they can behave irrationally.”
Next on the list for privatization are oil producers Rosneft and Bashneft. Stakes in both are due to be sold before the end of the year, but reports suggest the Russian government may opt for private sales for what are seen as more problematic assets.
Even if they do come to the public market, however, global banks may still find themselves excluded from the process. One ECM banker suggests that the Russian government has not forgiven them for hanging back at the start of the latest round of privatizations due to concerns over sanctions.
“Leaving them off the mandate for Alrosa seems to have been tit for tat,” he says. “Russian policymakers have said: ‘You didn’t want to raise your hand first, so we’ll do it without you.’”