Letter from... Russia

A new English business term is appearing ever more frequently in the Russian financial press nowadays - IPO, or initial public offering. The reason is that Russian firms are heading for foreign stock markets in unprecedented numbers.

In May, Russia’s biggest steel maker, Evraz (formerly Evraz Holding), announced plans to raise up to $700m in an IPO which is likely to take place this summer. The firm recently announced profits rising almost five-fold as it enjoyed the steel boom and the benefits of efficiency savings.

The firm is one of a growing number of Russian household names that have decided to list overseas in the last year. Other large steel makers going public include Novolipetsk, which was granted approval to sell shares abroad by the Federal Securities Market Service (Russia’s stock market regulator), in April 2005, and Mechel Steel Group, which raised about $330m in an IPO in October 2004.

Heavy industry is not the only sector opting for IPOs - in May 2005, Pyatorochka, the largest national supermarket chain, raised $598m in an IPO.

Not all big Russian firms are in a hurry to go abroad for financing, and the market regulator thinks they should list in Moscow first. For a start, the softer requirements there are likely to be more suitable for many firms, at least in the interim.

The foreign markets are dragging capital away from Russian markets - Russian share trading totals $25bn per month, but only about one-third of that takes place inside the country, Oleg Vyugin, head of Russia’s Federal Securities Market Service, said in 2004.

The RTS and MICEX, Russia’s stock markets, saw their total number of IPOs drop from 17 in 2003 to 12 in 2004, at a time when the total volume of money raised went from zero to 241m euros, according to PricewaterhouseCoopers.

The reasons for the sudden appearance of Russian firms on the international markets are unsurprising. Perhaps the most pressing is that raising capital by other means is very difficult for Russian firms. The Russian banking sector is notoriously weak, and long term lending is almost unheard of.

Loans of up to five years are a recent phenomenon; previously, loans of one to three years were all that was available, and interest rates are very high. Many of the “banks” in existence are, in fact, merely corporate treasuries designed to fund companies in the absence of alternatives.

Another factor is that many firms have now finished a long process of restructuring and consolidation (like Evraz), and are only now in a position to need large-scale financing to further expand and modernise. Evraz, for example, is a group of large steel plants; now, it wants to use money raised in its IPO to buy mines in former Soviet Republics and plant in other countries to guarantee supplies and production.

Similarly, Irkut, an aircraft manufacturer, has plans to use its IPO funding to branch out into unmanned aircraft and civil manufacture, instead of relying on solely military export work.

Many firms have only recently managed to meet the considerable requirements demanded by foreign stock markets for those listing. Things like good corporate governance, transparent ownership, proper accounting by and auditing procedures to international standards by one of the Big Four, are comparatively rare in Russia, but in the last few years many of the largest companies have made great strides in introducing them.

Neither is this mere window-dressing to appeal to wary investors or comply with legislation like the US Sarbanes-Oxley Act; many of the leading Russian firms are clear that these measures are necessary for the sake of better running of the company, as well as prerequisites to listing.

The markets in question have so far mainly been American and British, with NYSE and LSE leading the way. Last year, LSE said it was in negotiation with around 20 Russian firms, in addition to those already on its books.

Howard Gethin is a business journalist based in Moscow.