Robert Amsterdam

Today the FT is reporting that the initial public offerings of two Russian companies on the London Stock Exchange, Polymetal and Sitronics, are being met with "lacklustre" demand, perhaps signaling the end of the love affair with Russian stocks. Among the reasons cited for this waning enthusiasm is the enduring lack of transparency typical of Russian companies, as well as the numerous risk factors - not to mention the likely non-democratic coronation of Russia's next president, which could make big waves in the financial sector.

From the FT:

"Russia is no longer an automatic buy," said Christopher Weafer, chief strategist atAlfa Bank. "Therefore, new issues will have to be very attractively priced to persuade investors to invest. [Investors] are demanding on price, on risk and on trans-parency."

He added: "An issue will have to offer something really special and unique to attract the sort of valuation that it would have expected this time last year."

Vitaly Nesis, chief executive of Polymetal, yesterday told the Financial Times that sentiment for Russian flotations was less positive than in the past.

"There is an increasing wariness among investors who feel that some of these offerings in the past have been overpriced and did not perform as well as expected."
...
Tom Troubridge, head of the London capital markets group at PwC, said: "Sometimes the pendulum swings too much in one direction in terms of whether it's a buyer's market or a seller's market and it can swing very quickly. So it is probably premature to read this week's activities as a sign of waning demand for Russian offerings."

However there remain many more share offerings in the pipes ($30-$35 billion over the next year) - some of them representing good opportunities from solid and well managed private companies, despite the hostile business and political environment they operate in. If the Russian government wants these private businesses to have greater success in London (and New York, for that matter), serious steps need to be taken toward deepening transparency, improving corporate governance and accounting standards, and curtailing their habit of interference and over-management of the economy.

The negative impact on share offerings caused by the Kremlin's policies should not be underestimated. Don't forget Alexander Temerko's recent comments on the nefarious influence of state ownership in companies on offer:

"Russia has created a form of capitalism never seen before. Unless you have your own private mole in government, you will never be able to predict your returns with any confidence. Directly or indirectly, corporate authority ultimately rests with the state in Russia. ... Having raised more than $17 billion in 2006 -- 50% more than was raised over the past five years combined -- Russian companies coming to market in London should have been heralding bigger opportunities. Instead, they represent the ruling elite's bet that Russia Plc can exploit capitalism for its own purposes."

And more specifically, in the energy sector, Russia's state-encouraged economic nationalism is also damaging important relationships. Today Richard Lambert, the director-general of the Confederation of British Industry, one of Britain's most important business lobbies, asked Russia to resist this trend and allow more foreign investment in developing its energy infrastructure.

"Given the importance, both to the Russian economy and those of its gas export markets, of maximizing its gas output, the mixed signals that have been sent over whether the expertise of western energy companies is really welcome here creates real difficulties for long-term business planning," Lambert will say.

"I hope that Russia will want to reap the long-term benefits of full participation in the global economy and resist the temptation of opting for any perceived short-term gains from economic nationalism."