August 1, 2006


By Charles Ryan, Chief Country Officer and CEO of Deutsche Bank Group in Russia
AmCham Bulletin, July -August 2006
Over the last eighteen months the Russian equity capital market achieved a real breakthrough. Russian companies across nearly all industry segments have and continue to access capital through initial public offerings (IPOs) and secondary placements. The market has come of age, and now performs its primary function C providing capital for growing Russian companies and facilitating corporate expansion.

The retail and consumer goods companies were particularly active, with IPOs of OAO Seventh Continent, Lebedyansky, Pyaterochka, Magnit. Other sectors, such as telecoms, metals & mining, oil & gas were also very active. AFK Sistema, Russias biggest consumer services company, raised USD 1.56 billion on the London Stock Exchange in what remains the biggest Russian IPO to date. One of Sistemas subsidiaries, Comstar-UTS, once again demonstrated the healthy level of demand among domestic and international investors when it raised $ 1,062 m during its IPO in January of this year.

In the energy sector, the opening of the equity capital market is part of a much bigger story vis-a-vis Russias growing role in the global oil & gas and energy sectors. Following the liberalization of the Gazprom share market last year, Gazproms market capitalization has surged, making it the third largest company in the world, behind only Exxon and General Electric. And we expect more activity, given the Russian Governments strategy to develop national champions in the natural resources sector, combined with investors expectations of increasing M&A activity in the coming months and years.

Rosneft, second only to Lukoil in terms of reserves and production among Russian oil giants, has recently launched its IPO both in Russia and London. The IPO of this state-owned company will be of the largest ever in Russia, and one of the largest ever on the world market. During the IPO Rosneft could raise as much as $ 7.5-10 billion. The company is operating in Russias all main oil provinces, including traditional areas of West Siberia and Southern Russia, as well as successfully expanding into Timan-Pechora, East Siberia, Sakhalin projects and Caspian offshore. Analysts are positive on the companys future, predicting Rosneft to become the most profitable oil company in Russia in terms of production per unit of output.

Rosneft will be floating first in Moscow, according to the rules and requirements of the Federal Service for Financial Markets, the Russian Regulator of the securities market, with a secondary listing on the London Stock Exchange, where the companys shares will be available in GDR form. This is an extremely positive sign for the Russian securities market, clearly showing that the local market is very strong with real liquidity, which is why we are seeing more and more IPOs with local listings on the RTS and MICEX. Of particular interest, is the decision to market Rosnefts shares to the Russian population. This is a first in the history of the Russian securities market.

Apart from this much awaited IPO in the oil & gas sector, Russias utilities sector is also becoming a focus for the investment community.

Quite recently, after years of cautious steps and long negotiations between stakeholders, RAO United Energy Systems is now proceeding with the most important elements of its strategy to restructure the Russias utilities market. The Russian power monopoly is planning initial public offerings for a number its key power generating units C OGKs (wholesale power generating companies) and TGKs (regional power generating companies). While the transmission business will remain under state control, RAO UESs generation and distribution assets will be privatized.

In June 2006 the Russian government approved a pilot project to raise equity financing for several OGKs and TGKs, through new share issues. These five pilot companies include OGK-3, OGK-4, OGK-5, as well as Mosenergo and TGK-9; and the projects should be executed in 2006-2007. According to Viktor Khristenko, Russias Industry and Energy Minister, the energos being spun off from RAO UES could raise up to $ 7.8 billion by means of stock offerings between 2007-2010.

Russia, in its capacity as Chairman of the G8, has placed energy security on the agenda for the forthcoming G8 Summit in St. Petersburg. Russia will likely highlight the reforms mentioned above at the Summit, to demonstrate the steps Russia is taking to meet the growing energy demands of the Russian economy, and explain how Russia can support the search for greater energy security in the global marketplace. The newly emerged equity capital market is an important part of this developing energy story.

The Russian IPO boom is having a dramatic impact on the Russian business climate. The process of preparing for public markets is leading Russian companies to educate themselves about international standards and to improve their corporate governance. This process is literally driving corporate Russia toward fuller integration into the global economy. Given the political tensions so obvious in the world today, this economic integration is a real bright spot, and could provide the basis for broader mutual understanding in the years to come.


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