London, the traditional Mecca for Russian equity capital raising, is being frozen out as companies turn to Moscow for all their funding needs.  

The London Stock Exchange, which in the past has tended to host the biggest Russian initial public offerings, is being shunned as a wall of companies look to tap Moscow’s market for new money. Bankers, advisers and lawyers tell bne IntelliNews that the sector of London’s Square Mile servicing Russian corporates may disappear as most Russian companies already on the LSE make plans to delist.

Sanctions and politics are a significant factor, but the Moscow exchange’s deepening liquidity amongst international investors and improved execution is also helping to turn the tide. The upshot will be increased job losses for the phalanx of bankers, lawyers, accountants and advisers currently serving Russian companies in “Londongrad”, as it is fondly referred to by rich Slavic expats.   

“London will continue to attract interest but you can see the shift towards Moscow,” Tom Blackwell, the founder of EM, a leading communications and investor relations consultancy focused on Russia, tells bne IntelliNews. “The trend is definitely real and I think about half of the existing Russian-listed companies are unhappily listed. We could see a wave of defections and activism situations, which will see them disappear in some form.”

Tom O'Brien, head of international sales at the Moscow Exchange, says the Russia bourse was beating the LSE because it is attracting both international and Russian institutional investors.

"The buzz is in Moscow," O'Brien explains to bne IntelliNews.  "Moscow is winning because it has local and international liquidity. London only has international so it's over for London. The question is whether it will be a quick or slow death."

A source at the LSE insisted Russia and the former Soviet Union remain an important part of the exchange’s international listing business, but declined to say whether there were any new deals from the region on the horizon. Ayuna Nechaeva, head of the LSE’s Russian & CIS business, declined to comment for this story.

The total value of IPOs and SPOs raised in Moscow reached $1.2bn (€1.13bn) since the beginning of 2017, hitting a six-year high. Companies that sold shares during the period include children’s goods retailer Detsky Mir, which attracted $335mn in an IPO, Russia’s largest producer of steel pipes TMK, which raised $180mn in an SPO, and phosphate fertiliser major Phosagro and aluminum producer Rusal, whose SPOs brought them $250mn and $240mn, respectively.

The rebound in oil prices and the elevation of Donald Trump to the US White House has made Russian assets more attractive to foreign investors, with a raft of companies now looking to tap a renewed appetite for Russia risk.

According to the LSE, the total value of Russian and CIS companies listed in London has surged over the past year to $548bn from $312bn, but much of that is attributable to rising commodity prices and not to any new listings.

Indeed, the trend is very much for Russian companies to delist from the UK capital.  Russian gold miner Nordgold announced on February 9 that it would delist from the LSE in a bid to revamp its valuation.

Owned by Russia’s richest man, billionaire Alexey Mordashov, the company complained that it had failed to increase its market capitalisation in line with rising gold prices. Nordgold said its global depositary receipts (GDRs) were undervalued because of low trading volumes and general lack of liquidity caused by the company’s capital structure.

In 2015, three major Russian commodity companies delisted in London. Oil producer Eurasia Drilling Co., potash miner Uralkali, and gold miner Polyus Gold International all exited the LSE after complaining about their depressed valuations. Many companies from the 2005-2007 boom time for Russian IPOs are still way below their listing price.

A senior Russian investment banker in London says his peer group have been all but wiped out over the past three years due to the lack of dealflow.

“Russian bankers in London should be put on the endangered list because there are so few of us,” the financier tells bne IntelliNews. “I can’t see it getting better in the short to medium-term as companies repatriate and orient more towards Asia.”

Fears of the “bad old days” fade

Paddy Blewer, a former ruble trader and communications specialist, recently moved into a new role away from the Russia and post-Soviet space for the first time in 20 years.

“The Londongrad business model isn’t there anymore,” Blewer, head of communications for energy trader Peninsula Petroleum, told bne IntelliNews. “Moscow has become far more sophisticated as a centre for international capital and a lot of the fears of the bad old days, which centered on certain asset classes, have dissipated.”

International participation on the Moscow bourse has been increasing steadily and now accounts for almost half of all volumes. Almost all international investors who track the Russian market are now set up to trade locally, according to Moscow’s top brokers.

A staggering 90% of all bids in this month’s Detsky Mir IPO in Moscow came from international investors, according to organiser Sberbank CIB.

The iconic children’s retailer raised $355mn on February 8 in one of the biggest deals since Western sanctions were imposed on Russia for its involvement in the Ukraine conflict. Back in early 2014, Detsky Mir had been looking to list in London but the deal was scuppered after Russian troops seized Crimea that February.

Banking sources suggested that the involvement of a Russian Direct Investment Fund (RDIF) subsidiary may have ruled out any hope of a London deal. The RDIF, a Kremlin $10bn sovereign wealth fund, was sanctioned by the US in 2015.

But a senior Moscow lawyer says he is dubious the LSE or even the New York Stock Exchange would have “a blanket bank policy” on all new Russian listings.

“If there was an issue with Detsky Mir, I imagine it’s because one of the selling shareholders is 50% owned by RDIF, which is on the sectoral sanctions lists,” the lawyer tells bne IntelliNews. “If my hunch is right, I would think that’s quite specific to Detsky Mir, and probably wouldn’t prevent them from listing later if the shareholding structure changes.”

Lining up the ducks

Since the Detsky Mir deal, there has been reports of many companies sizing up the market. Billionaire Oleg Deripaska’s EN+ energy holding is the most advanced and has named Wall Street banks Citigroup and JPMorgan to advise on a potential bumper $2.7bn IPO.

Online retailers Ulmart and Avito, as well as software firm C1, have been cited for potential listings. Metro AG’s Russian cash-and-carry business, which had been seeking an IPO prior to the annexation of Crimea, is rumoured to be back in the market, as is footwear retailer Obuv Rossii.

Established companies such as miner Magnitogorsk Iron & Steel (MMK) are also considering secondary deals. Russia’s biggest gold producer Polyus has already chosen organisers of the coming share sale. They include Credit Suisse, Goldman Sachs, JP Morgan, Sberbank CIB and VTB Capital, several sources in the financial market told Reuters. 

The Moscow Exchange's O'Brien says the improvement in corporate governance in Russia and the bourse's enhanced institutional credibility have been major factors in enticing listings. 

"Consider if own a GDR (Global Depositary Receip) all you have is a call on a Russian asset anyway," says O'Brien. "The reputation line is smoke and mirrors and owning a GDR may make you fel you have a blanket of reputation keeping you nice and warm but you have little recourse in a Russian court when things go wrong as they are accorded very few rights. "

Since the start of 2010, a total of 267 companies announced IPO plans, according to PBN Hill + Knowlton, of which 45 have actually happened, 12 were cancelled and another 210 are still pending. An avalanche of bond deals in Moscow is also widely expected as analysts tip Russia to regain its investment grade status. 

Apart from Deutsche Bank, all of the major foreign banks still have boots on the ground in Moscow, including senior bankers and relationship people to source new deals.

Russian stock markets have been among the best-performing in emerging markets since November, when Trump’s election raised hopes of sanctions being eased and a agreement by Opec to cut production put a floor under oil prices. The Russian economy also returned to growth late last year after seven quarters of contraction.

“I think 2017 can be a good year for Russian equities,” Johan Elmquist, portfolio manager and partner at Swedish investment firm Tundra Fonder, tells bne IntelliNews. “It’s coming out of recession, there’s some loan growth, higher commodity prices, and sanctions may be lifted in the second half of this year.”

Elmquist, a Moscow investor veteran whose firm manages $230mn in frontier markets, has been fielding more questions from institutions about Russia, but for now they are still not buying.

His main concern is that much of the money coming to Russia now is “hot money” from hedge funds and Exchange Traded Funds (ETF) rather than from long-only funds and pension schemes.

UK puts the squeeze on Russia

Nobody is writing off London just yet as a destination for Russian companies, but appalling political relations between the two nations show no signs of healing. A British public inquiry concluded last year that it was probable that senior Kremlin officials had ordered the 2006 killing in London of former FSB officer Alexander Litvinenko by radioactive polonium-210, and that President Vladimir Putin himself likely gave the nod to the hit.

UK regulators have been making life more difficult for Russia entitites already listed in London, and oligarchs like billionaire Mikhail Fridman have been stymied in their bids to acquire assets. The LSE also introduced new rules to make it more difficult for foreign corporates controlled mainly by a single shareholder to list on their bourse.

Politicians from across the spectrum question the wisdom of London’s status as a hub for Russian deal-making. US Senator John McCain is an opponent of President Trump’s attempted rapprochement with the Kremlin and has said the UK’s close business ties have made government reluctant to punish Russia.

That may be changing following the adoption on February 21 of a UK version of the Magnitsky Act, legislation allowing the government to freeze assets of human rights violators. The campaign, which is aimed at Russia, is named after Sergei Magnitsky, lawyer who was beaten to death in a Moscow jail after exposing a $230mn fraud from the state budget involving a criminal gang and corrupt officials.

 “We need to make the UK a hostile environment for those seeking to move, hide and use the proceeds of crime and corruption,” Minister for State Security Ben Wallace said during the bill’s reading. “In an increasingly competitive international marketplace, the UK simply cannot afford to be seen as a haven for dirty money.”

 

Russian IPO/SPO 2013-2016 (Source: LiquidMetrix Research)