IPOs have been booming in Russia in the last year as smaller companies rush to market to raise investment capital, spurred on by high and rising interest rates on bank loans. But that could cause problems, as the process is now rushed, with the preparation time for a listing having fallen from several years to just four months, according to a report from the Russian firm of Makusheva and Partners, commissioned by MOEX and seen by Vedomosti.

If in 2022 there was only one placement of the Whoosh company for RUB2.1bn, last year there were already eight IPOs collectively worth RUB45bn. And this year the number of IPOs will double again, according to local investment bank forecasts.

As bne IntelliNews reported, Russia’s stock market has come back to life fuelled by domestic investment. Russia’s leading MOEX index regained its pre-war level after crossing 3,500 on May 18. (chart)

Since 2022, the Russian IPO has undergone significant “democratisation,” that has boosted its development but at the same time undermined the quality of the preparation companies go through ahead of their floatation.

Following the invasion of Ukraine in 2022, all the international advisors that normally carry out this work have left the market, which has radically reduced the costs of listing, but also means that a lot less effort goes into transforming the company to improve transparency and corporate governance ahead of becoming publicly traded.

At the same time interest in listing has increased after persistent inflation caused by a military Keynesianism boost to the economy has driven up inflation and forced the Central Bank of Russia (CBR) to consistently hike rates to the current 18% at the July monetary policy meeting. More rate hikes are expected, although it appears that inflation is currently close to its peak.

The rush to market has exposed Russia’s capital markets to potential violations that could undermine confidence in the IPO process, according to a study titled "IPO Market. New Issuers," conducted by the agency "Makusheva and Partners" at the request of the Moscow Exchange and the Association of Independent Directors, which was seen by Vedomosti. The study’s findings were presented on August 6 at the Moscow Exchange (MOEX).

The authors of the study conducted over 50 interviews with various market participants, including recently listed companies like Astra Group, Delimobil and Whoosh, as well as investors, independent directors, professional participants and bloggers.

After the exit of the consultants and foreign investors who demanded international standards in listings, the market swapped to local, less stringent, standards from both regulators and investors.

Preparation for an IPO in Russia has become simpler and cheaper compared to Western jurisdictions, the study notes. Russian investors now pay less attention to prospectuses and other company documentation, which previously received detailed analysis from large investment funds by analysts.

Companies are now allowed to skip providing confirmations of financial information from auditors and lawyers, known as “comfort letters.” Additionally, the responsibility of consultants, including IPO organisers, for the results is often not clearly defined.

The upshot has been a rush of “IPOs for growth,” listings where companies rush out an IPO with as little as four months of preparation, the report says. Instead of completing the preparation before the IPO, they hope the public scrutiny they receive after floating will push the management to put all those changes in place after the IPO to boost their share price.

One of the problems highlighted by the Institute of Independent directors, that has been instrumental in pioneering better corporate governance standards in Russia’s capital markets, has been the knee-jerk hiring independent directors from a pool of “serial directors” that server on multiple boards, simply for show, rather than bring in professionals that genuinely add to a company’s corporate governance. They may also select independent directors from among friends merely to comply with formalities.

As a result, an increasing number of immature issuers are being listed on the exchange without a coherent business structure or established processes for strategic planning, the report found. Supervision, risk management, long-term motivation, and succession plans are all missing. This trend poses reputational risks for the companies and undermines confidence in the IPO process, the study concludes.

Maria Makusheva, founder of the agency that conducted the study, told Vedomosti that this approach is typical for companies currently preparing for an IPO. She noted that issuers who went public in the past year and a half prepared according to international standards, targeting foreign investors, but that has ended now.

According to the Moscow Exchange and the industry community, the market is at a critical juncture, reports Vedomosti. It can either develop self-regulation and more responsible behaviour among companies or face stricter requirements from the CBR, which may enforce more stringent corporate governance standards, which is under discussion now.

Despite the problems the IPO pipeline remains full and there has yet to be a significant scandal.