Wednesday, August 09, 2006

Rosneft's share price could increase, but will it carry any rights?

The Share Price

Rosneft’s current share price could be described as uninspiring, following its mammoth IPO in July. Investors, having snapped up shares at USD7.55, are now finding that their GDRs are currently priced at USD7.33 on the London Stock Exchange, despite the efforts of the underwriter.

To increase the capitalization, the government is intending to gain an inclusion into the sought-after A1 list of shares. However the rules state that no more than 75 percent of the company must be in the hands of one owner (or affiliated owners). At this moment in time, Rosneftgas holds an 85 percent stake in Rosneft.

The controlling stake must be then shuffled between different companies, with a possible 50 percent plus one share going directly to the government. This could be accomplished by dividing Rosneft into two parts and then liquidating one of them. The only problem is that the government and Rosneftgas could be considered as affiliates, which would make any transactions between them worthless. Although there are ways of contravening the regulation, that would bring more opaque systems into the equation. The stock exchange has the final word, and many analysts predict that it could give the go-ahead even if it goes against the law, however any glitch in the operation could impact the prestige of the company which is obsessed with public image before and after its IPO.

The Investors

Anecdotal evidence points to the fact that the advertising campaign targeted at pensioners has produced a result. Almost a third of private customers investing in Rosneft are over 50. Persons connected with education are second in the list, with 11.7 percent of shares to their name. People working in financial structures have invested 10.8 percent, while students hold an estimated 2.3 percent of Rosneft’s shares.

Such big number of pensioners investing is linked to high approval rating of the president and the government, something which could be attributed to state television.

Overall, big oil companies have snapped up 21% of shares with Malaysia’s Petronas leading the way with USD1.1 billion worth of securities. Russian businessman Oleg Deripaska has invested USD700 million and Chelsea’s owner Roman Abramovich - USD300 million

The Rights

People’s IPO could be here to stay, argue some analysts, with VneshTorgBank being the next big offering. Although these shares do not have the same right as those in the West, with at least some part of the population holding small stakes in state companies may mean that the government may come under pressure over its economic policy in the future. Had Yukos’ shares been in the hands of the people, the whole affair would have done much damage to the image of the state in the eyes of the population. However, it remains to be seen whether shares in state-owned businesses are not just ITM options which may or may not have weight at future AGM.

Vedomosti, Gazeta, Rusecon

Trade deficit by 2009?

Russia’s difference between import and export could turn negative by 2009, said some experts in the government today.

The following scenario is based on Urals oil barrel priced in the range of USD65-54 for the next three years.

The ruble is expected to be stable in the range of 26.7-27.1 per USD. This is positive; after all, the ruble was looking to be unstoppable in its oil-influenced ascend. Strong ruble is said to hurt exporters, making Russian goods uncompetitive in foreign markets.

The price paid for making the national currency even out could be trade deficit (import higher than export). This essentially means that consumers will pay money which comes from high oil prices for goods which are not made in Russia, thus hurting the national producers. Even now, import from nearby countries to satisfy consumer demand is rapidly rising, posting an increase of 38.7 percent this year.

The possible trade deficit scenario is surprising, considering the current trade surplus of some USD63 billion.

Many analysts have expressed their disbelief at the idea that Russia could experience trade deficit, with some citing the stabilization fund as the solution in case the prognosis does indeed happen.

It is certainly worrisome that the Ministry of Economic Development should so calmly indicate that Russian goods may be redundant in the next years with the country relying heavily upon imports in the time when oil prices may go up as well as down.

Gazeta, Rusecon

Friday, July 21, 2006

Rosneft-style IPO coming soon

The Russian government is satisfied with the way the IPO of Rosneft has been completed. Another Initial Public Offering is in the works, and it might come sooner rather than later.

The company in question is OGK-5, part of the RAO UES of Russia energy giant. The proposed date for the IPO has been moved from November 2007 to November 2006.

OGK-5 was separated from RAO UES as a result of a reform carried out in 2005. More components of RAO UES will come onto the market in this pilot scheme is a success.

The company is expected to raise around USD500 million.

The reasons for bringing the IPO date forward is that the current market conditions are conducive to an event of such magnitude, with investors showing appetite for owning securities of Russian energy companies.

The main person behind the IPO scheme is the head of the president’s administration Sergei Sobyanin. According to some analysts, he is trying to strengthen his position with regards to Kremlin’s internal politics.

The oil and gas sector is very competitive, with many of Kremlin’s top officials having links to it. The electricity sector could be considered as being up for grabs.

Gazeta, RusEcon

Economy of Deficit hits Russia

Property, wine, cars are all in deficit and are priced higher than ever.

Russians, having experienced shortages of wine, have now resorted to buying and selling places in queue to buy popular foreign cars, such as Ford Focus. Car dealers, having not anticipated the increase in demand (analysts calculate it has risen by 50 percent), have run out of car models for the next few months at least. There were 400 thousand foreign cars sold in Russia in the first half of 2006. The most popular makes were Hyundai, Toyota and Ford. There is a 9 month waiting list to buy Ford Focus and Honda Civic. Car dealers are also experiencing shortages of transportation trucks needed to bring in extra automobiles from the makers. It appears that some have even resorted to using the railroad as a method of transporting vehicles.

Not surprisingly, the second hand market have seen rising price on already overpriced models sourced from abroad, usually in an opaque manner.

This shortage is attributed to yet another deficit, this time on the property market. Due to scarce availability and high prices (Moscow properties have added 30 percent to their value in the last half of the year), many have lost any hope of getting a foot on the property ladder, and as a result have moved their sight onto the automobile market.

Borrowing to buy a car in Russia is a much simpler process than acquiring a mortgage, something which can only be afforded by an estimated 1 percent of the population.

This deficit follows those present in other markets, notably in the alcohol and luxury goods sectors. As a result we are seeing prices many times higher than those in the West.

Vedomosti, RusEcon

Thursday, July 13, 2006

Gazprom buys 51 percent of Zenit FC

Former owners of St. Petersburg's Zenit Football Club, Vladimir Kogan and David Traktovenko, have made a profit of USD36.247 million in selling their club to Russian energy giant Gazprom. For the first time in the history of Russian soccer, we know the exact price of a club. Experts consider it fair, with prices of Russian players currently on the high side.

At the weekend Gazprom revealed the sum it had paid to gain a controlling stake in Zenit, one of the Russia's most popular soccer clubs. According to a Gazprombank IFRS report, the gas monopoly purchased a 51 percent stake in Zenit for USD36.247 million. The bank's press-service was not available for comment on Sunday.

David Traktovenko, former co-owner of banking house Sankt-Petersburg and Zenit chairman, refused to discuss the deal, quoting a clause in the contract forbidding the release of this information.

Most experts polled by Vedomosti say that the price Gazprom has paid is fair. German Tkachenko, president of ProSports Management and ex-president of Krylya Sovetov Samara, said that half the sports facilities of the St. Petersburg club, plus its players, who are professional by Russian standards, and its strong brand, are fully worth USD36 million. "Understandably, purchasing a club is a ticket to further spending, because Russian soccer is no money earner. But the ticket can be capitalized and resold to a higher bidder later on," he said.

The cost of players on the Russian soccer market is unrealistically high, said Maxim Belitsky, sport director of Sportima agency, and so the price Gazprom paid for half of Zenit can be considered adequate.

But an expert who asked to remain anonymous said that the gas monopoly had paid through the nose. Gazprom paid so much for the sporting brand, because only Zenit's training facilities and contracts with some soccer names are among the worthwhile items on its books. "Abramovich paid something like USD48 million for a controlling stake in Chelsea, and repaid about USD185 million in club debts. But Chelsea had on the physical balance some real estate in London's center, including a hotel. And the possible commercial benefits and sports successes of the London and St. Petersburg clubs are like apples and oranges," said the expert.

Earlier, deals to sell Russian clubs have never been made public. Spartak fans, for example, who wanted to know how much LUKoil vice-president Leonid Fedun forked out to acquire the club, had to make do with approximate expert estimates. Analysts and soccer market players estimated the Moscow club "at USD70 million."

Tkachenko said that before Krylya Sovetov was sold, he had put the full value of the club at about USD25 million. He did not name the size of the deal, however. For Torpedo Moscow, businessman Alexander Mamut offered USD31 million. Michael Sterling, director of sports market agency Global Sponsors, said that Russian clubs are generally difficult to put a price on - the soccer market is undeveloped, and market criteria are absent. He said Gazprom did aim to pay a market price for Zenit, because the company's top managers supporting the club were most likely moved by personal or image-building motives.

Russian soccer is now emerging from the shadows it had been in throughout the 1990s and early 2000s, said Tkachenko. Large companies such as Gazprom and LUKoil have entered the country's soccer market, he said, and the size of these concerns makes them do business by Western standards, and disclose the price of major purchases.

Vedomosti, RIAN

Criticism of state involvement in the economy

The head of the US regulator SEC has insisted that, in order to fully attract foreign investment into Russia, the state should stop being a major shareholder in many of the country’s biggest companies.

This argument has attracted praise and criticism from analysts and there are those that say that the upcoming Rosneft IPO shows that Russia still attracts investment even if the companies’ shares don’t hold the same level of rights compared to those in the West.

Mr. Cox said that “state interests sometimes don’t coincide with the interests of the market” and that decisions “are likely to be influenced by politics”.

Freedom of press also attracted criticism from him, as it “goes against principles of transparency, which are vital for the investing community and correct functioning of the market”.

Currently, state controlled companies are attracting large level of investment. LukOil, Rosneft are all in favour with large multinational clients and the list is growing. Short-term outlook seems to be good.

In the long run, the success of government involvement in running companies is likely to fall to zero. Companies are more effective when they are not run by the state. Some even state that the recent stock market growth might have been even steeper had it not been for Kremlin’s involvement in the economy.

When will the government cease to be a shareholder? When the budget deficit appears, possibly relating to the fall of oil prices, say some analysts. Reforms could happen then together with the full market liberalisation.

Gazeta, RusEcon

Monday, July 10, 2006

Search-engine market to become more competitive

  • Google is widely believed to make its foray into the Russian market this autumn. Not surprisingly, the current market leaders (Yandex and Rambler) are worried about this development.
  • Another, albeit much smaller, foreign competitor to the Russian companies comes in the shape of Webalta. The project, sponsored by an unknown foreign entity, is hoping to match Yandex and Rambler on technological grounds, but its chances are considered to be slim. To succeed, Webalta will need to spend a massive amount on marketing, something which it is unlikely to do.
  • The search-engine market in Russia is valued at between USD50 and 100 million.


Short: Gazprom

Photobucket - Video and Image Hosting

GAZP 2005 Profit: USD11.5 billion.

Net Debt: USD29.6 billion.

Rating: BB+/Baa2/BB+.


Sunday, July 09, 2006

Lack of communication between people and goverment - expert

The live internet conference which had the Russian president answering live questions was classified as a PR stunt by the majority of the world press. Serious questions from the West contrasted sharply with the light-hearted ones coming from inside Russia.

The fact that no real questions were asked on the Russian site could be attributed to the Kremlin press service which controlled the incoming questions and selected those that it so fit. Avoided were the issues relating to Khodorkovsky (“due to a technical fault”, says Yandex), Chechnya and democracy, with only the situation around Georgia being present in the discussion. Instead questions about nothing (robots, kissing a kid on the stomach) demonstrated that not only the chat was orchestrated by the president himself but also that Russians have nothing to ask the most powerful man of the nation. According to an analyst, this could be due to the fact that people already know the answer that would have been given by the president and that it would not have changed a thing. This means that the price of Putin’s media responses about serious issues have dramatically depreciated during the seven years of his presidency. Only the naïve or desperate people would risk a serious analytical discussion about the state of the current affairs in Russia.


Tuesday, July 04, 2006

Private security firms squeezed out by the state

State security personnel, formerly under the Ministry of Interior umbrella, have struck a crucial blow to the private security firms, something which is bound to eliminate any kind of competition in the security personnel services market.

It was hoped that once the “VOJR” section on the Ministry of Interior was separated from the state forces in 2005 (to form FGUP Okhrana), the competition would have a chance to increase its share on the market which includes guarding warehouses, apartments and carrying out private detective work.

But the new law recently approved by the president states that former state security personnel are allowed to use weaponry and guard dogs to defend themselves, something which is prohibited for the private companies. Additionally they are allowed to enter premises without seeking permission if they believe that a criminal is hiding within.

Not surprisingly such move has virtually wiped out any signs of competition in the market which was valued in 2005 at around USD4.3 billion. Analysts say that this represents yet another attempt at monopolisation of the market by the state-controlled company. At present, FGUP guards around 16,000 objects in Russia.

No such law exists in any other developed country. In Great Britain, private security personnel are even allowed to participate in the Iraq war operations.



FGUP Okhrana Webpage

Friday, June 30, 2006

Russian economy would collapse without corruption - expert

The Russian economy would collapse if corruption was to disappear today. Such is the strength of the system of corruption in the country which occupies the 126th place in the Transparency International index.

The transition to a legal economic system would require far too many resources and sacrifices to be taken. Not only it would take years for the country to progress towards a transparency, but support from business and the general public is vital.

Another issue which dogs any investor is insider trading. Whilst corruption scares foreign investors away, insider dealing negatively impacts the stock market. Although progress seemed to be made with the introduction of the Insider Dealing Legislation, the truth is that the new law is fundamentally flawed. Previously, any high-ranking official could have been under investigation, but now the legislation is only applicable to private companies. This means that Central Bank and the ministries have to regulate themselves while state officials are excluded from the list of potential suspects.

Since state officials are the likely recipients of unpublished price-sensitive information, their competitive advantage on the stock market will only increase. Not only is the state the biggest holder of Russian securities but its funds account for over 30 percent of the total 2005 Russian M&A. Corporate control of the ruling political system will become more apparent with the upcoming IPOs of Rosneft and VneshTorgBank. This potentially suggests that the level of insider trading will only increase in the future and, just like corruption, it will become a Russian institution.