06MOSCOW13006, DENGI FEVER”: RUSSIA’S IPO AND CAPITAL MARKET BOOM

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Reference ID Created Released Classification Origin
06MOSCOW13006 2006-12-20 16:13 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO0207
RR RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #3006/01 3541613
ZNY CCCCC ZZH
R 201613Z DEC 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 5978
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCNCIS/CIS COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RHEHNSC/NSC WASHDC

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 013006 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/RUS 
TREASURY BAKER/GAERTNER 
NSC FOR GRAHAM AND MCKIBBEN 
 
E.O. 12958: DECL: 12/19/2016 
TAGS: ECON EINV EFIN RS
SUBJECT: "DENGI FEVER": RUSSIA'S IPO AND CAPITAL MARKET BOOM 
 
REF: MOSCOW 1898 
 
Classified By: ECON M/C Quanrud, Reasons 1.4 (b/d). 
 
SUMMARY 
------- 
 
1.  (SBU) Russia's initial public offering (IPO) bonanza 
continued to gain momentum in 2006.  Fifteen Russian 
companies launched IPOs this year, raising over $17.5 
billion.  At the same time, Russia's domestic exchanges have 
enjoyed explosive growth.  Russian companies are increasingly 
able to tap the domestic markets for cash, as relaxed listing 
standards and increased liquidity have made Russian exchanges 
attractive IPO venues.  Though motivations vary, many in the 
evolving IPO arena seem focused simply on raising investment 
capital.  To get to the money, Russian companies have had to 
increase transparency and improve corporate governance to 
meet foreign and domestic listing requirements.  Indeed, 
public offerings appear to be playing a significant role in 
transforming Russian business practices and creating a robust 
domestic equities market. 
 
RUSSIA'S IPO BOOM KEEPS BOOMING 
------------------------------- 
 
2.  (SBU) The Russian IPO market has reached new heights this 
year, easily eclipsing the $5 billion raised in 2005 
(reftel).  By the end of 2006, Russia will have the largest 
single stock in the emerging-market universe (Gazprom), will 
have placed the fifth-largest IPO in history (Rosneft), and 
will have raised through equity issuance more money in 2006 
than every country in the world except the U.S., China, and 
France.  And some predict 30-40 more Russian IPOs in the 
coming year, bringing another $30 billion worth of equity to 
the market. 
 
3.  (SBU) As was the case in 2005, the London Stock Exchange 
(LSE) was the foreign exchange of choice for Russian 
companies looking to list abroad, as most see U.S. standards 
as too high and too costly.  More than half of this year's 
Russian IPO activity included listings on the LSE.  However, 
unlike last year, Russian companies also came to the Moscow 
Interbank Currency Exchange (MICEX) and the Russian Trading 
System (RTS) to raise capital, with six Russian IPOs occurred 
exclusively on the domestic exchanges.  Indeed, one of the 
biggest shifts over the year has been the increase in the 
number of Russian companies looking to raise capital at home. 
 
 
4.  (C) The head of Russia's Federal Service for Financial 
Markets (FFMS), Oleg Vyugin, can take much of the credit for 
encouraging growth in the domestic exchanges.  Vyugin has 
simplified the procedure by which companies launch IPOs on 
the Russian markets.  In fact, he claimed recently to us that 
it is now easier to launch an IPO in Russia than it is to do 
so in London.  Vyugin also spearheaded a 30% domestic-listing 
requirement earlier this year, but he is slow to celebrate 
the success of this initiative.  He suspects that brokerages 
operating in Russia have been taking ordinary shares on their 
books, and then sending these same shares abroad.  A deeper 
analysis, which is currently underway, should reveal whether 
Russian capital is staying close to home.  Whatever the 
result, the impressive growth of Russia's domestic exchanges 
is hard to ignore.  The MICEX and the RTS now have a combined 
market capitalization of almost $800 billion, or 80% of GDP. 
Trading on the MICEX grew by 191% over 2005, while the RTS 
grew by 122%.  Around 70% of Russian stock trading now occurs 
on the domestic exchanges, up from 55% one year ago.  Without 
a doubt, the stereotype of a cash-poor Russian equity market 
is crumbling. 
 
NEED FOR CAPITAL IS THE MAIN, 
BUT NOT SOLE, DRIVER 
----------------------------- 
 
5.  (SBU) Russia's economy continues to chug along.  Real GDP 
looks to be coming in just below 7% in 2006.  Russia's money 
supply has increased by 40% this year, yet its inflation rate 
(though still high) will be below 10%.  Both public and 
private consumption have grown over the year, as Russians 
continue to make more money and take out more consumer loans. 
 Capitalizing on new market opportunities has been a 
challenge for Russian firms, as many still suffer from 
underinvestment.  It comes as no surprise that demand for 
investment capital is high.  Russian companies have turned to 
 
MOSCOW 00013006  002 OF 003 
 
 
IPOs to raise the money they need for growth in an 
increasingly competitive market. 
 
6.  (C) Of course, the need for investment capital is not the 
only force driving IPOs.  As in 2005, some strategic 
shareholders have looked to IPOs as a way of "cashing out" of 
their holdings.  Doing so has helped them capture immediate, 
and often tremendous, wealth.  However, our contacts have 
been quick to downplay the significance of the "cash-out" 
incentive in 2006.  They argue that strategic shareholders 
stand to gain much more from staying with their lucrative 
businesses than they do from cashing out of them. 
 
7. (C) Oleg Vyugin echoed this sentiment in our recent 
conversations with him.  He believes raising capital for 
company growth is the main target of recent IPOs.  Vyugin 
also described an additional role IPOs have assumed in 
corporate strategy: enhancing management capacity.  "As a 
company grows, it becomes more difficult for management to 
handle the size of the company."  By increasing the 
shareholder base, new people are attracted to help manage the 
firm.  In some cases, these people are industry elites with 
superlative reputations.  Company boards have been increased 
to include managers championing Western-style business 
practices.  With new management, Russian companies are coming 
to realize that efficiency, increased accountability, and 
improved corporate governance are essential to success in 
today's global market.  And, he adds, strategic investors 
(many of whom are founding oligarchs) have their hands freed 
to pursue other interests. 
 
8.  (SBU) Naturally, companies have been improving business 
practices to the extent there is incentive to do so. 
Standard & Poor's Julia Kochetygova told us that she thought 
listing requirements are shaping changes in transparency and 
corporate governance -- for the better.  For Russian 
companies looking to list abroad, this normally means 
adopting standards sufficient for listing with the LSE. 
Similarly, in an effort to attract investors, Russia's 
domestic exchanges have increased accountability standards 
for companies looking to list in Russia.  Firms trading on 
the MICEX and the RTS now boast transparency and corporate 
governance levels that meet international standards. 
Kochetygova's work shows that most publicly-traded Russian 
firms exceed the listing requirements of LSE's AIM market. 
 
WHO'S BUYING? 
------------- 
 
9.  (SBU) Improvements in macroeconomic conditions and 
increased accountability have encouraged global investors to 
boost exposure to the Russian markets.  In the wake of the 
elimination of the so-called "Gazprom ringfence," emerging 
market indexes have been substantially rebalanced this year. 
The Morgan Stanley Capital International (MSCI) emerging 
markets index, widely considered the industry benchmark, has 
been reconstituted in 2006 to increase its Russia composition 
from 6% in 2005 to 11%.  The upshot of this is that foreign 
investment in Russian equities, once dominated by short-term 
speculators, now comprises more long-term investors.  Large 
international investment houses, such as Morgan Stanley, 
Merrill Lynch, and Citigroup, have come to Russia. 
 
10.  (SBU) Russia's domestic exchanges have also enjoyed 
investment from local institutions.  Mutual funds, pension 
funds, and insurance companies constitute the bulk of 
home-grown interest.  In fact, Russia's mutual fund industry 
has grown from virtually non-existent just a few years ago to 
a $15 billion industry today.  Even so, the domestic markets 
have been slow to attract individual investors.  Less than 3% 
of the Russian population own stock or other investment 
instruments.  Nevertheless, there are signs that a domestic 
investor base is forming.  Our MICEX contacts are confident 
that middle-class Russians will come to the markets as they 
become better informed and more investment savvy. 
 
MUSINGS OF A MARKET REGULATOR 
----------------------------- 
 
11.  (C) In an early December meeting with us, Vyugin said he 
is considering abandoning the 30% domestic-listing 
requirement.  In its place, he would oblige Russian companies 
to launch IPOs on a domestic exchange -- with at least 10% of 
the capital of ordinary shares in Russia -- before listing 
abroad.  This policy change could gain momentum in the coming 
year.  Vyugin has also made some progress on a few of his 
 
MOSCOW 00013006  003 OF 003 
 
 
long-term do-list items.  A draft law addressing price 
manipulation and insider trading (first proposed two years 
ago) is now with the Central Bank, the Ministry of Finance, 
and the Ministry of Economic Development and Trade for final 
comment, although Vyugin believes he has already secured 
their basic agreement.  The draft needs to go through a 
formal signature process, after which it will go to the 
Ministry of Justice for a final check before submission to 
the Government, which he hoped would result in approval by 
the end of this year.  In addition, a draft law creating a 
Central Depository was finalized in August.  The Central 
Depository would absorb the existing depository firms -- a 
move which could receive resistance from those with an 
economic interest in the status quo.  A hardy perennial for 
ten years, Vyugin hopes remaining disagreements over the 
draft law will be resolved by the end of the year. 
 
COMMANDING HEIGHTS STILL 
COMMAND THE MOST MONEY 
------------------------ 
 
12.  (SBU) As prices for oil, nickel, aluminum, platinum, and 
copper reached new highs this year, Russia's state-controlled 
companies benefited most on the bourses.  Russia's energy and 
steel sectors still constitute the largest portion of the 
shares traded on the domestic exchanges, and foreigners 
continue to invest mostly in these sectors.  However, 
Russia's diversifying economy is also producing attractive 
investments in other sectors, particularly in banking, 
communications, and retail, where sectors which were 
well-represented in this year's IPOs.  Russia's largest 
domestic-only listing was retail giant Magnit, whose revenues 
exceeded $1 billion in the first six months of 2006.  Next 
year looks equally promising, as some predict as many as 15 
retail-related companies will launch IPOs. 
 
COMMENT 
------- 
 
13. (C) As Russian companies look to raise capital and gain 
prestige, the requirements for them to do so are slowly 
transforming Russian business practices.  And there's a sense 
that the new wave of business executives coming to Russian 
industry will serve as iconoclasts to the current paradigm of 
opacity and inefficiency.  More and more, Russian companies 
are recognizing that entry into the global business world 
cannot happen without transparency.  Even Russia's 
state-controlled companies have taken notice.  This is not to 
say that companies under state control don't still have a lot 
to learn.  As Oleg Vyugin put it, "an imitation of good 
corporate governance" won't make a company competitive. 
Recent troubles at Gazprom illustrate this fact: either you 
become efficient, or your stock price will freeze. 
 
14.  (C) Russia's domestic exchanges will continue to grow in 
2007.  Thus far, they have been able to produce surprisingly 
impressive trading numbers with relatively few issuers.  This 
year we saw signs of a virtuous circle that we believe has 
not quite run its course: with new listings come new 
investors and added liquidity, which will likely lure yet 
more to the IPO tab
le.  To the extent this also forces 
transparency and compliance with international norms and 
market expectations, it is one of the most visible signs of 
grass-roots economic reform in Russia.  The real test will 
come when global and domestic liquidity tightens, and the 
fight to keep shareholders happy sharpens. 
RUSSELL

Wikileaks

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