From Russia with caution Article icon


‘When there’s blood on the streets, it’s a good time to buy,’ goes the old stock market adage. That circumstance is rarely a profitable time to sell, however, and that’s a problem for Russian companies looking to float in London as the tanks roll into Ukraine.

A steady flow of companies from former Soviet Union republics has boosted the international contingent on the London Stock Exchange in recent years, even if some of the businesses have suffered thereafter from oligarch egos, political instability and highly volatile commodities markets.

But the flow dwindled to a trickle in the aftermath of the financial crisis and, until the recent stockmarket recovery, all initial public offerings struggled to get off the ground in London.

That created a bottleneck of companies with owners, such as private equity groups, looking to realise profits by listing on the London Stock Exchange, resulting in a flotations boom over the past 12 months.

For Russian businesses readying themselves to join in the fun, its government’s actions in Ukraine could not therefore have come at a worse time.

Plenty of seasoned City hands remember the chaos resulting from Russia’s financial crisis of 1998, which resulted in the Russian government and the Russia Central Bank devaluing the rouble and defaulting on Russia’s debt.

Though dubbed by cynics as ‘Russian flu,’ it left some investors nursing losses so it should come as no surprise that any planned float of a Russian business now comes with a severe risk warning.

‘Five Russian companies floated in London in 2013 but any Russian companies looking to float in London this year need to address the trust issue,’ comments Ross Gow, managing partner of reputation management consultancy Acuity Reputation.

Gow advises oil group Lukoil, the first Russian company to be quoted on the London Stock Exchange in 2002, and says Russia’s annexation of Crimea and amassing of troops on the Ukraine border have come as a major geopolitical shock to Europe.

This, he argues, is forcing UK investors to reconsider long-held assumptions about relations with Russia and the nature of Russian business representatives, with Western business extremely nervous of what might happen next, given the unpredictability of Russian president Vladimir Putin and the fervour of Russian supporters in eastern Ukraine.

‘Many European chief executives sent diplomatic sick notes for the World Economic Forum event in St Petersburg this month [May],’ notes Gow.

‘Clearly there are limits to how much Russia’s creaking economy can withstand tough economic sanctions. There is also a fear that rather than become a post-modern state keen to strike deals, build joint institutions, deepen interconnectedness and engage in collaboration with the west, Russia remains a sovereign state with the mindset of a traditional power, including the ambition to dominate and even conquer other countries.’

Andrew Hayes is chief executive of financial public relations firm Hudson Sandler, whose Russian clients include steel and mining company Severstal, gas processing and petrochemicals group Sibur, oil and gas services company Eurasia Drilling, tubular products maker TMK and The Russian Direct Investment Fund.

He agrees that the Russian IPO pipeline this year is likely to remain very subdued until there is greater clarity on Russia’s intentions in the Ukraine.

However, he feels that fear and confusion are distracting attention from the individual merits of some of the Russian companies that were lining up to float before the crisis broke. These include the Russian cash and carry arm of German retailer Metro, Russian retailer Detsky Mir and Credit Bank of Moscow.

‘The bull case is that fundamentals haven’t changed,’ comments Hayes. ‘Russia has one of the lowest public debts of any major economy, a rapidly growing middle class, increasing disposable incomes, low unemployment and general political stability.

‘With the reaction to the situation in Ukraine, what was already a heavily discounted market has become even more attractive with depreciation of the rouble and still bigger discounts, so now could be a good time to look at Russia on value grounds, particularly in energy and commodity plays where Russia now offers extraordinary value.’

This is a view shared by Stephen Benzikie, a former communications adviser to oligarch Oleg Deripaska at financial public relations agency Bell Pottinger, who now runs his own independent agency, IHA Consulting.

‘Institutional investors have always been mindful of political risk around Russia’s foreign policy,’ he says, ‘but it didn’t seem to be an issue when GDP growth in Russia was motoring.

‘Now that it is slowing and the Ukraine situation is raging, they’re risk averse again. It’s a shame for some very good Russian companies looking to float in London, often with western management and private equity backing.’

Alexey Kondratyev, managing director of Industrial Investment Solutions, an independent Russian communications consultancy, says the Ukraine situation came up repeatedly when his client KTZ, a Russian thermal coal producer, held more than 20 investor meetings in April.

Almost all the firm’s investor meetings in London, Warsaw and Prague were cancelled but others took place in Vienna, Frankfurt, Geneva, Zurich, Tallinn, Helsinki and Stockholm and were positive.

‘Mostly the issue of Ukraine is discussed in connection with exporting coal to Poland and the risks that might be present,’ he says. ‘Country risk was not an objection in any of these meetings.

‘The weaker rouble is quite beneficial for the company, since 80 per cent of export proceeds are in US dollars and almost all cash costs, being localised in Russia, are in roubles.

‘The KTK official position is not to engage in discussions on sanctions and politics at investor meetings. The company makes sure that concrete sanctions are not affecting the company’s business or its capitalisation currently.

‘In my view, at the moment sanctions do more psychological damage than any real harm and, speaking of the backbone of the Russian economy which is the export of oil, gas and coal to international markets, the sanctions are currently more of a PR problem than a real financially measured threat.

‘That said, experts know that some issues start as PR issues and grow themselves into real economic problems.’

So what should Russian companies and their public relations communicators do in the current crisis?

David Simonson, partner at public relations agency Instinctif Partners, who has advised a long list of Russian companies including diamond group Alrosa and hydro-electric combine RusHydro, believes that Russian groups looking to float in London have little alternative in the current climate but to wait. Rather than that being a passive experience, however, he argues that Russian corporations should use their market-enforced isolation to get their finances, balance sheets and corporate governance policies fully in order so that they are ready for when the storm clouds clear.

Simonson says: ‘Good reporting standards and high quality corporate governance continue to be key requirements. The mantra of under-promising and over-delivering is essential. With the political risk factors in play the market will punish management who disappoint and they won’t be given a second chance for some considerable time in the current environment.

‘For those companies still wanting to list, they are going to have to be patient, but if they can use their time constructively to refine their communications structures and capabilities, they can put themselves in the best position to be ready to float when the markets open up again.’

The trust issue, argues Gow, needs to involve Russian companies demonstrating that they can meet requirements for improved transparency and proof that international standards of corporate governance will be adhered to.

They are also likely to want to follow UK stock exchange practice by appointing independent directors on the board and by producing quarterly accounts under the IFRS reporting standard.

Philip Dewhurst, a former senior PR adviser to Russia’s biggest gas company Gazprom, recalls efforts to build trust for Gazprom in both Russia and in the UK and Europe in order to obtain the company’s effective licence to operate.

Dewhurst, who is now a partner at Instinctif, says: ‘We largely did this through media and opinion leader outreach. As a result, Gazprom has established a considerable energy trading presence in London and a thriving retail energy business based in Manchester.

‘Gazprom’s messages were around trust and business relationships, and we steered well clear of politics. However, that might not be possible in the current situation, where the issue is highly politicised and it is difficult to guess what the politicians on all sides will say or do next.’

For Hayes, any efforts to regain trust need to be coupled with a cold and hard focus on investment credentials. He says: ‘If I was advising on an IPO of a Russian company right now, the focus would have to be on the fundamentals and valuation versus those of international peers. Governance is always a key issue when stock picking in Russia, so the calibre of independent directors is a key area that investors look at.

‘Media that don’t know Russia well tend to lump all Russian business in the untrustworthy box, which is unfair with some very blue chip management teams running world class businesses, so careful targeting and engagement with commentators is more critical to success in Russia than in other more established markets.’

The good news for frustrated Russian companies awaiting listings is that stock markets are highly adaptable and investors will be back looking for bargains when they feel it is safe to return to an economy that represents the ‘R’ in the BRIC group of fast-growing emerging markets.

There is, after all, a stand-out example of a recent investment by a top British company in Russia. In 2003, oil major BP and a group of Russians behind the Alfa-Access-Renova (AAR) oil businesses formed a joint venture called TNK-BP. It became Russia’s third largest oil producer but was so beset by strife that its boss Bob Dudley was forced to flee from Russia in 2008 after threats to his safety.

Last year, BP’s stake in TNK-BP was sold to Russian oil group Rosneft for £17 billion, which represented a dramatic return on the British company’s initial investment of about £5 billion. BP also took about £13 billion in dividends during its ten-year ownership, although some payments were blocked. Dudley is now BP’s group chief executive.

‘Investors that took a longer-term view in previous times of uncertainty in the early 1990s and the years of this century did very, very well in Russia,’ comments Hayes. ‘TNK-BP is probably the most value-creating joint venture in history.