07 April 2007

FT: NYSE is left in the cold as Russians flock to London

The sour grapes in New York over London's rise as financial centre have taken on a vodka flavour. In taking a pot shot at the London Stock Exchange this week, John Thain used the ammunition of concerns over Russian corporate governance. The New York Stock Exchange chief issued dark warnings about the quality of Russian companies that have become part of the London stock market.

The not-so-subtle subtext was that Russian companies represent all that is wrong about London's rise. It is not that New York has lost competitiveness, the city's promoters argue. Oh no, they say. It is just that London has loosened its standards, allowing any flaky company from Russia and the Commonwealth of Independent States to raise funds.

'We are very concerned about corporate governance, transparency of company financials and protection of minority shareholders and, with a number of Russian companies, these things are called into question,' Mr Thain said this week.

For the Russian companies on the main London market, those concerns might exist but have largely not yet been reflected in share prices in an obvious manner. Aim might still be a crapshoot with some series of dire performances by fledgling miners. But on the main market, investors, it seems, have taken a different view to Mr Thain. It is difficult to produce exact figures for their collective performance given differing lengths of time that the Russian companies have been listed. But on the whole, there are few disasters and mostly positive gains in absolute terms.

To give a sense of the performances, of the rush of Russian and CIS companies to list in London last year, Bank of Georgia is up 68% since listing on November 29, TMK is up 66.7% since November 3, Halyk Bank is up 45.9% since December 20, Kazmunigas is up 45.4% since October 5, Comstar-United Telesystems is up 19% since February 16, Sistema-Hals is up 16.8% since November 8, Rosneft is up 10.9% since July 19 and Severstal is up 8.8% since November 14.

The fallers, largely concentrated in the metals sector, were Shalkiya Zinc (down 21% since December 14), Polyus Gold (down 1.4% since December 18), Cherkizovo Group (down 11.5% since May 15) and Chelyabinsk Zinc (down 20% since November 10).

But as the pipeline of Russian and CIS offerings continues to build, the question is whether investors are underplaying corporate governance concerns, particularly those related to political risk. The Russians themselves seem to recognise the risks. Of the key motivations for many of the Russian companies listing in London is political insurance ahead of next year's presidential elections - a foreign investor base might help deter some of the worst extremes of government interference. Foreign investors seem to have been more sanguine.

The danger is that might change just as supply of Russian paper approaches the saturation point. Andrew Howell, emerging markets strategist at Citigroup, says IPOs in the pipeline from Russian companies are expected to raise some $28bn this year, up from $20bn in 2006. Mr Howell says investors had assumed a benign outcome to the presidential elections with Vladmir Putin installing a successor and remaining in the background. But that prospect was being questioned.

Mr Howell adds there have been signs of a shift in the approach of Russian companies from a shareholder-focused approach to more akin to state capitalism in recent years. 'They have realised the most important thing for them is to keep the government happy,' he said. But political risk is hardly new in emerging markets and history has shown that such risk tends to be overstated in a broader shift towards economic orthodoxy.

It is hard to see to see much difference, too, between the Russian and Chinese markets. Mr Thain went out of his way this week to make the dubious claim that that the corporate governance of Chinese companies was much better than Russian peers. That might say something about the NYSE's commercial ambitions to attract more Chinese listings and its fatalism about the prospects of securing Russian IPOs. For Russian companies, London is so much more attractive than New York given its principles-based approach to regulation, more convenient time zone, cheaper IPO fees and deep pool of internationally-focused investors. New York should drop the sour grapes and focus on being more competitive.

© Graham Bishop