Good time to invest overseas?

The U.S. Dollar is nearing a seven year low vs. the Ruble and it is likely it will fall even further. We could list why the strength of the Ruble and why the weakness of the U.S. Dollar, but let us briefly focus on how to play this strategy. When investing oversees, the two most obvious risks are the security you buy and the currency risk. There are now a multitude of Russian fixed income instruments to choose from, denominated in Rubles. These range from 6 months to around three years. We still think there is room for currency appreciation over the next year or two to enhance your return. Contact us for a list of customized candidates to add to your portfolio.

Gasprombank sold Eurobonds in the amount of 10 bln RUR today.

The demand for bonds exceeded the offer for more than 75%. 7.5 Bln RUR was bought by US and European investors. They are ready not just to have investments in Russian currency but get dividends in rubles.

Will Mr. Ivanov be the next President of Russia?

Recent changes in Russian gov last week intrigued Russian elite even more. First deputy Prime minister Dmitry Medvedev seemed to be a favorite in President election next year but Sergey Ivanov has been promoted to the exactly same level. Medvedev and Ivanov will rotate as a head of Russian gov when current Prime Minister is absent. Both candidates, Medvedev and Ivanov, are market and western oriented. We will see what happens soon but in both cases there is no much indication that there will be any major political course corrections in Russia next 8-9 years.

Need light?

There will be a major IPO event in Energy Sector this year. 15 biggest electric-generating companies would offer IPOs in a total amount more than $15 bln. Traditionally, IPO stock price is higher and reduces within few month after an introduction but, in this case, I doubt there will be any price decline any time soon. Russia’s fast economical development created shortage of electricity and huge demand would push prices up again. Bond IPOs will follow.

Russian Stock IPOs in 2006

Russian stock market was booming in 2006 despite a non-free market approach of Russian SEC regarding a mandatory requirement to sell at least 30% of IPO stock domestically (in Ru exchange) and up to 70% on foreign exchanges (NYSE, LSE etc).

2004; 2005; 2006
6------ 13---- 21----- N of IPOs
0.86--- 5.2-- 18.6---- Volume in $ Bln

The leader of Ru IPOs was RosNeft with more than $10 bln. The impressive results bring a concern though why NY based exchanges keep losing to London ones?

What some "Cold War" minds say...

Just overheard the Glenn Beck’s comment on a radio, that a “ New evil”, Russian Pr. Putin arises again. With the respect to the “comedian-like” shows of Mr. Beck, we do not have a good international news coverage here. For instance, we know very little even about our neighbors, Mexico or Canada, where new governments are acting now.

True, Russia is not an entirely “American – style democracy” yet. State Governors are being appointed rather than elected. There is no full-scale political competition, some say just imitation (where it’s not?...). But the President seems to be leaving and federal election would take place in 2008 and right after the parliament’s.

Economically, last 5 years Russian GDP grows 6-8% annually. There is a stable middle class. Russian credit rating was upgraded to AAA-, as it’s in Israel or S. Africa.
Russia federal government stands for free market values and the key ministers are West oriented/educated. Russia is trying to use its advantages having big territory and large deposits of natural resources. Russia is the N1 gas producer and could be the N1 oil producer as well. Practical but free market approach of Russian gov made Ukraine and Belarus mad because Ukraine and Belarus for years used to take advantage of cheap Ru resources and broker them out further to Western Europe. Ru stock market grew 67% last year and a number of bond IPOs increased 10 times.
President Putin effectively resolved the most painful Ru problem – Chechnya. Unlike the Afghanistan or even Iraq, Chechnya has a stable local government and there is no “guerilla war” anymore. I truly believe that Pentagon should take a close look at this and maybe, get help or at least a good,”by all means”, advice.
The next Ru President, most likely Mr. Medvedev, in my opinion, would be even better. There are no macro economical reasons not to invest in Russia.

New development in NizhnekamskheftHim (see previous blog)

Surprisingly, on Feb 2, 2007, the Board of Directors of NKNH and the major shareholder TAIF (75.6% of voting stock) changed its decision and confirmed the additional emission of shares in the amount of more than 1 bln dollars.
NKNH declared a new program of company development that would almost triple the revenue. That’s why NKNH needs more resources for re-modernization of equipment and purchase of new lines. Some analysts are very skeptical, although, say that would like to see more details first. There are no details yet. But what is clear that minority shareholders would lose more than a half of their value unless they’d buy more shares.

To be continued..

Turbulence on Russian Stock market. Always ask an expert.

There is a lot of rumors about big petrochemical company called NizhnekamskNefeteHim (http://www.nknk.ru/about_company_en.asp) go bankrupt in a near future. Here are the facts:
1. Revenue for 2006 is almost $1.3 bln
2. More than 20,000 employees
3. History of bond issues:
Issuer Volume, mln USD Type Status Maturity
NKNH 1 12 Ru bond paid off 11.06.2002
NKNH 2 50 Ru bond paid off 05.24.2005
NKNH, 2015 LPN 200 Euro Bond Traded 12.22.2015
NKNH 3 70 Ru bond Traded 09.01.2007
NKNH 4 50 Ru bond Traded 03.26.2012
4. More than 75% of voting stock is Owned by TAIF (a.k.a Local Governor)
5. Canada based Mackenzie Financial Corporation represents 3.9% of votes.

Taif, which is controlled by an older son of the local governor, consolidated more than 75% stock in early 2005. The CEO of NKNH, Mr. Busigin, is a long-term director from the Soviet time. There were a number of indications of conflict of interests between owner and management’s teams. The last “straw” was Taif’s desire to “dilute” the minority shareholders. In 2006 Board of Directors of NKNH approved the issue of more voting stock in the amount more 1 bln USD. The fact is current capitalization of company is less than 900 mln USD. There were no any benefits from this action except that minority shareholder would have lost half of the asset in NKNH. This would have given the current owner an absolute control and a possibility to sell NKNH in a most “effective way”. Minority shareholder, as usual, would have been “screwed”.

The story had a lot of publicity and thorough investigation by Feds is on its way. Additional emission of stock is canceled but CEO is most likely will be gone. He is already offered a position as a Deputy Minister of Energy in Moscow.

What about bonds? They are going to be paid at time despite these corporate games.

For more info please contact Robert Gayanov at rgayanov@verizon.net

Medium Fits Just Fine

Russia is going to have a new stock exchange devoted to corporations with market capitalizations below 115 million USD. Yes this is good, but not just for the obvious reasons. It will give growing companies more options of raising capital besides traditional bank loans, they now can offer IPOs, and an increasing number will enter the bond market as well. Obviously there will be great opportunities, we recommend you proceed with caution, and judge each sector and company like you would in the domestic U.S. market. Consumer Goods and Services should see explosive growth, as well as Business Services sector. We view this as the next step in Russia’s development from an economy and financial market system devoted to mega corporations resembling monopolies to a more balanced picture able to sustain growth over the long-term. We plan on having a section of the newsletter or website devoted just to this segment.