Large Russian Companies Are Turning Inward

(Bloomberg Opinion) -- The planned delisting of Megafon PJSC, Russia’s second-biggest mobile operator, from the London Stock Exchange is no ordinary event. The company is one of the most liquid Russian stocks trading overseas, and its exit is further evidence that the country’s businesses are turning inward as exposure to the West becomes increasingly problematic.

In 2011, almost 70 Russian companies’ depositary receipts traded in London. Offering those securities wasn’t just a way to raise money from foreign investors; it was also considered a badge of honor, a sign that a company had arrived. Now, there are fewer than 50 Russian listings. Soon after Russia annexed Crimea in 2014 and was hit with the first, relatively light Western sanctions, First Deputy Prime Minister Igor Shuvalov urged the country’s companies to delist as “a question of economic security.” A number of firms followed that advice after discovering how quickly their stock prices could tank on Russia-related political news. For some companies, such as the homebuilder PIK, the meat producer Cherkizovo or the drugmaker Pharmstandard, the London listing didn’t provide enough liquidity, and forced them to observe the constraints of a Western public company and adhere to stringent transparency requirements that carried significant costs.

Only a tiny number of Russian firms have come to the LSE since 2014. The miner Polyus delisted in 2015 and returned in 2017 to raise $879 million. The same year, billionaire Oleg Deripaska’s En+ Group, the major shareholder of Rusal, the biggest aluminum producer outside of China, raised $1.5 billion in the largest Russian initial public offering since 2012.

Deripaska, though, has since discovered what Shuvalov meant about economic security. In April 2018, the U.S. sanctioned him and his companies, including En+; the company’s stock price dropped 30 percent in a day. On April 9, the LSE announced plans to suspend En+’s listing. The suspension never took effect and was canceled in June. Still, there have been no trades of the stock since May. 

Megafon, which is majority-owned by the billionaire Alisher Usmanov, is among 15 companies included in the Russian Depositary Index of the most liquid London-traded Russian stocks, a blue chip among blue chips. It went public in 2012, when one of its shareholders, Sweden’s Telia, exited through an IPO. The official explanation for quitting the LSE is that the company is going private to pursue a different strategy, turning itself from a cellular operator to a tech investor. Yet that alone wouldn’t explain why it needs to leave London. Megafon’s partnership with the state-owned Rostech corporation, which invests in industrial and technology businesses, offers a better answer.

In May, Megafon formed a joint venture with Gazprombank and Rostech. Megafon gave the new entity a controlling stake of Mail.ru Group, a large tech company that is also included in the Russian Depositary Index. The new company intends to become a major bidder for government digitalization contracts; that means dealing with defense companies and government-controlled “national champions,” which face a heightened risk of sanctions. Gazprombank is already under mild sanctions that restrict its ability to borrow on Western markets. Usmanov, like Deripaska, is on a broad list of “oligarchs” the U.S. administration could target for sanctions; what happened to En+ could happen to Megafon any day. 

The company’s share price in London is down almost 55 percent from the IPO level, even considering the bump it got after Megafon announced it would buy its freefloat back at a premium to the day’s share price. There’s no benefit to Usmanov in dealing with minority shareholders, and he would want to avoid the hassles of running a public company whose price fluctuates along with political risk. And raising Western capital at the current price level is less attractive than going for Russian government contracts.

London is also losing its luster for Russian companies that are not going private: Among the 15 firms in the Russian Depositary Index, five are either under some form of sanctions or have executives who are, and any sudden tweak to the restrictions may mean En+-like nastiness. If London was once the place to gain access to foreign money. Since the Crimea annexation, the cash has gradually shifted to the Moscow Exchange. Foreign investors account for 53 percent of the exchange’s equity trading volume, and, according to the the market’s executive board chairman Alexander Afanasiev, holdings of Russian equities by foreigners — mostly Americans — now approach the pre-2014 level of more than $80 billion after dropping to $50 billion in 2015.

The foreign investors trading on the Moscow Exchange are fully aware of the risks and are less prone to panic than those who trade Russian equities in London. But not many Russian companies try to go after their cash. The 2017 annual report of NAUFOR, the Russian securities traders’ association, says Russian public share placements have been “sporadic.” Apart from the En+ IPO, it only mentions two sizable offerings — the toy retailer Detsky Mir and shoemaker Obuv Rossii — worth a combined $383 million. 

The existing sanctions and the threat of worse ones have made Russian business stick close to home, and not just in the sense of attracting investors on the domestic exchange, which is normal for most countries. Companies that otherwise would have looked to Western markets are seeking government money and partnerships with the state. That makes transparency and good corporate governance — which aren’t Russian companies’ strong points — largely unnecessary, destroying the last achievements of the 1990s and early 2000s, when Western consultants reshaped Russian corporations and markets to Western standards. 

I’m not sure this can be prevented while any kind of Russian money, public or private, is considered toxic. What’s certain is that even if Russia gets rid of its current rulers, restoring the business community’s interest in playing by Western rules will be a much slower process than the reverse one, which is taking place now.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is a Bloomberg Opinion columnist covering European politics and business. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

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