IPOs in Russia: Where and How Are They Offered?

Vladislav Kvetinsky Department of Corporate Development ICLC
Since 2003, the subject of IPOs has become unusually popular among business media, which have sometimes formed euphoric notions among Russian business managers and owners about this method of capital procurement, as if it is a magic wand capable making a business and its owners rich in a moment.

Over the past three or four years, a great deal has been clarified and put into place.

The most difficult parts of an IPO are the necessity to disclose sometimes very sensitive information about yourself and your business, to change radically your approach to business management or to modify your relations with other stockholders, and above all, to answer the question – to what extent do I and my business truly need it?

The analysis of the results of a three-year IPO rally among Russian businesses provides us with an interesting opportunity to trace the evolution of the opinions of Russian businessmen.

At first glance, the consistent trend of Russian businesses toward arranging an IPO in Russia is noteworthy. While in 2005 the proportion of cost on the London Stock Exchange for all Russian placements was 94 percent, in 2007 its proportion was reduced to 56 percent in favor of Russian trading floors.

Such behavior has been influenced by several factors, first and foremost by the professional and timely actions of the Federal Service for Financial Markets, which responded promptly to the Russian business tendency to attract financial resources from abroad. Changes made to IPO procedures in Russia have created appreciable competitive advantages for the Russian market as compared to its better-known Western rivals. As a result of these changes, it has become possible to actually begin re-sales of shares immediately after their placement. Issuers are provided with opportunities to organize primary placement on both domestic and foreign markets simultaneously.

The most significant result of the IPO regulation reforms in Russia is the shortened amount of time needed for preparation and implementation as compared with foreign markets: 120 to 160 days in Russia, 225 to 335 days in Britain, 345 to 510 days in the United States, according to the Stock Market Development Center.

The behavior of Russian issuers has also been influenced by the instability of the international monetary system and a certain cooling in relations with the countries with leading trading floors.

Over the last few years, the flow of funds received from the initial sale of shares has changed. For instance, over nine months in 2007, 86 percent of funds received from IPOs were injected directly into the issuing companies, and only 14 percent of sales were received by current stockholders themselves. Over the equivalent period in 2006, only 28 percent of the cost of all the distribution was received by the companies themselves. These facts support the stockholders' desire to raise funds to help develop their companies rather than sell some portion of their businesses.

What directions will be taken for the development of the IPO market in Russia in the coming two or three years; which factors will issuers take into greater consideration when making decisions?

Let us assume that businessmen will take into consideration to a greater extent three factors: cost value when choosing a method of attracting financial resources to their companies, the specific features of the industry and the strategy of their own expansion. Many analysts share the opinion that an IPO will not be successful if the investor is unsure that the raised funds will be directed to efficient projects and promote company growth. In addition, the successful development of a business in some industries may be more efficient when a strategic investor is engaged. The investor can then render assistance to the issuer by obtaining access not only to financial resources but also to advanced technologies and business management methods.

In forecasting the future of IPOs for Russian companies, I feel a conservative optimism for the Russian market. The negative predictions for the development of leading economic nations along with the history of variation in the quotes for Russian shares on external markets only helps to support my optimism toward the Russian market. Practice shows that the rate of capitalization growth for Russian companies that issued IPOs on the domestic market turned out to be higher than the average rate for the Russian stock market development. And on the contrary, the rate of increasing costs for the Russian companies releasing an IPO on foreign markets were, as a rule, worse than the dynamics of the Russian stock market.