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. Last Updated: 07/27/2016

LUKoil ADRs Cross Border

Attracting large American and British investors, Russian oil giant LUKoil's stock packages made a strong debut abroad this week, which could bode well for the more than half-dozen Russian companies that plan to follow with similar packages in the coming weeks.

The issuance of the packages, known as American Depositary Receipts, marks the first time Russian stocks have been offered abroad to everyone from the institutional to the "mom and pop" investors. Trading began Tuesday, with pension funds and insurance companies showing the most interest but small-time investors sitting out, brokers said.

"We've seen strong initial interest coming from mutual funds, largely American," said Stuart Amor, analyst for CS First Boston in London. "European funds haven't had as much of a problem investing in Russia and many of them are already in."

Investing in Russian stocks can be procedurally cumbersome for foreigners. By issuing ADRs, companies aim to simplify investment by making shares available through foreign brokerages. LUKoil ADRs are packages of four shares issued as securities look-alikes by the Bank of New York, which holds that stock on deposit.

LUKoil officials have said they anticipate that 20 percent to 30 percent of their stocks will be available for conversion to ADRs. At the 30 percent level, that means about $1 billion worth of shares will be available to foreign investors.

Company officials have told investors they aim one day to have all their shares available for such trades, according to Stephen O'Sullivan, associate director of MC Securities.

The ADRs were trading Thursday at between $21 and $24 as brokers tested the market interest in the new over-the-counter offering. At the 4-to-1 share ratio the American prices were in line with LUKoil's Moscow trading, which closed Thursday at $5.35 a share, or 24,985 rubles. ADRs, however, carry a fee of a few cents a package for transaction fees.

Christopher Sturdy, a vice president at Bank of New York, said oil firms Yukos and Chernogorneft, utility United Energy Systems, Seversky Tube Works, GUM Department Store and banks Inkombank and Menatep are planning to follow in LUKoil's footsteps.

"It's good that LUKoil is doing well because it is a high-profile firm and that creates a lot of attention [for all Russian ADRs]," said Sturdy, whose bank will be handling ADR offerings for several Russian firms.LUKoil, Russia's largest vertically integrated oil firm, was the first Russian firm to achieve the Level One ADR, approved by the U.S. Securities and Exchange Commission on Dec. 29. The firm had been planning the issue since last summer.

The Level One designation is less restrictive than the $22 million of ADRs issued in September by Mosenergo. Those were restricted to private placement with qualified institutional buyers such as pension funds or insurance companies.

"ADRs are going to bring in a whole new breed of investors to Russian stocks," said Dan Lubash, analyst for Merrill Lynch in London.

However, some regulatory and settlement details remain unclear. LUKoil officials said Thursday that announcements on those issues will be made before final transactions are settled.

The enthusiasm surrounding the issuance of ADRs by Russian firms has led some analysts to predict most trading of Russian stocks will be done outside of the country. But that is not likely, Citibank-Russia president Miljenko Horvat said.

"ADRs are sometimes viewed as a substitute for a functioning local securities market," he said. "But you have to issue ADRs on the back of that [local market]."

It is proving to be a busy week for LUKoil securities. The firm's board of directors will meet Friday to consolidate 90 percent of the shares in its subsidiaries, according to Alexander Vasilenko, a public affairs official with LUKoil. The exact share swap offered for each subsidiary was not released.