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. Last Updated: 07/27/2016

Stock Boom No Windfall for Companies

Will the 1997 boom in Russian equities translate into an investment windfall for enterprises themselves? Most market watchers are saying no, at least in the short term.


"In theory the stock boom represents an opportunity to raise money through new equity, to recapitalize," said Jack Orchard, head of corporate finance at United Financial Group. "That said, even if the Russian market was up 25 percent in a week, it's better to take a look at long-term fundamentals. Markets go down as fast as they go up."


A new stock placement "takes months to structure, and once they come to market it could be a bad time," Orchard said.


Share prices in Moscow slipped for the second day in a row Tuesday, with The Moscow Times Index dropping 2.34 percent to 171.15 in dollar prices. But stocks overall are up about 20 percent since the New Year.


Still, "the infrastructure isn't sophisticated enough yet" for Russian companies to quickly convert big gains in stock price into added value, said Gregory Van Beek, senior equity analyst at Rinaco-Plus.


For the moment, debt financing is still much more popular among Russian companies when plotting long-term investment and restructuring strategies. Moscow City Telephone, LUKoil and Mosenergo are among as many as a dozen blue-chips pursuing Eurobond offerings following the rating last year of Russia's sovereign debt.


"Corporate debt is an instrument which allows you to borrow from public markets with no dilution, no sale of stock in advance of a time when it might be more properly valued and no risk in the equity markets," Orchard said.


Companies themselves seem to be taking the recent surge in stride.


Red October, the Russian confectioner, might "relook at some projects, of course," if the market rally continues and its stock price were to double or triple, said its chief economist Yury Yegorov. But "concretely there are no plans to change" the company's investment strategy, he said.


"Most shareholders understand that some enterprises will have more opportunity with Eurobonds," he said, although he added that the company's success always depends to some degree on the success of its stock in the marketplace.


Over at Unified Energy Systems, management is "still formulating strategy" but for now won't change any of this year's investment or restructuring plans based on last week's run-up in the stock market.


"We may look at issuing either debt or stock capital," said Pavel Shabanov, head of financial operations with the utility's asset management department. But he acknowledged that the stock market can have an impact in the long term.


"It's obvious that the higher the stock goes the more we'd be able to consider it," he said.


The results of an auction of 8.5 percent of UES stock are due to be announced in the coming days. Bids had to be submitted in late December.


While Russian companies continue to monitor movements in the market, some said strategy and shareholders' wishes come before market swings in determining investment plans.


"Growth of the stock is not strategy," said Igor Kocheshkov, securities department head at Moscow City Telephone. "I understand it the other way," he said, explaining that a solid corporate growth plan would result in better dividends and value for shareholders, driving up share prices.


While the amount of equity required to attract the same amount of capital is becoming smaller with recent price gains, most investment banking advisers are not steering their corporate clients to pursue a financial strategy funded by stock sales.


Hedge funds and other portfolio managers can pull their money out as fast as they put it in, said Berend Yntema, a director at Sector Capital. That discourages companies from planning long-term investments based on what could be a temporary rise in the stock price.


Besides, Yntema said, "I like to remind Russian companies they can only give their equity up once." the motherland be, and there won't be any other worries."


But the arrival of the market did produce other worries for both worker and manager -- worries about oneself, one's family and one's factory as a source of well-being rather than of pride in the socialist economy. Of course, a large part of the population was not prepared for such worries, either by their education or upbringing.


At the start of the second half of the year, all statistical indicators showed a sharp decline in the economy: Productivity fell by 5 to 6 percent; investment dropped by 15 to 20 percent, and wages went unpaid on a large scale. The country had just survived the consequences of the last fight -- the presidential election -- and all resources were used to win it. Much could be condemned if one forgets that the country was facing the real threat of a return to the "bright communist yesterday."


The president's chief of staff, Anatoly Chubais, recently put President Boris Yeltsin after Peter the Great in order of historical importance. Many ascribed this to boldfaced toadying to the victor. In the Soviet tradition, it is more customary to be overthrown from a pedestal than put on one.


But however strange it may sound to the Russian ear, Chubais' remark was in many ways right. The president's victory was not just one over the Communist Party of Gennady Zyuganov. It was a grand victory in that the enemy that was conquered was in each one of us. Such a victory is far more complex.


Today, Russia is striving to move toward a normal life. There is and can be no straight path to it. But it is moving, and there are no analogues to such a headlong movement.





Boris Sergeyev is an economist. He contributed this comment to The Moscow Times.