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. Last Updated: 07/27/2016

UBS’s Russia Chief Urges Clarity in Sell-Offs

For MTMeehan

A plan to sell stakes in thousands of state-owned companies has piqued foreign investors’ interest, but they also want to see corporate balance sheets restructured and clearer indications of where their capital is welcome, said Steven Meehan, CEO of UBS in Russia.

The Swiss banking giant is also expecting an economic revival next year to pick up its investment operations in Russia, including new share listings and debt offerings, he said.

“The recent call for privatizations was very well received by market participants because that will increase the trading volume of the stocks that can be publicly held,” Meehan said in an interview with The Moscow Times. “I believe it will also be helpful to reduce the overall volatility in the Russian market.”

First Deputy Prime Minister Igor Shuvalov said during the Group of 20 summit in Pittsburgh last month that state stakes in 5,500 companies could be sold in the next three years, including more shares in state oil giant Rosneft. A week later, Prime Minister Vladimir Putin and Finance Minister Alexei Kudrin also got behind the plan, saying the state needed to start winding down its control of the economy as it returns to growth.

Some market watchers questioned the government’s intentions, however, saying the privatizations were aimed at plugging budget deficits rather than liberalizing the economy. The government expects to raise up to 7 billion rubles ($239 million) from stakes in more than 450 companies next year.

But the status of Russian companies’ balance sheets remains a big concern for investors, Meehan said.

“I think the restructuring of assets and liabilities is a key concern for foreign investment into Russia, but it’s often less discussed,” he said. “International investors … can be uncomfortable investing with short-term liabilities that are disproportionate to long-term assets. The asset and liability mismatching exists to a lesser extent in other markets.”

Russian companies have reduced their foreign debt — which exceeded $500 billion around the start of the year — to $303.5 billion as of Oct. 1, according to Central Bank data. Recapitalized state banks helped with refinancing, but the overall debt burden remains high.

Investors will also want more clarity on navigating the country’s bureaucracy and on which stakes will be sold and when, said Meehan, who took over as head of UBS in Russia and the CIS in March 2008.

“The government’s announcement is obviously not a signal that they’re ready to cede control of oil companies to foreign investors,” he said. “But it would clearly help if Russia could fully define to what extent foreign investment and foreign control is welcome.”

UBS is quite positive on Russia’s macroeconomic dynamics, though, which Meehan directly linked to the international recovery trend.

“A large part of the performance is related to a better-performing global economy, and the rebound of the oil price is also a big contributor,” he said. “The Russian stock market is one of the best performing stock markets in the world this year.”

Investors are interested not only in companies that are now public, but also in those that may have secondary offerings or private companies that could go public next year, he said. As a result, UBS could see a meaningful increase in its investment banking operations here, including new IPOs, eurobonds and internationally denominated debt.

“In the first half of 2010, we expect to see plenty of debt and equity issuance activity, and if the right companies move forward initially, we think IPOs will be very well received for 2010,” he said.

The 30-stock, ruble-denominated MICEX Index has gained about 120 percent this year, while the 50-stock, dollar-denominated RTS Index is up nearly 130 percent. But with crude prices nearing $80 per barrel, UBS and other banks still expect Russian stocks to perform well.

The MICEX remains 30 percent below its 2008 peak, while the RTS is still 40 percent off last year’s high.

“Our research analysts like the oil producers, since we think they are still relatively inexpensive at current price earnings multiples, and there could be some tax adjustments that will encourage the development of new fields and therefore provide further upside potential,” he said. “Domestically, we like large state-run banks and retailers in terms of other sectors our analysts are over-weighting.”

The Russian economy has stabilized, but the recovery in the real economy may take some time to be fully visible to the public, Meehan said, praising the measures taken by the government to stimulate the banking sector.

“The economy has sustained itself, but this doesn’t mean it will continue to generate high growth and profitability,” he said. “The government performed very well last year, stabilizing the economy and addressing the banking sector as the main priority, because the banking sector is the heart of any economy.”

Meehan criticized recent talk that the BRIC concept might have lost its relevance, as the more diversified economies of Brazil, India and China suffered less during the global recession.

“In my view, you can’t have BIC without the “R,” he said. “If China and India are going to grow, and the global economy will grow, Russia will be crucial to this global growth. It’s the world’s largest exporter of natural resources across many commodities.”

Russia’s position as a “big fuel tank” for the other BRIC countries is only strengthening, particularly as Moscow and Beijing step up energy and other natural-resources ties. Putin signed $3.5 billion worth of contracts on a to China visit last week, as well as a tentative deal to start major gas exports there.

But more work remains to be done on another government priority: boosting financing to the real sector.

“The credit market continues below normal activity levels, and small- to medium-sized loans are generally inaccessible,” he said. “The good news is that interest rates have come down and inflation is down dramatically, which should allow for further rates cuts.”

The Central Bank has signaled that it could continue to cut its key refinancing rate as inflation falls. Alexei Ulyukayev, a Central Bank first deputy chairman, predicted Tuesday that the year-end figure may be below 10.3 percent, the lowest projection from a state official this year.

“Banks have to get into the business of providing loans, that’s crucial for the economy,” he said. “Banks want to give loans, but they don’t want to take risk. However, a loan without risk is not a loan.”