Business Analysis: Russian companies hungry for cash are flocking to list in London

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The Independent Online

Novatek became the sixth Russian company to float in London yesterday, and as the independent gas producer from western Siberia celebrated its $878m (£500m) fund raising, bankers said the issue could have been filled many times over. Indeed, it is becoming increasingly clear that the Square Mile is the destination of choice for companies from the former Soviet country looking for cash.

Russian companies have raised $2.5bn in the London since January while New York has had no such luck. The last time a Russian company raised money there was October, and that was a rather modest affair compared with the sums made available in London. So why is the Square Mile so popular among Russian businessmen and why their rush to float on an international bourse?

Steven O'Sullivan, an analyst at the Moscow brokerage UFG, sees a London float as a way for oligarchs to diversify their wealth. He notes that most of the country's businessmen have the bulk of their wealth tied up in Russia, a country with more then its fair share of political risk. "Russia is expecting presidential elections in 2008 which is likely to be a time of some political uncertainty. Now is a great time for businessmen, such as Novatek's boss Leonid Mikhelson, to cash in some of their chips," Mr O'Sullivan said.

Meanwhile, the Yukos affair, in which Mikhail Khordokovsky - once Russia's richest man - was stripped of his prize asset and jailed, cannot be far from the minds of most Russian entrepreneurs. Who is to say such an episode won't be repeated?

With President Vladimir Putin at its helm, the Russian state has slowly reasserted its influence on society and tightened its grip on the economy. Yukos' most valuable asset, Yuganskneftegas, is under de facto government control, while Roman Abramovich is tipped to sell his Sibneft oil giant to the state-owned Gazprom. Independent media coverage is also becoming increasingly scarce in Moscow, and even more so outside the capital.

The Kremlin has even restarted Soviet-era youth camps where teenagers spend two weeks in the summer getting pro-Putin political instruction aimed at raising awareness of the West's "political manipulations". The question of where this process will end and in what state it will leave Russia is far from clear, but one thing is for sure - the fate of Western fund managers and local oligarchs is likely to be low down Mr Putin's list of priorities.

As for the question of why Russians choose London and not New York or Frankfurt, the London Stock Exchange argues that its market has greater liquidity compared with the alternatives when it comes to foreign companies seeking a listing. It points out that its international order book, where the likes of Novatek will see its stock traded solely among professional investors, sees average volumes of about £5bn each month. Meanwhile, a London listing also provides Russian companies with prestige and a higher profile than that offered by a quote in Moscow.

But analysts are keen to stress that the corporate governance and disclosure regime in London is more genteel than in New York.

Eric Kraus, the chief strategist at the Moscow brokerage Sovlink, said the six London floats might have struggled across the Atlantic, given the stricter regulatory environment. He said UK listing rules have become too lax as the LSE chases a quick buck from foreign floats. "The LSE is devaluing the London listing by relaxing standards for emerging country floats and not doing enough due diligence on the companies in question."

He is most concerned about the level of disclosure with regard to the ownership of some Russian companies, adding that those that have come to London are generally incorporated in obscure offshore domiciles and that it is often difficult to know who are the beneficial owners of these companies. "When you have a company sometimes owned by a cascade of offshore registered vehicles it is very difficult to known who owns it and who investors can sue if something goes wrong. I fear it is an accident waiting to happen," he said.

Rambler Media is an example of a company with an registration and ownership structure heavily reliant on offshore entities. The Russian media and internet group, which raised £27m in an AIM float last month, is registered in Jersey and most of its shares are owned by offshore trusts registered in the British Virgin Islands and Bermuda. A spokesman for Rambler was unable to say exactly who is behind these trusts.

In the case of Novatek yesterday, the major beneficiary of the £600m fund raising is SWGI Fund, a Cyprus-registered company linked to Leonid Mikhelson, the gas group's 49-year-old chief executive. After the float, SWGI retained a 20 per cent stake.

The phenomenon of Russian companies listing in London is a hugely profitable business for those investment banks, lawyers and public relations firms charged with the task of facilitating the process. City firms have made about £60m. Morgan Stanley and Credit Suisse First Boston have reportedly taken the lion's share, having played major roles in nearly every Russian float in London this year. Both stuck it out in Russian after the country's 1998 financial crisis and are now reaping impressive dividends. Whether those investors who have piled into London's Russia floats also profit, only time will tell.

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