Despite the frantic scramble out of the Russian market over the summer months, you may be surprised to hear that the general standard of investor relations in Russia has improved in leaps and bounds over the past few years. Of course, when you start from a very low base, it’s not hard to show a substantial improvement.
Still, some companies have made real efforts to improve information flows in recent times. Indeed, these are probably going to be the companies that recover most quickly from the downturn. Or, at least, weather it most easily. Unfortunately, there remain a lot of Russian companies which just haven’t grasped the idea of disclosure and transparency quite yet. Indeed, it was fears resulting from the lack of openness that accentuated the speed of the market collapse. Investors knew they had been taking a massive information risk for months – but few wanted to run the risk off losing out on massive returns until it was too late.
Past life
Three years ago, information was hard to come by even on Russia’s top ten or 15 blue chips; on smaller companies it was frequently completely unavailable. Investor relations as a discipline simply did not exist, and even brokerage analysts were often relatively uninformed. As Elizabeth Weiss, head of sales at Russian broker Troika Dialog, points out, ‘In 1994 we had barely got as far as understanding how many shares in issue the companies had, let alone the worth of the underlying business.’
This has certainly changed for the better. Some companies, such as Vimpelcom and Tatneft, have set up dedicated investor relations departments. Others, such as Rostelekom, refer analysts to their international relations departments. Many smaller companies have designated personnel in the securities department or treasury to deal with investors. Weiss points out that while these companies have made a first step in assigning the function, they need to add depth and definition to the role.
Language issues are a frequent problem; many companies don’t have enough English-speaking staff. Elena Shelmeva of Dewe Rogerson mentions this as a major difficulty for continuing contact with investors. Even though there is a significant English-speaking presence in the larger companies, translations are often inadequate, sloppy, or highly abstract. Financial terms in particular may be badly translated; for instance, ‘earnings’ is sometimes used instead of ‘revenues’. ‘These companies need the help of a native English-speaking IR consultant,’ she says.
Some large companies, on the other hand, realized the importance of IR at an early stage – and dedicated resources accordingly. Valery Goldin has held responsibility for the function at Vimpelcom since the time of the IPO and listing on the New York Stock Exchange in November 1996. ‘There were immediately two thousand shareholders who bought our ADR and we started the investor relations program then,’ says Goldin. The company not only complies with SEC requirements for quarterly reporting, but provides a quarterly conference call for analysts and investors. ‘Our attitude is very much appreciated by shareholders,’ says Goldin. Now that the company has become extremely well known, he has investor and analyst meetings several times a week.
Vimpelcom has made a point of not only having an IR manager, but also training all the senior management on IR issues. ‘We did it at the beginning on the advice of underwriters and other people who worked with us,’ says Goldin. ‘And we continue to educate people because from time to time you must refresh this knowledge.’
Vimpelcom also uses an excellent and well maintained web site to keep in touch. However, shareholders still appear to favor more old-fashioned methods of communication. On the other hand, says Goldin, analysts love the web site, and monitor it continually for the tariff information, which they can then include in their earnings models.
A quick survey of those analysts and investors in the know reveals Vimpelcom as having one of the best investor relations programs. Lukoil and Rostelekom are also well regarded. These companies have recognized the benefit of foreign investors and worked hard to get better known. However, below the major blue chips, only a few companies stand out – and most of them are those with depositary receipt programs, such as Uralsviazinform and Tyumentelekom.
Vital attraction
Depositary receipt programs have been crucial in attracting foreign investors to the Russian market, much more so than in other eastern European countries, owing to a number of concerns including security of settlement. In fact, ADRs appear to be a must-do, not a nice-to-do for Russian companies dealing with foreign investors. That’s because they not only raise the profile of the company, but also ensure its compliance with IAS or US Gaap accounting standards, and satisfy portfolio managers as to the security of settlement and custody. The importance of these programs can easily be seen at the larger Russian companies: foreign investors through ADRs now account for around 25 percent of the capital of Lukoil, for instance, and 22 percent of Tatneft.
Many foreign investors have remained loyal so far to the large blue chips, despite the growing economic crisis. Chris Kearns of Bank of New York points out that in aggregate, foreign investors have not been selling out of Russia; as an investor class they still represent the same percentage of capital, and there has been no flowback.
A number of Russian companies are still interested in issuing depositary receipts, though under current market conditions these are likely to be secondary listings rather than capital raisings. Originally, this was a market only for the blue chips, but now an increasing number of second-tier companies are seeing depositary receipts as a way to attract foreign investors. Regional telecoms and utilities have been particularly sought after by foreign investors, and such companies as Tyumentelekom are well regarded.
In fact ADRs have probably driven the improvement in IR to quite a large extent. Elizabeth Weiss says ‘the companies with ADRs are generally good at investor relations.’ They produce accounts according to IAS and provide relevant disclosure, even though level 1 ADRs do not have onerous disclosure requirements. The information itself is improving, particularly on business trends and strategy, but as Kearns notes, ‘Being able to deliver it in a way that is acceptable to western investors has been, I think, a problem.’
Development days
Yury Yarushenko, senior specialist in the international financial reporting and investor relations teams at oil producer Tatneft, describes the delivery of information as a developing process. ‘Originally we didn’t have the information in the format which is adopted in the west,’ he explains. But gradually we have got to the position where the information is there and in the right format. Nowadays, it’s a running process, not a special effort.’
As far as accounting standards are concerned, the larger companies are now providing either IAS or US Gaap accounts. ‘Russian accounting, both cash and accrual basis, are disliked by investors and companies alike,’ he says. Yarushenko underlines this: ‘Russian financials are not suitable for analysis: they’re only intended for the tax authorities.’ And hence he discourages investors from relying on them. Meanwhile the discussion of operations in most annual reports is certainly improving, but it still typically fails to give real insight into the business. Kenneth Lopian of the Bank of New York agrees. He says disclosure of business issues is ‘better than it was, but not good enough yet’.
Views vary on the sophistication of foreign investors in Russia and the degree of protection they require. Lopian sees existing shareholders as an educated, sophisticated investor base: ‘People who know Russia, know Russia; they appreciate the challenges and the risks.’
Tatneft’s Yarushenko on the other hand points out that portfolio managers in the UK and US often cover huge areas, sometimes ‘using the same models for very different countries.’ And although Yaru-shenko has to comply with western ways of doing business, he also has to point out the differences in the Russian business environment. He still regards domestically-based analysts as the key opinion formers, but accepts that the interest of less highly informed investors requires work on the company’s part to give them basic information that Moscow-based fund managers might take for granted.
No lemmings here
Most experts see the situation as improving not because of legislation or regulation, but as the result of increased awareness on the part of market practitioners. Companies will have to start competing for funds much more overtly now that the stock market is not driving investors lemming-like into Russia.
At the same time, knowledge of investor relations disciplines is trickling down from the larger companies into the second tier. Goldin says that he has received a number of calls from other companies wanting his advice on investor relations programs; and one of the Russian business magazines now has a regular investor relations column.
It’s still early days for Russian investor relations, but the discipline is certainly moving ahead. Whether current market conditions will put a brake on that movement remains to be seen. Many investors and analysts out there hope that’s not the case.
