The annual report of Saint Petersburg-based company Lenenergo is probably one of the most unusual annual reports ever produced in Russia. It’s done in post-revolutionary Bolshevik constructivism, all brown and maroon with black and white photos of management posing in early-last-century business garb.
Lenenergo grabs your attention with the Soviet propaganda-style images that other companies try hard to escape from, then presents the financial results of the $250 mn Russian utility according to international accounting standards with a level of disclosure that could be expected from any western company listed on a western stock exchange. Listed in Moscow with GDRs traded on NewEx in Vienna, Lenenergo also publishes its results quarterly and does monthly updates for analysts. Welcome to the new Russia.
‘The hardest part was to persuade management to agree to have their pictures taken like that,’ laughs James Gerson, Lenenergo’s British-born head of IR who has a degree in Russian history from London University and five years’ experience working in the Russian market. ‘I am very lucky because I work for a company whose management has excellent understanding of investor relations.’
Indeed, the last two years have seen a drive for transparency, and an ensuing appreciation of the value of good investor relations, spreading to an ever increasing number of the Russian companies.
Russia has changed
In one of the most dismal years for world markets in recent history, the Russian RTS index of 63 top stocks shot up almost 35 percent between January and November. Compare this to the FTSE 100 (down 14 percent) or the Dow (down 17 percent), and you know why Russian fund managers are the only cheerful bunch around this year.
‘Russia’s fundamentals have improved dramatically in the last couple of years. It’s the only country with GDP growth above average. You have low inflation, a current account surplus and companies with tons of cash,’ says Ghadir Abu Leil-Cooper, manager of the New Russia Fund at Baring Asset Management. Add to that tangible improvement in corporate governance, and valuations still well below those of western companies (in case of oil businesses, at least 50 percent, says Abu Leil-Cooper) and you see why Russia has become an ‘in’ destination for many western investors.
And a safer place, too. Since Vladimir Putin succeeded Boris Yeltsin, Russia has also been shedding its image of a lawless and largely ungovernable society. Granted, things don’t change overnight. In October alone Russia witnessed a contract murder of the governor of a rich northern region, an explosion in front of a Moscow’s McDonald’s, and the tragic theater hostage incident. And there is still a long way to go before Russian business can call itself civilized, says Gerson. But things are moving in the right direction.
‘There is a real drive against corruption,’ Gerson continues. ‘People are beginning to understand the government is committed to creating a civil society, where laws work and where people get penalized for abuses. Unattractive things still happen, but whereas in Saint Petersburg a few years ago there was a businessman shot every other day, it is now becoming unusual. I don’t think there is a danger of returning to the bandit-dominated economy of the Yeltsin times.’
On the road to Damascus
Marina Boughton is a partner with Shared Value, a London-based communications and marketing consultancy. A former journalist, she started her IR career five years ago. ‘At that point I don’t think Russian companies paid any attention to IR,’ she muses. ‘In fact, before 1998 they didn’t need to have any IR, because people were so eager to give them money.’
All of this changed after the Russian crisis of 1998, when western investors fled Russia en masse, and Russian companies had to start facing the music: change and prove you are playing a fair game, or forget about western money.
Yukos, a previously shady oil conglomerate, was the first Russian company to sense which way the wind was blowing. Since the crisis Yukos boss Mikhail Khodorkovsky has used every legal and allegedly not-so-legal means to consolidate his control over Russia’s second-largest oil producer, from defaulting on the company’s nearly quarter-billion dollar debt to hiding assets in shell companies and offshore accounts and squeezing out a minority investor. But in the last two years, Khodorkovsky has rapidly converted Yukos into a paragon of transparency in Russia. The firm implemented a restructuring program, introduced quarterly reports and substantially increased dividends.
Khodorkovsky’s newfound passion for transparency was richly rewarded. Over two years, Yukos’s market capitalization has increased ten times to $22 bn. Khodorkovsky, who owns 36.3 percent of the company, saw his personal wealth shoot up to about $7 bn. As a result, says Andrew Wiles, director at Charlemagne Capital, an independent investment management boutique, Russian business leaders have realized they can get more out of a rising market capitalization of their companies than out of stripping their cash flows.
‘We see this across the board, not just in oil and gas companies,’ says Wiles. ‘It’s ironic. The perception among western investors is that corporate standards in Russia are improving and they can have more confidence about what they see, whereas in the west it is going in the opposite direction.’
Yukos’s success has not only shown Russian companies the material values of transparency, it has also increased peer pressure on other Russian companies. And in a show of how much the climate has changed, Russia’s top business lobby, the Union of Industrialists & Entrepreneurs, whose members collectively produce about 60 percent of Russia’s GDP, announced in September its plans to hire a western PR company to spread the good news about Russia in the west. ‘Yukos has shown the way, but now Lukoil and the rest don’t want to be left behind,’ remarks Abu Leil-Cooper.
Meet the new arrivals
Access to western capital markets is another powerful incentive for transparency. Wimm Bill Dann, a Moscow-based fruit juice and milk products group, this year became the fourth Russian company to list on the New York Stock Exchange, raising $207 mn. Amazingly, its IPO prospectus revealed that its largest shareholder had a violent crime conviction, while some of its other shareholders and directors hold stakes in and directorships of another Russian group rumored to be connected with organized crime. Far from scaring investors away from WBD, such transparency seems to have been appreciated and the offering was heavily oversubscribed. France’s Danone snapped up a 4 percent stake during the IPO, increasing it to just over 6 percent in September.
Shared Value, which represented WBD through the IPO, is retained by the company and has been helping it establish an IR function. ‘It was a totally new way of thinking for the Russian firm,’ says Boughton. ‘In the beginning they had to learn real basics, the logistics, and often we had to be very patient explaining the basic things.’ Today WBD’s IR department has four people, and the progress has been remarkable.
Andre Bliznyuk, one of WBD’s investor relations team, says there is still a lot of work to be done within the company to convey the importance of transparency. ‘Every day is interesting and difficult here. A lot of things lie in the area of law. From the legal point of view, as an NYSE-listed company, we have to comply with their rules as well as with Russian law. But often these do not coincide and we have to find ways to satisfy every audience. We also need to work with our own people; we just went public, so there has to be an understanding that we are no longer a private company, that there is a disclosure environment.’
Quality of people
Bliznyuk was brought up in the city of Vladivostok in Russia’s far east and came to work for WBD after doing a degree in communications at Moscow’s prestigious state university, MGU. In his impeccable English, he explains that while working for WBD he is also is pursuing a PhD in economics and management. Is his background typical of Russian IR professionals? ‘I wouldn’t say there is such thing as typical profile of the Russian IR person,’ he answers. ‘The profession itself is not institutionalized yet. In our trade people come from very different backgrounds.’
But according to many western investors, the quality of IR personnel, particularly in the new Russian companies, is stellar. ‘We see a lot of companies setting up IR and hiring people of very good caliber,’ says Abu Leil-Cooper. ‘Some of them are former analysts, often westerners. Others are Russian graduates with western degrees. Lukoil, Russia’s largest oil producer whose record of transparency was lagging well behind Yukos, recently hired Andrei Gaidamaka, a Morgan Stanley analyst, to head up the IR effort, while MTS, the Russian mobile communications firm, has lured analyst Andrei Braiginski from Renaissance Capital.
Russia even has a new Association of Investor Relations, whose head, Alexander Goldin, was inspired by the example of the UK Investor Relations Society. But it is a measure of how young the profession is in Russia that over a year after its founding, the association’s members count in their ranks no more than a dozen people, mainly in Moscow.
‘In terms of IR professionals, there are hardly more than 100 people in all of Russia who you could classify as professional IROs,’ says Lenenergo’s Gerson. ‘On the other hand, five years ago there was nothing like it at all. Five years ago I helped organize a visit of western fund managers to Saint Petersburg, and it was hard to recommend who to talk to. It was hard to explain to the Russian companies what kind of information the fund managers needed and how to present it. This has now changed.’
The risks and the problems
For any investor who weathered Russia’s 1998 crisis, one of the biggest questions of today’s IR revolution is how permanent the move towards transparency might turn out to be – and how irreversible the changes. Cynics say it may be a passing fashion.
‘After Yukos, lots of Russian companies have been talking their share prices up. And remember, they all accumulated their equity positions at much lower valuations,’ says Charlemagne Capital’s Wiles. ‘Now they are selling down their equity, and we may, theoretically, get to the point when it becomes more profitable for them to start misappropriating cash flows again. I don’t really think it’s going to happen, but some people say it will.’
The legal framework, too, leaves a lot to be desired. The Russian Federal Securities Commission has drafted a blueprint of a corporate governance charter, but it remains voluntary and there is nothing enshrined in law. Russian companies are hiring record numbers of independent directors because they realize how crucial it is for the perception of good governance, says Abu Leil-Cooper. But few of Russia’s top managers have a clear idea of what executive directors are there for, or what their liabilities are.
‘Russian companies are recruiting high-profile names, but these names do not necessarily have the right qualifications for the job,’ says Wiles. ‘Plus, few of them are truly independent. More often than not, foreigners sitting on the boards represent minority shareholders, leading to potential conflicts of interests.’
Last summer’s board struggle at Gazprom, Russia’s gas monopoly, illustrated this well. None of the three board candidates was truly independent. One represented Ruhrgas, Gazprom’s largest foreign customer and the holder of a 5 percent stake. Another was the head of a Moscow-based investment fund, keen on raising his profile and attracting new money for his fund in the process. The third candidate, who served as Gazprom’s director for the last two years, was also a part owner of a leading Moscow brokerage firm, whose clients account for a large block of Gazprom’s shares.
Investors also point out a division between old companies like Gazprom – those with privatized Soviet assets – and new companies, like Yukos or Wimm Bill Dann. According to Christopher Fitzwilliam-Lay of Charlemagne Capital, old companies tend to be much more entrenched politically; they have more issues with corporate governance; and they do a less effective job in terms of communicating with investors.
‘Whenever you go to see Gazprom or United Energy System (UES), you don’t get much information unless you have access to very, very high-ranking managers,’ he complains. ‘Pre-Yukos most oil companies were exactly the same, but now when you go in to see them, the level of information and the competence of professionals is much higher.’
Still, even UES is changing, believes Abu-Leil Cooper. ‘Anatoly Chubais [UES’s CEO] came publicly to a Renaissance Capital conference to address minority shareholders, which was unprecedented,’ he says. ‘Until very recently nobody in UES cared what investors thought.’
Now that Russian companies are starting to care, Lenenergo’s Gerson adds, they are also starting to recognize the value of good IR. ‘I am not cheap for my company, but I am here because Lenenergo’s senior managers recognize that my role adds value. The broader this recognition gets in Russia, the more good IR you will have,’ says Gerson. ‘This is not a revolution yet, but it is definitely a realization that shareholders are important and that without transparency Russian companies will never be able to attract them. The carrot is proving to be more attractive than the stick. Transparency is driven by numbers – which are the most powerful incentive.’
