Energy sector boosts Russia's consumer market

October 22, 2012 Ben Aris
Russia’s oil-fueled consumer splurge has led it to become Europe’s largest consumer market in everything from cars to diapers.

Contrary to popular misconceptions, Russia is much more of a consumer story for investors than an oil and gas play - as the services and consumer goods sectors are now outstripping energy as the main drivers of growth.
That’s the message coming from Russia’s top financial analysts, who see the consolidation of energy assets by the state being offset by greater investment opportunities elsewhere.
Chris Weafer, chief strategist at Sberbank Investment Research, says the changing roles are clear: “The Russia story now is like the tortoise and the hare - a static energy sector, but very fast-growing consumer and service industries.”

Steady growth in disposable income and investment capital, together with more government support and the advantages of WTO membership, will provide greater non-energy growth, Weafer says.
Russia became the biggest market in continental Europe for milk and children’s toys in 2011, worth a collective $22.7 billion in sales. Next year it’s on course to become the biggest market in Europe for clothes, footwear, accessories and advertising worth a collective of $76.8 billion in sales.
Russia’s consumer market has reached critical mass and, thanks to steadily rising incomes, is poised to become the biggest consumer market for a wide range of products sometime between now and 2018 when it will simply become the biggest consumer market full stop.
“Rising wealth levels over the last decade have turned Russia into a middle-class country for arguably the first time in its history,” says Citigroup’s chief Russian strategist, Kingsmill Bond.
Russian incomes have risen an astonishing 16-fold over the last decade, from an average monthly income of about $50 under Boris Yeltsin to just under $800 under President Vladimir Putin. This figure puts the country into the middle income bracket, according to the last U.N. Development Agency report. If George W. Bush had delivered the same sort of increase during his eight years as president then U.S. average per capita income would have increased from $35,082 in 2000 to $561,312 by the start of this year.
“In 2004 the government made the principle decision to hike taxes on energy and slash them on everything else. Today Russians enjoy some of the lowest income and corporate taxes in Europe,” says Clemens Grafe, managing director of new market economics for Goldman Sachs in Moscow. Focusing on the price of oil is a red herring, Grafe says.
The state is using its oil and gas windfall to subsidize the real economy, which has fueled a decade-long shopping spree.
Already the 11th largest consumer market in the world, according to Euromonitor International and in the top two or three for most sectors in Europe, Russia continues to climb the rankings. GDP will expand by about 3.5 to 4 percent this year, according to the World Bank.
The flood of petrodollars primed the pump and ironically the state’s big presence in the economy provides a very effective “trickle down” mechanism.
Russia’s per capita income is the fastest growing of any major emerging market in the world over the last few years. It reached about $21,350 last year (on a purchasing power parity basis) according to the World Bank, well ahead of Brazil ($11,720), China ($8,440) and India ($3,650).
With very little debt, the lion’s share of Russians’ income is disposable. And since the advent of consumer credit in 2001 shoppers can multiply the power of their income many times over by borrowing. Consumer loans have been running high this year and are up 43 percent, a level the Central Bank says may even overheat the economy.


Appetite grows for IPOs

October 19, 2012 Ben Aris, Array

Russian IPOs are back on the menu after Russia’s biggest bank, Sberbank, broke a four-year lean spell with a secondary public offering that raised $5.3 billion.

As a slew of companies dust off plans for listings, investors will be keeping an eye out for the next big sale, from No. 2 mobile operator Megafon, to gauge the appetite for Russian risk.
The roadshow for Megafon’s London listing hit a slight hiccup earlier this month after one of the banks involved in the sale, Goldman Sachs, pulled out over corporate governance concerns. The U.S. bank cited recent comments by Megafon’s majority shareholder, Alisher Usmanov, to Reuters that he intended to consolidate his assets into a single holding.
In another sign that investor appetite for Russian IPOs may be mixed, MD Medical Group, a leading Russia chain of private health clinics specializing in reproductive services and maternity care, held a successful $311 million IPO, while leading commercial bank Promsvyazbank delayed its listing plans, citing current market conditions.
Moscow-based analysts are confident, however, that the resilient consumer growth story underpinning the Megafon listing, currently underwritten by Morgan Stanley, Sberbank CIB, Citi, Credit Suisse and VTB, Russia’s second-biggest bank, means the IPO pipeline is still very much on track.
“Megafon could be more attractive than its rivals MTS and Vimpelcom, as it leads in the promising mobile data segment and has the most clear geographic focus” of the Russian mobile firms, said Konstantin Chernyshev, a telecoms analyst at Moscow-based Uralsib. “Megafon’s solid cash flows should also make it a strong dividend play, which have proven to be popular stocks amongst investors this year.”
The attempted flotation will be closely watched to see if there is enough demand to get more Russian company names listed internationally. Megafon aims to list in London and raise up to $3 billion from the sale of a 20 percent stake.
Usmanov, who made his first fortune in metals and mining, is well-known in Russia for his canny ability to think outside the box when it comes to investment opportunities. He became Russia’s richest man in 2011 after making well-timed investments in Internet stocks such as Facebook, and in April 2012 completed the purchase of a majority stake in Megafon.
In his Reuters interview, Usmanov attributed his success to investing smartly: “Buy low, but not at the bottom, and sell high but not at the top, to leave some profit to others.”
Buying into Sberbank, a top Russian blue chip, was a no-brainer for many investors with exposure to emerging markets, but Megafon may only appeal to investors specifically interested in the Russian investment story and the risks that go with it.
Russian stocks have not been popular over the last four years, and trade at a significant discount to their emerging market peers. IPOs have been few and far between. There were only three listings in 2009 in the aftermath of the global meltdown, but things picked up in 2010 with 12 IPOs, including aluminum producer RusAl in Hong Kong and e-mail service Mail.ru in London.
Hopes were higher in 2011 with some $30 billion worth of IPOs planned. However, as fears of a second global recession mounted, only 10 companies actually made it to market. Search engine Yandex led the way, raising $1.3 billion on the NASDAQ, followed by mid-sized commercial bank Nomos, which netted $718 million in London.
This year had been even slower, with only one successful IPO before Sberbank’s listing: RusPetro, an oil explorer with assets in western Siberia, raised $250 million in London in January.
Within weeks of Sberbank’s placement, MD Medical Group (MDMG) and Promsvyazbank (PSB) announced plans to list in London.
Following the announcement of MDMG’s London placement, the company said its market capitalization would be about $900 million after the IPO, with its free float expected to be at around 35 percent.

Dr. Mark Kurtser, chairman of MDMG’s board and the driving force behind the group, said in a statement after the listing that the company was “delighted with the positive response to our IPO, which highlights strong investor appetite for industry-leading businesses in growing markets.
“Supported by the London listing, we are well placed to capitalize on opportunities to develop our network of healthcare centres and selectively enhance our service offering in Moscow and other economically attractive regions of Russia.”
MDMG operates 11 clinics and hospitals in Russia, including the country’s largest private hospital, and one in Ukraine. The company caters to growing middle-class demands for modern treatment, more comfort and service during childbirth.
Ahead of the listing, Kurtser said that he expected the group to grow by 35-45 percent a year.
Meanwhile, Promsvyazbank (PSB) pulled its plans to list 20 percent of its shares, citing disappointing offers for its global depositary receipts, which had been priced at $10 and $12 per GDR.
But the bank said it had received expressions of interest from investors wanting to buy shares privately “outside the scope of a capital-markets transaction.”
PSB specializes in corporate banking for mid-sized Russian companies, trade finance and factoring. After the 2008 crisis, the bank also got into retail banking and last year had the country’s fastest-growing consumer lending business.

Le russe Rosneft devient le plus grand groupe pétrolier au monde en rachetant TNK-BP

Le groupe proche du Kremlin va débourser 55 milliards de dollars. Le géant britannique sécurise l’accès aux gisements de l’Arctique encore inexploités.

Rosneft dépense la somme formidable de 55 milliards de dollars pour 100% TNK-BP, le troisième groupe pétrolier russe, qui appartenait jusqu’ici à parité entre le britannique BP d’un côté et trois milliardaires russes regroupés dans le consortium AAR de l’autre. Le R tient pour Renova, contrôlée par le résident suisse Viktor Vekselberg.

TNK-BP a été fondé en 2003 et est rapidement devenu l’un des groupes pétroliers privés russes les plus rentables, malgré de fréquents conflits d’orientation stratégique entre AAR et BP.

Un accord à la structure complexe. Si AAR récupère 28 milliards de dollars en liquide, BP ne va de son côté recevoir «que» 17,1 milliards de dollars en liquide, mais aussi 12,84% du capital de Rosneft. BP s’engage de son côté à acquérir 5,66% de Rosneft pour une somme de 4,8 milliards de dollars. Au final, BP détiendra 19,75% de Rosneft (en comptant le 1,25% déjà entre les mains des Britanniques) et pourra nommer deux des neufs membres du conseil d’administration. L’Etat russe continuera de disposer de la majorité du capital de Rosneft. Sa part tombera à 55,25% contre 75% aujourd’hui.

Au terme de la transaction, Rosneft va devenir le premier groupe pétrolier mondial coté en termes de production avec 4,5 millions de barils par jour, loin devant les actuels leaders mondiaux Petrochina (2,4 mln b/j) et ExxonMobil (2,3 mln b/j). Rosneft est déjà leader mondial en termes de réserves de pétrole parmi les sociétés cotées.

L’éminence grise Igor Setchine, le patron de Rosneft, a transformé ce qui était un tout petit pétrolier d’Etat en 2003 en gigantesque groupe grâce à l’appui de son mentor, Vladimir Poutine, dont il est le bras droit dans le secteur énergétique. Igor Setchine est réputé être le cerveau de «l’affaire Ioukos», qui a vu le groupe pétrolier de Mikhaïl Khodorkovski se faire phagocyter par Rosneft. Vieille connaissance du président russe, Igor Setchine est souvent considéré comme la personnalité la plus influente du pays après Vladimir Poutine.

Rosneft fait d’une pierre trois coups: une domination de la production domestique (presque la moitié des volumes russes de brut), un accès au savoir-faire de BP en matière d’exploration et d’exploitation offshore. Et surtout, grâce à son actionnaire stratégique BP, une stature internationale, alors que le groupe russe cherche à acquérir des gisements en Afrique et en Amérique latine.

Cet appétit place Rosneft face à des obligations gigantesques. Le groupe affirme financer l’acquisition de TNK-BP grâce à ses propres ressources, ainsi qu’à travers des crédits bancaires. On sait que Rosneft table sur un crédit de 15 milliards de dollars. Une majorité d’experts pense que le seul moyen de couvrir les dépenses est un placement boursier, soit d’une partie de TNK-BP, soit de Rosneft lui-même.

De son côté, BP peut se satisfaire de rester en Russie. Lassé des conflits incessants avec AAR, BP avait depuis plusieurs mois signifié son intention de vendre ses 50% de TNK-BP, afin aussi de renflouer ses finances en difficulté. En outre, BP ne veut surtout pas s’éloigner des immenses réserves pétrolières russes. En scellant une alliance capitalistique avec Rosneft, BP table sur un accès aux gisements de la zone Arctique, dont seuls les groupes d’Etat russes Rosneft et Gazprom détiennent les clés. «20% de Rosneft, c’est une compensation tout à fait acceptable pour la perte des 50% de TNK-BP», commente Konstantin Simonov, directeur du Fonds pour la sécurité énergétique nationale, une société de conseil. Rappelons que TNK-BP représentait plus d’un quart de la production globale de brut du pétrolier britannique.

Les trois milliardaires d’AAR sont, sur le papier, parvenus à récupérer 2 milliards de dollars de plus que BP pour une part égale de TNK-BP. Toutefois, si l’accord de BP a déjà été validé par Vladimir Poutine, le régulateur russe n’a pas encore donné son feu vert pour la transaction avec AAR. Pour l’instant, les paramètres de cette seconde transaction, dont Rosneft rappelle qu’elle est totalement séparée de celle avec BP, restent inconnus.

Foreign investors discover Russia's private medical market

October 18, 2012
Roman Ovchinnikov, Yekaterina Drankina, Kommersant-Dengi

Moscow’s chief gynecologist, Mark Kurtzer, has set up Russia’s first and only private maternity hospital, which recently IPOed in London. This is a clear – yet far from isolated – sign that Russian private medicine is on the verge of a global breakthrough.

Last week in London saw the IPO of Cyprus-registered MD Medical Group Investments (MDMG), set up by Moscow’s chief gynecologist, Mark Kurtzer. The group includes several private gynecological clinics and hospitals, as well as a perinatal center. Investors’ initial doubts about the project proved unfounded. During the IPO in London, the company’s ceiling value was put at $900 million, while Kurtzer’s 35 percent stake fetched $311 million.

“Russian private medicine is the most interesting in the market,” Kurtzer said. “There is no income tax for us to pay, and the demand for high-quality services is colossal – the profit margins are extremely appealing. And for the first time, the government has started to provide meaningful assistance.”

The double life of a gynecologist

Although he established MDMG in 2010, the future chief gynecologist of Moscow first entered the world of private business back in the early 1990s.

“Like many other prominent people in the industry, he saw the lack of patient care and the need to provide services not in the hospital, but in the home,” said scholar Alexander Rumyantsev, director of the Center for Pediatric Hematology, Oncology and Immunology. “Mark and some colleagues set up a health care service to meet that demand.”

Kurtzer has, so far, made every effort to remain in the medical practice. “Every single day of my life I have been a doctor. Every day I’m in the operating room at seven in the morning, and in the maternity ward at night. Even now, when the business is large, most of my time is spent as a physician,” said the gynecologist.

In the mid-1990s, Kurtzer’s new business concept began to take shape: his observations of children in the first years of life and pregnant women crystallized his idea for a network of “Mother and Child” clinics. There later followed a perinatal center, about which Kurtzer and his colleagues speak with unbridled enthusiasm.

“The Perinatal Center is a wonderful business where most revenue comes from the hotel standard of service,” said Rumyantsev. “It provides women with a three-, four- or even five-star level of service, where they can live with members of their family in comfort.” This income has enabled Mark to enter the third phase of development: he is now building a hospital in Lapino, where not only mothers and children will be taken care of at each stage, but the rest of the family, too.

“It will be a unique clinic, an order of magnitude above the Perinatal Center,” said Kurtzer, his eyes lighting up. “It was my own brainchild – I didn't pinch it from anywhere.” It will provide open MRI without the need for neonatal anesthesia, plus intensive care, the most advanced surgery options, and the most rapid trauma care available.

“Why doesn’t anyone else build private maternity hospitals? They’re afraid of the enormous responsibility. I know that, whatever happens during birth – or before or after – I’ll go to the operating table and everything will be OK. I have complete and utter faith in all my doctors,” said Kurzter.

Foreign investment banks bet on the ruble

October 22, 2012
Alexei Rozhkov, Galina Kamneva, Vedomosti.ru

High oil prices, the easing of monetary policy in Europe and the U.S., in addition to the end of capital flight — these are the three cornerstones of the ruble's newfound status, say Goldman Sachs and JPMorgan analysts. Experts at the two major investment companies expect Russia's currency to strengthen.

The Russian ruble will strengthen, say experts at Goldman Sachs. In the past three months, they have updated their forecast rate against the euro-dollar basket to 34.5 rubles. The semi-annual and annual prognoses are 33.5 and 34 rubles, respectively, against previous forecasts of 35, 34.5 and 34 rubles in relation to the basket. The new figures correspond to a U.S. dollar exchange rate of 31, 29.2 and 28.2 rubles (see box below).

Experts assert that, in the short term, the ruble could prop up oil prices and lend weight to developments in the global economy. The latest easing of monetary policy by the European Central Bank (ECB) and the U.S. Federal Reserve, with interest rates still practically at zero (while the Russian Central Bank is raising them), is making Russian government bonds a more attractive investment than their foreign counterparts.

However, the forecast is only credible at an oil price of $130 per barrel, says chief economist at Alfa Bank, Natalia Orlova. According to forecasts by Goldman Sachs Group Inc., this will be the price of Brent in Q3 2013, while Goldman Sachs expects to see $125 per barrel quarter. Looking further ahead, the ruble could be assisted by Russia's current account surplus: Goldman Sachs predicts that Q4 could see the surplus grow to $32 billion, from $16.6 billion in Q3.

Although recent data point to a slowdown in investment growth and consumption, the bank says that will not become a trend, since real wages are growing almost twice as fast as outlays.

Goldman Sachs is not the first foreign bank to predict a strengthening of the ruble. In September, JPMorgan Chase & Co. recommended opening long positions on the ruble, eyeing a rate of 29.5 rubles to the U.S. dollar in the coming months. The arguments of both investment banks look similar: Russia's currency is cheap relative to oil (JPMorgan revised its forecast for Q3 upward from $95 to $109 per barrel, and from $100 to $105 for Q4), interest rates could rise, OFZs (federal loan obligations) are available, and the trade balance is improving.

“The Russian economy really does look in good shape: low debt, plus return on capital; and investment is only just beginning,” said head of transactions at ING Groep N.V., Stanislav Yarushevichyus. However, Goldman Sachs' forecast is, in his view, still too aggressive: a more realistic level would be 29-30 rubles in 2013.

The Russian Central Bank also expects to see a slowdown in capital outflows. It is “quite possible,” said the RCB’s first deputy chairman, Alexei Ulyukayev, in mid-October. Net outflows in the first nine months, according to the RCB, came to $57.9 billion, of which Q3 saw $13.6 billion; the RCB expects the annual figure to hit $65 billion.

There may even be periods of capital influx, adds Orlova. Yet the economist does not consider this a long-term trend: Russia lacks investment opportunities, and money flows are largely determined by the mood of global investors.

If the status quo in the Russian economy is preserved, the dollar could be worth 34.3 rubles by end 2013 and 37.4 rubles by end 2014, predicts Renaissance Capital analyst Ivan Chakarov. If the positive scenario comes to pass in 2013-2014, the ruble will strengthen to 31.8 and 30.3 against the U.S. dollar.


Sinking feeling for investors in super yacht company

Shares in one of the world’s leading super yacht companies, with clients including Roman Abramovich and Sir Phillip Green, have collapsed despite soaring boardroom pay, prompting outrage amongst investors.

When investors poured their money into one of the world’s leading super yacht companies they did not expect their money would sink like a stone.
Believing YCO would be a safe haven in turbulent times, investors pumped millions of pounds into the luxury boat broker, which has had an impressive range of super rich clients including the billionaires Roman Abramovich and Sir Phillip Green.
However, four years after the flotation, shares in YCO have plunged by 94% – sinking from 49p to just 3p.
Next week, in what is expected to be a stormy annual general meeting, investors are to attack soaring boardroom pay at YCO and £415,000 of company money handed to Neil Miller, a former director, in the form of a loan.
Senior executives have been awarded large pay rises in the past year. Charlie Birkitt, YCO’s chief executive, was paid £294,365 in 2011 — a 28% rise on the previous year. Another director, Gary Wright, last year received £290,617 — up nearly 30%.
Shareholders are also calling for YCO’s board to provide full details of the loan to Mr Miller which is understood to have been used to fund a £6,000 skiing holiday and a £20,000 payment towards the wedding of one of his daughters.
The marriage took place at Wrotham Park, a large country house in Hertfordshire, which also hosted the wedding of Ashley and Cheryl Cole and the 50th birthday of Simon Cowell, the pop impresario. YCO’s accounts reveal that the money was later repaid, with interest.
This weekend Mr Miller and YCO declined to discuss the arrangement. Both parties said that they had signed a non-disclosure agreement after Mr Miller left the company in late 2009.
Investors are now preparing to vent their anger at YCO’s annual shareholder meeting in London next Tuesday, at which the company plans to take the company private again — a move, called delisting, that shareholders say will effectively render their holdings worthless.
According to its 2011 accounts YCO made an operating profit of just £14,650 — down from £785,998 the year before.
Despite the unimpressive results, YCO said that the pay of its executives is in line with directors at similar public companies and is less than many of its rivals
YCO prides itself on its discretion when managing and arranging yachts for some of the world’s wealthiest people. As well as acting as an agent overseeing the sales of luxury vessels, the company also manages constructions and refits, recruits crew and services yachts.
Mr Abramovich, the Russian oligarch who owns Chelsea Football Club, has had four of yachts fuelled and serviced by YCO. The £32 million yacht *Lionheart*, which is owned by the retail baron Sir Philip Green, has also been handled by the company.
Other wealthy people who have used the services of YCO in the past include Paul Allen, a co-founder of Microsoft who owns the 414ft super yacht Octopus, and Richard Caring, the restaurant, property and fashion entrepreneur.
“What has happened at this company is an absolute disgrace,” one disgruntled shareholder said. “The value of the shares has collapsed, the company is barely making any money and yet the executives are still paying themselves huge salaries.
“YCO has never paid a dividend since the flotation, and if the directors succeed in taking the company private there will effectively be no market in the shares.”
The company blames the volatile world economy, the ongoing eurozone crisis and rocky stock markets for the collapse of its share price, and says the pay of its executives is in-line with other executives at similar public companies.
It added that the large fall in profits over the past year are partly due to a restructuring that will leave the company well-placed for future growth.
In recent correspondence with shareholders, YCO said that the stock market flotation has “not recognised the underlying value of the business”.
“The delisting will allow the management team to increase their focus on the business itself by reducing the time and costs currently spent adhering to the administrative and regulatory requirements brought about the [stock market] admission,” the letter said.
For the delisting to succeed it will need to be backed by investors holding at least 75% of YCO’s shares.


Ruble Set to Strengthen on Free Float, Fiscal Cliff, BofA Says

By Maria Levitov - Oct 17, 2012 Bloomberg

The ruble will climb 1.5 percent against the central bank’s target euro-dollar basket by the end of next year as global growth concerns recede and Bank Rossii stops buying and selling currency to manage the exchange rate, according to Bank of America Merrill Lynch.
The ruble is “very attractive in terms of fundamentals,” David Hauner, head of fixed-income strategy for emerging Europe, the Middle East and Africa, said in an interview in London yesterday.
Russia, the world’s largest energy exporter, will expand 3.5 percent this year, according to the Economy Ministry. The nation’s debt is set to reach 11 percent of gross domestic product this year, compared with 64 percent for Brazil, according to the International Monetary Fund. The ruble will be “one of the top beneficiaries” of improving risk appetite if the so-called fiscal cliff of automatic spending cuts and tax increases in the U.S. is averted at year-end, Hauner said.
Bank Rossii is no longer targeting the ruble’s exchange rate, First Deputy Chairman Alexei Ulyukayev reiterated at a conference in Moscow on Oct. 2.
“Russia will allow more appreciation than other central banks,” Hauner said. “They need to show that they are serious” about the free float, he said.
Euroclear Boost
The ruble strengthened 0.7 percent to 30.7050 per dollar by 4:59 p.m. in Moscow, the second day of gains. The currency rose 0.3 percent to 35.02 against the central bank’s euro-dollar target basket. The ruble will end the year little changed against the basket, Hauner forecast.
The ruble will also get a boost as Euroclear Bank SA begins servicing ruble-denominated government notes as early as December, expanding access to Russian debt markets. Foreign holdings of local-currency debt account for approximately 4 percent of the total, compared with more than 20 percent in Brazil, Mexico, South Africa or Poland, according to Hauner.
The Russian currency lost 3.9 percent in the last 6 months, lagging behind the Mexican peso which gained 2.3 percent. Brazil’s real lost 8.5 percent in the same period, according to data compiled by Bloomberg.
The ruble will benefit once we “get through the fiscal cliff,” Hauner said.“But it makes sense to start to build the position already before the end of the year.”
To contact the reporter on this story: Maria Levitov in London at mlevitov@bloomberg.net