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18 February 2019

Russian ECM poised for revival

Russian equity capital markets issuance is likely to return soon, potentially in the first quarter, as issuers and bankers in the country prepare to sell stakes in publicly listed Russian companies through accelerated bookbuilds.

"We have a substantial amount of potential transactions in our pipeline, and a lot of these were originally planned for last year, but they have been moved to this year,” said Boris Kvasov, co-head of equity capital markets at VTB Capital. “We think the market will re-open but it will be far more likely to re-open with ABBs rather than with an IPO."

Kvasov added that in the current volatile market environment investors are focused on liquidity and track record which would aid the Russian blocks market after strong Russian equity growth this year.

"We have some transactions which could be executed in the first quarter, and if the market allows us to do it, we will try and close some of them," Kvasov added.

Moscow’s benchmark Moex index closed 19% above its last 52-week low — the lowest point for Russian stocks was April 2018, when the US sanctioned a number of prominent Russian oligarchs including aluminium magnate Oleg Deripakska and his company Rusal and its holding company EN+.

At the beginning of February, the benchmark MOEX index surpassed the 20% growth mark from its 52-week low that is often cited as the start of a technical bull market.

This strong performance of Russian equities should therefore benefit potential Russian block sales.

“ECM works like any other market on a basis of supply and demand," said Kvasov. "We have experienced some geopolitical challenges last year and it takes time for the market to recover, this relates to both investors and issuers, who need to adapt to the situation, and for that supply and demand dynamic to become balanced again.

“We feel that there is a lot more balance now and we hope investors feel that now is a good time to enter into the Russian equities market."

Should Russian issuers begin to start selling shares through accelerated bookbuilds, it would mark the first significant equity capital markets activity in a year. Russian ECM has hamstrung since the US started to hand-down sanctions designations last April.

International investors soured on Russia, with many fearing that they would be at risk of having to quickly sell positions in a company should the US desire to designate their holdings as a sanctioned entity, as was the case with holders of debt and equity in EN+.

While international interest in Russia has grown, the blocks market should also benefit from an increase in local demand given the growing trend of Russian capital repatriation.

"We have seen an increasing share of Russian local demand over the last couple of years, unfortunately, we didn't have a sufficient number of ECM deals last year to see if this trend will continue,” Kvasov said. “But we hope to see after a couple of transactions whether this trend of strong domestic demand still exists."

Sources also feel that a lack of further sanctions against private individuals or companies will have calmed many of western investors’ fears, but it may take a steady stream of block trades to be executed before any large Russian IPO can be sold.

Part of this is down to the inherent risk which comes with investing in a new listing rather than an established stock. Companies which have just floated tend to be less liquid which means that it is more difficult for investors to speedily exit a large position should relations between the US and Russian sour again.

In addition, the IPO market in general has been quiet, with no significant listing completed in Europe this year. The only listing that began a marketing process, French logistics firm Gefco, was postponed after two weeks of investor education.

Getting substantial western buy-side interest, still required for most new listings, could be even trickier for a Russian flotation.

“If you look at global ECM, European ECM in particular, the IPO market landscape is not as favourable as it used to be, therefore any IPO is a difficult exercise at the moment," said Kvasov. "So when we look at the possibility of a big Russian IPO, it is quite challenging.

“However, you never know what to expect in a couple of months, and if we re-open the market with some successful transactions, then investors might be ready to consider investing in a large IPO."

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