Tim Gosling in Moscow -

The huge pipeline of IPOs anticipated this year in Russia is set to shrink as issuers hit a wall built by investors refusing to pay the top dollar demanded. While this will greatly reduce the flow of issues, some companies will just have to swallow it.

When Rusagro pulled its IPO in mid-May citing "market volatility," it was just the latest in a series of disappointments for Russian companies looking to tap the waves of cash washing around the globe. The sugar producer's postponement followed close on the heels of a similar announcement by Uralchem. A red flag had already been hoisted in April when Russian Sea - the first to emerge onto the RTS and Micex from a pipeline some have suggested could total $20bn this year - cut the size of its float after it was forced to the bottom of its pricing range.

However, as pharmaceutics company Protek discovered in April, it's not that investors are unwilling to take on the risks of the Russian market, but they do insist on a better premium than most issuers are ready to offer. Protek reported its $400m IPO was massively oversubscribed once it accepted a price at the lower end of its indicative range. As Chris Weafer, chief strategist at Uralsib, puts it: "There is good investor appetite for Russia, but only if the price is right."

Overheated

The heat on the debt markets at the start of the year evidently helped bring the optimism of many Russian companies (locked out of the action either by size or an already heavy debt burden) to the boil. Rusal's successful Hong Kong share listing in January, despite the company's huge leverage and other risks, added fuel to a fire stoked by memories of the seller's market in the boom years.

Yet Rusal was a red herring for Russian Sea and their ilk. The real lesson was that the deal only increased investors' wariness of the pricing of Russian IPOs. Just like so many floats during the boom years prior to the crisis, buyers saw the market value of their new assets nose-dive the minute trading opened on the bourses.

Moreover, it took a heavy push to get the Rusal deal priced in the middle of its indicative range, including no small support both from a Hong Kong exchange keen to grab Russian listings and, of course, the bookrunners. As the Wall Street Journal commented at the time: "A very specific group of factors made this impossible deal possible. Among these, the most important may be that bankers are motivated to participate because Rusal... is sure to generate plenty more banking business in the future."

The commissions on the issue wouldn't have been sniffed at either presumably, and it must be wondered how much encouragement the likes of Rusagro have been given to believe that top dollar is achievable. "Wall Street is back - greed is good," says Ivan Ivanchenko, chief strategist at VTB Capital. "Of course, owners are looking for the highest possible price, and bookrunners' fees are a function of that. A month ago there was a lot of appetite for risk, and the books were growing very tight."

"It's the game," laughs Weafer. "It's the bank's job to talk up the stock and the book. Everyone knows it, and when the bookrunner tells you the book is oversubscribed by X, then you automatically divide that by Y."

There will be both Russian bookrunners and clients forced to swallow lower prices this year, however, which could offer a useful lesson to both. "The banks need to be tougher and get issuers to be more realistic," says Weafer, who suggests that around $10bn worth of IPOs will still have to go ahead in 2010. Some companies will be able to ride out the storm, managing their debt somehow - Uralsib sees $100bn in equities that needs to come to the market to ease corporate leverage - but others will have their hands forced at some point, although they'll likely manage to hold out in the hope of a return of sentiment in the autumn.

The risk here is that the pill could get even more bitter. Into the second quarter, Russian fund managers had been seeing inflows for 12 straight weeks, but this tide turned in the second week of May when, haunted by the Eurozone's nightmares, $2bn was redeemed from emerging market funds. Should Brussels be forced to spend the whole summer putting out fires, then some Russian companies will be in for a very cold shower.