A significant improvement in corporate governance standards in Moscow is encouraging more Russian issuers to list on the domestic bourse rather than overseas.
Russia’s new corporate governance code, which has been in place for two years, is being increasingly adhered to, according to market participants. Other reforms undertaken by the Moscow Exchange - as well as an increase in domestic liquidity - is accelerating the trend for more companies to list in the Russian capital rather than in London.
Many major Russian firms have also voluntarily improved their financial and ownership transparency in terms of shareholder rights, disclosure and transparency and the appointment of genuinely independent directors.
“Cash is King,” Tom O’Brien, head of international sales at the Moscow Exchange, told bne IntelliNews, underscoring the growing importance of acceptable business practices to turning profit. “Unless you adhere to the code you can’t be in the premium segment which locks out Russian pension fund money. This is small at the moment but will grow and will significantly contribute to better governance.”
The goals of transforming Moscow into an international financial centre may now be in tatters but the project contributed to a push for reform. One of its initiatives was the appointment by the government of an Expert Council, led by Prosperity Capital partner Alexander Branis, to push through reforms.
Even in 2014, before Crimea's annexation and sanctions were imposed, the World Bank acknowledged the progress being made on corporate governance in Russia.
“The past few years have seen a new burst of enthusiasm for corporate governance reform in Russia, as the financial crisis and the resulting market declines revealed the dangers of inaction,” it said.
Code to success
The new code replaces the Code of Corporate Conduct, which was adopted back in 2002. It was devised by the Central Bank of Russia (CBR) and its implementation is being monitored by the Expert Council. Adoption by state companies has been patchy with only six out of the 13 implementing the code at their annual general meetings.
Sovcomflot, Transneft, Gazprom and Russian Railways have “a long way to go” to make the code an effective instrument, while Bashneft, Rostelecom and Alrosa were rated as the top performers by the World Bank.
The code is being discussed at almost all companies, but many will not give its recommendations full consideration, primarily regarding them as an obstacle for “decision-making”. This reason, in particular, was mentioned by Rostelecom, UES and Rosneft, according to a report late last year by the Expert Council.
Companies appear to be “quite effective” in regard to information disclosure, delegation of supervisory powers to the board, information hotlines and anti-corruption policies. The slowest progress is made in ensuring clarity and transparency of choosing board members and in providing real powers to boards of directors which are currently denied the power of decision-making by a simple majority vote, the right to appoint directors at state-owned companies’ subsidiaries and full access to subsidiary companies’ documents.
The Moscow exchange is playing its part and announced changes to the bourse’s quotations lists in late January this year following completion of the first phase of the listing reform.
Issuers have had the opportunity to bring their corporate governance practices up to the new standards for each listing level. The more stringent corporate governance standards are based on the corporate governance code. Upon completion of assessments, seven issuers have already moved from the Level 1 List to the Level 2 and ten were downgraded to Level 2.
Having a Level 1 listing means local pension funds can buy the shares and they can’t for the other levels, according to the exchange.
“The listing reform has already resulted in significant strengthening of corporate governance at Russian public companies as well as improved transparency and attractiveness of the Russian equity market as a whole,” says Alexander Afanasiev, chief executive of the Moscow Exchange. “A key aim of the reform is better protection of the rights of individual and institutional investors. Our issuers have made great efforts to implement best corporate governance and reporting practices and boost the trust of investors.”
Slow cave-in to change
Institutional investors engage on corporate governance concerns through the Association of Institutional Investors (API), renamed from the Investor Protection Association (IPA) in 2015. The API, whose members include Prosperity, UFG and most of Russia’s biggest portfolio managers, has been involved in a number of scraps over the years with state companies, such as Rosneft and Transneft, and oligarchs like Mikhail Prokhorov and Oleg Deripaska, but has generally came off the worse.
The group was originally set up in 1999 in response to the abuse of minority shareholders at Yukos. Compared with similar bodies in Western markets, the API just doesn’t have the teeth or the adequate public profile to fight its corner effectively.
Representing 30 members with about $30bn in assets, the API has done some good work under the radar and says it has been involved in appointing about 500 independent directors to almost 200 companies.
A leading investor in Russian equities for the past 20 years said the wider investment universe wasn’t aware of the strides being made. “Russian governance and boardroom practises has come in from the Caveman era but there is still a lot to be done,” the investor told bne IntelliNews. "The index still has its big corporate governance dogs, like Gazprom and Transneft, but there are others that don't bite like Sberbank and Magnit."
Being a businessman or a banker in Moscow in the 1990s - and even the noughties - was a dangerous occupation. A prominent central banker Andrey Kozlov was shot dead in 2006 after trying to shut down corrupt lenders, while other chief executives were blown up in carbombs. Guns and baseball bats were more likely to be brandished in boardrooms spats than balance sheets and analyst reports.
While Russian corporate governance has improved, some investors are still nursing wounds from the most spectacular abuses over the past 20 years.
“Menatep/Yukos isn’t that long ago, not are the aluminium wars or the rather tasty situation around post-Soviet telecommunications,” Paddy Blewer, head of communications for energy trader Peninsula Petroleum, told bne IntelliNews. “Many of the London GDR (global depositary receipt) transactions were overseas because of the perception that this would be a more secure investment window than Moscow; that the Kremlin would not allow competitive Russian interests to screw over international investors.”
GDRs are now falling out of fashion amongst Russian issuers as companies turn homeward amidst the realisation the stability of the Russian corporate economy is stable and can withstand global and local economic crises.
“Russia is now a more stable polity and the very competitive industrial groups appear to have come to accept the status quo,” says Blewer. “Therefore the entire rationale for GDR listings has come to an end. It’s less about individual corporate governance, more the stability of the Russian corporate economy.”
Moscow Exchange’s O’Brien believes liquidity has deepened locally because corporate governance has made a leap in the past two years.
“The reputation line is smoke and mirrors and owning a GDR may make you feel you have a blanket of reputation keeping you nice and warm but you have little recourse in a Russian court when things go wrong as they are accorded very few rights,” he says. “In the nineties and noughties Russia did not have the correct infrastructure but it does now.”
Not all are convinced that Russian standards of governance are up to scratch. The current economic crisis has shown yet again how minority shareholders can get squeezed in takeovers by Kremlin-controlled giants like Rosneft of smaller companies like Bashneft.
“I would like to see more evidence of Russian corporate governance having improved,” Max Gutbrod, managing partner a Baker McKenzie in Moscow, told bne IntelliNews. “I tend to think it [the code] is too lengthy, and when you for instance look at the disclosure of remuneration systems Russia seems to not be up to date, and I have a similar impression on compliance issues.”
Reforms clearly still have a long way to go and the CBR, under governor Elvira Nabiullina, is playing an active role in cleaning up corporate abuse. Karina Litvack, a corporate governance guru in the UK, told bne IntelliNews that she had been tapped by the regulator to work on reforms but her appointment was scrapped in 2015 after relations deterioriated with the West.
Nonetheless, the chasm in standards between Russia and the West is clearly narrowing as abuses increasingly crop up in US markets, such as the recent decision to allow the $3bn Snap IPO to go ahead without voting rights being offered for the shares.
“Russia at times gets a lot of bad press on corporate governance but just look at some global companies that come to mind such as Petrobas, GSK, Samsung , BT in Italy and Volkswagen - let alone all the Western banks to see that good governance is not based on geography,” says O’Brien.