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Just as in 2010, forecasts of new equity issuance from Russia were grand at the start of this year, with talk of up to $30bn worth expected to be put on the table. However, global macroeconomic and geopolitical uncertainties have considerably dulled prospects, says a new report from Uralsib.

Chief strategist at Uralsib, Chris Weafer, notes that whilst new equity issuance across global markets over the first two months of 2011 was at a record high of $26bn, Russian IPOs have managed to raise no more than $360m, whilst the state's privatisation programme pulled in $3.3bn, but only after the price on the 10% stake in VTB Group had dropped 20% or so during the roadshow.

"The total value of potential new equity issuance originally targeted in 2011 from non-state sources may be $15bn-20bn, while the state had hoped to place $10bn of its $30bn three-year program," Weafer writes, before warning that just like last year, the final figure is likely to come in well below. "That is far too ambitious in the current environment. If current market conditions continue through to the third quarter of 2011, the total private sector issuance may be in the range $5bn-10bn and the state's privatisation programme may be cut to about $6bn."

Forecasts for share offerings in 2010 were put at around $20bn at the start of the year, but no more than $6.6bn was actually issued, as offers fell like flies in the face of resistance from investors. And Weafer notes that current market conditions have investors just as wary on new issues, despite the fact that Russia's stock market is outperforming most of its global peers so far this year. "Current market performance is being driven by the oil and gas sector," he notes, "while investors remain wary of domestic themes and of locking into new illiquid names."

At the same time, investors continue to see more value in oversold developed market stocks than emerging market names, which have inflation risk hanging over them. And that could mean Russian issuers will face huge competition. Dealogic reports that it has identified a $48bn backlog of IPOs globally, and as Weafer points out, most of the record amount of new issuance so far this year has come from the US and other big developed markets.

By contrast, Russian IPOs fared badly in February, with three of the four (from coke and pig iron producer Koks, energy-industry supplier ChelPipe, and gold miner Nord Gold) failing to make it past the post, whilst the only finisher, Hydraulic Machines and Systems, barely limped across the line.

Limited interest

Weafer says the lessons from the 2010 programme, which were reinforced in the failed issues this year, are obvious.

First, that in difficult market conditions investors want a very deep discount to existing industry peers to reflect the liquidity risk offered by many Russian companies. However, that's a well-established story, and most issuers appear to think it doesn't apply to them. More specifically, says Weafer, issuers in the more established sectors need to think carefully before coming to market. "The appetite for stocks in industries that are already well represented on the stock market, such as metals and mining, is a lot less than for stocks that offer exposure to high-growth industries, or to areas of the economy not currently well represented in the stock market. To buy into a 'more-of-the-same' stock, investors want a much deeper discount."

At the same time, he suggests, investors are also looking closely at the motivation for equity issues. "There is little interest in buying stock simply to cash out the core shareholders. In such instances, investors will also want a very deep discount. There is better demand for issuance where the proceeds will be used within the company, eg. to repay debt or to fund acquisitions and growth."

All this makes predictions for the rest of the year difficult. "At this point in time... with so many variables in the global macro and geopolitical environment, it is almost impossible to predict the level of expected investor demand for the next quarter or for the second half of 2011," says Weafer.

The demand from issuers is easier to calculate. "As in most other economies, there is considerable pent-up demand for new equity issuance by Russia's companies. The total over several years could be as high as $50bn from the private sector alone, albeit the total value of issuance ambitions that has been previously disclosed publicly for 2011 is around $17.5bn.

In addition, he notes, phase one of the state's privatisation programme aims to raise about $30bn over a three-year period, with several big state corporations already indicating their ambition to list on the stock market. Russian Railways is one of those that is planning a public listing in the "next few years" and is aiming for a valuation range of $60bn-100bn. The CEO recently said that the company is today worth about $57bn, while pre-crisis its market value was $100bn.