Tim Gosling in Moscow -

Rusal's listing on Hong Kong's stock exchange in January 2010 was supposed to blaze a trail that would have other Russian companies following in its wake, but over a year later only one company, IRC, has managed it (and that was barely). Now that push to expand the investor pool for Russian equities is back on - will it work this time?

Hoping to leverage the momentum from this month's BRICS summit in China, Russian President Dmitry Medvedev visited the Hong Kong bourse on April 17, popped on a trader's jacket for the cameras, praised the territory's investment climate, and claimed that several Russian companies are on their way to list.

Yuri Soloviev, president of VTB Capital, backed his president up, saying Russian companies are set to raise "billions of dollars" in Hong Kong, as did Lukoil Vice-President Leonid Fedun a day later when he confirmed the company hopes to complete a secondary share offering there in the next 12 months or so. The Russian enthusiasm was matched by Hong Kong Chief Executive Donald Tsang, who predicted "Russian firms can use Hong Kong as a stable and efficient platform."

The thing is, it's all been said before. A year ago, the likes of Russian Railways, Polyus Gold and Brunswick Rail Leasing were rumoured to be ready to add to the $2.2bn that Rusal raised in Hong Kong. The names bandied about this year include EuroSibEnergo - another company owned by oligarch Oleg Deripaska that has already cancelled one planned IPO on the territory - as well as RusHydro, Otkritie Financial Corporation and Renova's Kamchatka Gold.

The attraction of tapping "one of the most liquid markets globally" (as Soloviev described Hong Kong) for Russian companies seeking capital to pay down debt or expand is clear, especially in light of the series of listings that have flopped in London this year. Meanwhile, Hong Kong Exchanges & Clearings, which runs the Asian bourse, is also keen to tempt Russian equity issuers away from the usual European destinations. As Michael Hanson-Lawson, head of East Capital's Hong Kong office points out, "the Hong Kong bourse wants to become an international resources exchange."

To that end, points out Peter Westin, chief strategist at Aton Capital, Hong Kong has held off on stiffening conditions for listing companies. "It's a simpler process in Hong Kong than London, which of course Russian companies like," he says. "[The Hong Kong authorities] said they planned to make it more demanding, but it hasn't happened."

For investors in Hong Kong, diversification would be one the main attractions of Russian listings, particularly those offering exposure to China's insatiable appetite for raw materials. Whilst Chinese domestic names are represented on the bourse, commodity exporters to the country are few and far between.

However, the track record of the two commodity-based Russian companies that have listed in Hong Kong so far does little to inspire confidence.

Hiccups

In his meeting with Medvedev in April, Tsang praised the Rusal listing as a "breakthrough." That will be welcomed by Russia, which moved mountains at the start of 2010 to push through an IPO beset by regulatory hiccups and poor sentiment. A roster of cornerstone investors were called on to join state banks to see the company hit the middle of its pricing range. Rusal shares plummeted 11% when they launched trading, and didn't regain their listing price of HK$10.80 until late December.

One analyst believes this has been a factor in limiting the focus of Hong Kong investors to China. Mentioning one Eastern European fund manager that set up an office a few years ago, he claims "they haven't raised a penny out of Hong Kong - everything comes from Singapore and Australasia."

For his part, Hanson-Lawson says that East Capital is seeing interest in its funds offering exposure to Russia finally pick up. "It was very dry from the fourth quarter of 2008 to six months ago. Then enquiries began to flow, and they're slowly transforming into flows."

Westin insists that many investors would prefer Russian companies to continue to list in London, as they feel that the tougher conditions offer some protection against traditional Russian risk elements such as transparency and corporate governance.

Hanson-Lawson says that Hong Kong investors are no less concerned about Russia risk than those further west, despite their level of exposure to emerging markets. "Investors here are happy with China because it's right next door, in much the same way that Scandinavians have embraced Eastern Europe due to the proximity," he points out. "However, the first question potential clients ask us generally is about the level of political risk in Russia."

Still, the move to attract the vast cash resources lying off the coast of China into Russian equities is likely to continue enjoying support from the highest levels in Moscow. As much as it's a purely economic question of securing much-needed capital - Russia has little in terms of domestic resources - it's also both a developmental and ideological issue for the Kremlin.

On the one hand, establishing links with one of the globe's largest capital markets would only help Medvedev's vision of turning Moscow into a global financial centre, especially with global financial flows increasingly bypassing the more traditional centres in the West. On the other, it fits neatly with the efforts of the emerging markets to the east - led by China - to press that advantage by trading directly with one another in order to raise their global clout.

All those elements came together to push Rusal through, but it proved a false start. Whilst other major companies will be called on to support the effort and will be granted the same in return - Fedun offered little justification for Lukoil's plan except to say: "After the President's visit, of course, it will be Hong Kong" - it won't be possible to rally the troops every time.

Priced to go

For Russian companies to grab a slice of the huge liquidity in Hong Kong, they'll have to price their share issues competitively, insists Westin. "It's been suggested that Russian companies could raise their valuation multiples in Hong Kong," he points out - the average price/earnings (P/E) of Russia's RTS is around 6.5-7.0x, whilst the Hang Seng is sitting at 12.0-12.5x, "but I don't buy into that."

The refusal of investors in London - where the FTSE average P/E is around 13x - to pay the prices demanded by the likes of Nord Gold, ChelPipe, and coke and iron ore producer Koks this year suggests he could be right, whilst Hanson-Lawson agrees that in today's globalised markets, there's no reason for investors in Hong Kong to offer Russian companies a premium. "Russia comes with its discount," he states. "Whether you're in Hong Kong, Moscow or London, the rule is the same: don't be greedy!"

At the same time, there are plenty of commodity-based companies available on the UK market, whereas their rarity might offer Russian issuers a little leverage further east. That said, the opportunity for investors to diversify did little to help iron ore miner IRC when it was forced to slash its offer and pricing in October. The company had pushed its credentials as a supplier to China's commodity-hungry economy, but hit indifference in the market. "People tend to buy in the industries that they understand, and mining companies probably need a bit more time for investors to get familiar with," Alfred Chan of Cheer Pearl Investment told Reuters at the time.

That familiarity may be building now though, hand-in-hand with the recent rapid recovery on global commodity markets. The shares of both Rusal and IRC spent months trading below their listing price at first, but have now broken out of those boundaries. "There are plenty of Chinese commodities companies listed in Hong Kong, and that's no bad thing. It is allowing investors to become seasoned in those sectors," says Hanson-Lawson, who points out that it's not just Russian raw material exporters looking to Hong Kong. "The rumour is that [Brazil's] Vale and Petrobras are considering listings here also."