Ben Aris in Hong Kong -

With western capital markets reduced to smoking ruins, Russian efforts to tap the deep pool of Asian capital have accelerated. The Kremlin is pushing its oligarchs into listing on the Hong Kong Stock Exchange (HKSE) and leading Russian companies are touting their wares around the glass and concrete forest of Hong Kong's Central business district. Yet so far, the sales pitch is largely falling on deaf ears.

Russian metals tycoon Oleg Deripaska was hoping to float his Strikeforce Mining and Resources company on the HKSE in September, but the issue was cancelled at the last minute. No reason was given. Likewise, Russian state-owned telecommunications firm Svyazinvest was in town at the start of November hoping to raise hundreds of millions of dollars in investment capital. "Svyazinvest is looking into Asian markets because they seem more stable than European and US markets at this time," Deputy Chief Executive Yelena Selvich told the Russian press, adding that some deal might be forthcoming in the New Year once the company's budget it set.

But the push into Asian capital markets is being driven as much by politics as profit. There is a lot of interest in closer financial ties between Beijing and Moscow: Russia has traditionally had cool relations with the Chinese - even in Soviet times - but the Kremlin did an abrupt volte-face in 2004 as relations with the West began to deteriorate. Beijing, hungry for power and materials, has swallowed its pride and is also working hard to make the uneasy relationship work.

As the governments of both countries are strong, the push-me-pull-you of both sides has already produced some deals. Within weeks of the collapse of capital markets around the world in September, China National Petroleum Corporation bailed out Russian oil producer Rosneft with a multi-billion-dollar loan. More financing and cooperation is on its way: Chinese-Russian bilateral agreements were signed during a visit of Chinese State Council Premier Wen Jiabao to Russia in November, including a document allowing major Russian companies to place their shares on the HKSE. "The agreement on issuing depositary notes and preliminary placement of shares on the Hong Kong Stock Exchange to be signed by the Russian Evrofinance Mosnarbank [part of the state-owned VTB Group] and the Industrial and Commercial Bank of China has a major importance for us," Viktor Melnikov, deputy chairman of the central bank, said at the signing ceremony.

Lack of liquidity

Hong Kong is the world's third-largest exchange by turnover and capitalization after New York and London, but local investors in Hong Kong remain dubious of Russian companies' push into the Asian capital markets. "If any Russian companies float in Hong Kong as their primary listing, they will delist again within three years," reckons Stuart Maxwell, a private investor, who is one of the few locals with a large exposure to Russia. "The same was tried with American companies listing on the Tokyo exchange, where there is a huge pool of capital. But there as here, there just won't be any turnover. It just doesn't make sense."

At first glance, the logic of a listing seems compelling. There is an obvious synergy between the Russian and Chinese neighbours: one has the power and materials, while the other doesn't, but both are growing and increasingly trading with each other. For Asian investors, putting money into Russia's natural resource sectors is an obvious proxy for the Chinese growth story, which also allows them to diversify out of Asian assets. And this is already happening. The Japanese bank Nomura took Russian real estate developer PIK on a road show to Hong Kong prior to its IPO. Maxim Seltzer, general director of Nomura CIS said: "We took PIK on a road show in Asia before the IPO was an issue with a 'show and tell'. Asian investors are a different breed and you can't just parachute into Hong Kong and Singapore. Despite the fact that the two other banks working on the IPO advised against going to Hong Kong, because we took PIK's two owners and an independent director, it was a huge success and over a third of the order book was covered by Asian investors only two days after it was opened. Real estate is one sector the businessmen in Hong Kong understand very well indeed and so they speak the same language as the Russian developers. There is less need for a specialist understanding of Russia."

Nomura also showcased Ukrainian agricultural company Black Earth Farming in Asia with similar success: Asian investors took up about 20% of the placement of that IPO. Seltzer concedes it is still a hard sell and admits the expertise in Hong Kong is not there. However, he draws a parallel with selling Polish stocks in London in the 1990s. "It will take time and is a process. However, the Asians are already specifically looking at Russia - not Eastern Europe - because of the natural resources and the scale of the country is similar to that of China."

So it's possible to raise serious money for Russian business in Hong Kong. But listing a Russian company in the port-city is a different kettle of fish entirely. The first problem is local investors have such a large and diverse playground on their doorstep that few have paid much attention to Eastern Europe and know little about it. Then there is the five hours time difference and nine hour flight between the two countries; the HKSE is closed for much of the Russian day when price-moving news comes out. Finally, there is almost no research or Russian equity sales capacity in Hong Kong and few Russian speakers. Most of the Russia specialists outside of Russia tend to sit in London, which is only three hours behind Moscow and two and a half hours on the plane. Those Asian investors who are interested in investing in Russia, tend to make these investments through banks and partners in London. "There is no reason why Russian companies can't raise money in Hong Kong and they should come and showcase their companies here," says Maxwell. "But listing here is a bad idea."

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