Russia had to cope with four rounds of new US sanctions in 2018 as well as unstable oil prices and a general miasma that has fallen over the population as real incomes failed to rise for the fifth year in a row. All that hurt business sentiment, and overall M&A activity in Russia was almost flat in terms of value in 2018, totalling €19.99bn across 153 transactions, compared to €20.2bn (178 deals) announced in 2017, according to Russian M&A data from Mergermarket.
The Russian story was out of step with the rest of Central and Eastern Europe (CEE), which saw M&A volumes rise on the back of booming economic growth.
The slowdown in deal making was particularly bad in the second half of 2018, which put in the lowest second half deal value result and deal count since 2002, reports Mergermarket, with only €5.8bn (29% of total annual activity) across 74 deals.
Unsurprisingly the Energy, Mining & Utilities was the most active sector for deals in 2018, accounting for just under a third (29.8%) of all deals, although it too declined sharply compared to previous years, with the second-lowest annual value (€6bn) and the lowest deal count (19) since 2002 (€3.1bn, 12 deals).
The biggest deals in this sector included the Qatar Investment Authority’s acquisition of Glencore's 9.18% stake in Rosneft Oil Company for €3.7bn, which accounted for 18.5% of the overall M&A value. Glencore and Qatar Investment Authority jointly bought a 19.5% in Rosneft for €10.5bn in December 2016.
Outbound deals grew to €2.27bn from 17 deals, up 169.3% by value y/y, with five more transactions compared to 2017 (€843m, 12 deals).
Russia has always exported more capital than it imports as Russian businesses invest in the so-called “near abroad” countries. The majority of outbound investments were made by corporates and private investors (10 deals) while almost 60% of deals conducted by local institutional investors outside the region (seven deals) targeted the technology sector (four deals), reports Mergermarket.
Western sanctions appeared to have taken their toll on foreign investments, with the inbound M&A deal count dropping to 22 in 2018, less than half the equivalent figure in 2017 (48 deals) and the lowest level since 2002 (11 deals). In particular, investment from the US and Europe has fallen to just 16 transactions, down from 36 a year prior. The largest foreign investments in 2018, including the aforementioned Rosneft deal, were conducted by Asian and Middle Eastern investors, totalling €6.1bn across five disclosed deals, compared to Western companies contributing only €1.1bn, just over 15% of the total inbound activity.
Another function of the sanctions is the Russian state remains by far the biggest player in the M&A business. The three biggest deals, representing over 50% of the value of the top 10 biggest transactions in Russia in 2018, were all conducted by state-run companies.
Given that the share of Russia’s state-owned companies in the GDP is around 50%, and the government has no plans for massive privatisation in the near term, Mergermarket says it expects the government to play an even more important role in the M&A market in 2019.
Mary Tasouli, research coordinator (EMEA) at Mergermarket, commented: “Amid ongoing uncertainty due to high geopolitical and trade tensions, the number of deals targeting Russia declined in 2018, hitting the lowest figure since 2003 (111 deals). Deal value however, remained steady compared to 2017 following a strong performance in the first half of the year.”