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Russia: How to Bring Investors In?

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Russia: How to Bring Investors In?
In March this year, at the meeting of the Commission for mo...

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Russia: How to Bring Investors In?

  1. 1. E A S T E R N E U R O P E A N D C E N T R A L A S I A WORLD FINANCE REVIEW Russia: How to Bring 300M Investors In? 20 0M IPOs of Russian Companies: 100M Outlook for 2011 W rrk I .0 /754 / t.734 y- f Recovery of the Russian M & A Kazakhstan: Strong Recovery to Market: Cautious, but Steady Continue, But Inflation Poses Risk Ukraine: The Most Promising Kazakhstan Stock Exchange: Frontier Market in the CEE Global Challenges, Local Strategies Innovation in Tourism Diversifying Global Private Equity Development: Yamal Nenets Investments: Should Kazakhstan Autonomous District Be Considered? YOUR PARTNER FOR SUCCESSFUL GLOBAL INVESTMENT fin time
  2. 2. R U S S I A | Investment Russia: How to Bring Investors In? In March this year, at the meeting of the Commission for modernising the Russian economy, President Medvedev characterised the state of Russia's investment climate as "very bad" and noted that the "money is running away from our economy". The President stressed that, in order to modernise the economy, Russia needs "investors' interest and trust". In April, the President announced a ten-point programme of measures aimed at improving the country's investment climate and requested the Government to ensure the immediate implementation. It seems that Russia has started to put more effort in changing its image in the eyes of the global investment community and to take some practical steps to eliminate barriers to foreign investors coming into the country. However, are these efforts aimed at right targets; will they yield real results or remain on paper? World Finance Review asked private equity experts in Russia about their opinion on what barriers to foreign investments exist, how these can be eliminated and what needs to be done to make Russia a marketplace attractive to foreign investors. What main barriers do investors establish such on-the-ground presence retail chain. There is a conflict between face when entering the Russian in Moscow are substantial; therefore, two sides trying to install their own market and doing business in this creates a large barrier to entry for candidate as a CEO and using methods Russia? many foreign investors seeking to invest like office raids. Surprisingly, both sides in Russia, particular in the area of direct are led by American investors - TPG, a Dmitry Elkin, Managing Director, UFG investment. US private equity firm, in alliance with Private Equity: the EBRD and VTB, on one side and a For a foreign investor seeking to enter Vladimir Kozlov, Partner, Quadro US citizen (or former a US citizen and the Russian market, the main problem is Capital Partners: former state prosecutor from San Diego) informational. It is difficult to obtain an Overall, I do not think that Russia is on the other side. accurate picture of the Russian business much different from many other environment, and the majority of foreign emerging markets. Of course, there The image of Russia and its economy is investors do not have direct experience are local preferences, differences also distorted by a significant share of doing business in Russia. As a result, and particularities, which investors attributed to the natural resources many foreign investors rely on indirect and foreign businesses should be sector. Indeed, political and state ways of risk assessment, such as what aware of. interests often lay in the sector, the Western press says about Russia, businesses are run by oligarchs, and which is subject to political sentiment From the risk-reward perspective, the most of the press attention is attracted and often does not reflect the business Russian market is definitely one of the to the sector. Gazprom, Rosneft, realities, or what other Western most attractive among EMs. Recent data Khodorkovskiy, etc. At the same time, investors are doing, which results in published by the EBRD shows that in if an objective observer would look at "herd" behaviour, market volatility and Russia the returns on private equity the consumer market in Russia and abnormally wide range in valuations of investments over three-, five- and ten- consider macro economic trends, Russian companies. Thus, when in 2009 year horizons are much higher than that political risks, success stories, investors pulled out of the Russian anywhere else in the world: 17-18% net competitiveness, etc, he or she might market en masse, investors' pain was returns over 3 and 10-year horizons and discover that it is not only a huge partly self-inflicted, and could have been more than 40% over 5 years. At the same market with more than $1tril]ion in minimised if better information about time, while risks are present, the capitalisation, but a market with growth the Russian market was available. perceived risks are much higher than the rates much higher than the GDP growth. real ones. It is also not politicised and, therefore, Once a foreign investor has entered the does not carry the kind of risks for Russian market, the main problem is the In fact, there are quite a lot of which Russia is cliched. One would be overall complexity and inefficiency of misconceptions about Russia. In some surprised to discover a large number of Russia's business environment. Russia cases, foreign investors believe that the success stories of entrepreneurs, who lacks an efficient market for many government support replaces the rule of built and developed their companies business services that in the West are law, so they adapt their business without the government or state typically outsourced to third party practices in a way they would not do in support. providers. As a result, many successful their own countries. The recent example investors in Russia tend to have a large of the BP-Rosneft deal shows how a Lev Tretyakov, Managing Partner, degree of "horizontal integration", British company attempted to ignore the ROEL Group: maintaining in-house teams of lawyers, shareholders agreement to strike a deal In my opinion, the entrance barriers for security, government relations, CFOs, with a state company. Arbitrators foreign investors are decreasing. It has and other experts that can effectively blocked the deal, and ultimately the become easier to work in Russia in deal with myriads of problems arising in parties had to return to the negotiation comparison with the previous periods. day-to-day business dealings in Russia. table. Another example is the recent Political and economic risks are much The time and the cost required to shareholder conflict in Lenta - a food lower, and there is a higher degree of 12 May 2011 * WORLD FINANCE REVIEW
  3. 3. Investment | R U S S I A stability, which is one of the most Vladimir Kozlov, Partner, Quadro A list of ten priority measures to important conditions for attracting Capital Partners: improve investment climate has investors' interest. Russia is not yet a country that has been announced. How well, in your resolved the issues related to corruption, opinion, do these measures address The currently existing barriers are high the rule of law and transparency. the current problems? interest rates on loans, and lack of However, there have been a number of infrastructure development. However, in initiatives to improve the country's Dmitry Elkin, Managing Director, UFG my opinion, these barriers are investment climate. While the courts and Private Equity: insignificant. the Russian legal system overall remain The President has an ambitious plan: to ineffective in structuring and protecting increase foreign investors' trust in Dmitry Kashaev, Head of Asset direct private equity investment, there Russia. The goal is not easy to attain, but Management, BrokerCreditService: has definitely been some progress made the announced measures seem to be Coming to Russia, investors should be since 90s. A number of investment funds well thought out, reasonably decisive aware that, in spite of 20 years of started operating, including Rusnano and directed at solving many overdue development, many market institutions and Skolkovo, which significantly raises problems, such as providing investors are either completely absent or do not the profile of the industry and pushes with tools to protect themselves via work as they should (in comparison the country up the learning curve. I mandatory public disclosure of the with other countries). These are the believe that only practical steps like results of investigation of allegations of institution of private property and of fund formation and actual investments official corruption. Medvedev's policies intellectual property; also the legal and can become a major force to drive seem to follow the principle that judicial systems have their weaknesses. changes in the legal system and to "sunshine is the best disinfectant". If improve the country's investment Russian government has sufficient climate. political will to enforce the At the same time, those investors, who accept and understand the rules of the implementation of these 10 principles, game, receive higher returns on invested Lev Tretyakov, Managing Partner, this can have material impact on capital. Recently, mot so much ROEL Group: Russia's investment climate. speculative capital, but direct The measures taken so far can be investments have started to flow to the characterised as a policy of small steps. Another effective measure is the real economy. This indirectly confirms that stability is removal of the state representatives forming in Russia. from the board of state-owned companies, and the related privatisation What improvements have already Laws have improved. There is a little of the state assets. This can serve as an taken place and what areas remain more PR (TV channel Russia Today). effective response to frequent criticism of greatest concern? Success stories have appeared: plants of that many Russian companies are run by Toyota, VW, Nissan, SAMSUNG and "Kremlin cronies", or that the Dmitry Elkin, Managing Director, UFG others. Overall, the practice of investing government is planning Private Equity: into Russia is becoming increasingly "renationalisation" of several sectors of Foreign investors often point to the positive. the economy. Policies stated by the arbitrary government interference as an President deal directly with such area of a substantial risk in Russia. This Dmitry Kashaev, Head of Asset concerns. complaint is understandable, given many Management, BrokerCreditService: examples of government bureaucrats All previously voiced questions are Lev Tretyakov, Managing Partner, seeking to leverage their access to the under constant consideration not only ROEL Group: state apparatus for personal gain. This by the Government but by the entire The main idea behind the proposed creates additional expense for investors, economic community as well. Now, the measures is to strengthen stability in the and could potentially lead to improper situation in Russia is very interesting: country, to improve flexibility of the change of control, when contingent the economy and markets are state institutions dealing with investors, liabilities, such as inflated tax bills, are developing so rapidly, that state to remove corruption barriers and to used as leverage against bona fide institutions do not have time for them. decrease the influence of officials and of shareholders (the practice known in This is why a lot of their functions are the state machine on the economy. Russia as "corporate raiding"). taken over by those, who participate in a particular process and define the codes The Russian government is now actively and rules of business behaviour. One of the proposals is to establish cleaning up many branches of the a sovereign fund for direct government implicated in such abuses, The most notable impact is on the investments. What should the main including the removal of heads of publicly traded companies - independent objective of the fund be and how regions and law enforcement directors' institutes, regular meetings should it be operated to promote functionaries, which should have a with investors, development of IR direct investments? substantial and immediate effect. For services, etc. If you plan to buy equities, example, the removal of the overbearing now it is much easier to get information Dmitry Elkin, Managing Director, UFG Moscow mayor Luzhkov has eliminated about the company. Private Equity: a substantial source of the local political Compared to the other BRIC countries, risk for many Moscow-based businesses, And, of course, we can note the Russia's private equity has a major including retail operators and real estate government efforts - their risk-sharing drawback: it is very small scale. developers. offer to foreign investors. Therefore, despite its relatively strong WORLD FINANCE REVIEW * May 2011 13
  4. 4. R U S S I A | Investments performance, Russian private equity has announcement on the need to improve Dmitry Kashaev, Head of Asset been viewed as largely irrelevant by investment climate brings attention to Management, BrokerCreditService: Western institutional investors who the issue. The fact that the president Investments go to where it is profitable focus on China, India and most recently focuses on this issue is great, but the and comfortable. A number of regions on Brazil. Without the support from main challenge is to follow it through. are already successful in attracting large Western money managers, Russian There will be real results, especially if investment. For example, the Kaluga private equity has been very slow to the main KPI on amount of foreign Region has a lot of industrial clusters: develop, which discouraged many direct investments is established and not only automakers, but also food and established Russian companies from followed both by the central government consumer goods. considering private equity as a stable and in the regions. source of capital. This, in turn, has limited investment opportunities for Lev TTetyakov, Managing Partner, What is the reaction of the investor large Western private equity funds. This ROEL Group: community to the announced Catch 22 situation is difficult to break, During the trip to Hong Kong, President measures and how soon the effect is which is unfortunate, because the Medvedev named the main activity expected? Western-style private equity could play a directions and the principles of RPEF's bigger role in the Russian economy by, participation in projects. RPEF will Dmitry Elkin, Managing Director, UFG for example, acquiring non-core invest in large-scale infrastructure Private Equity: divisions of industrial conglomerates. projects: construction of roads, Foreign investors with no well- development of a communication established presence in Russia are likely If the Russian sovereign fund is facilities, etc. RPEF will invest 10 % to 20 to remain sceptical for some time, until successful in demonstrating that large % of the project costs (budget). Private the improvement in Russia's investment size private equity transactions ($1 investors, including foreigners, will climate is accepted as a fact by the billion and above) are possible in Russia, provide the remaining part of required Western investment community. This and if such investments generate investments. may take a number of years, and this attractive returns, Russian private equity interim period presents an attractive will finally get investor attention it Dmitry Kashaev, Head of Asset investment environment for funds like deserves. Management, BrokerCreditService: UFG, who are already present on the Investment objects of the fund have ground and can take advantage of the Vladimir Kozlov, Partner, Quadro already been identified, but the economy "arbitrage" between foreign investors' Capital Partners: needs diversification, which means that perception of Russia, which remains The establishment of a sovereign we must develop at least assembly largely negative, and the realities of the investment fund will help to develop and production. One of such project we have investment climate, which is finally improve investment climate and is Skolkovo, would be better to have starting to improve. promote private equity. The effect of the another two or three similar projects in fund will mostly depend on the way this Russia. Lev Tretyakov, Managing Partner, initiative will be implemented -the ROEL Group: strategy, operations, professionalism of As a whole the investment community the team. Investments in Russian regions - has positively apprehended the do the announced measures foresee proposed measures, as they I believe that the fund's main objective any particular steps to improve demonstrate the country's growing should be attracting as many private investment flows into regions? openness to investments and the desire equity houses and foreign funds as to work on improving the investment possible to participate in Russian deals. Dmitry Elkin, Managing Director, UFG climate. The country has a long-term It will help break misconceptions of the Private Equity: development strategy, to which the Russian reality, to promote the industry, Among other measures, President has government consistently adheres. This is and will ultimately improve the business proposed steps specifically directed at why it is possible to invest Russia. environment. To make it practical and to improving investment climate in Russia's get the results quickly, the fund could be regions. For each region, Medvedev Dmitry Kashaev, Head of Asset established as a co-investment structure, suggested to appoint a "regional Management, BrokerCreditService: possibly taking significant minority investment supervisor", whose The reaction is restrained yet. The main stakes, and mostly focus on providing responsibility would be to facilitate reason is that this is only a statement growth capital. After a few years, when investment process and assist investors and specific problem solving. Therefore, track record is established, the fund in interaction with governmental a full reaction cannot be expected could launch a new limited partnership authorities. earlier than the end of this year, but, attracting institutional investors as realistically, at the beginning of next limited partners. Lev Tretyakov, Managing Partner, year or may be later. ROEL Group: The significant size of the announced If regional investment representatives fund will prevent investing into small (the ombudsman) will work actively, I and medium size businesses. However, think the situation in Russian regions this is only a first step, and a whole new will improve. However, I consider this set of initiatives is needed to develop measure insufficient. private equity as an industry. Dmitry Medvedev's recent 14 May 2011 * WORLD FINANCE REVIEW

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