BUSINESS REPORT IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA WEDNESDAY, NOVEMBER 10, 2010 Diplomacy Russia tries to break stereotypes by inviting East Asian countries to partner in high-tech, nuclear energy ASEAN ties go on upswing REUTERS/VOSTOCK-PHOTO


Russia is set to accelerate economic ties with ASEAN as it joins East Asia Summit next year and refurbishes its image to counter US influence in the region.


IGOR TOMBERG STRATEGIC CULTURE FOUNDATION


On October 30, Russian Pres- ident Dmitry Medvedev at- tended the second Russia- ASEAN summit in Hanoi (the first Russia-ASEAN summit convened in Kuala Lumpur in 2005). The forum was meant to boost coopera- tion between Russia and East Asian countries which, as a Kremlin official said, are hoping that Russia can bal- ance the growing US influ- ence over the region. Currently, Washington is pouring massive investments into the military sphere of the Asia-Pacific. The US ini- tiatives in the region include the construction of an air- craft carrier dock, the cre- ation of a missile defence system, and an $8 billion up- grade of an aerodrome on the Island of Guam. The Pen- tagon also invested $126 mil- lion in the modernisation of the military infrastructure in Great Britain's Diego Garcia Island, which will serve as a repair base for submarines, every one of which is equipped with 154 cruise missiles and rivals an aircraft carrier group in terms of total firepower. Washington says the efforts are made in response to Chi- na's military buildup in Asia-Pacific, but the region's countries are predictably concerned over the emerging confrontation and are there- fore interested in maintain- ing a local balance of super- power interests. Moscow discerned the contours of the situation. Medvedev stated in Hanoi that Russia is open to new regional alliances and


President Dmitry Medvedev at the second Russia-ASEAN summit in Hanoi


Russia open to new regional alliances in Asia-Pacific region where the US influence is growing


Moscow has adopted 2010-15 programme of energy cooperation with ASEAN


stressed that the admission of Russia - along with the US - to the East Asian Commu- nity was an important deci- sion of the summit. The East Asian Community compris- es 10 ASEAN countries plus Australia, India, China, New Zealand, South Korea and Japan. The summit focused on the future of the economic coop- eration between Russia and East Asian countries. Com- bined, the ASEAN GDPs, share of global trade, and in- vestment volumes respec- tively account for around 60%, 50%, and 40% of the world's total. The popula- tions of ASEAN countries number 580 million. As a group of steadily growing


Trend Emerging market investors willing to bet on stocks


IPO pipeline flows back after dry spell


After a prolonged dry spell, IPOs have begun to flow back. Will the hopeful trend triumph over low bids and widespread scepticism?


TIM GOSLING RIBR


After slowing down earlier this year, Russia's IPO pipe- line is cranking back to life. Investors look keen to get a piece of the most attractive companies, but are dithering over price. At the start of 2010, Russian stock worth $20bn was expected to go public. However, with equi- ties stubbornly refusing to follow bond markets, the market has seen just $3bn or so of this equity. The tap is now turning back on. On one hand, some com- panies can no longer avoid having to hunt cash to pay down their debt. For most, the bond markets are still too expensive, and the banks are tightening requirements on borrowers. "In short, to some extent it's a natural process as we come out of the economic crisis," says Peter Westin, strategist at invest- ment bank Aton. Yet others sense that emerg- ing market investors are fi- nally ready to cash in the


economies with GDPs add- ing upto $1.5 trillion and a cumulative trade turnover of $1.7 trillion, ASEAN ranks among the global heavy- weights and plays a key role in the Asia Pacific region. Russia's share of the ASEAN trade turnover in 2009 was a modest $6.8 billion. It’s time to prioritise expansion of the economic cooperation be- tween Russia and the ASEAN countries. In the run-up to the summit, Mos- cow adopted a 2010-2015 programme of energy coop- eration with ASEAN, in- cluding plans for the oil, gas, and electric power energy sectors as well as for renew- ables, nuclear energy, and environment-friendly tech-


Dmitry Grishin, CEO, Mail.ru, believes the company will sig- nificantly benefit from the growing Internet market


Russian funds attracted highest inflows of any emerging market for first time since May


profits they've made in mar- kets such as China, India, South Africa and Turkey to take a punt on Russia's cheap stocks. As Chris Weafer, chief strategist at Uralsib, wrote on October 29, across the


previous week, Russian funds attracted the highest inflows of any emerging mar- ket for the first time since May. Tom Mundy, chief strat- egist at Otkrite Financial Corporation, suspects "there's already cash on the sidelines that could be tempted by some offers". But scepticism about Rus- sian IPOs continues to per- sist. IRC, which was first out of the gate in October, found out quickly just how suspi-


cious investors remain. The non-precious metals divi- sion of Petropavlovsk slashed its proposed $500m offer in Hong Kong by 50% in the face of low bids. Mundy picks out retailer O'key as one sector that peo- ple want exposure to. The most bullish of the whole batch is internet group Mail. ru, whose initial pricing range for its debut in Lon- don values the company "no- tably higher than most inter- national peers," says Konstantin Chernyshev of Uralsib. Driven by Mail.ru's positioning as "the only Rus- sian tech stock of such cali- ber" and offering exposure to both the consumption story and "Russia's human capi- tal", the bid book was quick- ly filled towards the top of the range in early Novem- ber. Yet at the same time, others continue to struggle with the persistent gap between ex- pectations and the refusal of investors to pay top dollar. Freight rail operator Trans- container set the price on its offer 5% below the lower end of guidance, whilst Novem- ber 3 saw Mostotrest list at the bottom of its pricing range, although the bridge builder did break a trend in early trading when the shares jumped in value. It seems unlikely then that everyone of the companies that have announced plans to list in the near term will actually go through with it. However, with a $50 billion privatisation programme penciled in for 2011-15, it may be the only opportunity for many.


nologies. Russian Foreign Minister Sergei Lavrov said after the summit that Rus- sia's ASEAN partners are keenly interested in the nu- clear energy sector and in jointly evaluating the poten- tial of geo-thermal power. New Zealand's prime minis- ter expressed a typical per- ception of Russia during the debates over a possible free trade agreement between the two countries when he described Russia as a coun- try with a lucrative market and huge quantities of valu- able resources like oil and gas. Hoping to break the ste- reotype, Russia is inviting ASEAN to work together in the high tech sphere. In his summit address, Medvedev


praised the Russia-ASEAN cooperation in the electric power, nuclear, renewable energy, and gas sectors, but laid out a bolder vision for the future based on joint ef- forts in high tech areas such as machine-building, new materials, medicine, earth remote-sensing, aerospace and Russia's recent staple – the satellite navigation sytem to deal with natural disasters. In the global market and Asia, Russia's inferiority complex stemming from its over-reliance on natural re- sources often creates obsta- cles in the way of positioning the country in a more realis- tic fashion, demonstrating its capabilities, and thus ad- vancing its national inter- ests. The Russian nuclear sector, for example, should be able to win for the coun- try more high tech side of the energy business. The state- owned Rosatom secured a contract to build Vietnam's first nuclear power plant with two 1,000 mW facili- ties. Russia also boasts ad- vanced R&D in renewable energy sources. Till now, Russia's diplomacy in Asia was hindered by a lack of persistence. Custom- arily prioritising its relations with the West, Russia only occasionally switched to cul- tivating ties with the Asia- Pacific. Hopefully, Moscow's assertiveness in Hanoi and its plan to host the 2012 Asia- Pacific summit signal a ris- ing awareness about Asia in the ranks of Russian deci- sion-makers.


Igor Tomberg is Director of Energy and Transit Studies Center of the Institute for Oriental Studies in Moscow and professor at the Moscow State Foreign Relations In- stitute of the Russian For- eign Ministry.


Bill To cover 20% exports by 2011-13


Hopes high on new export credit agency


Pursuing modernisation plan, Russia is set to create an export credit agency in 2011 that is expected to boost exports by 30%.


NATALYA FEDOTOVA RIBR


It's an idea whose time has come. This summer, Russia’s Prime Minister Vladimir Putin announced that a set of regulatory documents had been drafted to establish an export insurance agency. The government is now review- ing a draft law that details the process of providing credit guarantees. The export credit insurance agency will be a public cor- poration (open joint stock company) and a 100% sub- sidiary of state-run Vneshe- conombank, which will ini- tially earmark 30 billion roubles for export credit in- surance. It will provide in- surance coverage for Rus- sian companies’ big export-import contracts and global investment projects. Export insurance solutions against commercial and po- litical risks will become available in 2011. “It is ex-


pected that 20% of all Rus- sian exports ($13 billion), will have credit insurance coverage provided by the agency in 2011-2013,” says Yekaterina Karasina, a Vneshekonombank spokes- man. The bank says that insuring export credits against com- mercial and political risks will be granted selectively to specific exporters and will depend on an individual as- sessment of risks and goods or services to be insured. Ex- perts believe that the new agency will help "Made in Russia” label products to gain greater visibility in in- ternational markets. Backed by the insurance agency, Russian exporters will be able to offer better financing deals to their foreign part- ners, primarily those in the fast growing markets of Asia, Africa and Latin America. The agency plans to insure at least 30% of all exported Russian goods: machinery, equipment, construction and engineering services. This will hopefully result in a 30% increase in Russian ex- ports.


OPINION


Wake up, take a closer look at Russia's reform and wealth-creating story


Plamen Monovski SPECIALLY FOR RIBR T


he proportion of people living on, or below the poverty line in the US ex-


ceeded that in Russia in September: the US had a 14.3% poverty rate and ris- ing (as of September 15), according to the US Cen- sus Bureau; Russia’s pov- erty rate was 13.7% and falling, says Rosstat. Wealth in Russia is rising because it has consistently tackled difficult reforms, which have improved its ability to create wealth. Western countries face falling standards of living, as mature political systems are bad at making the changes needed to deal with the current crisis. The consensus politics of ma- ture democracies works well when things are run- ning smoothly, but not when there are big eco- nomic dislocations. If any- thing, the current crisis has only steeled the Kremlin’s resolve to push through the most liberal set of reforms under President Dmitry Medvedev’s banner of “modernization”. Will it work? There is a widespread per- ception that reforms in Russia have failed. Yet nearly every important in- dicator – size of the econo- my, personal income, stock market capitalisation – has expanded 10-fold in the last decade. Reforms have been work- ing, but in most cases, while they have created wealth and opportunity, they re- main a 'work in progress'. The retail sector was the first to take off more than a decade ago but its develop- ment is essentially apoliti- cal: all the government had to do was to free prices and ensure companies have ac- cess to capital. Retail turn- over has been running ahead of GDP growth, driven by surging in- comes. Reform of the telecommu- nications sector was the state’s first big top-down reform; starting around


IN BRIEF


Rise of the middle class: 200 cell phones per 100 households


At the end of September, Rosstat, Russia's statisti- cal agency, published the results of its extensive panel study of household income and expenditure. The study was conducted last year and covered some 48,000 households located in diverse Russian re- gions. The structure of Russian consumer behaviour evolved significantly be- tween 1990 and 2009; to- day's structure closely re- sembles other countries with a similar level of eco- nomic development. Rus- sia's current level of con- sumption makes it a midlevel consumer econo- my by global standards. In 1990, Russian house- holds spent 41% of their income on food; last year, that share had fallen to 35%. Compared to devel- oped countries, Russian households, however, still spend a sizable chunk of


their income on food. Some 46% of income went to non- food goods purchases in 1990, compared to 38% in 2009. The share of services doubled from 13% in 1990 to 27% in 2009. The strong growth in services indicates just how underdeveloped the service sector remained during the Soviet era and how rapidly the sector ex- panded thereafter. The eat- ing habits of Russians are definitely healthier. Rus- sians eat more fruit, vegeta- bles and fish than 20 years ago. Meat consumption has held fairly steady, while the relative share of bread and potatoes has diminished. Many home appliances have become standard in the last two decades. In 2009, there were over 100 refrigerators, 100 washing machines and over 200 mobile phones per 100 households. There were also about 50 cars and 50 computers per 100 house- holds last year. BNE


2002, it has been a huge suc- cess. The quality of phone lines is beyond any compari- son with Soviet-era telepho- ny. There are 141 sim cards for every 100 people in the country, far ahead of any other BRIC country, while the value of the leading com- panies has soared. The point is that the Russian equity market looks very dif- ferent depending on where you stand. From afar, it looks unattract- ive and volatile – fortunes can be made and lost in a fi- nancial quarter. But when you take a closer look at spe- cific corporate and reform stories, you see gems. Thanks to its poor invest- ment image, the Russian eq- uity market is the only one of the BRIC countries that has failed to re-rate. Russian stocks are trading at an aver- age price-to-earnings (P/E) ratio (a widely used metric, where the lower the number, the greater the perceived value of a stock) of less than 8, and this is expected to fall to 6.3 next year as corporate earnings recover. This com- pares to India’s 19, China’s 15 and Brazil’s 13 as of the end of September. In other words, Russia gets no credit from investors for the re- forms already carried out. However, look closer at the representative companies in each of the sectors that have been overhauled and the pic- ture is the opposite. Take two examples: independent gas producer Novatek’s stock is currently trading at a P/E ratio of 20.1 and the shares of supermarket chain Mag- nit are trading at more than 30 – both look expensive, but investment banks still have both marked up as “buy”. It looks like investors fo- cused on Russia’s reforms have realised the benefits and are heavily invested into the best stories in each of these sectors. But the reform story has yet to percolate out to the rest of the world, which is still painting Rus- sia’s image in very dark colours.


Plamen Monovski is the Chief Investment Officer of Renais- sance Asset Managers based in London


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