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RUSSIA INDIA BUSINESS REPORT

IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA

THE ECONOMIC TIMES WEDNESDAY_MAY 12_2010

Banking & Finance

Interview Retail and housing sectors could be the key drivers of economic growth

Stakes are high for stocks

Major US oil fields returning to production will not satisfy global energy demand, says General Director of Zerich Capital Management Alexander Shcheglov.

VLADISLAV KUZMICHEV

RIR

Has the Russian stock market recovered?

Yes. Based on all conventional indicators such as turnovers, price benchmarks, etc., we can confidently say that the Rus- sian market has seen a re- bound. We are past the global crisis and will see a growth trend for another 5-10 years until the next downturn. If you want to make long-term investments, it is just about time to enter the Russian stock market and start generating value.

The credit crunch is over but the RTS index is about 25 pc below its pre-crisis level. Why?

It is important to recognise that the price peak before the col- lapse was driven by the bubble effect. As early as 2007, serious financial experts were warning that all financial markets had been heavily oversold. These were not simply alarmists who make it their business to hor- rify the public with apocalyp- tic predictions. In 2008, every- body understood that things were too overheated to buy any stock. Still, investors could not bring themselves to believe that the obviously soaring mar- ket would soon collapse. That

Alexander Shcheglov, General Director of ZCM

is why when trouble eventually struck as the fall was so steep. It will take some time before the market can scramble back to its historic highs. We won’t see it for another year or two, but the current level already reflects good progress.

The Russian economy has been slower to recover than the stock market. What are the reasons for this?

The Russian stock market is considerably different from the classic American model. The stock market in the United States is one of the major finan- cial sources that fuel the econ- omy. Most American companies are public corporations, private but owned by teams of share- holders, rather than one person. The stakes of the biggest share- holders hardly exceed several percentage points.

Although Russia is moving in that direction, right now, our stock market is nothing but a minor auxiliary tool for at- tracting investment into the economy. The bulk of capital comes from oligarchs, the gov- ernment or foreign investors. We are trying to make our econ- omy public, but we have to overcome many challenges. One of them is the mindset of corporate leaders who prefer the model, under which busi- nesses are controlled, either by a physical person or govern- ment agency. Therefore, even IPOs are seen as a way of tap- ping larger capital sources rather than increasing the value of the business.

What is happening in the IPO market?

The Russian IPO market is al- ready stirring to life. RusAL is a great example. Although the aluminum giant had govern- ment anchor investors to back it, the floatation did raise some public money. The bond market does not look bad, demonstrat- ing even faster recovery. But I would rather not make any specific forecasts.

What issuers could be of interest to investors?

The retail sector is getting back on track. It had to pay huge debts, but the business itself has not been affected because all people, wherever they are, have to eat. Consumers are about to start regaining their purchasing power. Salaries will

go up. Additionally, the share of retail chains on the Russian market is not as big as in Eu- rope. So even if consumers do not get any richer, the big re- tailers will be able to grow by acquiring smaller competi- tors. Realty developers have bril- liant prospects. Home owner- ship is limited in Russia and people will be looking to buy one. Russia did not have the subprime problem, which trig- gered the credit squeeze in the United States. American lend- ers offered mortgage loans to people who by definition could not have a home due to their marginalised situation in life. Russia, conversely, was short of housing even before the reces- sion and the industry was struggling to catch up with de- mand. Companies had pro- curement problems with all kinds of supplies, including ce- ment and construction vehi- cles. There are also conventional drivers such as commodity markets. As we can see, oil and gas prices have been recovering too.

Can the shale gas fever affect this recovery?

Not much, really. The Ameri- cans have created excessive pe- troleum supply in the market. But let’s look beyond the short- term horizon. Energy demand is bound to grow. There will be two centers of demand. The emerging Asian economies, the traditional pre-crisis demand

07

The world's largest aluminium producer RusAl's successful IPO in Hong Kong opened doors for other Russian and CIS issuers

drivers, will be joined by the United States and Europe. In this context, bringing large hy- drocarbon fields back online in the United States makes sense, as this will smooth over the spike, but it will not be able to satisfy all the demand. This dual-sourced increase may lead to substantial energy shortages that will take all kinds of resources, including shale gas and alternative ener- gy, to alleviate. But the chal- lenge is that shale gas has little time left to make it to the mar- ket, because the unconvention- al fields will be able to reach planned production targets only in 5 to 10 years. As for al- ternative fuel, its share is too small in the global energy mix. It is more of a political tool, which is used to put pressure on producers.

Another BRIC summit has been held in Argentina. How could it influence the global and Russian economy?

What unites us, perhaps, is the fact that western countries who are so far the real global leaders have acknowledged our presence. Today, we are witnessing a dra- matic transformation of the classic three-world model. Whereas the developed econo- mies are happy with 2 or 3 pc growth, the third world is fac- ing wider financial gaps be- tween its members. One part of that world, including BRIC and such countries as Indonesia, Vietnam, South Africa and some others are edging closer to the leading nations. The other part, mostly in Africa, is degrading into even starker poverty.

Fund Renaissance Group hopes to capture emerging markets' asset management franchise

Cashing in on the growth prospects

Russia’s asset management business is up for grabs. The CEO of Renaissance Group, Stephen Jennings argues that Russia has just begun a new “super cycle” and is looking at about a decade of stellar returns.

BEN ARIS

RIR

New Zealand born and only for- eigner to have been dubbed “oli- garch” in Russia, Jennings found- ed the group in the mid-1990s and was worth over a billion dol- lars just before the crisis struck. But the banking group survived and on Febraury, he launched the new fund Renaissance Asset Management (RAM) with $800 mn in assets, which he hopes will be worth $10 bn in five years' time.

“RAM will be the pre-eminent asset manager in Russia, emerg- ing Europe and Africa,” Jennings said in lilting accent of his home- land that is slightly out of place on the frozen streets of Moscow. “A huge amount of development already has been archived in Russia with equities, banks and the like, but asset management has yet to start. The largest firms in 5-7 years' time will be very large and valuable.” Predicting this kind of growth anywhere else in the world would raise scoffs of disbelief – but not in Russia. Over the last ten years, the Russian equity market returned just under 750 pc, easily beating out the second best performing market in the world, China, which was up 190 pc, according to equity rating company Morningstar (and that

CEO of Renaissance Group, Stephen Jennings

is including the loses made in the recent crisis). The trouble is that over the last 13 years, Russia has always been in either the three best perform- ing markets in the world – or the

bottom. Investing into Russian stocks is all about timing and if you get it right, the returns are huge. This is why Jennings has chosen now to launch the fund. The Rus- sian stock market lost nearly 80 pc of its value in just a few weeks after a “death spiral” of selling began in September 2008. The market bounced back at the start of 2009 and returned nearly 150 pc for investors brave enough to go back in. But as RAM’s manager Bulgar- ian born Plamen Monovski points out, the market needs to rise 400 pc just to attain all the ground it lost last year. Thanks to Russia’s bad image, it remains the cheapest of all the world’s significant equity markets on a price to earnings basis. “The time to invest is now,” says

Monovski. “Emerging market discounts are currently at a all time high. Russia had a horrible crisis but unlike last time, this crisis didn’t decimate the econ- omy. You will pay a lot less for growth and profits in Russia. We are certain that this market will grow for a long time.” And if anyone can realise Jen- ning’s dream, the London-based Monovski can. He joined RAM as a chief investment officer, got designated in February coming from leading US hedge fund Blackrock, where he built up their emerging Europe fund from a $80 mn exotic oddity into a $9 bn powerhouse and top ten performing fund in the world during the 1990s. And Monovski hopes to do it all over again; the crisis has knocked Russia’s eq- uity market back several years

of development and he argues that it will simply repeat the same performance of the last de- cade. “There will be a boom of unprec- edented proportions,” says Mon- ovski. “Russia is currently amongst the cheapest markets in the world and we have just start- ed out on the next cycle. The market seems like it has done a lot already, but really it still has a lot to do. Currently, the funds in the com- pany are being offered to institu- tional investors, but as the fund will receive UUU status approv- al in June, it will become avail- able to retail investors around the world. “Building up the fund is going to be a long, slow process as we are in the business of winning trust and you can only do that by con- sistent long-term performance,” says Monovski. “The goal is to be the best in breed and give access to investors large and small to opportunities that are currently unavailable to them.”

YURY MARTIANOV_KOMMERSANT

FROM PERSONAL ARCHIVES

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