OPINION: New restrictions a mild negative for Russian equities

Contributed by Alex Kantarovich, Chief Strategist, Aton Capital

MOSCOW, Jan 18 (Prime-Tass) -- The Federal Service on Financial Markets (FSFR) has approved rules aimed at restricting new issuance and trading of Russian companies' shares outside the country. The code lowers the limit for ADR programs to 35% from 40% at present, stipulates that no more than 70% of a new issuance will be allowed to take place abroad, and allows for simpler and faster domestic listing. The new rules will become effective within 10 days of approval by the Justice Ministry.

While the FSFR had previously said it planned to introduce limits, more details are needed to assess the effect. According to Kommersant daily, companies with existing ADR programs in excess of the new limits will not be affected by the rule amendments (i.e. it will not be retroactive). Also, Gazprom may be allowed to proceed with its plans to issue ADRs to a 40% limit as it has already filed a request for 40% and is likely to get approval before the new rules take effect. At the same time, Vedomosti quoted an anonymous source at Gazprom as saying the monopoly could live with a 35% limit, implying the cap will take effect.

In any event, we do not believe the restrictions will result in any changes in the MSCI Russia index or influence the expected increase in Gazprom's weighting. Lowering the ADR limit does not automatically affect the Foreign Inclusion Factor (FIF) used in weighting, because trading by foreigners of local shares will not be affected. Also, since it is not going to be applied retroactively, ADR programs on all the existing stocks that are components of various indices are unlikely to be affected. As to issuance of new shares, the agency's intention is to promote domestic participation, an understandable goal given the growing popularity of equity investments in Russia and high domestic liquidity. However, such limits may be negative for companies trying to realize their IPO potential as the 70% foreign listing limit would apply even if domestic demand is weak.

The challenge is exacerbated by the fact that the wave of new IPOs this year may see the total volume of new placements reach U.S. $15-$25 billion, implying a whopping $5-$8 billion would have to be placed locally. Although domestic demand (including foreign money domiciled in Russia) could potentially match foreign interest - and the recent placement of a 10% stake in MTS is a clear indication of this - it remains to be seen whether it will be sufficient to handle that much supply. On the positive side, the agency has decided to lift a 45-day no-trading rule after a new issue is registered with the FSFR, which should help post-IPO price discovery and simplify associated paperwork. On balance, we view the new rules as a slight technical negative (as greater restrictions are always worse than lower restrictions) that may potentially affect new IPOs. However, we believe high domestic liquidity and the proliferation of the equity culture in Russia will mitigate the effect. End

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18.01.2006 12:26