AvtoVAZbank Looks to U.S.

In a bid to attract foreign investors daunted by the risks and red tape involved in buying stock in Russia, AvtoVAZbank has taken the first step toward becoming the first Russian company to issue securities in the United States backed by its stock.


The bank, based in the central Volga region and largely owned by AvtoVAZ, Russia's largest automobile maker, last week filed an application with the U.S. Securities and Exchange Commission, or SEC, to issue American depositary receipts, securities traded in the U.S. and backed by foreign stock.


"We think ADRs could be a good instrument to attract Western investors and to ease their fears about Russian securities," said Dmitry Zharanov, development director at ANS Investment Co., the daughter company of AvtoVAZbank which handles investment.


He called the application a first step toward being listed on a U.S. stock exchange and eventually floating new shares in America. AvtoVAZbank's first ADRs would be backed by existing stock.


A number of other Russian companies, including oil giant LUKoil and utilities conglomerate United Energy Systems, are also working on ADR issues. The issues require approval from the SEC, which is now considering the AvtoVAZbank bid.


The main reason for Russian companies to issue ADRs, analysts say, is to simplify stock purchases for foreign investors who are reluctant to buy shares within Russia because of the lack of a central stock exchange, adequate securities regulation and ownership guarantees.


Currently, would-be investors must hunt down brokers who offer the shares they are looking for, then travel or send a representative to the company, wherever it may be, to register their stock.


A listing in the company register is the only proof of ownership since Russia has no legal share certificates and no developed system of custodial services. Registers are often controlled by factory directors, as the British metal trader Transworld found out the hard way recently when directors struck from the register nearly all of its 20 percent share in the Krasnoyarsk Aluminum Factory.


By contrast, ADRs allow companies to "sell something that looks recognizable to the shareholder and limits the registration problems," said Miljenko Horvat, president of Citibank in Moscow, which is working on ADRs with some companies.


ADRs are issued by U.S.-based financial institutions that hold the foreign shares in their own names. AvtoVAZbank's ADRs will be issued by the Bank of New York, which will register the shares with an independent Russian custodian in Moscow, Mortgage Standard Bank, said Jim West, president of Score Financial Corporation, a California company that advises AvtoVAZbank.


"What happened in Krasnoyarsk couldn't happen here," he said.


Still, analysts cautioned that ADRs add more to convenience than they do to security.


For the lowest level of ADR, which AvtoVAZbank is seeking, the SEC only requires that companies comply with the regulations of their own country, leaving investors to "rely on the regulations of the home country," said Diana Downing, a lawyer at the Moscow office of Milbank, Tweed, Hadley & McCloy, which filed the bank's application.


"In Russia, not much is regulated, so we'll see how the SEC looks at that," she said.


Horvat of Citibank said that while ADRs are normally aimed at small or passive investors who wait for foreign stocks to come to them rather than actively searching foreign markets, Russian ADRs would likely be snapped up by aggressive, risk-taking investors as well.


International hedge funds, for example, are still hungry for Russian shares, he said. "They're not full and bought-up for all their Russian appetite -- they've been held up by technical restrictions."


But West said that it may be some time before Russian companies flock to Wall Street. "Many of the people we're talking to, they don't understand the reason or the need," he said.


Many Russian enterprises are reluctant to go out on foreign markets right now because they believe they are currently undervalued and that their stocks will sell at higher prices if they wait, West said.


He added, however, that unless Russian companies go after a broader range of foreign investors, it will be hard for them to raise the capital they need to modernize and increase their inherent worth.