IR in Russia and the CIS: The Country Makes a Difference

Interfax Business Service and Thomson Financial have for a second time made a study of the quality of investor relations (IR) in Russia based on a survey of the investment community. In the 2008 study, we have included IR specialists from two CIS countries -- Ukraine and Kazakhstan. Although IR is in the formative stages in all three countries, some significant differences can already be seen in each of them.

All talk of investor relations in Russia and the CIS countries always begins with a discourse on the problems of the profession. The formative period for IR in Russia, Kazakhstan, and Ukraine is undoubtedly accompanied by a scarcity of staff, insufficient qualifications of IR specialists, and the strong demand for training. The vagueness of the professional duties of IR specialists poses considerable difficulties; in moving from company to company the specialist encounters profoundly different IR systems, new management structure, and most importantly, new responsibilities.

Nonetheless, we are experiencing the burgeoning growth of this profession, and in all three countries this business is taking into account the local characteristics.

Foreign Investor Relations

The Russian stock markets are much larger and more liquid than those in Kazakhstan and Ukraine are. Volume for local stocks on the KASE (Kazakhstan) and PFTS (Ukraine) is insignificant, and those markets are not very liquid. The MICEX, by contrast, boasts more than 70 percent of the world volume for Russian stocks (including trading for Russian stocks on the LSE and NYSE).

It is interesting, however, that IR is primarily focused on foreign investors in all three of them.

Moscow continues to play a key role in IR for Kazakhstan and Ukraine, since the better part of their sell-side businesses is based in Moscow. This pertains not only to Russian investment banks, but also to the offices of many global investment banks. Russian companies issuing stocks are at an advantage in this regard and have broader opportunities to interact directly with analysts, but apparently for that very reason most Russian companies have concentrated their efforts on analysts rather than investors, which cannot be said of companies from Kazakhstan and Ukraine.

Loyal, But Not Liquid

The main objective of IR in many European countries and the United States is to create a base of loyal and long-term investors. Paradoxically, companies from the CIS often have significant free float in cash terms but suffer from low share liquidity, and for example their depositary receipts on the LSE (which often account for up to 70 percent of the issue) are in many cases far less liquid than shares in Moscow.

But it is the absence of liquidity that is often the main barrier to capitalization growth and in future could seriously undermine an SPO.

Ukraine: Eyes on EU

Ukraine has relatively few public companies and fewer still that are internationally listed. Interestingly, Ukrainian companies far more often opt to list on the Frankfurt exchange instead of the London exchange than do companies from Russia and Kazakhstan, and some Ukrainian companies show a keen interest in the Polish stock market too.

IR in Kazakhstan: New Quality

It is interesting that the average level of IR in Kazakhstan is much higher than in Ukraine and Russia. This is partly due to the specific nature of initial public offerings (IPO) in Kazakhstan. The share of banks, oil companies, and metallurgical companies is very high there. Moreover, a professional shortage and significant growth in the number of public companies that had no opportunity to hire experienced specialists in Russia had a noticeable impact on the decline in the average level of IR in Russia.

On the other hand, in Kazakhstan the limited number of public companies coincided with another crucial developmental factor -- the start of the international financial crisis, which hit Kazakhstan hard. The need to continue IR efforts amid a crisis elevated the importance of IR in the opinion of upper management.

Russia: Crisis Stimulates IR

The global credit crisis spurred demand for a whole new breed of IR in Russia. Amid rather favorable foreign conditions, many companies quickly moved from bank loans to issuing ruble-denominated bonds and even IPOs, and they relied very heavily on investment banks to raise financing.

But the lingering crisis was a cold shower for many: companies seeking new financing were suddenly faced with the inability to raise new resources because the markets were "closed." Moreover, many companies must meet offers on ruble bonds. And companies are suddenly beginning to realize that they have no concept of their own investors, with whom they could have negotiated before the offers. This is where the need to know and understand the investor arises from within the company.

All of this means that IR is metamorphosing from something obtruded upon companies by investment banks, consultants, and regulators into something strategic, and at times something that is vital to the company's operation that top management is beginning to afford the proper attention.