Walter Hutchens’ Blog

Today a New York Times article by Andrew Kramer notes the relative lack of success of Russian companies in conducting IPOs on global markets, contrasting this with China’s experience (including last month’s IPO in Hong Kong of the Bank of China which raised USD 9.7 billion, the world’s largest IPO in six years).

Quoting a report by Ilya V. Sherbovich from Deutsche Bank in Moscow, the Times observes:

Among emerging market economies, Russia was in eighth place last year in number of initial stock offerings, behind Israel and Poland. But measured by the value of stock issued, Russia, with $5.2 billion, was in second place behind China, with $19.4 billion, according to the report.

Note how far China as the number one emerging markets issuer is ahead of number two Russia—nearly four times!

One other striking paragraph indicates that enthusiasm for Russian IPOs was dampened when:

. . . an article in Forbes magazine quoted the chairman of the board of Kuzbassrazrezugol, a Siberian coal company with a stated goal of going public, explaining his management practices. They included threatening employees with death.

I don’t think many Chinese managers would brag about using death threats as a motivational tool, but it’s not clear to me that the other problems identified in the article as affecting Russian IPO candidates don’t equally affect PRC companies. The Times notes:

The shortfalls [of Russian IPOs] suggest that Russian companies are going public too early, for the wrong reasons, or are valuing their shares too high, critics say. Investors have also raised questions about the lack of transparency in accounting at some Russian companies and the shortfalls in corporate governance standards.

If these are the factors retarding Russian IPOs, should we assume the relatively greater success of PRC IPOs means Chinese firms have more financial transparency, better corporate governance and more conservative valuations than Russian companies? Um, I don’t know much about Russia, and one should not wholly discount the restructuring that occurs before PRC IPOs, but the notion that PRC firms offer dramatically better transparency and corporate governance than Russian firms seems counter-intuitive (four times better?).

Maybe the reason PRC issuers have hit home runs while many Russian ones aren’t even coming up to bat is more related to the perceived option value of the two countries. China has a bigger population and is perceived to have a tremendously positive overall growth and reform story. Russia is smaller and is perceived to have a less successful reform process, with lower overall growth prospects.