Close on the heels of Russia's return to western capital markets following its default in 1998, Russian firms are increasingly emerging from the shadows to access both debt and equity finance. The pace of listings and the size of the companies coming to market have so far focused investor attention on equity markets, where for more than a year, particularly in London, Russian issues have been greeted by strong and resilient interest.
In recent weeks, however, some of the initial enthusiasm may have waned as investors began to question whether the governance and disclosure standards of the companies that they are buying meet the demands of international capital. It is in some ways inevitable that some of the firms now planning to list are fast-tracking their corporate governance programmes in an effort to capitalise on current investor interest. Reassuringly, a closer look shows that there have been important changes in corporate governance and disclosure across Russia over the past three to four years, among Russia's blue chips in particular, that should provide a degree of confidence to the international financial community.
Compared to the upheaval that existed in Russia in the 1990s, when state-owned industries across the country were rapidly being broken up, privatised, and at times re-consolidated by private owners, the state of play in Russia is considerably different. Six years ago, offshore havens could lay fair claim to being the only secure home for Russian capital. Many private owners structured their firms to enable themselves to extract as much cash as possible. For those firms that were publicly traded, a weak legal and regulatory regime exposed minority investors to risk that was often far more than theoretical.
Although there is still considerable room for improvement across Russia plc today, with the rise of a more stable domestic political and economic environment, this value-destructive behaviour is on the decline. Increasingly, Russian firms are pursuing and capturing value through reinvestment, development and expansion of their asset base. Suddenly, disclosure and corporate governance are in vogue.
The shift to transparency and a more western style of management is not seamless. Although aided by the rise of a skilled Russian managing class, the overhaul of many Russian enterprises is a major undertaking, often hampered by corporate structures that reflect more the exigencies of the environment in which they were created than careful forward planning. It is not coincidental that some of the most successful early Russian listings on western bourses were those of companies in industries that had no ties to the old Soviet infrastructure and which were founded on entirely new technologies. Vimpelcom, for example, Russia's second-largest mobile telecommunications provider, was listed in 1996 on the NYSE and is regarded as a local leader in its investor relations practices. In past years Vimpelcom has been recognised as having the best corporate governance in Russia, and it currently meets the strict disclosure requirements of Sarbanes-Oxley at a time when many other firms are looking to London.
For many other Russian businesses, the change is still some way off. For small Russian businesses, the benefits of transparency and corporate governance fare poorly against the direct costs and the risks of disclosing proprietary information. For others, particularly those working and obtaining financing purely on the domestic market, the value of transparency is not yet clear. Ironically, according to some studies, the investor community trading in domestic Russian shares does not pay a premium for good governance, as it is seeking the kind of returns available with more highly speculative investments. While better disclosure and governance are a requirement for western listings, it may be that the investors in these markets are the only ones willing to pay for it.
Despite the challenges, for a range of reasons, recent years have seen the introduction of improved disclosure and corporate governance programmes across various businesses, large companies in particular. Increasingly, the Russian businessmen who created major enterprises in the '90s are now moving out of day-to-day management. The companies that they own, Russia's corporate leaders, are setting the pace for disclosure of ownership, interests and financial performance, and embracing clearly-delineated areas of responsibility that ultimately offer greater protection for all constituencies whether the companies are private or publicly held.
On the path to transparency
Disclosure and corporate governance generate most public interest when they concern public enterprises, but it would be a mistake to overlook the role of good governance as a management tool. The real litmus test for Russia is whether transparency is understood to be not just about protecting access to capital, but also about information flow and management controls for day-to-day operating needs.
Increasingly, Russian companies are becoming aware that more transparent structures translate into business practices that enhance efficiency, reduce risk, and improve overall management. A disclosure and corporate governance programme for Lukoil, for example, with its far-flung empire, from Siberian oil fields to a retail distribution network in the US, would need to cover not only what to disclose, but also how to gather and ensure the accuracy of information that could have a critical impact on the valuation of Lukoil's business.
TNK-BP, an oil and gas producer partially owned by BP and known as Russia's largest private enterprise, is well under way in this area. The firm describes corporate governance as 'a key driver of value creation ... and the foundation on which operational improvements are built'. It is using sophisticated information management tools to develop its advantage over its competitors, acknowledging that transparency improves forecasting and planning, decision-making and effective resource allocation. Russian accounting standards, which are an adaptation of Soviet-era requirements and ill suited to business planning and accountability in a profit-centred environment, are being replaced in TNK-BP's regional centres by IAS accounts for business needs. However, TNK-BP was created from the outset with an eye toward transparency and the markets, and is in some ways unique.
RUSAL's approach
A more representative example of the kind of massive corporate transformation that needs to take place throughout Russia might be that of RUSAL, Russia's second-largest private corporation after TNK-BP and the world's third largest primary aluminium producer. Established in early 2000, just six years ago, through a merger of several large aluminium smelters and alumina refineries in the CIS, RUSAL's 47,000 employees provide primary aluminium and value-added products to customers in 40 countries. Operating in nine regions of Russia and 13 countries, it is also a global holding, having within the recent past completed the purchase of a 20%-stake in the Australian Queensland Alumina Limited, privatisation of bauxite and alumina complexes in Guinea and Guyana, and an agreement to purchase ALSCON, Nigeria's only aluminium smelter. RUSAL accounts for 75% of aluminium production in Russia and 10% internationally.
Without great fanfare, RUSAL embarked on a corporate disclosure programme in 2004, the same year as its first 10 year strategy was developed and introduced. The company's creditors and client base were key - in order for RUSAL to achieve its stated strategic goal of becoming the world's leading aluminium producer, the company has to invest an estimated $8bn in its development in the coming years. Any given project is usually financed 30% through own funds and 70% through debt, well outstripping the capability of local Russian institutions, and making it crucial to be in a good standing with global financial institutions and to possess an excellent reputation. Similarly, RUSAL's purchasers are major international corporations willing to pay a premium for long-term reliable supply. With these kinds of business partners, the company recognised that its disclosure and corporate governance would need to meet international best practice.
RUSAL's current corporate governance programme is designed to cover a period of 18 months and includes a range of activities aimed at improving the company's governance standards and demonstrating RUSAL's willingness to follow the principles of transparency. The plan incorporates measures that include introduction of a corporate governance code as well as other necessary corporate documentation, appointment of independent directors, establishment of independent committees, development of a compensation policy for top managers and a series of other activities. RUSAL is also in the process of disclosing the company's ownership structure and data on the group's consolidated accounts, a move that has set the mark for the wider Russian business community. This is not an overnight process, but there is a strong drive on the part of the company's management to achieve the highest standards in this area.
The EBRD and the IFC, which along with the OECD and related institutions have been active supporters of corporate governance reforms in Russia, have put their own clout behind RUSAL's reforms. In early 2006, RUSAL welcomed a decision by EBRD and IFC to endorse and support the company's efforts to achieve higher transparency. This decision by these respected institutions boosted further development of the company's corporate transformation programme.
A common misconception is that Russia's problems in implementing corporate governance are unique. The reality is that investors face the same problems in other emerging markets. Another popular opinion holds that Russia has no laws that would regulate development in the corporate governance area. While there is certainly progress to be made, there is a growing body of legislation and precedent covering the rights of different classes of investors. In some cases these changes have been years in the making. The real problem in this respect is law enforcement.
Having a full understanding of their constituencies and responding to the needs of all of these parties is a broad concept that Russian business is growing to understand. The changes that need to take place are systemic in nature - the process can't be one sided, along with legislation and a change in corporate attitudes. The trend toward seeking international funding sources is a good one as it reaches out to institutions that value transparency and good governance, but ultimately, the key that will unlock disclosure in Russia will be the realisation that a business that uses information to its advantage is a globally competitive business.
- Alexander Livshitz is director of international and special projects, RUSAL, and former Russian deputy prime minister. www.rusal.com
