5 July 2011
The American Lawyer publishes commentary by Roman Malovitskiy in its Special Report “Focus Europe Summer 2011”

Country Reports. RUSSIA

Providing a snapshot of the business market in Russia, some of the leading lawyers in Moscow share their insights on trends and developments in the banking and finance, IPO, M&A and energy sectors over recent months.

Camilla Sutton reports


The banking and finance sector has picked up recently, with both domestic and international projects being financed. ‘Salans’ Russian banking and finance work this year has included a major pre-IPO financing which should sign and disburse in the next week or so,’ says Timothy Stubbs, a banking and finance partner at Salans who works out of both London and Moscow. ‘We are also working on a major IFI CIS industrial financing.’

‘In 2010 and into the beginning of 2011 the Russian market saw an increase in the number of project financings, partly because of the growing activity of Russian banks,’ explains Maxim Alekseyev from ALRUD. ‘Government (on both federal and local levels) was involved in financing new projects. At the same time, foreign banks (especially, in the Asia-Pacific region) launched new export finance projects in and with Russia.’ His firm, ALRUD supported establishing a Russian-Korean joint venture (a hotel and retail business) based on export financing provided by a Korean bank.

‘There is certainly a guarded excitement in the market that there may be significant increased activity this year in the finance markets generally,’ says Steve Wardlaw, the partner in charge of Baker Botts’ Moscow office. ‘Banks (including Export Credit Agencies (ECAs)) are looking to build up business with new lending, and private equity firms are raising funds, or moving to dispose of assets that they rolled over during the crisis.’ Baker Botts has certainly seen an increase in one of its areas of expertise – ECA-backed aircraft financing. The firm recently advised on the financing for approximately 20 new aircraft for an airline client. It also recently acted for Russian Post on an ECA backed financing of mail sorting centers.

Interesting developments have been recognised. ‘I would note the following significant trends in the Russian banking and finance market – the increase of retail banking especially by state owned banks; the decrease of the stake of the foreign banks in the market and the continued significant amount of overdue debt,’ comments Roman Malovitskiy, head of the banking practice at Egorov Puginsky Afanasiev & Partners. ‘Vnesheconombank exercises the vast majority of ECA functions in Russia and it still supports Russian based companies whose business has been affected by the recession.’ Egorov Puginsky Afanasiev & Partners advised the Federal Agency for State Property Management in the privatization of its 10% share in VTB Bank. ‘This was the first ever sale of Russian state property via SPO involving international financial institutions acting as agents,’ adds Roman Malovitskiy.

Looking ahead the market seems positive. ‘Traditionally financing of trade in the energy, minerals, agriculture and natural resources sectors was always key to the Russian economy and this trend will continue to be strong in the near future,’ comments Simon Allen, the head of banking and finance at Goltsblat BLP’s Moscow office. ‘Structured finance will be driven by demand for Russian commodities and it will be one of the major instruments for the financing of business development in Russia and CIS in the coming months. The shortage of international funding will continue to drive the demand for new financing and Russian state owned banks with strong balance sheets will accelerate their position in the market and continue to be dominant players in the region. Generally Russia has emerged as an important and credible partner for the international banking community and this confidence will create a basis for the introduction of more complex funding mechanisms, supported by finance institutions and export credit agencies.’


The halcyon days of early 2008 may seem like a distant memory, but the legal community is cautiously optimistic about the growth of the IPO market in the future. ‘There were several significant IPOs in Russia during 2010 and more are scheduled for 2011,’ says Maxim Alekseyev. ‘Russian experts expect more than 40 Russian companies raising more than $15bn during this year.’ In the past six months ALRUD’s capital & equity markets team acted as Russian legal advisor to the underwriters of Mail.Ru Group’s offering, namely Goldman Sachs International, JP Morgan Securities Ltd., Morgan Stanley &Co International Plc, VTB Capital plc and Pacific Crest Securities LLC.

‘Presently the issue of Russian IPOs is at the peak of its popularity,’ agrees Alexander Muranov from Muranov, Chernyakov & Partners. ‘The trends of the IPO market development in Russia are similar to those of the USA and European markets. There is a growing interest to IPOs, and the forecast for the market dynamics in Russia is positive. According to experts’ estimates, the volume of the IPO market in 2011 may be up to $20bn. However, the Russian market and international trading venues demonstrate a high degree of volatility, the trading venues are susceptible to the slightest fluctuations, as is the Russian market, with a greater discount towards developing markets. The domestic companies’ securities are heavily underestimated. This is basically explained by Russia being associated with high risks.’

‘This market is gradually reviving and a number of companies have already indicated their willingness to arrange an IPO prior to the end of this year,’ comments Roman Malovitskiy. ‘However, the market has not recovered yet.’ United Company RUSAL Plc, a company headquartered in Moscow and incorporated in Jersey, raised around $2.24bn through its new listing on the Main Board of the Stock Exchange on 27 January 2010.

For now at least the market seems relieved that some degree of normality has returned. ‘I don’t believe that the market will ever return like it was in Spring 2008 when decoupling theory was all the rage and Russian assets and the ruble were valued at the top of the market mainly due to the spike in oil prices and commodity prices,’ comments Varun Gupta, a capital markets partner at Akin Gump Strauss Hauer & Feld LLP (Akin Gump) in Moscow. ‘However, looking at the situation more rationally, the Russian equity capital markets have returned to a more normal state of play. There is in fact a large investor appetite for Russian equities and investors are appropriately disciplined on valuation and discerning in terms of business models and management. The pre-crisis memories of the Russian-Georgia war and the pressure on BP in relation to its governance of TNK-BP have faded, and there is a willingness to invest again provided there is an appropriate risk discount on Russian equities. Russian foreign policy now expressly acknowledges the importance of building economic links to the West and President Medvedev has provided a new face to the Russian enigma, although the mystery still remains and grows. There are very significant vested interests, both domestic and foreign, in maintaining the status quo and the presidential election in 2012 is not expected to change things. Savvy investors know this and are long on Russia.’ The equity capital markets team at Akin Gump – working across Moscow and London – is currently advising on a listing of a large Russian mining company on the LSE that is expected to come to market in September, and expect to commence work on two more IPOs scheduled to come to the market in the fall. ‘We know that a number of other Russian companies are also preparing to come to market this year. Not all companies will be successful and attractive to investors and investment banks will need to do their groundwork before launching deals in order to avoid disappointments,’ warns Varun Gupta.

Unsurprisingly the reality is that business in this sector is tough. ‘The IPO market has not seen much success this year with a number of planned IPOs shelved,’ says Timothy Stubbs. ‘That said the market expects the Yandex IPO slated for 24 May 2011 to be successful.’

‘We think that the market is still very difficult,’ agrees Steve Wardlaw. ‘One of our clients recently did an IPO to dispose of one of its investments and found that the price was pegged right at the bottom of the range, and even then sellers were scaled back materially in terms of the volumes that they could sell. A lot of sellers are watching the market, but I believe that many IPOs are already being delayed now until 2012.’


The M&A market is gradually recovering. ‘During 2010 – 2011 the number and value of M&A deals in Russia continued to increase. In 2010 256 deals (with a total value of around $45bn) took place. The most active sectors were real estate, and construction, retail, the food industry, oil and gas,’ comments Maxim Alekseyev. During 2010 his firm, ALRUD advised TNK-BP Management and Aeroflot on a number of complex acquisition projects throughout the Russian Federation and in cooperation with a US law firm assisted Skype in its acquisition of Qik – a provider of mobile video software and services.

‘We have also been involved in a number of large-ticket private equity deals and some increased real estate M&A activity in Moscow,’ says Timothy Stubbs.

‘The results of the 1st quarter of 2011 clearly evidenced the restoration of the M&A-activity in the Russian market,’ explains Alexander Muranov. ‘As compared to the same period last year, there is a significant increase both in the number and value of deals. On a year-on-year basis, the number of deals almost doubled (122 transactions in the 1st quarter of 2011 against 82 in the 1st quarter of 2010), while the value of the deals more than doubled ($16.8bn and $6.9bn, respectively). The growth rate of the domestic deals’ volume was particularly strong. While in the 1st quarter of 2010 it amounted only to $3bn, in the 1st quarter of 2011 it totaled $13.6bn. These data show that Russian companies and the Russian market in general have won back the trust of businessmen. Companies see a lot of opportunities for an unlimited growth in the domestic market and seek to take advantage of the favorable situation to increase their market share.’

‘The M&A market is far from a complete recovery but some deals have emerged,’ adds Roman Malovitskiy. ‘JV has become the most prevalent form of cooperation and we have participated in a number of JV incorporations.’ Egorov Puginsky Afanasiev & Partners also recently advised global fast moving consumer goods giant Danone on the merger of its operations in the CIS with major Russian diary producer Unimilk.

Other trends have been noted. ‘Debt restructurings are still common, but ‘regular’ M&A is back,’ says corporate partner Suren Gortsunyan of Akin Gump’s Moscow office. ‘Over the last six months M&A has been prevalent in the Russian market. The larger M&A transactions of early 2011 signal in part the new governmental policy on foreign investment and its desire to improve the investment climate.’ Akin Gump has been involved in one of the largest debt restructuring transactions involving a Russian retailer. However, it is transactions such as the multi-billion dollar merger of VimpelCom with Weather Investments, led by Dan Walsh out of London, which created the world’s sixth largest mobile telecom carrier (by number of subscribers) which closed in April 2011 and the $970m sale of Stillwater Mining Company by Norilsk Nickel (which closed in January 2011, led by tax partner Ilya Rybalkin in Moscow) which are the main highlights for the firm in the last six months on the corporate side.

‘There is still significant debt retructuring going on in the market, but more and more this is for positive reasons (eg pre-IPO tidying) rather than for potential insolvency
reasons,’ comments Steve Wardlaw.

‘Debt restructuring in Russia has never taken as active a path as in most western jurisdictions and in practice has often led to either an extension of the term of the loan or causing Russian lending to switch debt into equity, which is something most foreign lenders were not prepared for,’ comments Anton Sitnikov the head of corporate and M&A at Goltsblat BLP. ‘As to size of M&A deals, small to medium sized deals still dominate the market though one can certainly notice the appearance of big deals.’ Goltsblat BLP recently advised a new client, Sberbank of Russia on an investment project related to the acquisition of 25%+1 share in Detskiy mir-Center, the largest children’s goods retail network in Russia.


The energy market, so vital to the Russian economy, is certainly full of opportunities, but there is also cause for caution. ‘On the one hand, it is still an attractive sector for potential investments due to its current underdevelopment and the huge opportunities to increase production efficiency,’ comments Maxim Alekseyev. ‘Particularly the favour for high-level processing of coal, gas, etc. can be emphasized. Current processing technologies are outdated and investments in new technologies allowing to significantly increase the produc- tion efficiency are in trend. On the other hand, it was announced recently that Michael Prokhorov and probably some other investors are going to leave the energy sector. The reason is the last government decision on tariffs, causing investors to expect further government interventions into the regulation of the energy sector.’

‘We are still not seeing a big influx of the mediumsized oil companies/NOCs coming back in,’ comments Steve Wardlaw. ‘However, we are seeing more smaller M&A as people rationalize portfolios, and also an increase in work in the power sector (which is a natural result of the sector’s unbundling two years ago). Large projects are attracting a high level of interest – for example, Yamal LNG, where we are project counsel, is negotiating with a number of potential major investors. Large projects are becoming more scarce, and there is a lot of political will to progress Yamal LNG, which is attractive to the IOCs.’

‘The chaos of the early years is clearly gone, and companies from all over the world are looking at Russia as a more stable place to do business,’ says Doug Glass of Akin Gump’s London office, who previously lived and worked in Russia and who focuses on energy transactions in emerging markets. ‘The low hanging fruit in the oil sector that was enjoyed for the last 20 years is giving way to new projects in order to maintain Russia’s production levels and export demands. Large energy projects that in the past have not been developed due to the immense capital required are starting to see movement. For example, Nord Stream is well underway. Shtockman and Yamal LNG projects are moving forward. If it were not for the impediment of the Strategic Resources legislation that requires significant State-company participation and restricts non-Russian companies in competing for the largest projects, we would no doubt see even more activity on a large scale. On the other hand, Russian corporates, who in the past have been prone to stay at home, have branched out and are beginning to become more multi-national. A consortium of the largest Russian companies have signed up the Junin-6 block in Venezuela; Lukoil has begun operations on its large West Qurna-2 block in Iraq, and has moved into West Africa and Viet Nam; and Rosneft is carefully looking at projects in Europe. We would expect to see the appearance of more Russian company activity around the world as they become more sophisticated and well financed.’

The future of the energy market in Russia has without doubt exciting possibilities. ‘Talks over developments on alternative sources of energy are becoming more widespread,’ concludes Maxim Alekseyev. ‘While no real projects have been launched yet, in a little while this could bring a boom to the energy sector.’