Is Russia, so rich in natural resources and human capital, the last great emerging market? Or is it an investment quagmire, where that immense economic promise will be drained away by scandals, corruption and decay?
To date, such questions have troubled only a relatively small band of adventurous investors. But they are assuming greater currency as more Russian companies sell their shares and bonds abroad and start storming the citadels of international capital.In February, Rostelekom, the dominant long-distance telephone operator, became the first privatized Russian company to be listed on the New York Stock Exchange, making its shares - in the form of American Depositary Receipts - available to a far broader range of investors.
Tatneft, Russia's fourth biggest oil producer, plans to follow suit this month. Vimpelcom, a start-up cellular telephone company, has already gained a full listing. Three more Russian companies may be posted on the New York board this year.
The attractions of a foreign listing are obvious. The news of Tatneft's move lifted its shares 9 percent. A foreign listing gives it access to a vast pool of potential new money, increases the liquidity of its shares, and reduces its cost of capital.
Yet is a listing equally beneficial for investors? At first glance, Russian companies resemble all others trading on the NYSE. The U.S. Securities and Exchange Commission rigorously scrutinizes all companies before listing. They must have high levels of disclosure, produce three years of accounts to U.S. standards and report results regularly.
A leading investment bank will usually hold a Russian company's hand during the process, giving some additional assurance that it is a respectable client. In the case of Rostelekom, Merrill Lynch organized a 10-day investment roadshow throughout the U.S., exposing it to the scrutiny of scores of fund managers.
Nonetheless, skeptics may still wonder how far a Russian company's outward appearance corresponds to its inner reality.
There are, of course, the obvious risks attached to investing in any country with such a fragile system of government and such a weak legal regime. But there are also company-specific risks to evaluate.
Almost every day the Russian press recounts tales of rapacious managers siphoning assets out of big corporations. Even honest managers can succumb to the predations of criminal organizations or the political pressures of federal or local government. There is no guarantee that a company's assets or cashflow will only benefit its shareholders.
Russia's Federal Securities Commission is currently investigating allegations that two of the country's best-known oil companies, Yukos and Sidanco, have disadvantaged minority investors in their daugh-ter companies through opaque trans-fer pricing. In Russia's volatile business climate, it can be difficult to distinguish between the legitimate minimization of tax bills and illicit asset diversions.
The advantage of both Rostelekom and Tatneft is that they are relatively simple and transparent companies. Rostelekom accounts for 85 percent of Russia's long-distance telephone traffic. Tatneft, located in the largely autonomous central Russian republic of Tatarstan, sits on huge, provable reserves. Both companies are run by well-regarded managers who appear to understand both the rewards and the risks of raising their investor profile.
"Once you have set off down the road to attract foreign investors, it is very difficult for a company to stop or turn back," says one Moscow-based investment banker. "All their creditors would pull the plug, their share price would tank and they would lose three years' hard work if their management did something silly."
Ultimately, perhaps, the greatest protection for investors is the management's own self-interest. Although a foreign listing commits a company to onerous new obligations, it can also provide additional assurance.
Strong foreign shareholders can help ensure a company is run as an independent commercial entity rather than as a quasi-ministerial concern.
Andrew Balgarnie, head of investment banking at Morgan Stanley's Moscow office, says the most progressive Russian managers simply want to run straightforward commercial enterprises.
"One of the reasons Russian companies want foreign listings is to provide protection against improper interference with shareholders' interests at home," he says.