Rosneft fuels controversy as LSE IPOs flood in from Russia

Last year witnessed the first significant wave of Russian companies floating on the London Stock Exchange (LSE) since the high-profile Lukoil IPO in 2002.

Six companies made their LSE debuts in 2005, raising approximately $5.1bn (£2.74bn) in total (see table). These included the $1.2bn (£643.8m) flotation of Russian conglomerate Sistema; Pyaterochka, the first Russian retailer to issue shares overseas; and Novolipetsk Steel, which raised $625m (£335.3m). Indeed, as we march through 2006, the pace at which Russian companies are floating on the LSE does not appear to be slowing down, with several multibillion-dollar IPOs expected later in the year.

Latham & Watkins managing partner Anya Goldin, who has recently advised on a number of Russian floats, attributes the surge in IPO activity to a number of factors. "The environment has been more positive and stable and investor appetite has been incredible," she says.

The LSE has prevailed as the preferred bourse for Russian companies seeking to raise money in the international equity capital markets. "The London market is simpler and faster, and there aren't any Sarbanes-Oxley-related issues," says Goldin.

Although Goldin is confident that the IPO market will remain buoyant in the short-term, she warns that deal flow might slow down prior to the parliamentary and presidential elections in 2007 and 2008. "That sort of uncertainty might make the markets a little shaky and have a chilling effect on IPO activity," she says.

Indeed, there are plenty of reasons for Goldin to be optimistic. Latham is dominating Russian floats on the issuer side. The Los Angeles-based firm advised Russia's largest independent gas company Novatek on its $940m (£504.3m) IPO, as well as on the listings of Sistema. Thanks to Latham's role on the Sistema IPO, the firm was also brought in to advise on the IPO of the company's subsidiary Comstar, which was the first company to float in London this year.

Latham is also understood to be advising the $2bn (£1.07bn) Vneshtorgbank (VTB) float. In addition to VTB, several of Russia's big banks, including the likes of Gazprombank, Rosbank, Bank of Moscow and UralSib, are expected to make their debut on the LSE later this year.

Linklaters, meanwhile, has developed a reputation for representing the underwriters on Russian IPOs and has advised the investment banks on the Sistema, Novolipetsk and Pyaterochka deals in 2005. Debevoise & Plimpton and Freshfields Bruckhaus Deringer advised the issuers on the Novolipetsk and Pyaterochka IPOs respectively.

Linklaters is also well placed to secure a mandate on the VTB float thanks to its role advising the bank on is debt issuance programme.

But the boom in Russian companies listing on the LSE has caused concerns among some in the City. Some fund managers have expressed fears about the possible legal and political risk to the assets behind the floats.

But one senior in-house lawyer at a US investment bank remains bullish: "If some of these assets are the ones that the oligarchs got hold of in the 1990s, the ownership structure might be more oblique. But I don't think there's legal risk here. It just means more work and that's not a Russian phenomenon - it's a wealthy person's phenomenon," he claims.

Linklaters corporate partner Dominic Sanders, who recently returned to London office after a five-year stint in the firm's Moscow office, argues: "Clearly there are sometimes concerns about the identity of the underlying beneficiaries [of the assets]. But for serious deals, the shareholders understand that the quid pro quo for doing an IPO is a basic level of transparency."

Another partner goes even further, arguing that "Russians are no-nonsense about disclosure".

Despite these reassurances, the contentious $10-$20bn (£5.37-£10.73bn) float of Russian state-owned oil and gas giant Rosneft has got critics' tongues wagging. Billionaire financier George Soros wrote to the Financial Times saying that the IPO, which is expected to complete in July, raised serious ethical and energy-security concerns.

Cleary Gottlieb Steen & Hamilton is advising Rosneft, while it is understood that Linklaters has scooped the mandate to advise the underwriters.

Goldin argues that the Rosneft IPO is an isolated case. "Rosneft is in a class of its own and has unique issues. You can't apply the controversy surrounding Rosneft to other Russian IPOs," she says.

Nonetheless, there is no denying that executing deals in Russia comes with a degree of risk. "Russia is a high-risk, high-reward market. But if you want to be in the market, you have to be prepared to consider the risks and how you're going to deal with them," says Sanders.

But are the risks really worth it? On the face of it, advising on a Russian IPO sounds like lucrative work for the firms that have the stomach to handle it. After all, the work is incredibly complex - companies seeking overseas listings are required to offer a proportion of shares in the Russian market and must obtain regulatory and Government approval. Indeed, one lawyer goes as far as to say that the execution of deals in Russia is "painful".

In reality, the complexity of Russian IPOs and the sheer volume of deals has not bumped up hourly rates. "IPOs can be difficult for lawyers because the banks do sometimes see them as commoditised products and themselves face stiff competition to win mandates. That can mean pressure on fees," says Sanders.

Nonetheless, Sanders argues that in a strong market a half-decent firm is not going to take a loss-making deal. "Russian deals are labour-intensive and require a huge team effort to execute. That has a commensurate effect on the level of fees," he adds.

Russia is becoming a huge market, whether people like it or not. And for firms with reputable equity capital markets practices and credible Moscow operations there are a wealth of opportunities out there. But all it takes is for one deal to go wrong and the market might just take a turn for the worse. There is a lot riding on the Rosneft IPO.

husnara.begum@thelawyer.com