Big groups to lead Russian buying spree

Big groups to lead Russian buying spree

By Isabel Gorst in Moscow, Stefan Wagstyl in London and Richard McGregor in Beijing

Published: February 1 2008 19:07 | Last updated: February 1 2008 19:07

Russia’s big energy and mining companies are expected to be the first to respond to the Kremlin’s call to embark on a global shopping spree for new assets to expand the economy and boost Russia’s standing overseas.

Dmitry Medvedev, Russia’s likely next president, urged Russian businessmen this week to mimic China and invest in foreign companies as well as reducing reliance on imported technology. Roland Nash, chief strategist at Renaissance Capital, said: “The Kremlin has already encouraged the development of national champions. The next stage of their development will be to become international champions.”

However, while cash-rich Russian companies may not lack the financial resources to make foreign acquisitions, they may struggle to use their money effectively. The history of early foreign investments by Japanese, South Korean and Middle Eastern companies, among others, shows that first-time buyers often lack the management skills to make the most of acquisitions. Companies tend to do best if they stick to their own sectors – facing particular difficulties when they do try to diversify, for example in buying unfamiliar technology.

Existing foreign investments are dominated by Russia’s largest groups. According to a study by the Moscow School of Management and the New York-based Columbia Program on International Investment, four oil and gas companies, led by Gazprom and Lukoil, and nine metals and mining firms, led by Rusal, the aluminium giant and Severstal, the steelmaker, together accounted for more than 78 per cent of total assets of $60bn held by Russian companies overseas at the end of 2006.

Much of this investment is concentrated in pipelines, refineries and processing plants in former Communist states – and most consists not of acquisitions but of direct investment in physical assets. But corporate acquisitions are a growing element, particularly for companies ready to invest further afield, including Evraz, the steel group, which paid $2.3bn for Oregon Steel of the US in 2006, and companies controlled by Rusal’s owner, Oleg Deripaska, which has bought stakes in General Motors, Magna International, the Canadian auto parts group, and Hochtief and Strabag, the German and Austrian construction groups.

Such moves have already run into political difficulties, notably in the case of Gazprom, which has raised fears in the European Union that its asset-buying would give it a stranglehold on EU energy markets.

Mr Nash said oil, gas and metals companies would probably maintain their lead as Russia’s main overseas investors. The defence industry and banks, including VTB, formerly known as Vneshtorgbank, and Sberbank the two leading state banks, would become increasingly active in foreign markets.

He said attractive opportunities in Russia might discourage companies outside the national champion category from investing overseas. Notable exceptions are MTS and Vimpelcom, Russia’s leading telecommunications companies, which have invested in the former Soviet Union. Real estate companies, such as Mirax, Russia’s fifth-biggest property developer, have also established a toe-hold overseas.

Russia has considered a plan to invest part of its $157bn oil windfall fund in global equities.

The Beijing government began pressing state Chinese companies to invest offshore in earnest about four years ago mainly to secure energy and raw materials, force their management to compete globally and, more recently, to relieve the huge build-up of foreign currency at home.