With Russia’s economy starting to thaw after its latest recession, we’ve seen an uptick in initial public offerings (IPOs) – companies going public to attract more capital – by local companies. Such offerings this year (so far) include toy retailer Detskiy Mir, shoe seller Obuv Rossii, and oligarch Oleg Deripaska’s holding, En+. To get a better sense of the current state of the market, and Russia’s corporate scene more broadly, Bear Market Brief spoke with Tom Blackwell (pictured right), CEO of EM Communications, an international emerging markets focused financial communications team with a presence in New York, London, Moscow, Beijing and Hong Kong.

Interview conducted in writing by Aaron Schwartzbaum. For more coverage of Russia’s economy and politics from EM Comms, don’t miss their daily newsletter, .

Thanks for joining us, Tom! To start, could you tell us a bit about your experience on the Russian corporate scene, and with EM?

 I have been working in Russia as a consultant for most of the last 15 years, helping Russian companies in their communication and interaction with the international financial markets.  Often this is companies that are already public, but also companies that come to us at an earlier stage when they are preparing to go public and want to establish a profile in the financial markets before they do.  And of course we advise on IPOs themselves, and I believe my colleagues and I have, over the years, advised on more Russian IPOs than anyone else.  From Raspadskaya back in 2006 to Detsky Mir and Obuv Rossii this year, and many in between.

We formed EM following a Management Buyout in the summer of 2013.  Crimea, sanctions, collapse of oil prices and the rouble etc. were not really part of our business plan when we did the deal.  The silver lining to this is that when the market started to get very difficult, there was no question for us of whether we should stay focused on Russia.  We were already “all in”.  So we just doubled down and went for it – kept building the business, expanded our Russia-facing offering into the US and Asia, and now with the market showing some signs of bouncing back, we are in an exciting position.

Speaking in broad terms, why do companies go public — launch IPOs? And then zooming in, what does IPO activity mean in the context of Russia’s economy? What can it tell us about the macro picture?

I have witnessed a number of distinct phases of Russian IPOs since I started working in this field.  The first was the golden era of 2005-2007, when growth in developed markets was muted and international investors were ready to rush into Russian equities in search of higher growth.  It represented an opportune time for companies to either raise equity finance to fund growth, and we also saw a number of owners who used the occasion to sell down.

Since 2008, we have seen two intense crises, with very different underlying causes.  The first was a financial crisis, the second more of a political crisis.  But the knock on effect on Russian IPOs in both cases has been similar – getting any deal done is a challenge.

What we see today is that there is a market for selected new Russian issues, on the back of a slowly improving macro picture.  But with a potential pipeline of dozens of companies out of Russia, probably only the top 10-15% can get traction in this market.  High quality businesses, with established growth profiles, either from sectors in Russia that investors are very familiar with and have made money in (such as retail, consumer goods), or from sectors that are recognized to be outperforming now (IT / technology, agriculture, etc).

We’ve all heard about the “unique” characteristics of the Russian corporate scene. But has it changed much in your experience? Improved at all, say, corporate governance-wise?

When I first started working with Russian companies in the late 90’s / early 2000’s, there was a little bit of a Wild East feel to things.  A lot of companies were growing so fast and profitably, that corporate issues like governance, transparency and best practices were if anything an after-thought.  Speaking specifically about governance, it only really started to become “a thing” as the Russian IPO market first took off in the mid 2000s.  The approach to governance was generally very superficial.  Few went beyond window dressing; they paid for Lords and Sirs who had impressive names and who could be counted on not to interfere.

Everyone was making too much money to ask further questions.  Only later did it become clear that having a Lord on the Board wasn’t exactly a bastion of investor protection.  This forced companies to rethink governance and take a more substantive approach to it – ticking boxes alone would become less acceptable to the market.

Of course today we still see some shocking governance cases in Russia (though I am pretty sure that Russia doesn’t have a monopoly on bad governance – even some developed market companies have been known to circumnavigate good governance practice when it really suits them to do so).  But governance horror stories in Russia today are more the exception than the rule.  And coming back to the question of which companies can IPO in this market…being able to demonstrate that proper governance is in place is increasingly becoming a pre-requisite to tapping the public markets.

On the other side of that coin, what are some of the challenges Russian companies face in publicizing themselves, especially to Western investors?

While a lot of the challenges over the years might have been self-induced, a number of the challenges today are not.  The biggest external challenge that Russian companies face in a fundraising context is that for many in the West (including media), Russia has simply become toxic.  One can separately debate to what extent this is deserved.  But the fact is, regardless of where one stands on issues of geopolitics, electoral influence etc., individual companies should not necessarily be automatically tarnished by this brush.

Yet if you look at international media coverage of Russian corporate stories, even a simple results story, there is nothing to stop a journalist from ending with a paragraph or two about sanctions, Trump, Putin, collusion, hacking, etc.  The company may have nothing to do with these themes, but everything is fair game when writing about Russia.  Or a company principal can easily be dismissed as being “close to the Kremlin”, even if the closest he/she has ever come to the Kremlin is a tour of the armory in their childhood.  Or there is the infamous label of “Putin ally”, which can seemingly apply to anybody who has not publicly denounced the President.

All of this makes for a very challenging backdrop for any Russian company in the international markets.

Let’s talk about two recent public offerings in particular. The listing of shoe retailer Obuv Rossii seems to have gone quite well. Meanwhile, En+ appears to have run into some geopolitical headwinds. Are there any lessons to be drawn here?

Obuv Rossii was a much easier story to sell.  It was a clear play on Russian consumer recovery; operating in retail / consumer, which is a very familiar sector for international investors in Russia; it offered a strong track record of stable, profitable growth; it was founded and is run by an incredibly talented and personable self-made entrepreneur Anton Titov; no legacy issues, no complex privatisations – everything was created from scratch.  Even in the current market, these kinds of stories, if marketed well, can find willing investors.

EN+ was a harder story.  The sector and type of business was a less familiar one for investors; the shareholder had a more “complicated” story, and was inevitably going to get more media attention towards alleged Kremlin ties, not to mention alleged Manafort ties at the height of the Manafort takedown; and it came to market at a high price.  The deal still got done, but it was always going to be a harder ride.

Back to the macro: in a sentence, how would you describe Russia’s economy right now? How is it doing?

It could be worse!  And was much worse in the peak of this latest crisis.  Today things are more stable, and generally moving in the right direction – the cautious re-opening of capital markets providing evidence of that.

 And last question – hopefully a fun one. Do you have a favorite anecdote from your experience in the Russian business world that you might share?

 There are many!  I remember back to one of the first ever IPO pitches I took part in.  I had relatively recently moved to Moscow and was still finding my way in the Russian corporate world.  We were due to meet the majority shareholder of the company.  As we were to discuss a London IPO, and I was the sole foreigner in our team, I knew the questions were likely to come my way.  But I had a decent command of the IPO process by this time, and what needed to be done on the communications side.  So I felt confident I would find a common language with the shareholder.

The moment the shareholder walked into the conference room, I became less confident.  Surly-faced, evidently wondering what on earth he was doing meeting us, he was wearing the shinest suit I had ever seen and white snake-skin shoes.  With some apprehension, we started to go through our presentation.  The company was a completely unknown entity in London, and as I talked about the need to educate the market on who they are, build relationships with journalists who we would need when the IPO comes, and other totally un-interesting and vague notions (from the shareholder perspective), he stomped one of his snake-skin shoes down on the ground and shouted out: Оцифруете!  (tell me in numbers! – only using infinitely more colourful language in the original).

 Slightly taken aback, I tried to think how I could concert the need for the market to have heard about them and find their story attractive into pure numbers.  Just hard numbers.  All attempts to get more quantifiable fell on deaf ears, and were met with the continued bellowing of the highly colourful Russian phrase demanding numbers.  Each time shouted with rapidly growing disdain.  The meeting may have lasted for half an hour, or 10 hours.  It’s hard to say.  Anyway, it couldn’t end fast enough for both sides.

We didn’t win the pitch.  The deal never happened and so I never found out who did.  But I will remember the man’s style forever.

Thank you again for joining us!

 My pleasure!