Whenever there’s a boom in a particular type of business, people – especially journalists – always get the jitters. Financial journalists in particular like nothing better than to predict a market will go belly up, because they themselves don’t have any money to invest, and are secretly envious of everyone else making money.

We see this phenomenon happening now with Russian IPOs. Russian firms raised around $7 billion last year through London Stock Exchange (LSE) flotations, This year, they’re set to raise perhaps $30 billion, and possibly even more next year. This is fantastic news for the City, and for the banks, accountants, PR firms and consultants who work within it. It’s good news for British investors too, if you think the Russian market is going to carry on getting stronger.

But when a market is booming, and when it’s Russian, with all the Western connotations of Russia (Wild East, mafia, weak legal system, KGB), then something has to go wrong, right? Such are the growing predictions in the Western press. Last week, the head of the LSE, Clare Furse, wrote to president Putin to scold him over the government’s treatment of British investor Bill Browder and warn him that such behaviour could harm the reception of further IPOs. Her letter was splashed over the front page of the Financial Times.

Then Reuters ran a piece with the headline ‘Russian IPOs could end in tears’, which mainly quoted someone called Philip Modiano, an advisor at a consultancy called Strategica, who warned that Russian companies were being too hasty in their rush to London.

The same day, Reuters revealed that Morgan Stanley, the investment bank, had decided not to participate in the London IPO for Cherkizovo, the Russian meat processor, because it thought the price expectations of Cherkizovo’s management were unrealistic.

The Financial Times has been getting especially anxious about Russian IPOs, particularly the $20 billion IPO of Rosneft, the Russian state-owned oil company, which is scheduled for July. On April 25, it ran an editorial by George Soros, warning foreign investors to steer clear of the flotation. Buying the stock, said Soros, would legitimize Putin’s increasingly authoritarian regime, and cement the West’s growing energy dependence on Russia.

The FT ran another piece quoting Karina Litvack, head of corporate governance and social responsibility at F&C Asset Management, a big British investment fund. She said F&C wanted proof that the company had protected itself from legal risk from Yukos before it would invest.

The FT editorial writers have likewise consistently raised doubts about the IPO, again because of legal risk from Rosneft’s acquisition of Yukos’ main asset last year. Other newspapers have also been negative on the upcoming deal. The Washington Post today ran an equity advice column headlined ‘A word about Rosneft stock: Nyet’. 

Suddenly it’s not looking so good for Russian IPOs and particularly for Rosneft. Peter O’Brien, the company’s western CFO, said yesterday that in fact the company may only raise $10 billion, half the amount it was originally hoping to raise.

But investors should take their time and make their own assessments before they give Russian IPOs a wide berth. As often with Russian issues in the media, there’s a lot of static.

First of all, the experts being lined up to warn about the risks to Russian IPOs are being given a lot of prominence by the media, but how expert are they really? Reuters quotes Philip Mondiano. Who he? Karina Litvack of F&C. Who she?

Clare Furse we’ve heard of. But did her letter to president Putin really deserve to make the front page of the Financial Times last week? It seemed rather a case of a minnow warning a whale. Imagine the head of the Russian stock market wrote a letter to Tony Blair, do you think he would give it even a second of his attention?

George Soros we’ve also heard of. But he has a long record of personal enmity with president Putin, particularly after the Kremlin bullied Soros’ liberal NGO into closure in 2003. Since then, Soros has been more and more critical of Putin’s democratic failings.

But this is a man who has made a career out of using his personal capital to bring down governments, in the UK, in Georgia, and elsewhere, despite being an unelected, self-appointed guru of liberty. He travels over Eastern Europe, like some God of liberalism, planting freedom with bags of money. Admirable, yes. Democratic, no.

Besides, Soros’ main idea, as far as I understand it, is that open, transparent societies work better than closed ones. I agree with that. So why is he so hard on Russian IPOs? Selling a stake in Rosneft on the LSE forces the company to be more transparent, more open, and to obey international legal norms. The same goes for all the other Russian IPOs. As Charles Ryan, head of Deutsche Bank in Russia, has pointed out, this wave of IPOs is the most positive sign that Russia wants to integrate with the West. Isn’t that what we want?

As for investors, yes, Russian stocks have risks, and yes, you should be careful of the risks. Russia does indeed have a weak legal system and an unpredictable government. That’s why Russian stocks trade at such a high premium to other emerging market stocks. But look at the growth of the stocks. The Russian stock market was the best performing market in the world last year. Gazprom’s stock has grown ten times in the last two years, making it now the fourth biggest publicly listed company in the world.

Rosneft is the second biggest oil company in the world by proven reserves. And it has the support of the Kremlin. Because of all this static from Soros and others, Rosneft will probably be sold cheap. So you’ll be able to buy a company with more reserves than Exxon, for a fraction of the price.

The overall Russian economy is in a very good state. A much more predictable and responsible government is in place than existed in 1998, the time of the crisis, when Russia was run by oligarchs like Khodorkovsky. The government is a net creditor with an investment grade rating. Russia has now overtaken Saudi Arabia as the biggest exporter of oil in the world. And the finding of new reserves is about to peak, so we have perhaps less than a century of affordable oil left. The Russian economy is not about to collapse.

Risks certainly exist, but if you can’t assess risk intelligently you shouldn’t be investing in the stock market in the first place.   

Julian Evans, a British freelance journalist based in Moscow.

May 2, 2006