Local investor group fights for minority rights

Financial News: Focus on Russia

Jason Corcoran
30 July 2007

The Investors Protection Association was set up in 2000 to enable investors to join forces to protect their rights and improve corporate governance in Russia.

The association, little known outside Moscow’s financial community, is the only Russian investor group that backs the rights of minority shareholders. Its membership is drawn from Russian and international banks such as Alfa, Troika Dialog, Deutsche Bank and foreign fund managers such as Hermitage, Prosperity Capital and East Capital.

Former chief executive Stanislav Vartanyan said the association had scored notable victories in the energy and fixed-line telecommunications sectors by forcing companies to pay the dividends they had promised and demanding the election of independent directors.

Members have been elected to the electricity monopoly UES and seven regional subsidiaries of state-backed telecoms group Svyazinvest.

Vartanyan said: “Russian stocks are no longer cheap because investors are paying more and more attention to corporate governance. The Russian stock market has limited capital-raising ability so companies are subject to the stringent listing requirements of London or other exchanges.”

Shareholder activism has played a role in pushing for corporate reform but arguably a minor one. Two activist hedge funds, Hermitage and Prosperity Capital, operate on a regular basis in Russia.

Swedish-owned Prosperity continues to thrive but Hermitage has suffered outflows following the barring of its crusading founder Bill Browder from Russia.

Prosperity’s modus operandi is collaborative: to support a company’s management and give it a chance to perform. However, it can become aggressive when results disappoint and has filed several lawsuits against the Russian oil company Surgutneftegaz.

Prosperity is tangling with Lukoil, another oil company, over the legality of the merger of its subsidiary NGD with Ritek, in which Prosperity is the largest shareholder.

Mattias Westman, chief executive of Prosperity, said: “Ritek is a flashback to the bad old days but things have greatly improved. The enforcement of the tax codes and the abolition of complex corporate structures has helped. We have taken a lot of board seats in the power utilities sector.”

Hermitage has been a vocal critic of state-controlled entities such as Gazprom, Sberbank and Unified Energy Systems since it began investing in Russia in 1996. But Browder’s exclusion has led Hermitage to turn to other emerging markets in Latin America and the Middle East.

Hermitage did not field a candidate for election to Gazprom’s board on June 24, nor did it release its annual report highlighting alleged shady practices at the energy giant.

Moscow-based Vadim Kleiner, research director of Hermitage, declined to comment but other investors suggested there was little value in agitating for reform at Gazprom.