SMR, a metal and mining business company in Russia, announced last month that it plans an initial public offering in Hong Kong this year. The question is whether Hong Kong equities investors are ready to capitalise on the growth in Russian companies. With a 6.6 per cent growth in GDP in 2006, Russia's economy has already attracted the attention of international investors. In addition to listing locally, Russia's corporates have been seeking to raise capital in developed economies. Russian IPO activity has soared in Europe with London being the most popular location to list. Yet recent diplomatic tensions between Britain and Russia since the 2006 murder of former Russian spy Alexander Litvinenko in London and tough listing requirements are prompting some Russian companies to look for other options. John Thain, chief executive of the New York Stock Exchange, warned fellow exchanges last year about accepting international listings from former Soviet Union countries because of the lack of adherence to corporate governance rules. However, Russian IPOs have grown in the past two years. In 2006, Russian companies raised more than US$17billion and other Commonwealth of Independent States (CIS) companies raised more than US$4billion by listing their shares in Moscow, London, New York, Frankfurt, Almaty (Kazakhstan) and Warsaw, according to consulting firm PBN. Analysts say that the total amount of capital by Russian companies last year topped 2006. Russian oil and gas conglomerate Rosneft raised GBP5.2billion (HK$80.34billion) on London's main market in 2006. This was the largest IPO of the year, according to PricewaterhouseCoopers. OAO SeverStal, a mining and steel company, and Comstar, a telecommunications operator, issued the third and fourth largest international IPOs in London, collecting Euro839million (HK$1.01trillion) and Euro823million respectively in 2006. The aggregate amount of capital raised by Russian IPOs was dwarfed by those raised by Chinese companies in 2006. The total funds raised from IPOs reached US$62billion in that year. Few private banks Net Worth spoke to are advising investors on looking at Russian stocks alone. Russia has been seen as part of the emerging BRIC economies (Brazil, Russia, India and China). Even though many investors have holdings in Hong Kong-listed mainland companies, few consider investing in Russian firms directly, according to private banks. Alan Yue, investment adviser at ABN Amro private banking, says: 'Our clients usually prefer to access [emerging market Europe] through diversified and actively managed mutual funds. We seldom have demand for structured products linked to Russia. We have, however, seen client appetite for currency products linked to the Russian rouble.' But clearly Russia has untapped potential. It gains strong energy export revenues as a large producer of mineral products and metals, and it can continue to build on natural resources in the coming years. Russia is the largest producer of nickel (21 per cent of the market), platinum (14 per cent) and palladium (44 per cent) and ranks second in the production of aluminium (11 per cent), titanium and titanium dioxide (29 per cent). The PBN report notes that while 2005 was characterised by an influx of consumer goods companies coming to market, by the end of 2006 it was all about different sectors. There was a range of Russian and CIS IPOs, from telecoms and media, food and agriculture, metals and mining, property and development, pharmaceuticals, energy, retail and financial services companies in 2006. Although the growth of share prices is not as spectacular compared with China, Russian equities have had positive growth in the past two years. The FTSE Russia IOB Index which contains the 10 biggest and most liquid Russian companies trading on the London Stock Exchange's International Order Book under the form of Russian Depositary Receipts, had an annualised return of 28.1 per cent last year. In 2006 it had an annualised return of 46.83 per cent. To tap these opportunities, fund managers in the past two years have launched funds that invest in Russian equities. ABN Amro Asset Management and Manulife launched funds at the end of last year, each allocating more than a third of the assets in the energy sector of Russia. While Manulife's fund invests about 30 per cent into the materials production sector, ABN Amro's fund invests 20.8 per cent. Hong Kong-based Raymond Kong, assistant vice-president and product manager at Manulife Asset Management, said: 'The reason we launched a fund focusing on Russia is that we believe investment in the country is sustainable. Although some investors might have had some concerns over the political stability of the country under the Vladimir Putin administration, the Russian economy saw increases in gross domestic product.' Russian equities are undervalued and Mr Kong adds that the growing wealth of Russia has helped and will continue to develop other industries such as banking and consumer services. Russia's population of high-net-worth individuals increased to 119,000 in 2006, up by 15.5 per cent from 2005, according to Merrill Lynch. Since Manulife launched its Russia Equity fund in November it went from US$1 to US$ 1.077 by the end of December. It is inevitable that more international companies may choose Hong Kong as a base for listing. The stock exchange conducted a roadshow last year to the Middle East to attract more overseas companies to trade shares on the city's bourse. It also led marketing initiatives in Vietnam, Thailand, Malaysia, Kazakhstan, Russia, South Korea, India, Singapore, Taiwan, Mongolia, Japan, Europe and the United States to attract more firms. As reported in the South China Morning Post on February25, Israel's ZIM, one of the country's largest container shipping firms, may be a listing candidate on the main board this year. And if the Hong Kong stock exchange plan pans out, then in addition to Chinese companies, investors can place their cash in overseas companies directly. Mr Yue suggests that interested investors may want to adopt a diversified approach. 'It is always difficult to make recommendations on IPOs given the dearth of research during the lead-up period; and for an emerging market IPO, those difficulties are magnified. 'If investors understand the risks involved and have the inclination for such investments, then all well and good. But from a prudent point of view, a more diversified approach either through a fund or a passive index tracker would be more appropriate, and this is probably true for the majority of our investors.'