Russian CFO Foresees Five Sluggish Years

The CFO of one of Russia's biggest telecoms contends that investors in the developed world are overly biased against companies in the developing one.
David KatzJuly 23, 2010

A few weeks ago, Alexey Kornya, the CFO of Mobile TeleSystems, was in New York to help ring the opening bell of the New York Stock Exchange. Yet while he and other top executives of MTS, a leading cell phone operator in Russia, would be celebrating the company’s 10th year of listing on the Big Board, Kornya was in a combative mood.

Investors in the developed world have an irrational bias against companies headquartered in regions they don’t understand, he told CFO the day before the bell-ringing. That prejudice took particular hold during the 2008-2009 recession, when shareholders grew timid after being burned by investments in fundamentally unstable companies such as AIG and failed to recognize the value of more-stable companies headquartered in Russia and China.

But their day is coming soon, the finance chief thinks. Fueled by the lack of opportunities in a stagnating world economy, investors will zero in on companies with solid balance sheets and ample cash — regardless of where they’re located. Indeed, MTS itself may have already benefited from that trend. In June the company announced its issuance of $750 million in Eurobonds denominated in U.S. dollars and listed on the Irish Stock Exchange. The bond was oversubscribed.

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The following is an edited excerpt of CFO’s interview with Kornya.

As a recent issuer of debt on the Irish Stock Exchange and a long-time issuer of equity on the New York Stock Exchange, what are your perceptions of investors in the developed world?

I was just talking with investors about this and told them that the risk understanding and the risk attribution currently in the markets are wrong. They need to be changed within the next two or three years. And I’m pretty sure that they will change. We saw during the crisis that lots of AAA or AA credits effectively were bankrupt or were on the edge of bankruptcy if the government hadn’t stepped in to help them. While this was going on, lots of fundamentally stable companies received relatively low ratings simply because they are based in Russia or China — and I’m not talking here necessarily about MTS.

Alexey Kornya

People in the United States do not always fully understand how markets operate in these countries. Risk attribution should not be based so much on how familiar you are with the different environments. Because AIG operates in the developed world and was of the size it was, there was a perception that it would never fail. But it really was effectively bankrupt. That’s why I say risk attribution and risk perception need to be changed completely to more fundamental principles.

Do you think some of the problem has to do with the conflicted nature of the credit-rating agencies?

Well, not necessarily. I think it’s about whom they are working for — investors. Some of the wrong perceptions of investors are easily translated into what the credit agencies do. Because if you don’t have a buyer, then you are not needed. You are adjusting your view to the view of the buyer, and the view of the buyer is: I don’t know anything about Russia, so I will invest in Russia only for high interest rates or for high return. The problem with the credit agencies is that they’re adjusting their understanding for those who buy their views. They are not fully independent in this sense.

What will push investors to assume the fundamental change in risk that you’re predicting?

There is a certain period of stagnation in the world economy coming. It will be very up and down, and I don’t foresee any sufficient growth in the coming three to five years. As a financial guy, I’m very conservative and usually pessimistic, but that probably comes with the profession. What will happen to the world economy is something very similar to what we had the past 10 years in Japan. Money will be cheap, but I think you will see fewer and fewer opportunities to invest and more of the risks associated with this type of economy.

So investors will be forced to look more into countries that are developing faster and giving you better return — and that are indeed less risky. That will force them to rediscover the emerging markets and rethink the real risks associated with those markets.

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