Three Russian metallurgy companies are currently seeking to obtain a primary listing on the London Stock Exchange (LSE), which is seen by market analysts as a new stage in their corporate development. While the key reasons behind moving headquarters to London, which is required in order to receive a primary listing there, are economic ones, the companies are also trying to reduce political risks associated with Russia by moving to London, analysts said, adding that investors are likely to feel more confident about their assets if the companies are registered in the U.K., as their possible disputes with the Russian government are likely to be subject to international law. Russian companies’ move to London could be a trend, but other Russian metallurgy companies have only considered making primary listing on the LSE and are unlikely to take firm steps before the forthcoming presidential elections in Russia, after which receiving government permission to move headquarters to London may become more difficult, analysts noted.

Russian precious metals producers Polyus Gold and Polymetal, as well as Luxembourg-based but operating mainly in Russia metals and mining holding Evraz Group, are currently in the process of obtaining a primary listing on the LSE. The LSE has traditionally been the key exchange for metals and mining companies, investment company Rye, Man & Gor Securities analyst Andrei Tretelnikov said. Russian companies are also seeking to get a primary listing in London, as “this is a step up in their corporate development, a new level,” he said, adding that by listing shares on the LSE the companies are expected to increase their market capitalization, as their shares are expected to be available for purchase by a wider range of investors. Also, by fulfilling the LSE’s requirements, the companies are expected to improve their corporate governance, thus also increasing their attractiveness to investors, Tretelnikov said.

The key reason for the move to London is merely economic, market analysts said. First of all, shareholders of precious metals producers plan to merge their companies with major foreign metals producers, which is easier to do when the companies have a primary listing in London, investment company UralSib Capital metals and mining analyst Dmitry Smolin said, adding that depositary receipts traded in London can be used as M&A currency more easily than those traded in Russia.

Meanwhile one of additional reasons, not stated by companies as official, is that registering in London reduces risks for the companies’ shareholders, Tretelnikov from Rye, Man & Gor Securities said.

Shareholders want to feel safer by registering companies in the U.K., as they can thus avoid in particular political risks they could face with companies registered in Russia, Smolin from UralSib Capital agreed.

Evraz Group, which is registered in Luxemburg, also listed a number of political risks connected with Russia, where its core business is located, in a prospectus released in late October for an additional share issue as part of the process of obtaining a premium listing in London. The company in particular said that “while the Russian political system and the relationship between President (Dmitry) Medvedev, the Russian government, and the State Duma (the lower house of the parliament) currently appear to be stable, future political instability could result from deterioration in the overall economic situation, including any decline in standards of living, as well as from the results of the upcoming elections of the State Duma and the Russian president in 2011 and 2012. In particular, the recently announced intentions of Mr. Prime Minister Vladimir Putin to return to the presidency and Mr. Medvedev to support Mr. Putin’s re-election as President in 2012 could cause political protests and unrest. Shifts in government policy and regulation in Russia are less predictable than in many Western democracies and could disrupt or reverse political, economic, regulatory, and other reforms.”

The company must state all the possible risks in the prospectus so that investors are aware of every factor that may negatively affect their investments in the company and have no reason to claim compensation from the company if any of the stated risks actually occur, Tretelnikov from Rye, Man & Gor Securities said, adding that such statements are usually drafted by legal departments of investment banks hired by companies, rather than by companies themselves. As for the risks associated with Putin’s return to the presidency, they may be linked with Western perceptions of Medvedev as a more liberal politician than Putin, Tretelnikov said, adding that “the fact that Evraz Group stated such a risk does not necessarily mean that the company expects this to happen; moreover, we all know that relations between the Russian authorities and Evraz’ major shareholder Roman Abramovich are quite good.” Tretelnikov thus disagreed with a suggestion made by the Russian media in late October that Evraz Group’s prospectus reflects Abramovich’s fear of future political instability in Russia.

Nevertheless, Evraz Group’s example shows that many political risks remain important even if a company is already not registered in Russia, which could be applied to Polyus Gold and Polymetal seeking to move headquarters to the U.S. from Russia, analysts noted. Fitch Ratings said on October 26, that Polymetal, which is soon expected to complete a share swap deal with its Jersey-registered affiliate Polymetal International in order to obtain a primary listing on the LSE, would hardly mitigate the broader risks associated with operating largely in Russia. “Russia scores poorly on ‘political stability,’ ‘rule of law,’ and ‘control of corruption,’ in the World Bank’s governance indicators. We believe that the centralized power structure, weak institutions and high levels of corruption carry event risk. While the risk of major political instability in the near term is low, upcoming parliamentary and presidential elections and a growing sense of disaffection over corruption and the political system adds uncertainty,” a Fitch Ratings analyst was quoted as saying.

Although Polymetal, as well as Polyus Gold, are still expected to face most risks associated with Russia, moving headquarters to London is still seen as a positive factor by investors, primarily in psychological terms, Smolin from UralSib Capital said.

A company operating in Russia, but registered in the U.K. is expected to be subject to international law in possible disputes between shareholders or between shareholders and the Russian government, which is a positive factor for investors, Tretelnikov from Rye, Man & Gor Securities agreed, adding that regulatory, tax, and other risks are certainly expected to remain, but these risks can easily be mitigated if a company operates in compliance with Russian law.

Besides Polymetal, Polyus Gold, and Evraz Group, other Russian metallurgy companies have also considered the possibility of obtaining a primary listing in London, but have taken no firm steps toward this goal, Smolin from UralSib Capital said, adding that “some other companies are unlikely to get permission on the primary listing in London after presidential elections in March 2012.”

Meanwhile, Polyus Gold still needs approval from a government commission, as it plans to transfer control over already existing London-registered company Polyus Gold International, which was set up in July following the merger of Polyus Gold and its 65%-owned Kazakh subsidiary KazakhGold, to a yet-to-be-established U.K.-registered company Polyus Gold Plc. On October 25, the government commission delayed consideration of Polyus Gold’s application until the next meeting to be held on an unspecified date. The Federal Antimonopoly Service’s (FAS) Director Igor Artemyev, who is a member of the government commission, however, said on October 27, that the commission would try to make a decision on Polyus Gold’s application as quickly as possible.

The delay is unlikely to negatively affect Polyus Gold’s plans to obtain a primary listing in London, Tretelnikov from Rye, Man & Gor Securities said, adding that even if the company has to wait a number of months before the next meeting of the commission, it is not crucial to the company or investors, as the final goal is still likely to be reached.

Smolin from UralSib Capital also said that Polyus Gold is expected to receive permission at least by the end of the year, but added that Polyus Gold needs to get a primary listing before Polymetal or Evraz Group does, as “the first company who gets the primary listing has better chances for a successful share offering and inclusion in the FTSE 100 index, combining the 100 most highly-valued companies on the LSE. While Polyus Gold’s primary listing on the LSE is being delayed, Polymetal’s U.K.-registered subsidiary Polymetal International on October 28, set a price for forthcoming share offering. Evraz Group plans to list shares on the LSE already on November 7.