RUSSIAN CONSUMERS COME IN FROM THE COLD / THE WALL STREET JOURNAL ( RECOMMENDED READING )

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OCTOBER 13, 2010, 5:36 A.M. ET.

Russian Consumers Come in From the Cold .

By MATTHEW CURTIN

Commodities or consumers? Russia may be rich in resources, but increasingly it is the spending power of 140 million Russians as their living standards rise to catch up with the rest of Europe that is exciting the interests of investors. Imminent initial public offerings from food retailer O'Key Group and Internet group Mail.ru should underscore the trend.


Meanwhile, planned listings of resources companies are gathering dust. Buoyant commodity prices alone aren't enough to sell an IPO amid so much global economic uncertainty. In the one listing underway, gold miner Petropavlovsk has halved the amount it wants to raise from floating its iron-ore unit to $240 million.


O'Key and Mail.ru, seeking to raise up to $500 million and $750 million respectively, have an easier story to tell. Russia's population is shrinking but disposable incomes are growing, forecast to rise 60% by 2015. Russia is Europe's fifth largest food-retailing market. Penetration by modern stores is 40%, half that of Western Europe. Domestic leaders such as O'Key face limited foreign competition. Germany's Metro AG and France's Auchan have less than 5% of the Russian market.


For Mail.ru, invested in Russia's top three Internet sites, the story is similar. With 45 million Internet users, Russia ranked eighth globally in 2008 but penetration is well below Western European levels. Internet use could rise 15% a year on average between 2009 and 2013, in line with India, but ahead of China, according to consultants J'Son & Partners.


The Russian market may be less overpriced than other emerging markets, trading at double-digit discounts to Brazil, China and India, according to Troika Dialog, an investment bank. Russian retail stocks have outperformed the wider Moscow stock market by 27% this year. O'Key's rivals Magnit JSC and X5 Retail trade at 24 times 2011 earnings. Mail.ru would be the biggest listed emerging market Internet company after China's Alibaba.com Ltd. and Baidu Inc., trading at 35 times and 45 times. O'Key could be worth up to $3.3 billion and Mail.ru, which has a 2% stake in Facebook, up to $5 billion if priced at small discounts to those valuations.


True, some metals IPOs are likely to get to market. But for now it is the capacity of Russia's consumers to come out from the cold that is getting investors excited.


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