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SGX Catalist: An IPO platform for Russia’s tech entrepreneurs and resource firms?

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Note: An edited version of this article was first published by Silvercliff Capital Partner Shiwen Yap in Venture Views.


The Singapore Exchange (SGX) Catalist board may wish to tap Russia’s booming startup ecosystem for more technology listings, as well as explore tapping its abundant natural resources. Such a move potentially offers investors and entrepreneurs from Russia a highly liquid growth platform for their enterprises. It also aligns with the aspirations of the city-state to develop itself as a technology hub.

The presence of a growing Russian entrepreneur community in the city-state, the favourable political mood in Southeast Asia towards Moscow — it’s perceived as a moderator in the region amid rising US-China strategic rivalry — as well as Singapore’s commitment to closing an FTA with the Russian-backed Eurasian Economic Union (EAEU) are high-level developments that could facilitate greater economic activity with Russia and its economic sphere of influence.

Relations between Singapore and Russia see strong bilateral trade, which has grew at a compound annual growth rate of 10.36 per cent from 2011 to 2015 to S$7.66 billion. This made Russia the 21st-largest trading partner of Singapore in 2015.

Firms domiciled in Singapore accounted for close to half of Russia’s FDI in 2016, with$16.3 billion flowing into Russia from Singapore out of a total of $33 billion, an increase 88 times over from 2015’s figures. According to The Diplomat, the city-state acts as a conduit for “roundtrip investment” of Russian capital and as a general intermediary for Russian finance.

Fundraising data on the SGX Catalist from 2012 to 2017. Sources: Bloomberg & SGX

Why Russian enterprises?

Ruble notes and MasterCard.

There is a clear opportunity for Singapore to collaborate with Russian technology entrepreneurs and resource firms in enhancing access to capital, as well as boosting the technology and resource clusters on the SGX.

Moreover, there also seems to be a gap in Russia’s understanding of China, an area which Singapore could leverage on, given a prior ‘special relationship’. However, recent years have seen this relationship experience tension, though the city-state has since recalibrated its relationship in an attempt to stay relevant to China, despite a recent cyberhack that some allege was sponsored by China.

Enterprise Singapore notes that it possesses the highest per capita GDP among the BRIC economies at, as well as rich resource sector — as at 2015 its sub-soil wealth is valued at US$75 trillion — and has significant reserves of natural gas, oil, coal, precious metals, diamonds and fertilizers.

According to an account by Inc: “Startups in Russia must grapple with U.S. and E.U. Economic sanctions, a dearth in venture funding, and their country’s tarnished reputation. Yet they routinely overcome these challenges, offering entrepreneurs everywhere a lesson in perseverance.”

Russia’s high-technology enterprises —who benefit from the substantial investments into STEM education and the former USSR’s military-industrial complex — are already exploring means to grow beyond their dependence on Russia’s hydrocarbon sector and operate in a business environment that breeds resilient business models and entrepreneurs.

For instance, firms such as the Nasdaq-listed Russian Internet major Yandex command more than 54% of all online searches in Russia — though information from Internet intelligence firm StatsCounter indicates that as of July 2017 the firm accounts for 50.87% of the search engine market in Russia — while the firm generates as much as 94 billion rubles ($1.6 billion) in 2017 sales, a 24% increase over 2016 figures.

It is arguably positioned to establish itself as a competitor to Amazon in the country and possesses sufficient expertise and capital to outcompete Uber in Russia.

In an interaction with Inc, William Courtney, a retired diplomat and executive director of the nonprofit policy firm Rand Business Leaders Forum, commented: “If it weren’t for political risks, Russia could become a global startup powerhouse.”

Serguei Beloussov, the founder and CEO of global data security firm Acronis — its international headquarters is based in Singapore — commented in an exchange with the South China Morning Post (SCMP): “I have always wanted to be part of a country that is politically stable, focused on knowledge building and developing its economy in a non-invasive way.”

“When you say you are Singaporean, you get a neutral reaction because the country is not politically aggressive. But you get a strong reaction when you say you are Israeli or Russian.”

“It is crucial to be neutral. It is a value that allows people to use Singapore as a base to do global business, even in times of calamity,” adds Beloussov, who came to Singapore in 1994.

Why Singapore?

Artificial ‘Supertrees’ at Singapore’s Gardens by the Bay.

The rise of Singapore as a international financial centre and its status as a challenger to London as an international financial centre — Boston Consulting Group suggests it could displace London by 2020— make the city-state a compelling destination for businesses looking to scale up, as well as being a global innovation centre.

Coupled with it’s trade connectivity, this makes it an attractive destination for a number of firms amid efforts to strengthen its capacity as an international innovation hub.

PayPal has established its international headquarters in Singapore, while the likes of Google, Microsoft, Facebook, Twitter, Hewlett-Packard Enterprise (HPE) and other major technology enterprises maintain their Asia-Pacific (APAC)/Asia-Pacific & Japan (APJ) headquarters there. This bolsters Singapore’s claim to be more attractive than Hong Kong as the Asian base for multinational corporations (MNCs).

As of July 2018, representatives of Russia’s Skolkovo Foundation and Singapore’s Action Community for Entrepreneurship (ACE) — which helps foreign startups establish a presence in Singapore — are also discussing options to expand collaborations in the information communications technology space.

In a public statement, Dmitry Khodkov, Head of Telecommunications & IT cluster of the Skolkovo Foundation, commented: “There are several barriers on our way to the Singapore market. These are high cost of production as well as the requirements stating that 30% of a company must be registered in the country and that you must hire local personnel.”

“ On the other hand, here is the bright side: We have the grant system and a well developed ecosystem of cooperation with business and universities. There has been a positive dynamic after the talks with the Action Community for Entrepreneurship.”

The SGX Opportunity

The SGX, which has played a role in the city-state’s rise as an international financial center, despite not being a particularly active stock market, has seen its Catalist growth board emerge as a highly liquid platform for growth-stage firms. Companies listed on the Catalist do not need to demonstrate a track record of profitability.

Valuation & liquidity information as at March 2018. Credit: Bloomberg & SGX.

As at end-2016, there are 650 Russian companies operating in Singapore, a number that is increasing. Gazprom (natural gas) and Lukoil (oil) are some of the Russian companies that maintain a presence in Singapore, and the presence of more Russian firms is promoted at the highest levels.

Meanwhile, the last 12 months have seen growing trading volumes on the SGX, as well as the establishment of co-listing partnerships with the NASDAQand Tel Aviv Stock Exchange (TASE), creating an East-West corridor; as well as the implementation of dual-class share structures and the listing of junior resource firms earlier in their life cycle.

The most recent tech listing the SGX was of Synagie Corporation Ltd. With a market capitalization estimated S$71 million. This brought the Catalist aggregate market capitalization to more than S$11 billion and the SGX’s technology cluster — which saw trading activity increase in H1 2018 —to more than 70 companies, with combined market capitalisation of more than S$70 billion.

Its most recent resource firm listing was Silkroad Nickel, which listed with a market capitalization estimated at S$92 million and brings the aggregate market capitalization of the Mineral, Oil and Gas (MOG) cluster to more than S$2.5 billion.

In media interactions, SGX’s equities chief, Sutat Chew, has argued that global trends favour the bourse, with a healthy pipeline in the property, consumer, technology and healthcare space, as well as growing traction in its tie-ups with TASE and NASDAQ.

Research by Deloitte indicates the SGX is an attractive listing destination of choice for both Singapore companies and foreign companies, with the last five years, there were 45 Singapore companies and 40 foreign companies that listed on the SGX. Between 2014 to H1 2018, nearly 47% of listings in Singapore were from overseas issuers.

Credit: Deloitte, 2018

Deloitte observed: “Overseas issuers from developed countries such as Australia, Europe, Japan and USA raised between 3–7 times more funds per IPO listing than Singapore and Southeast Asian countries.”

While highlighting the interest of investors of the SGX market to the increasing exposure to overseas companies, what is notable is that most cross-border offering on the SGX were from the property-based industries.

Mean proceeds raised by geographic origin. Credit: Deloitte.

Commenting on the prospects of the SGX in a public statement, Ms Tay Hwee Ling, Global IFRS and Offerings Services Leader, Deloitte Singapore, elaborated: “At Deloitte, we expect to see a continuing healthy pipeline of domestic and cross border IPOs in spite of global uncertainties in relation to the escalating trade tensions between US with China, Europe and Canada.”

“With the introduction of dual-class shares structures, SGX is now
in a position to support high-growth companies and attract blockbuster listings from around the world, while broadening investment options for investors and adding to the vibrancy of Singapore’s capital market. We are cautiously optimistic that Singapore’s IPO market will continue to do well in 2018 H2.”

Russian Macro Risks

Cityscape of Moscow.

Russia presents a contrast of both socioeconomic and technological risks, which is also compounded by geopolitical tensions with Europe and the US. While Russia has as rich history of innovation in the STEM fields — it launched the first satellite, Sputnik 1, and sent the first human, Yuri Gargarin, into space — there are also substantial risks in engaging with and commercialising Russian technology and intellectual property (IP), even as Moscow attempts to rehabilitate its reputation in areas such as fintech.

The Global Innovation Index 2018, an index developed by INSEAD, the World Intellectual Property Organization (WIPO) and others, ranked Russia № 46 globally. Human capital & research was identified as a key strength, though it lagged in rule of law, political stability, logistics performance, and a number of other areas.

Russia’s global innovation ranking for 2018. Credit: Global Innovation Index

Beyond its backwardness as a technology economy, according to one observer — there is systemic academic fraud has a negative impact on Russia’s scientific research — the same account highlights the strength of Russia’s manufacturing capacity, which consumes around 2.7% of the world’s machine tools and is ranked as the worlds’ eight manufacturing power.

GDP growth, global mean compared of world, Singapore and Russia. Credit: World Bank.

Infrastructure has improved since the collapse of the USSR and economically speaking, Russia as of May 2018 is a mixed bag of risk factors ranging from geopolitical tensions to international political sanctions. It also has a history of volatility underpinned by being one of the few countries in the world with negative population growth.

While 2018 makes a recovery year for the Russian economy following the market shocks from the decline in the oil market in 2014, its growth is forecast to reach 1.7% this year. This is above the economic contraction of close to 3% it saw in the 2015/2016 period.

This contracted growth has also affected its venture ecosystem has also affected the growth of its startups, with a crisis and shortage of finance making it difficult for entrepreneurial ventures to secure financing. It has also caused venture capitalists to seek talent and investment opportunities elsewhere.

The investment risk of Russia is further compounded by systemic and endemic corruption, significant market opacity and an oligarch-dominated economy, as well as calculations of its relative national power. With state finances under significant pressure — alleviated by the recent rise in oil prices — this has also seen increased borrowing on the international market and sizeable foreign exchange currency reserves, leading to relative stability for now.

While Russia has been seeking to pivot to Asia, with the intent of using its Far East region as a gateway to the Indo-Asia Pacific (Indo-APAC), the dynamics of Russia across its history, geography and culture translate to its centre of gravity being in Europe.

This not only impacts the outlook of Russian entrepreneurs, investors and business community as a whole but also and raises questions about the sustainability of medium and long term business connectivity.

Rather than a full pivot, Russia is pursuing a rebalancing in its trade, with an evolving commercial partnership between Russia and Asian countries driven by commodities and weapons at this time. However, further trade growth with Asia is inhibited by infrastructure deficits for transport and production, despite a number of Asian countries actively seeking improved economic ties with Russia in the form of trade and greater investment.

Stephen Blank, a Senior Fellow at the American Foreign Policy Council, also argues in a study, Russia’s “Pivot to Asia”: The Multilateral Dimension, that despite the optimistic rhetoric of Moscow regarding its pivot to Asia, its ability to influence the various multilateral projects in Asia are limited by its political system.

Blank argues that Russia is “failing to benefit from or participate in these projects”, while the Eurasian Union projects has ”become an economic disappointment to both Russia and its other members”, with the country being increasingly marginalised. Likewise, despite the many ASEAN agreements, few have seen any meaningful implementation.

With most (>90%) of Russia’s population located west of the Ural Mountains — which divides the European and Asian segments of Russia — this translates to significant human capital limitations on Russia’s capacity to forge trade links with Asia for now.

Divide between European and Asian parts of Russia. Credit: Wikimedia Commons.

SGX Concerns

While the SGX may offer a compelling venue for Russian tech companies’ listings and, there have been no listings from Russia to date, indicating either a lack of awareness or a lack of appetite on the part of Russian corporates.

The possible downsides of SGX as compared to the Hong Kong Stock Exchange (HKEx) — where Russian Aluminium is listed — means that Russian firms listing there are virtually invincible to the potential sanctions-related pressure from the Western countries. Moreover, the HKEx generally offers greater liquidity than the SGX in terms of trading volumes, as well as higher valuations on the Growth Enterprise Market (GEM).

FTSE Straits Times compared to MOEX Russia Index, FTSE ST Catalist, and MICEX Innovation Index. Credit: Financial Times.

Hong Kong has emerged as a preferred IPO destination for Singaporean and Southeast Asian firms — particularly those with a business focus on Greater China — with 2018/2019 expected to see a continuing battle for Southeast Asian listings between Hong Kong, Singapore and Southeast Asian exchanges.

While the HKEx and GEM benefit from a resilient stock market, coupled with solid share price performance of companies post-IPO, its investor base also tends to possess a strong domestic bias focused on Greater China.

Using turnover velocity — how frequently a stock changes hands — Catalist’s 5-year median turnover velocity from 2012–2017 is 129%, against 60% on Hong Kong’s GEM and 62% on London’s AIM for the period of 2012 to 2017 — and this is coupled with the fact that the SGX arguably maintains an edge in attracting and distributing international capital.

FTSE Straits Times Index & FTSE ASEAN 40 Index track compared to MOEX Russia Index. Credit: Financial Times.

But while the SGX concentrates on reining in delistings, stakeholders in Singapore have expressed concerns over subpar regulations and the regulatory it spun off in September 2017 being compromised.

As of May 2018, it is monitoring 53 directors and executives, according to a media report. However, the SGX’s joint commercial and regulatory role continue to arouse substantial concerns about protections for investors.

In January 2018, Mak Yuen Teen, an associate professor of accounting at the NUS Business School, observed: “When SGX decided to form a separate regulatory subsidiary from September last year, I thought this would go some way towards better addressing the conflicts — although like some others, I felt that the better model is to totally remove the regulatory role and place it in a separate entity, similar to countries like UK.”

Mak expresses skepticism of the SGX RegCom, noting that while it has “undertaken certain initiatives…consistent with strengthening regulation and transparency in the market… it has been at the forefront of advocating for far more significant changes that move the market in the opposite direction.”

Meanwhile, an account by Splash, a publication of Singapore-headquartered Asia Shipping Media (ASM), cited Arnaud Vagner, who elaborated: “The regulatory environment of the SGX is prehistoric. The problems are structural, not superficial. The functions of stock exchange and regulator have to be separated. Putting the onus on the auditor and expecting them to behave is absurd.”

While the introduction of dual-class share structures and proposed changes on quarterly are “a regression in investor protection” on the SGX, the listing of Russian tech enterprises represent both an opportunity and a risk. Russian enterprises represent a specific brand and risk. If the SGX decides to pursue the Russian opportunity, it could stand to win big in the listings space but will also expose itself to the inherent geopolitical risks that Russian enterprises and capital bring.

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