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East: U.S. Stock Markets Impose Strict Standards

Only a small number of East European and Russian companies have attained a coveted listing on any of the lucrative U.S. stock markets. Most of the companies in the region are seen as too small or unable to meet the strict financial standards for listing in the U.S. RFE/RL's Nikola Krastev looks at requirements for being listed on the markets and why so few companies from Eastern Europe qualify.

New York, 26 February 2001 (RFE/RL) -- Most companies from Eastern Europe and Russia do not comply with the stringent financial requirements for listing on a U.S. stock exchange. Many are also too small for consideration.

Those factors, combined with uncertainties about the global economy, have cooled U.S. investors' enthusiasm for initial public offerings from East European companies. The Eastern firms are thus deprived of access to the world's wealthiest equity market.

Stock market analysts say high technology, telecom, and energy companies from the East generally have the best prospects for a U.S. listing. But this only refers to the type of business the companies are engaged in. More important, analysts say, is the question of whether their accounting practices adhere to strict U.S. standards. For example, the practice of internal audits is still widely practiced in Russia. But it is unacceptable in most Western countries, which insist a company's accounts be examined by independent, external auditors.

What would be the benefits for a company from Eastern Europe to have a listing on a U.S. stock exchange? The most obvious advantage would an ability to raise money by selling stock.

But there would be other benefits as well. Oliver Kratz is portfolio manager of the European Emerging Markets fund at Deutsche Asset Management in New York. He tells RFE/RL that the great advantage is:

" enhance liquidity, enhance transparency, to facilitate trading for those investors that are restricted in buying the local shares, to enhance visibility of the company. It is in many cases [perceived] as [a] symbol to have a listing on the New York Stock Exchange."

The few companies from Eastern Europe listed on U.S. markets have their shares traded on two exchanges -- the New York Stock Exchange (NYSE) and NASDAQ, which is dominated by high-tech companies.

Doreen Davis, vice-president of NASDAQ International, spoke with our correspondent about why the exchange's requirements have limited the listings from East European and Russian companies.

"To a large extent, that is probably driven by the criteria here in the United States -- in [the] sense that an issuer here has to conform to U.S. accounting standards. [They also have to comply with our corporate governance practices which are] probably more stringent here, as are the accounting practices, [than] anywhere else in the world. And so, there is a premium that is put on, basically, that type of disclosure. Which, I think, is to a large extent reflected in the stock prices."

Foreign companies listed on the NYSE or NASDAQ can trade their shares in the form of American Depository Receipts, or ADRs -- that is, through an intermediary. The intermediary is usually a respectable U.S. financial institution that can guarantee the liquidity of the stock. ADR is the most common form of listing in the U.S. for companies from Eastern Europe and Russia.

If the listing requirements in the U.S. are so difficult to comply with for most Eastern companies, wouldn't it better for them simply to try to get capital on their local stock exchanges? Not necessarily, says Kratz of Deutsche Asset Management.

"There's two arguments to this. Number one: it is not a question whether it's better to raise capital at home. It is sometimes a question whether they are capable of doing this, whether there's enough capital to be raised at home. [The] second argument would say that in many cases having an ADR reduces local liquidity and takes away trading volume from the local exchange."

Golden Telecom, incorporated in 1999 in the U.S. state of Delaware, is a big telecom and Internet service provider in Russia and the CIS whose shares are traded on the NYSE. Shares of Netia Holding, Poland's largest telecom, are traded on NASDAQ. Matav, Hungary's largest telecom company, is traded on the NYSE, as is Mobile Telesystems, a cellular communications provider in Moscow, and Vimpelcom, another communications provider in Russia.

Telecoms from Eastern Europe and Russia suffered declining valuations in the last 12 months. A string of worse-than-expected returns in the telecom industry and hints of lower future revenues has some observers speculating that the East European securities market may be sluggish for the foreseeable future. Shares of Hungary's Matav, for example, dropped as much as 10 percent in a single day three weeks ago.

Since almost none of these companies are familiar to the U.S. public, most of their stock is being traded only by institutional investors that deal in large quantities of securities. Analysts say it is not so important how a stock is traded -- primarily or through an ADR. What matters, they say, is being listed in the U.S. at all, because it opens the door for an infusion of capital and thus for the company's potential growth.

Davis of NASDAQ International says that U.S. investors might in some cases be more cautious when investing in companies from Eastern Europe and Russia because of the perceived risks and political uncertainties in the region. Also, largely because of the dynamics of the U.S. financial markets, companies that at one point may satisfy the listing criteria can later be removed, or "de-listed."

"We de-list companies each year for a host of reasons. Roughly we lose about 500 a year, on average about 500 companies a year we lose on the NASDAQ stock market. Most of those companies, though, are de-listed because of mergers and acquisitions -- although some for financial reasons. We have not only what's called the original listing criteria, but we also have continued listing criteria. Once a company is listed on NASDAQ, they have to maintain various levels in order to continue to be listed on this market."

The cautious approach of many U.S. investors toward Eastern companies also has to do also with the newness of these enterprises on U.S. equity markets. In this regard, companies from another emerging market area -- Latin America -- fare much better. Kratz of Deutsche Asset Management explains:

"It's partially due to the fact that many of these [Latin American] companies are larger, the capital markets are deeper, that U.S. investors are more naturally biased of Latin American equities than of Slovak or Czech assets. It is partially based on geographic proximity. [But] also, if you look at Latin American equity markets history, it's a much longer history, so these companies have had [a] longer time to prepare themselves for international listings compared to Eastern Europe [where] the genesis period of most equity markets was really in 1995 or 1996."

All of the analysts agree that a company trying for a listing in the United States has to be of a certain financial size, to have accumulated a critical mass of cash. They say it is not worth seeking a U.S. listing if the company's valuation is less than $20 million.