Lately, the Russian financial market attracts attention of not only its players but also state authorities. The government dedicated a special meeting to discussion of its fate and at the conference in London Bloomberg presented analysis of condition of the Russian market done by Boston Consulting Group (BCG). The evaluations and proposals voiced at these events enable the analysts to state that the market will face big changes.
BCG analyzed condition of the market according to the order of Russian stock exchange RTS. In the process of the research the market was evaluated according to three parameters: infrastructure (exchanges, clearing systems and legislative base), demand on the part of investors for financial instruments and supply of these instruments. Russia was compared to Poland as another emerging country, as well as to France and the US.
The main conclusion of BCG is that the market lacks securities and hence opportunities for investments, which is the main obstacle for its development. Its structure is also unsatisfactory because it depends to heavily on shares. They account for 73% of the trading turnover, bonds account for 21% and the forward market accounts only for 5%. In Poland, for example, this proportion looks like 44:4:53. In developed countries turnover of trade in shares is also comparable to the turnover of the forward market and sometimes is even smaller. Along with this, the Russian market is excessively concentrated. Ten largest issues account for more than 78% of capitalization and for more than 98% of turnover. In Poland these parameters amount to 71% and 80%, in France to 45% and 53% and in the US to 26% and 16%. Ken Pain, manager of the BCG project, notes, "This is typical for emerging markets; the situation will change slowly but this is normal. However, it is alarming that there are some companies among these largest ones that may disappear - restructuring of RAO EES Rossii is underway and YUKOS has problems."
Limitation in instruments overlaps the constantly growing demand on the market. According to BCG experts, demand of Russian investors alone will grow fivefold in the next five years and pension money will be the main factor. Along with this, among all analyzed markets Russia is characterized by the biggest share of foreign players' participation and by the smallest share of private investors.
For example, in the structure of investments in the US nonresidents have only 7%, 41% are individual private investors and 52% are local institutional investors. In Russia everything is vice versa: 50% are foreign players, 3% are foreign investments and 47% are large local market players. At any rate, this is also typical for emerging countries. For example, in Poland this proportion amounts to 45%, 6% and 49%. "The share of local investments will grow but what will they buy? If there are still little instruments, they will be traded at an excessively high price," explains Pain.
According to BCG, the infrastructure plays a less important role in development of the Russian market. In any case, drawbacks were also found there. The market does not comply fully to a single parameter of quality stock market proposed by the international federation of stock exchanges. For example, there are problems of general nature like uncoordinated marketplaces, absence of the law on inside information, absence of strong legislative base for operational market regulation. There are also problems with disclosure of information and corporate governance. However, Pain admits that in general the infrastructure is quite prepared to accept new instruments and to serve the investors. Along with this, the problems of expedience of organization of anonymous trade and the need to improve protection of investors' rights remain.
According to results of its analysis BCG proposes a number of recommendations. The main of them is organization and conduction of new IPOs by Russian companies. However, these should be IPOs not in the West (the case of Wimm-Bill-Dann) but in Russia and with a big free float. The exchanges are also recommended to lower the fees for listing and to provide marketing and PR support to the issuers.
BCG also notes that in due time Russian exchanges will be able to compete against the Western exchanges trading in ADRs of global issuers less. For example, LSE has much stronger positions now than in 1997. The analysis states, "The slogan "Russian shares for a broad circle of investors" should be the motto of the Russian stock market development." This means that there should be work with private investors besides the IPOs and increase of free float.
BCG experts conclude that approach to the market should be systematic, "The market should focus on fulfillment of all tasks at once." According to Pain, "Supervisory authorities are typically concerned about one element and it is necessary to think about the market in general."
In any case, very much was said about the systematic approach to the financial market at the state level too. The Russian government organized a special meeting dedicated to development of financial sector. The Economic Development and Trade Ministry acted as the main lecturer about this issue and Federal Securities Commission and Central Bank acted as co-lecturers. Each agency presented its own vision of the market situation.
Economic Development and Trade Minister German Gref delivered the most revolutionary report. Gref has said that the financial market does not correspond to economy's needs. Gref proposed radical changing of the market regulation system, namely taking of the right to simultaneously set the norms and control their observance from the agencies. Gref proposes to increase the share of self regulation, to include direct action norms into the laws and to delegate the remaining operational control to the government. Regulating agencies, which will be finally merged into one mega-regulator, will watch observance of the law.
The Federal Securities Commission also agrees that the market is developing insufficiently fast. According to the commission, comparison of the volume of the financial market and investment resources that have come to the economy speaks about the presence of misbalance - a "bubble" on the market. Hindering of the flow of money to the real sector is conditioned by the big transaction costs including a high cost of capital, infrastructure and issue of securities. Along with this, Federal Securities Commission Chair Igor Kostikov says that weak development of the financial and stock markets is connected, first, with insufficient capitalization of banks and, second, with non-fulfillment of the functions of crediting of the real sector of economy by banks, which prevents development of IPOs.
Although the Federal Securities Commission and Central Bank spoke against the mega regulator, the government took the report of the Economic Development and Trade Ministry as the basis for its resolution. In any case, the Prime Minister left some time to the government for the resolution's improvement allowing it to take into account opinion of the Federal Securities Commission and Central Bank.
The government resolution also included the proposals regarding the gradual withdrawal of the Central Bank from capital of the Moscow Inter-Bank Currency Exchange, on establishment of the central depository and clearing system, abolishment of the tax on issue of securities and on protection of rights of mortgage holders.
Mikhail Kasyanov instructed the government to separately study the administrative barriers that hinder entrance of new issuers into the market, for example, the existence of the institution of financial consultants. At any rate, it was the Federal Securities Commission that had lobbied creation of this institution in the past and legalized their status by the law "On securities market." It is not clear how will the commission find a way out of this situation.
Author: Sam Maxwell
