Russia Forum Buzz: Paths of Development for the Stock Market

April 22, 2013


Russia’s financial markets are in the midst of massive structural changes, shaped by a combination of market forces and regulatory reform. Market forces include greater competition, the impact of technology, differences in tax and cost regimes, global and domestic financial controls and regulations, growth in ETF trading, and the bifurcation of the buy side. The panel examined such forces and evaluated ways in which the government’s aim to boost Russia’s standing as a principal financial center might best be achieved. The Russian stock market is valued at a little over $800 bln, with a free float of just 28%, well below many comparable markets.

The Russian government is committed to reducing state ownership across many industries, but the objectives remain ambitious and many investors require greater confidence that their interests will be protected. Key issues that the panel addressed include the likely direction of future financial regulation and reform in Russia, moves to encourage greater domestic exposure to Russian equities and foreign direct investments, a potential IPO boom driven by privatizations and the private sector, and the competitive advantages of Moscow for listing purposes. From a global asset-allocation perspective, Russia remains just 0.7% of MSCI World, and many funds retain underweight positions. The panel will examine the reasons for such a risk-averse stance and the ways in which all stakeholders might further develop and expand the Russian stock market.

Bella Zlatkis introduced the panel speakers and highlighted that the stock market is now undergoing a structural transformation, the most vivid examples of which are the central depository and infrastructure consolidation. She also asked several questions to the audience. The first was on what will define the future of the Russian stock market. The most popular answer was “structural reforms” (43.8%), the rest being “politics” (34.4%), “investors” (18.8%) and “issuers” (3.1%). The second question was what drivers of institutional demand will prevail going forward, answers being “international” (28.7%), “local” (21.7%) and “both” (49.6%). The third question sought to identify the main catalyst for the development of the stock market. The absolute leader was “full-fledged access of pension funds to the stock market” (59.6%), while “T+2 introduction” was supported by only 8.3% of the audience. The last question touched on whether issuers should pursue parallel listings, with the majority of the audience in favor (79.8%).

Sergey Shvetsov started with highlighting the path of regulatory development, stressing that on the one hand Russia is moving toward best international practices, for example the implementation of Basel 3 and on-exchange derivatives clearing, while on the other hand it has its own goals, like the creation of an international financial center, in which respect the setting up of the central depository was one of the most important steps. He continued with a discussion of the mega-regulator, particularly stressing the need to improve the regulation of the shadow banking system. Among the initiatives that are expected to be launched this year, he looks toward the transfer of long-term instruments to floating rates and the on-exchange OTC derivatives clearing. He concluded with saying that now is not the time for a revolution of the stock market, but rather it is the time for smaller-scale achievements.

Dmitry Pankin elaborated on the need to improve the speed and efficiency of day-to-day supervision and regulatory action, highlighting that this will drive overall development success. He also suggested that the idea of a complete separation of commercial and investment banking operations, as well as other potential reincarnations of the Glass-Steagall Act, are rather utopic. He stressed that it is rather more important that investors should be able to see clearly what the risks are behind certain commercial as wells as investment banking operations.

Olga Dergunova pointed out that privatization is not just the decision to sell particular assets in the government’s portfolio but also the process of changing the regulatory environment. She stressed that means and timing of privatization should be chosen in the best interests of shareholders and the asset itself, and the fiscal purpose is important but not determinant. She also highlighted that the government should serve as the driver of positive change, potentially bearing the first costs of revising infrastructure. She confirmed the intention to place assets eligible for privatization locally and that VTB and ALROSA shares are planned be placed this year.

Alexander Afanasiev laid out the various steps in the development of Moscow Exchange’s infrastructure, both planned and recently implemented, with the most notable being the merger with RTS, access for international depositories to the bond market and the launch of T+2 trading. He also called for both investors and issuers to come and try the developed infrastructure themselves.

Dmitry Konov pointed out that two main aspects are important for issuers: stock liquidity and infrastructure transparency. He also stressed that while being present on the local market as an issuer is very important, exposure to international investment flow is also necessary, so directly contrasting Moscow and other venues abroad is not really the issue at hand. Rather, both liquidity pools offer benefits to issuers.

Nadya Wells named certain catalysts for the development of the stock market that investors are looking for: the creation of the mega-regulator, setting up infrastructure, local placements and domestic pension fund access. She also highlighted examples from the South African market, known for its deep domestic investor base, and the Polish market, which benefited from the institution of carefully thought out procedures.

Konstantin Ryzhkov, representing RDIF, stressed that they are believers in the success of Moscow Exchange and the Russian stock market more broadly, effectively shown by their recent investment in the company. He also pointed out that the government has a unique position to help the stock market both by bringing in issuers through the privatization program and by encouraging the development of long-term investors with the help of pension funds.