Russian securities market _general plan_ by liuqingyan


									Financial and Investment
Decision Making in Russia

         Dr. Ivan Darushin

The Department of Credit Theory and
       Financial Management
   St-Petersburg State University
• In finance, the purchase of a financial product or
  other item of value with an expectation of
  favorable future returns.
• In general terms, investment means the use
  money in the hope of making more money.
• In business, the purchase by a producer of a
  physical good, such as durable equipment or
  inventory, in the hope of improving future
      Short-term investments
• An account in the current assets section of a
  company's balance sheet. This account contains
  any investments that a company has made that
  will expire within one year. For the most part,
  these accounts contain stocks and bonds that
  can be liquidated fairly quickly.
• Most companies in a strong cash position have
  a short-term investments account on the balance
  sheet. This means that a company can afford to
  invest excess cash in stocks and bonds to earn
  higher interest than what would be earned from
  a normal savings account.
       Long-term investments
• An account on the asset side of a
  company's balance sheet that represents the
  investments that a company intends to hold for
  more than a year. They may include stocks,
  bonds, real estate and cash.
• The long-term investments account differs
  largely from the short-term investments account
  in that the short-term investments will most likely
  be sold, as the long-term investments may never
  be sold.
                     Investing ways
                        Capital owners

Direct interaction                        Banks

                        Capital lenders
                          (objects of
   Main foreign economy features
  concerned with investing abroad
• the securities market and it characters;

• the accounting and taxation features;

• banking characters;

• limitations on direct investments.
Russian Securities and
 Derivatives Markets
                      General plan
•   Definitions
•   Foundation of the market (1991-1992)
•   Privatization in Russia (1992-1994)
•   Financial and stock crisis in 1998
•   Current state of the Russian securities market
 legal regulation of market
 important market features
 disparities of stock relations
• Derivatives market
• Security is a legal form document which
  secure the totality of interests and non-
  property rights. Realization and delivery of
  these rights are possible with the security
(Civil Code, 1994)
          Securities market
• Securities market is a part of capital
  market (the market of debts issued for one
  or more years)
• Some securities are circulate on the
  money market (market of debts with less
  maturity than one year)
         Securities market
• Primary market (deals between the issuer
  and the first investor)
• Secondary market (deals between
Stock market (deals are arranged on the
  stock exchange)
Over-the-counter (OTC) market (deals are
  arranged outside of stock exchange)
          Securities market
• Cash market – deal arranges and
  executes at the one period (delivery of
  securities can lag from arrangement up to
  3 days)
• Derivatives market – execution of the deal
  take place in some long period (from some
  weeks up to some years)
• Debts securities (bills, bonds, certificates,
• Equity securities (shares)
• Derivatives (forwards, futures, options,
• Government securities (government bills
  and bonds)
• Municipal securities
• Corporate securities (shares, bills, bonds)
• Bank securities (certificates)
•   Short-term (bills, certificates) up to 1 year
•   Medium-term up to 3-5 years
•   Long-term up to 10-15 years
•   Perpetual (shares) without the maturity
Participants of securities market
•   Issuers
•   Investors
•   Regulators
•   Institutional investors (funds, unit investment trusts, etc)
•   Professionals of the market:
   brokers
   dealers
   registrars
   clearing houses
   depositaries
   organizers of deals (stock exchanges)
            Role of market
• Securities connect lenders of capital
  (investors) with borrowers of free capital
• Professionals provide help in deal
  arrangement for investors and issuers.
• Regulator establishes rules for other
          It’s of importance
Securities market works properly if:
• regulator established the rules;
• different types of securities exist;
• professionals work properly;
• market execute it main role (connection of
  investors and issuers)
    The state of the Russian economy in
       the beginning of 1990th years
•     High Rate of inflation
     800% - 1991
     2600% - 1992
•     High level of state budget deficit
•     Overissue of money
•     Deficit of funds
•     High level demand for short-term credits
     Permanent growth of interest rates (1-2% per month)
•     Lowering of gold and exchange currency reserves
•     Repayment of state credits by issuing of new loans

    Summary: crisis of the economy and the finance system
     The first analogues of the Russian
constant necessity of funds
use of money substitutes:
•   bills of exchange
•   banks payment obligations
•   clearing house checks
•   various coupons
•   wage payment by production of enterprises

Summary: All of these are the first Russian securities.
In fact it’s quasi-money.
    Debt instruments and government
              papers in 1991
1987 – certificates for natural persons (Sberbank)
1989 – state Exchequer Stock to bearer
1990 – state premium bonds for natural persons
1990 – loan of Finance Ministry for legal persons (5%, 8
  and 10 years)
1991 – Government internal loan (15%, 30 years) for legal
1992 – bonds of Russian internal lottery-loan

Summary: market is present but not large.
Secondary market is absent.
                  Market of shares
In the USSR shares market was absent.
1988: enterprises were aloud to issue “shares of labor
   collectives” for the workers and “shares of enterprise” for
   legal persons.
Only conditionally shares (dividend is paying from
   development fund).
Since 1990 market enlarges:
• new joint-stock companies, banks and exchanges;
• reorganization of public industries (it’s necessary to
   obtain a permit of Government).
Totally: legal vacuum
Shares of exchanges, enterprises and
In the end of 1991 shares take 35.7% of
  stock market.
- 25.8% - shares of exchanges
- 5.4% - shares of banks
- 3.3.% - shares of firms
- 2.1% - shares of investments companies
- 2% - industrial enterprises
            Other stock instruments

First bonds of private companies – 1991
- in the end of 1991 – 2.1% of stock market
First certificates of deposit – 1991
(Sberbank, AvtoBank)
First derivatives – 1991
(futures and options)
Summary: stock market with different types
 of papers appeared by the end of 1991.
             Stock market in 1992
• Stagnation of shares market (only 59 enterprises were
  reorganized into joint-stock companies)
• Growth of the certificates of deposit market (28% of
  stock market volume)
• Growth of the bills market (issued by banks)
• First emission of municipal bonds (Moscow region)
Evenly: securities don’t play the role of an investment
  instrument. The volume of trade doesn’t correspond with
  the economy proportions.
Main opposition: high rate of state sector of economy
Solution: privatization
           “Small” privatization in 1992
To privatize in the first place:
•   Trade firms
•   Public catering establishments
•   Transport companies
•   Agricultural enterprises
Large-scale enterprises can prepare for privatization.
Primary intent: increase of the budget income,
  financial stabilization  highest possible valuation.
Opposition: a wide range of privileges for workers
Results: 3701 companies were privatized in 1992
  (more than a half were reorganized into joint-stock
   Stock market in 1991-1992 (totals)
• Laid foundations of the market legal regulation
• Appearance of the first professional participants
  (brokers, dealers, etc)
• Beginning of licensing of professional activities
• Appearance and testing of different types of
  securities (shares, bonds, bills, certificates, etc)
• Training of potential investors for work with
  securities (including psychological factors)
     Program of “wide” privatization

   “Government program of privatization”, 1992

Methods of privatization (by the program):
• Shares selling (joint-stock companies);
• Auction selling of enterprises;
• Selling by “commercial contest”;
• Investment auction;
• Asset selling of companies to be liquidated;
• Redemption of leasehold
   Program of “wide” privatization (2)

To privatize until the end of 1994:
• 60% of enterprises in light industry,
  agricultural, transporting, retail trade and
  consumer services
• 50 % of enterprises in food industry,
  building, wholesales trade and catering
Total sum of assets: 72 billion rubles
   Program of “wide” privatization (3)

Three groups of companies:
• fewer than 200 workers and fewer than 1 million
  rubles capital value – selling by auction or
• more than 1000 workers and more than 50
  million rubles capital value – reorganization to
  joint-stock companies and selling of shares;
• other companies – any method.
        Program of “wide” privatization (4)
          Tree variants of privatization
 Category of      Type of       Quantity of shares (by variants), %
   share           share
                                1               2                 3
                     A          25               -                -
                     B          30              19               30
               at a cut price   10               -               20

               normal price     -               51                -

ordinaries     with option      5                -               20

               works fund       10              10               10

               State fund       20              20               20
       Characteristics of “gold share”
• 3 years veto in the following cases:
 Modifications of articles of the association
 Reorganization and liquidation of the company
 Interest in another business
 Pawning, renting and selling of privatized
“Gold share” is a state property only.
In cases of sell it’s transformed at the ordinary
Repealed in 1997.
            Voucher privatization
First security for the mass – voucher (privatization
Nominal – 10 000 rub;
To bearer;
Secured by the state property.
- to pay for shares (in the process of privatization)
- to buy securities on the voucher auctions
- to sell (free circulation)
                Russian voucher
Different prices:
• Market price (from 4000 rub in April 2003 to
  45000 rub in December 2003)
• Nominal price – used only in the process of
  privatization (exchange at face-value)
• Auction price (quantity of shares exchanged for
  a voucher):
 by request without a quantity of shares
 by request with the minimum quantity of shares
The results of the voucher privatization
• Wide variety of shares (June 1994 – 104 000 companies
  privatized, shares of 16000 joint-stock companies sold)
• Large quantity of shareholders (more than 40 million)
 Accelerated formation of securities market
• Paltry incomes from privatization (about 1000 billions of
  rubles by November 1994)
• Waste of the state property and control (500 of the
  biggest companies with evaluative capitalization of USD
  200 billions were sold for USD 7.2 billions)
    The part of the voucher privatization in
         the stock market formation
• Increase of the market volumes
• Approved technology of securities trading
• Rapid growth of secondary shares market
• Growth of authorized capital stock (existent
  corporations issue excess shares)
• Creating of the market institutional participants
  structure (investment funds, financial
  companies, etc)
• Every citizen became a participant of the
  securities market
• Stratification of society
      Legal control of the stock market
Federal Law “On the securities market”, 1996

•   Definition of securities
•   Procedure of issue and registration
•   Professionals of the market
•   Federal authority of the market regulation
•   Professional associations of market participants
Federal Committee of the Securities Market
   (Federal Financial Markets Service)
•   Licensing of professional activity
•   Standards of professional activity
•   Registration of emission advertisement
•   Registration of emission results
•   Protection of placement owners rights
•   Control of market functioning
•   Rights and obligations of Professional
    associations of market participants
 Professional associations of market participants
          (self-regulated organizations)

• NAUFOR - National Association of Stock Market
  Participants (1996) – market
  regulation, making out of the foundations of
  professional ethics, legislative control (about
  2000 participants).
• PARTAD - Professional Association of
  Registrars, Transfer Agents and Depositories (1994) – creating the
  infrastructure of stock market, elaboration of
  information efficiency and software support.
                 Creation of RTS
RTS – Russian Trading System, created by NAUFOR and
  NASDAQ in 1995.
Main features:
• Full computerized trading system
• Steady trading
• Participants arrange the deals from remote stations
• Large quantity of securities
• Nowadays – biggest stock exchange in Russia (more
  than 65% of stock deals in Russia):
 has an organized sector (listing, securities of biggest
 and a secondary sector (shares of small companies,
  without listing procedure)
 and a derivative sector (futures and options on shares,
  index and currency)
         Privatization in 1997-1998
• Continuing selling of shares in state property
• 12 000 companies in state property (in the end
   of 1998)
• 2 500 control packets of shares
• 5 000 non-control share holdings
• only 30 millions of dollars in the form of dividend
(ineffective management)
       Totals of 1992-1997 years

• Accelerated creation of the Russian
  shares market (by emission of shares of
  privatized companies)
• Rapid growth of the secondary market
• Legal regulation of the market
• Formed structure of market professionals
  and market infrastructure
Preconditions of the stock market crisis
• Asian financial crisis
• Growth of Russian market risks
• Stagnation of production in 1998 (decrease of
  GDP on 0.2%)
• Extension of the budget deficit (collected taxes
  are 40% of budget plan in 1998)
• Decrease of the export volume
• Red ink of the payment balance
• High value of the public debt service (issuing of
  new debts to liquidate the previous debts)
    GKO and state budget deficit
• Financing of budget deficit by issuing of State
  Short-term Obligations (GKO) since 1993
• Rapid growth of public debts volume (by GKO
• High interest of GKO (7-8% per month in currency)
High value of the public debt service
10.1% of on-budget expenditures in 1996
35.2% - in 1998
Debt money turned to liquidate previous debts
(Financial pyramid of GKO)
           Default of August 18th
• Termination of GKO trading
• Restructuring of GKO debts to the new
 Total sum of debts – 45 billions of dollars
 31% - foreign investors
• Cancellation of currency corridor (national
  system of currency regulation)
devaluation of ruble (5 times in 2 months)
crisis of the payment and banking systems
crisis of the securities market
   Crisis of the stock market in 1998

• Decrease of securities prices (RTS-index
  decline 3 times in 2 months)
• Decrease of trading volumes
   Positive points of 1998 crisis
• the rouble devaluation created preconditions for
  growth of the national production and,
  consequently, for development of the financial
• bankruptcies of ineffective enterprises took place;
  the number of the traders on the securities
  market decreased;
• spare cash assets were moved from the state
  sector of economy to the corporate one (the high
  interests on GKOs had distimulated investments
  in the private sector)
  Program of GKO debts restructuring
Joint resolution of Ministry of Finance and Moscow Club of
For banks:
• 10 % - by funds
• 20 % - by shares
• 70 % - long-term state bonds
For other companies:
• 30 % - by funds
• 20 % - by shares
• 50 % - long-term state bonds
To natural persons, pension funds, nonprofit organizations:
• 100% repayment of money or 2nd method
         The results of the crisis
It can be considered that by the present time the Russian
    securities market has overcome the consequences of
    the 1998 crisis. The development of the securities
    market took place in favourable macroeconomic
    environment. Since 2000, stabilization and slow
    reduction of interest rates has being observed, the
    interest on the state securities being lower than the
    interest on similar instruments on other developing
    markets since 2002. The credit rating of the Russian
    Federation has been rising since 1999, but it is still lower
    than the average level of the rating of other countries
    with the markets being formed, although the difference
    gradually reduces.
Crisis overcoming. Market of shares
Crisis overcoming. Market of shares
     Disproportions of market
• institutional problems;
• problems of price formation and equality of
• supply problems;
• demand problems.
Institutional problems of the market
• Overconcentration of broker-dealers in Moscow and
  lack of them in the peripheral regions.
• Overconcentration of other professional participants
  of the stock market in Moscow.
• High concentration of institutional investors in
• Concentration of stock exchanges and off-exchange
  trade operators in 4 centres: 4 in Moscow, 2 in Saint
  Petersburg, 2 in Yekaterinburg, 2 in Novosibirsk.
• Concentration of transactions and financial assets in
  Problems of price formation and
        equality of investors
• The oligopolistic nature of the market
• Concentration of the market on several
  particular shares.
• The fragmental character of the share market
• Insularity of regional exchanges within their
  regions and their constant remoteness from the
  national market
• Manipulating with prices and insider trading
  Problems of securities supply
• 1. Absence of certain segments of the market
• 2. The limited number of the issuers whose shares are
  transacted on the organized market.
• 3. Absence of mass supply of shares.
• 4. Insignificant amount of the free float of stock.
• 5. Poor legal regulation of ownership relations.
• 6. Conflicts of interests which make it difficult for
  enterprise to enter the market and decrease the
  investment attractiveness of shares.
• 7. Low level of corporate management.
• 8. Absence of a proper system of opening the
  information on the securities market.
 Problems of demand for securities
• deficit of cash resources for investment purposes–
  understated economy monetarization as an anti-inflation
• lack of trust of investors.
• crisis of trust in the state as the issuer of securities.
• absence of the class of institutional investors as a whole.
• strong dependence of the market on the actions of
  foreign investors
• excessive administrative barriers, ineffective and
  alternativeless regulation
Disproportions and unsolved problems
         of market relations:

• absence of state development strategy;
• securities market doesn’t work as a mechanism
  of savings transformation into investments
  (people save in currency and bank deposits);
• poor efficiency of the market;
• shares market doesn’t work as an instrument of
  capital formation;
• absence of a dividend policy (most companies)
Disproportions and unsolved problems
         of market relations:
• underestimation of Russian companies shares;
• small volume of state loans market (3.4% of
• high trading cost and low information efficiency;
• down level of information clarity;
• low liquidity of the secondary market;
• absence of trust for securities from citizens
  (active participants - only 0,1 % of population)
Crisis of 2008
• Domestic bonds
• Eurobonds
Securitized debts:
Information about bonds market
           Securitization scheme

    Assets owner    SPV       Investors

• Assets owner creates the SPV and
  delivers assets to it;
• SPV issuing secured bonds;
• SPV passes the proceeds to assets owner
  as a payment for assets
                         CLN scheme
                                 (1) Buying of CLN

                            (3) Periodical payments

Credit owner                                              Investor (CLN buyer)
                       (5) Discharge («default») on CLN
                (coupons and
                (2) Periodical
 (4) Default


Credit (bond)
       CLN activated by issuer

                  Service the loan
                                       SPV founded by
Russian company
                                       Russian company

                                     Money           CLN

  CLN activated by creditor

Russian company     Debts    SPV founded by
  debts owner       Money     debts owner

                            Money          CLN


    Innovations on the bonds market
• Stock bonds

•   Amortized bonds
•   Bonds with indexing
•   Convertible bonds
•   Bonds with options (call or put)
•   Mortgage-backed bonds
     Mortgage-backed bonds
The Low on Mortgage-backed securities
• Pass-through certificates
• CMO (collateralized mortgage obligations)

Agency of Housing Mortgage Loans (AHML)
(founded by Government in 1997)
                Derivative market
• Moscow Inter-bank Currency Exchange (
  - 10 futures (shares, stock index, USD, Euro, some
• St-Petersburg Currency Exchange – 6 futures
  (currencies, gold), 18 options (some goods, petroleum,
• FORTS (Futures and Options of RTS, – 23
  futures and options (15 shares, 3 currencies, RTS index,
  4 goods)
• Stock Exchange “St-Petersburg” – futures on goods.
 Complete volume of derivative market – 2% of stock
  exchanges general volume
    4 types of external factors influencing the
       development of the Russian market

•    Influence of long-term cycles;
•    Influence of oil prices;
•    Influence of leading markets and
     interdependence of markets being
•    Competition of national markets.
         Influence of oil prices

a high correlation (0.87) of the Russian
  stock market with the fluctuations of the
  world oil prices has been proved with
  7 months outpacing lag of oil prices.
  Influence of leading markets and
 interdependence of markets being
• the decisive factor of the dynamics of the
  Russian securities market are the actions
  of major international investors
(In 90% of observations (from 1995 to 2005)
  its dynamics was synchronous with the
  behaviors of the considered groups of
Correlation with foreign markets
• 0,945 – USA and Latin America markets
• 0,9 – Brazil market
• 0,87 – European developing markets (East
• 0,66 – European developed markets.

! Correlation of crisis period was increased with developing
   markets and decreased with developed markets.

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