MICEX Head Backs State Halts

The state should interfere when financial markets fail to price assets correctly and should stop trade if necessary to cool markets down, Konstantin Korishchenko, the new head of the MICEX exchange, said Thursday.

The exchange's main index is down 71 percent since its May peak, making Russia the worst-performing emerging market, and trade has been plagued by frequent stoppages, which regulators see as the best medicine against market panic.

The bourse was shut all day Wednesday and closed half an hour into the trading session Thursday after falling more than 10 percent. The bourse said it would stay closed until Monday, but the financial markets watchdog ordered it to reopen.

In September, authorities shut the MICEX for 1 1/2 days to clear up payment backlogs.

"Due to the liquidity problem, the reliability of the price formation mechanism was in question," said Korishchenko, a former Central Bank deputy chairman who parachuted into the MICEX shortly after the forced shutdown in September.

"In our industry — financial markets — the state provided liquidity and took a decision, albeit not a very popular one, to give markets a break. Such decisions are not unique," he said.

The market slump started in August when foreign investors, spooked by the war in Georgia and Moscow's worsening relations with the West, shifted their money out.

The flight of foreign investors exposed the weaknesses of the Russian financial markets, where brokerage houses have borrowed excessively, pledging stocks as collateral. It also prompted calls for a sweeping reform of the sector.

Korishchenko said the decision to shut the market was justified but that such measures should not be overused to stay effective.

"When the market, for one reason or another, does not cope with its job of helping the price formation, there is nothing else but for the state to set the rules of the game," he said.

"When liquidity disappears, even a small, haphazard deal has an impact on the asset price. In that sense, I do not think it is correct to determine the asset price on such a basis," he added.

Prices in the Russian market, especially in midcap stocks, fluctuated wildly in recent weeks with moves of up to 40 percent in a day not uncommon.

"Since the lack of external financing has been compensated by internal state financing, there is no risk for a repeat of this situation," he said, referring to September's near collapse.

Korishchenko said that despite complaints from investors, trade stoppages will not result in trade in Russian shares moving to foreign bourses. "One month of periodic stoppages is not enough to make investors flee to Western markets," he said.