The Russian Stock Market Is Better Than Is Assumed

UnknownNikolay Egorov Director, NDC
Two years ago, the ratio of domestic equities to Russian companies' depository receipts was at approximately 50-50. Today, it is 70 percent domestically traded compared with 30 percent internationally traded. It is difficult to find a better illustration of the quality of the Russian stock market and investors' attitudes toward it. Given the current discussion about the formation of a financial center in Moscow, we can say that our task is to support improvement of the infrastructure of the Russian stock market. What do I mean by this?

The Russian stock market is still developing at a rapid pace. The growth rate for 2003 to 2006, when market capitalization rose more than six-fold, caused increased interest in the market from both major international investors and individual investors who actively participated in "national" IPOs. Despite the global crisis of the summer of 2007, the Russian stock market continued growing. Capitalization of the share market as of 1 May 2008 reached $1.26 trillion. This is 90.2 percent of Russian GDP for 2007.

A transparent and quite well-regulated infrastructure has already been formed in Russia. We have an advantage over other countries -- the non-documentary nature of securities. Russia is one of the few countries where all securities are in electronic form.

But we believe that our goal is the formation of a unified depository settlement infrastructure corresponding to international standards and providing transparency, high quality, and convenience of interaction for all professional securities market players. This will contribute to the creation of a favorable investment climate and the establishment of conditions for the creation of an international financial center in Russia.

Today, investors are focusing on the undervaluation of Russian issuers' securities given that the macroeconomic situation is still favorable and supports an increase in value.

Refusing to use paper documents in the course of corporate activities can in actuality save time and decrease costs: with the conduct of the "national" IPOs, the number of non-professional investors rose significantly, and it turned out that technologies for manual processing of securities cannot be used now. After the switch to electronic data interchange, the time for processing for shareholders lists can be reduced by 2.5 times. Interactions among an issuer, a registrar, and the market are being improved: now 90 percent of document exchanges with registrars are being conducted in electronic form, allowing ownership rights re-registration to be reduced from five to seven days to one day. Not many infrastructure organizations in the world can reach that kind of result.

However, there are a number of issues decelerating the development of Russia's stock market. One of the problems is connected with the building of relationships with international depositories. If a Russian depository can open an account with a foreign depository, the foreign depository cannot open a nominee account in Russia. To date, Russia's regulator still has not elaborated its position on this issue. Another significant negative factor for the domestic market is the lack of laws on the central depository and clearing.

The need for a central depository in Russia was recognized by market participants long ago.

The existence of such an organization is one of the key elements determining the limit policy for international investment institutions. This guarantees the protection of ownership rights, decreases the risks of breach of investors' rights in the course of corporate conflicts, solves the problem of "double registry," provides for the formation of a unified source of corporate information, and increases the transparency of market infrastructure in general. The existence of a unified central depository will help increase and improve settlements on transactions with securities.

The quality of Russian infrastructure is significantly underestimated. The Russian stock market will definitely grow and develop in the future, improving and integrating with international markets. Thus, the number of transactions increases two- and three-fold every year. The involvement of new participants and new companies in the market contributes considerably to this expansion.

We believe that centralizing securities settlements in particular, bringing the internal format of securities to international standards, implementation of unified standards, and expansion of the list of standards, is a priority. A full switch to a centralized clearing model, with automation and standardization of servicing of different types of assets, is necessary for the optimization of the conduct of corporate activities, which represent the most complicated sphere in terms of automation.

These measures are contributing to the accomplishment of the most important task, namely, the integration and creation of a unified settlement infrastructure. This is the latest trend practically for all developed stock markets. It is assured that achievement of all stated objectives will raise the level of confidence in Russia.