No Room for Small Investors

So you broke open your piggy bank, found a couple of thousand extra dollars, and you want to get into the booming Russian stock market.

Forget it.

"This country is no place for the mom and pop investor," said Dmitry Sogoloff, of Hermes Capital, a New York-based investment group. "It's a losing proposition for both the broker and the investor."

In theory, there is actually nothing preventing small-time investors from investing their mad money in the market. The process is simple, requiring only a seller and a buyer agreeing to a price, and a company registrar recording the trade.

In reality, buying and selling stocks on the Russian market is a bureaucratic nightmare: registration is arduous, taxes are daunting and most brokers won't make trades of less than $20,000, experts said.

"In theory, it's a very simple process," said Brian Zimbler, a partner at the law firm of LoBoeuf, Lamb, Greene and MacRae in Moscow. "In practice, there is nothing simple about it at all."

The registration process is the main money-loser for brokerage firms. Russia lacks a centralized custody and settlement system for stocks, forcing companies to rely on an antiquated book-entry system to settle trades and issue shares.

Under this system, stockholders show a document recording a buy-sell agreement to a firm's registrar, who then enters their holdings in a company log. Investors should know before they make a deal that the company is willing to register their shares. If the company decides not to, on the other hand, the investor has little recourse, Sogoloff said.

"Your shares are at the mercy of the company," Sogoloff said. "It's just another reason small investors shouldn't be in this market."

For multimillion-dollar investors, brokerages are willing to travel to enter trades. For a couple of thousand dollars, they find that somehow they are less mobile.

"It's not worth our time or trouble," one broker at a large Russian brokerage said. "It's probably a day or two of work for us to get the stocks registered. If the company is in Tyumen, for example, it also requires a day or two of travel. It can cost thousands for us to get a stock registered."

And that, alas, is not the worst news.

Without a broker willing to head to far-flung places like Tyumen, individual investors need to travel to the provinces themselves. Brokers and Western investors say that this pilgrimage should be a yearly event -- a security measure to make certain their stocks are still registered under their name.

Bureaucratic requirements are another roadblock. Legally, individuals have to set up their finances the same way large institutions do. According to a 1993 decree, foreigners have to open a special investment bank account, which requires that they register with the tax service, draft a corporate charter, and sign a power-of-attorney agreement, all of which has to be done in Russian, or translated into Russian.

Taxes and tariffs also siphon off profits. Investors pay registration fees, taxes on transactions, and often capital gains taxes in their home country.

Taxes on share sales can run as high as 30 percent, said Firuz Mansurkhodzhayev, who is in charge of the equities department at Grant Financial Center, a Russian brokerage firm.

"It's complete delirium," Mansurkhodzhayev said. "At every turn there's another tax."

There are ways around taxes and the lengthy bureaucratic setup process, especially through the use of offshore trading accounts. Popular sites for these accounts include the Cayman Islands and Cyprus.

These accounts have their own problems, however. In addition to having a dubious legal status with the Russian government, they can be quite expensive. Often they run into thousands of dollars.

"Any way you look at it, you have to wade through a lot of paperwork and pay a lot of fees," Zimbler said. "After a certain point, it isn't cost-effective to invest."

With all the registration, bureaucracy and tax problems, brokers say they find it hard to make a profit on small trades. They are rarely willing to sell to people with under $20,000. Indeed, the larger brokerage houses have minimums of $250,000.

"Small packages of shares aren't interesting to Grant," said Mansurkhodzhayev. "They take as much time to register and sell as large packages. Where's the profit in that?"

For investors determined to get into the market at any cost, there are many severely risky options, including MMM, Telemarket, and other companies offering "shares" that could actually be anything from advertising material to lottery tickets.

Also, shares can be purchased individually from a company's workers or management, or from Russians who obtained them at voucher auctions. But investors are still faced with the problem of getting the trades recorded in the company's register.

The Russian market is likely to remain inhospitable to small investors for at least the next several years, experts predict. Most brokerage houses said they aren't planning on offering a retail service anytime soon.

"Five or 10 years from now, I could see us cold-calling people and asking them to invest a few thousand dollars in a Russia fund," a Western broker said. "But at this point, there's just no reason. I have clients with $2 million to $3 million to invest, and I can't help them."