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. Last Updated: 07/27/2016

Vladivostok's Bourse Takes Off

Andrew Fox, the first foreigner to own a seat on the Vladivostok International Stock Exchange, reached behind his desk and pulled out what looked like a 10-pound iron weight. "It's a railroad brake, and there's only one manufacturer in the region," explained Fox, managing director of Pacific Gemini investment fund. "We recently bought an interest in the producer and put two directors on the board with the purchase."


Welcome to the world of investment in the Russian Far East.


Smelling big returns, foreign investors like Fox are leading a rush on stocks that have pushed up prices on the Vladivostok International Stock Exchange ten times over the summer. From May to August, $9 million from abroad was invested through the Vladivostok International Stock Exchange, according to a stock exchange official, compared with just $1 million in 1993.


Seven hours ahead of Moscow, Vladivostok is the financial center of the Russian Far East and when Russia's nascent stock markets are integrated it is set to become the rooster call of the Russian financial day.


But this summer's boom is not without its naysayers. "The stock market is jumping on dreams and expectations, like a casino" says an American business man who lives in Vladivostok.


"It's uncontrolled, unregulated and grossly exaggerated -- some bubbles are going to burst."


If bubbles are to burst, it will most likely be across Russia because the country is experiencing an investment boom.


Foreign investors who a year ago were wringing their hands in frustration have been calmed by signs of stability in the Russian economy. American institutional investors, English asset management funds and Japanese securities houses are scouring Russia for investment opportunities. According to Russia's privatization chief Anatoly Chubais, foreign investment is running at a clip of $500 million a month this summer. That compares with just $2.9 billion for all of 1993.


In the Russian Far East, the two-year old Vladivostok International Stock Exchange, or ISEV, has proved itself to be a most able vehicle for funneling investment into the region.


Housed in a cavernous hall that was meant to be the Regional Archives for the Soviet Communist Party, the exchange lists over 350 companies on a self-designed computer-matching trading system, and is open to its 65 registered brokers three days a week. Brokers execute deals in study-hall silence on 14 terminals, patiently waiting their turn when there is a line. In August, the exchange started publishing its own stock index.


"We are closer to the Dow Jones index," says vice president Andrei Malutin, a biology professor who studied soft corals of the South China Sea before turning his attention to hard stock transactions. A good number of brokers also have science backgrounds.


One of them, 28-year old Sergei Pavlenko, a former molecular physicist, helped open the first brokerage house in Vladivostok in 1992 with just $250. Two years later, Asia Pacific Region Securities is worth $150,000 and is a major conduit for foreign investment in the Maritime Region. "Our aim is to serve foreign clients," says Pavlenko, who learned how to be a stock broker by reading books he bought in Moscow.


Pavlenko says he expects foreign investment on the ISEV to jump to $50-$100 million in 1995. "But we need information links between regions, better phone lines, and a clearing system," he says. Without a modern clearing system, transactions can take up to a week to process. Registering purchase of shares is a major headache, often requiring an out-of-town purchaser to travel thousands of miles to record his ownership of shares in the company's register.


Nevertheless, foreigners are bullish on the market. Founding members of the exchange include CS First Boston and National Westminster Bank Ptl., as well as individual investors from Australia, England, Hong Kong, Japan and the United States. Fox, a former Eurobond trader in Australia, has started the first two funds targeted specifically at the Russian Far East, the First Vladivostok Fund and the Primorski Region Development Fund.


The region's main lures for foreign investors are its commercial ports, fishing fleets and shipping companies along with abundant natural resources, a well-educated labor force and access to Asia. After privatization, many enterprises in the region were undervalued with price to earnings ratios of less than 1, according to Fox.


Brokers' top picks for 1994 include the Far Eastern Shipping Company, Vladivostok Commercial Port, Vostochnie Port and Vladivostok Refrigerated Trawling Fleet Base. Another is Spassk Cement, currently operating at a third of capacity and facing a $20-$25 million modernization project if it wants to stay alive. But it is the only cement producer in the Russian Far East and has an internationally competitive product. A group of U.S. banks were reportedly behind a 24-percent acquisition of Spassk Cement stock in July, according to a Vladivostok broker.


Despite the activity of the exchange, the nascent stock market is not necessarily indicative of what is going on in the region, Fox warns. Only 25% of deals are done through the stock market, the rest taking place over-the-counter. When they do transpire, deals are big and bulky. Liquidity is hampered by archaic rules and backwards technology. No deals made over the phone are considered official. Contracts must be signed. Only about 6 stock transactions are done a day on the exchange, and on most Russian exchanges brokers won't take deals seriously unless the investor has at least $500,000 to invest. Finally, market watchers in Vladivostok say the stock market has not escaped Russia's political uncertainty. "Boris Yeltsin could catch a cold and send FESCO stock plummeting," says a broker, referring to Far Eastern Shipping Company. And if foreign investors were to sell, there are serious doubts that local demand could sustain today's high prices.


Some help is on the way. KPMG Peat Marwick is working with the Russian Government to develop a centralized clearing system. For its part, the ISEV will move into more modern accommodations this fall, with 50 terminals and links to 30 remote terminals throughout Russia by 1995.


Pavlenko's Asia Pacific Region Securities is poised to get into international currency trading and bonds. But the young broker shows no interest in investing money abroad. "Why invest in Japan and get 5% when you can get a 200% return in Russia?" he says.