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. Last Updated: 07/27/2016

Securities Commission Stripped of Status

The Federal Securities Commission, Russia's stock-market watchdog and a reformist stronghold in government has been caught up in high-level political infighting that threatens to curtail its powers, investors and lawmakers said Monday.


The commission, which until recently reported directly to President Boris Yeltsin and had wide powers to regulate Russia's emerging equities markets, has been demoted from a ministry to a state committee with an unknown mandate and no appointed chairman, officials said.


While the effects of the change are still unclear, market participants said they feared it could undermine the commission and herald a change of direction in the development of Russia's stock markets.


Dmitry Vasiliyev, a well-known reformer who as the head of the FSC enjoyed ministerial status, was not reappointed earlier this month together with the rest of the government, while the FSC was downgraded to a state committee under an Aug. 14 Yeltsin decree.


The foreign investment community expressed surprise and dismay Monday at the unclear situation around the FSC.


"This was an absolutely unexpected decision," Igor Moryakov, a senior consultant with the Barings Group, said of the decree that changed the status of the commission.


"You need an independent, well-resourced securities commission with a clear mandate," said a senior Western investment banker, who asked not to be identified. It would be cause for serious worry "if any of that was compromised," he said pointing to the recent developments. ministries and the federal security service -- that report directly to the president.


This set-up was confirmed by a presidential decree issued July 1, a mere six weeks before the Aug. 14 decree that places the FSC under the Finance Ministry and effectively abolishes the body in its current form.


Market sources said the current ferment around the FSC was another chapter in the long-standing struggle over what shape the Russian securities markets should take and who should be in charge of the process.


"This is a battle between the Finance Ministry, the Central Bank and the securities commission," said one Western executive.


He said the attack on the FSC had been made while Anatoly Chubais, the reformist head of the presidential administration and original chairman of the commission, was out of town on holiday.


But the struggle is not only a question of different government structures vying for power. It also reflects conflicting conceptions of the future of Russia's equity markets, the Western executive said.


While Vasiliyev is in favor of an "American model" for developing the Russian stock market, assigning considerable importance to the activities of investment funds, other players would prefer a "German model" with more emphasis on the role of large banks.


It remained uncertain Monday whether the decision to downgrade the commission was final and what the precise implications would be.


"It is very unclear if a [final] decision has been made," said George Kjallgren, a director of the Brunswick brokerage.


Vladimir Tarachev, a member of the State Duma subcommittee on the securities markets, said the decree "leaves a great many open questions," adding: "It clearly does not conform with the new securities law under which the Federal Securities Commission should be an independent [entity]."


"A presidential decree cannot be inconsistent with a federal law," said Eric Michailov, an attorney with the White and Case law firm. But he added that when determining whether a decree actually contradicts or merely "expands" a law one enters into "a gray zone."


Some observers suggested that the current transformation of the FSC would amount to abolishing it altogether.


"The authors of the new cabinet structure considerably lowered the authorities of the ex-FSC, de facto reducing it to a department for corporate securities under the Finance Ministry," the Segodnya newspaper wrote.


If the ministry asserted full control over the securities markets it would, however, create a curious situation, Tarachev said.


"The commission was supposed to issue the Finance Ministry a general license for its securities operations, but it is unclear how it could do so now," he said.


Tarachev said the subcommittee would demand an explanation of the decree when parliament reconvenes next month.