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. Last Updated: 07/27/2016

How to Invest in Local Stocks




Impressed by the fresh stability in Russia and excited about the prospect of making a buck on the stock market? Where do you start?


The first step is to decide how much you want to initially invest.


Unlike the middle of the 1990s when pampered brokers turned away individual shareholders who had less than $10,000 to spend, the industry is now less selective.


A tenner in the pocket is enough to start trading stocks, provided you (or your close friends) have a Russian passport, some basic skills and a hefty appetite for risk.


Indeed, a fair approach for any investor, no matter how deep their pockets, would be to only put money into Russian stocks if you can afford to lose it.


For the small investor there is the Moscow Stock Center, or MSC, which was set up about three years ago by several market participants targeting households with tiny cash holdings on their hands.


The MSC charges an entry fee equivalent to about $7 for the paperwork related to opening trading accounts. On the same day, immediately after placing a deposit in the account, you can start buying stocks. The minimum lot is 10 preferred shares of Unified Energy Systems, which would cost some 60 cents at current rates, or a single, much pricier Sberbank share, currently quoted at $40.


Unfortunately, the MSC is open to Russian citizens only; even those from neighboring Belarus or Ukraine face legal constraints, not just Westerners.


"Written permission from the Central Bank of Russia is required [for nonresidents]," says Alexander Kuzetenko, deputy director with the MSC. "We hope that a simpler legal framework will be introduced by the end of this year."


An average speculator at the Moscow Stock Center manages a portfolio of stocks worth $1,000 to $5,000, buying and selling UES, LUKoil, Gazprom and also, occasionally, Surgutneftegaz, Mosenergo or Sberbank.


Another option available for households is to buy shares in unit funds, some of which will happily take money from clients for an initial investment of 250 rubles or even less.


Unfortunately, almost all such funds got savaged by the 1998 crash, so judging them by past performance is both depressing and not necessarily accurate. These funds also have restrictions for foreigners, so the only way out is to get your local contact to open an account and issue a power of attorney in your name.


Taxation in both cases, whether you trade directly or buy through a unit fund, remains a nuisance, but if you bet on a short-term bull run, then it is only a minor consideration given the returns one can hope for from the Russian market.


Turning from the small-fry to the more dependable means of investing in the market - through mainstream brokerages - most traders recommended investing at least $50,000. This figure is based on the fact that most stocks are sold in minimum lots of $20,000 and an investor should at least partially hedge his risks by buying into more than one company.


You then need to find a respectable brokerage that deals with individual investors. Moscow has dozens of foreign and Russian brokerages eager to help you spend your money, but you want to make sure that you pick one that has a strong financial base. You also need to consider how long the broker has been on the market - at least four years is considered the rule of thumb - and review both the quality of its research and execution of deals.


Only a handful of brokerages fit this criteria - mainly NIKoil, Alfa Bank and Troika Dialog, according to market insiders. Houses like Rye Man & Gor, Credit Suisse First Boston, Fleming UCB and Brunswick Warburg are also considered highly reputable, but they rarely, if ever, deal with individual investors. The largest of the private brokerages is NIKoil, with a capital base of almost $1 billion. It is also the market leader in turnover for the last two quarters, having accounted for 26 percent of volume on the Russian Trading System.


Most brokers open accounts for free and charge commissions of 0.4 percent per deal.


After selecting a broker, you need to decide if you want to invest in your own name or save on high Russian taxes by going through an offshore company. To invest in your own name, a call to the preferred brokerage will net you an opening form to fill out and instructions on depositing the sum you intend to invest. Usually, the cash is transferred to a correspondent account in a banking capital such as New York, and the sum is then credited to your Moscow account.


If you are concerned about taxes, you can eliminate your name from the papers by having the brokerage assist you in channeling the cash through an offshore company. Cyprus is a favorite haven and is described by traders as being cheap, efficient and safe.


Now that you are settled with a brokerage, you need to buy some stocks. Deciding which shares to buy depends a lot on your investment horizon and how much risk you are willing to take.


"If someone does not know a lot about the market ... they want something that is actively traded with reasonable volumes," advises Eric Kraus, chief strategist at NIKoil Capital Markets. "Ask for research and do some homework. You must be concerned about the fundamentals of the company."


A look to the stocks page of The Moscow Times, for example, will show which companies are seeing brisk trade and at what volumes.


Insiders say the safest companies to bet on are blue chips like oil companies LUKoil and Surgutneftegaz - the latter is currently losing value thanks to controversy over a rather murky consolidation plan but it still has long-term promise - and power provider Mosenergo. Second-tier oil companies and many of the telecommunication providers are seen as medium-risk shares.


If you've picked a reputable broker, it can help you pick a stock that meets your interests. However, insiders warn, there are many brokerages holding worthless stocks - known as toxic waste in trading circles - that they would love to unload on a naive investor.


Once you're in the game, you can buy and sell your stocks with a simple call to your broker. Most insiders advise, though, to hold on tight. Although the market roller coaster may rise and fall, those on board get their pot of gold at the end of the rainbow.