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. Last Updated: 07/27/2016

Vyugin Warns Cabinet of 'Volatile' Markets

Itar-TassOleg Vyugin on Thursday
Russia's chief financial markets regulator won tentative approval from the Cabinet on Thursday for a three-year program of long-awaited reform, and warned that unless it was implemented, the country could join the ranks of "volatile bubble" markets like Thailand and South Africa.

"Unfortunately, the infrastructure of Russia's securities market has developed in a speculative way," Oleg Vyugin, head of the Federal Service for Financial Markets, told reporters after the meeting.

Countries such as Thailand and South Africa, where market capitalization has reached 200 percent of gross domestic product, "are not in crisis, but they are very volatile. We wouldn't want to see that in Russia," Vyugin said.

Economic Development and Trade Minister German Gref told the Cabinet meeting that Russia's stock market capitalization had reached 79 percent of GDP, or $604 billion, Interfax reported.

Vyugin said he was pleased to win ministers' approval for his plan to speed up the formation of pension funds and other long-term institutional investors, modernize the financial markets infrastructure and beef up investor protection.

First Deputy Prime Minister Dmitry Medvedev, who chaired the Cabinet meeting in the absence of Prime Minister Mikhail Fradkov, gave a broad welcome to Vyugin's proposals, but told him to hone them and resubmit them in a month, Interfax reported.

Fradkov was in Vietnam on Thursday to discuss energy and trade. (See Story, page 5.)

Medvedev advised Vyugin not to copy financial markets legislation from the United States, but instead follow Europe's experience more closely, Interfax reported.

Markets in the United States have tougher standards than those in Europe.

After the Cabinet meeting, Vyugin pointed out that because foreign pension and investment funds own 70 percent of traded shares in Russian companies, there was an urgent need to develop domestic institutional investors that would stay in the market for the long haul.

"It's a long-term resource that must be established in the economy," Vyugin said.

In the flurry of initial public offerings on foreign and local markets this year, Russian companies are expected to raise about $20 billion, Vyugin said.

"There is this kind of money in Russia, but it's not mobilized," he said.

In the biggest expected IPO this year, state-owned oil company Rosneft has said it hopes to raise $15 billion.

At Thursday's Cabinet meeting, Gref cited the example of other state companies that were planning IPOs, including subsidiaries of Unified Energy Systems and Russian Railways.

While Russian companies are striving to list on foreign bourses, taking Russian assets abroad, their IPOs are not contributing to the development of domestic markets, Vyugin said.

Creating a centralized depository and modernizing other market infrastructure, as well as outlawing insider trading, are key to strengthening Russia's financial markets, Vyugin said.

Vyugin said a bill to outlaw insider trading and ensure a level playing field for investors would be prepared in the near future.

Analysts expressed hope that the government would adopt Vyugin's reform plan, and backed his call for greater long-term investment into Russian stocks.

It was the lack of local long-term investors that caused the crash in Southeast Asia in the 1990s, where "you ended up with one-way traffic" when spooked foreign investors fled and most local investors were speculative, Alfa Bank chief strategist Chris Weafer said Thursday.

"International investors look at Russia as part of a global picture," Weafer said. For the moment, Russia looks good, but a change in oil prices or politics could reverse this, he said.

Also, the lack of a broad long-term investor base is one factor pushing Russian companies to list abroad, he said. Companies need investors "who will stay for a long time and provide stability to their shareholder base," he said.

Al Breach, head of research at UFG, said that improving market regulations and infrastructure would attract long-term foreign investors and help create local players who would be able to accommodate Russian companies' growing demand for cash.

These measures "will make it less speculative as well," Breach said.

Some of the bigger institutional foreign investors are unable to bring their money to Russian bourses as local infrastructure is not in line with European regulations, he said.

Alfa Bank's Weafer expressed optimism that Vyugin's strategy would lead to legislation in the near future.

"As the state establishes its ownership structure in various strategic sectors, the government will want to make changes in these sectors," he said, adding that the state now had a greater incentive to make markets more stable.

"They have a vested interest," Weafer said.

Vyugin's Markets Reform Plan



1. MARKET INFRASTRUCTURE

• Create a central depositary.

• Establish a central clearing system.

• Boost the role of bourses in ensuring fair trade, proper disclosure and prudential risk management.

• Improve rules governing derivatives markets.

• Improve legislation on asset securitization.

• Cut for companies the cost of floating on Russian markets.

2. INSTITUTIONAL INVESTMENT

• Widen the range of securities that the national pension fund, acting for so-called "passive" savers, can invest in to include Russian municipal bonds, corporate bonds and stocks, as well as foreign securities.

Passive savers are people who have not chosen a private pension provider and whose savings the national pension fund invests by default in government securities.

• Launch an information campaign to promote voluntary retirement saving.

• Improve pensions legislation, for example, concerning people who change employers.

• Promote company pension schemes.

• Introduce a single industry disclosure standard for pensions.

• Promote insurance-based saving.

3. INVESTOR PROTECTION

• Ensure equal access to market-moving information by passing a law banning insider trading, using the European Union's anti-insider directive of 2003 as a model.

• Increase fines for companies violating disclosure rules.

• Boost role of electronic media in distributing regulatory news releases.

• Tighten to five days the deadline for companies to disclose beneficial owners of stakes exceeding 5 percent.

• Pass legislation requiring listed Russian companies to publish consolidated accounts.

• Create a legal basis for the market regulator to operate as a collegial body.

• Boost market self-regulation.

-- Reuters

Sources: Vedomosti, government web site