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. Last Updated: 07/27/2016

The State of Trust in Markets

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President Vladimir Putin likes the idea of domestic initial public offerings for state-owned companies, and for good reason. On Thursday, VTB-24 president Mikhail Zadornov announced that 130,000 Russians had purchased shares in VTB in May, spending 40 billion rubles ($1.45 billion). This was higher than the 115,000 who bought shares in Rosneft's domestic offering to the tune of 20.3 billion rubles last July.

If Russians don't become disillusioned with these new financial options, then companies can depend on a convenient domestic source of financing. Experience in developed countries shows that individual savings tend to be split almost evenly between banks and investments. Personal savings in Russian banks have reached about 4 trillion rubles ($154 billion), so the further development of securities markets and a continued trend toward domestic IPOs could net tens of billions of dollars from individual investors. This source of funding is advantageous for companies in three ways.

Besides an immediate infusion of capital, companies also end up with attractive shareholders. That the shareholders are essentially isolated from one another and have relatively small investments insulates management from interference in running the company. Finally, the same large number of individual shareholders provides the company with additional insurance: If everything goes badly at this kind of "people's" company, the government will have no option but to step in and help.

But people don't just invest because life is good. People have to shelter their money against inflation, and there simply isn't enough real estate to go around. The only options are to increase personal consumption or to invest. Another factor underpinning investment preferences, as identified in a number of studies by the FOM polling agency and the Salvador D consulting agency is an itch for entrepreneurial action. According to their studies, about 20 percent of Russians would like to be involved in entrepreneurial activities but are prevented from doing so by a lack of funds or administrative barriers to getting into business.

But if these are the motives, taking part in IPOs isn't the most attractive option. The impressive growth in domestic share prices seen last year (the RTS index rose by 70 percent for the year) is unlikely to repeat itself. Analysts' projections are for a period of measured growth for the country's markets.

Domestic investment is a positive thing, of course, but the instruments available to investors should be more secure and profitable. Unlike direct investment in a particular stock, putting money in investment funds allows for the diversification of risk, as the money is placed in different assets and managed by professionals. But Russians don't yet fully see the point, as 60 percent of those surveyed by FOM weren't even familiar with the term "investment fund." Last year, according to a study by the National League of Managers, a mere 220,000 Russians had holdings in these funds. In developed countries, this figure is as high as 50 percent.

And the picture isn't any brighter when it comes to pension funds. At the end of last year, total pension fund reserves totaled 286 billion rubles ($11.4 billion), of which only about 10 billion rubles were deposited in private pension funds. A bit more than 9 billion rubles had been trusted to management companies, while the remaining 267 billion rubles remained in state hands.

So, with encouragement from the government, Russians end up opting for the riskiest and most speculative options when it comes to investing their money. The results of domestic IPOs serve as a kind of indicator of the general mood of the population and a reflection of the nature of the times. Apparently, if it's run by the state, you can trust it. The fact that people are holding on to their shares in Rosneft, despite the absence of profits, demonstrates that Russians judged the dependability of a certain instrument not on financial, but on some other factor.

This appeared as an editorial in Vedomosti.