Creating a Domestic Capital Base

February 3, 2012


The panelists generally agreed that Russian authorities are following the correct course to establish a larger and more vibrant stock market. They all commented that building a market culture takes time, especially in a country with such a long history of a command economy. But all also agreed that the government needs to accelerate efforts to build a more active and larger domestic capital base in Russia. Without the establishment of a strong base of domestic capital, it will be very difficult to create a stock market that is relevant to both investors and issuers. The moderator, Bella Zlatkis, commented that improving the pension fund system is the number one priority for government and that, while a lot has been achieved, a lot still needs to be done. In general, Russia is doing all the right things, but improvement takes time.

The panelists came up with several specific comments.

–The market needs to strike a balance between investors and issuers, with clear and predictable regulations and enforcement.

– The stock exchange needs to leverage technology to make market access easily and cheaply available across the entire country.

– The authorities need to pursue programs to introduce insurance, mutual and pension funds in addition to boosting retail-based investment funds.

– The authorities should avoid following the Western bourses and not introduce any restrictions on market development, such as transaction taxes. The fact that Europe is following this more restrictive path could actually help Moscow develop a more international base faster.

MICEX. Ruben Aganbegyan set out the developments already achieved and planned for the Moscow bourse. He said that MICEX_RTS is already working in cooperation with other international bourses and sees itself developing as part of the global market rather than in competition with it. He stressed the need for greater harmonization in the further development of laws, regulations and infrastructure in order to better cater to the needs of both issuers and investors. He talked about plans not only to build out the infrastructure further, but also to promote the capital markets with Russian investors.

FFMS. Dmitry Pankin reflected on the measures already in place and, in particular, the Central Depositary that has now come into force. He explained that there are still a number of measures that now need to be added, or improved, to make the new depositary fully effective, including the license issuance procedures and document flow rules, as well as other work within the exchange.

India’s experience. Madhu Kannan reflected on the fact that India had strong domestic institutions that helped in the creation of an infrastructure and legal framework for the development of capital markets in the country. He also noted one other key difference between Russia and India in that Indian people also had a long history of trading.

LSE experience. Xavier Rolet said that the LSE is not a competitor to MICEX_RTS. The LSE wants to work more closely with the Moscow bourse to help build a stronger market. The LSE compliments other bourses rather than competes, as it offers access to a broader range of investors and investment capital. He also highlighted one of the key advantages that Moscow has as it tries to build an international financial center – it sits in the ideal time zone between Asia and Europe and, in that, can become an important intermediary hub as the world moves to 24-hour trading.

Brazil’s experience. Marcos Troyjo highlighted the difference between how investors today view Brazil (very positive) compared with Russia (less positive) and how, about 15 years ago, Brazil was in a much less favorable position. He set out the measures that Brazil introduced to achieve that positive turnabout.

– Introduced fiscal responsibility laws.

– Made it easier to access capital.

– Introduced transparency laws.

– Worked hard to build a positive business climate and investor perception of the country.

He also highlighted that Brazil managed to avoid the credit explosion that hit the US and EU, and built a strong resource base with bio-fuels. This also helped sustain strong economic growth.

Russia’s perception. Gideon Rachman talked about the current poor perception of Russia among foreign investors and how this may be addressed. He commented that while it takes a long time to build a positive reputation, losing it is very quick if the wrong decisions are made. He said that investors remember bad events easier than positive events and highlighted the cases of YUKOS and Hermitage Capital as two that are regularly cited. He said Russia now needs to keep doing the right thing and avoid any further “accidents” and, eventually, it too can have a much more favourable perception with investors. Mr Rachman also highlighted one major advantage that Moscow has over, for example, Shanghai, as they both try to build an international financial center – Russian authorities allow a much greater climate of openness than China does. Discussions are much more open than that allowed in China. This is strongly to Moscow’s advantage.