10Section 3. Financial Markets and Financial Institutes
3.1. The Year of 2010: Recovery of Russian Financial Market
The year of 2010 saw the continuation of the recovery of the national financial market which kicked off between March and April 2009. The two crises in Russia's recent history (1997-98 and 2008-09) display substantial differences the major of which is that the 1997-98 crisis was a local one, while the latter crisis had a global nature. The crisis in the late 1990s was aggravated by the RF Government's obvious economic policy flunks. Having learned a bitter lesson, the Government managed to eschew a déjà-vu in the late 2000s and secured a financial cushion; however, stagnation in the economic policy resulted in a high degree of the nation's dependence on the external environment.
The 2008-09 crisis did not overrun the 1997-98 one in terms of intensity of the fall of stock indices (see Table 1). During the first crisis, the RTS index tumbled by 91.3%, while the MI-CEX one - by 73.0%; meanwhile, the intensity of the fall of both indices in 2008-09 accounted for 78.2% and 68.2%, respectively. The length of the fall of stock prices during the recent crisis was shorter than during the previous one: while in 1997-98 the RTS index was falling for 14 months and the MICEX one - for 13 months, the respective lengths in 20082009 were 8 and 7 months, respectively. That should be attributed primarily to the fact that during the recent crisis, it took oil prices just 5 months to hit the bottom vis-à-vis the 24 month-long period during the 1997-98 crisis (see Fig. 6 below).
Table 1
Quantitative Parameters of the Financial Crises of 1997/98 and 2008/09 in Russia
Crisis 1997/98 Crisis 2008/09
1. fall from the peak
1.1. Intensity, %
RTS index -91,3 -78,2
MICEX index -73,0 -68,2
1.2. Length, months
RTS index 14 8
MICEX index 13 7
2. Recovery, months
RTS index 59 24
MICEX index 8 25
Source: the RTS and MICEX data as of 31.01.2011
The recovery of the MICEX index during the two crises in question took a pace different from the RTS' one. During the 1997-98 crisis, because of the 5-fold depreciation of Rb., the MICEX index recovered just in 8 months, while the RTS forex index - in 59 months. In 2008-09, Rb. depreciated roughly by 50%, and it won back roughly 50% of the depreciation during the subsequent appreciation. That is why both indices have been bouncing back roughly at the same pace - the RTS index - for 24 months in a row, while the MICEX one-for 25 months. As of early 2011, the recovery has not been complete as yet: as of 31 January 2011, the RTS and MICEX indices hit, accordingly, 76.0% and 85.9% of their pre-crisis peak
values. With such market recovery rates in place in 2011, both indices are most likely to hit their pre-crisis values, which is why this time the ultimate recovery of the market would most likely to happen far sooner than in 1997-98.
Against the backdrop of the long-term financial crises of the past century (see Fig. 1) Russia's financial crisis of 2008-09 appears clearly V-shaped. Gauged by the intensity of decline, it falls far behind the Russian crisis of 1997-98, which posted the record-breaking rates in this respect vis-à-vis most notorious crises of modern times, as well as the collapse of the DJIA in the times of the Great Depression of 1929-1933 and the fall of NIKKEI 225 - in the late 1980s. The length of the cycle - between the fall of the RTS index and its complete rebound was "just" 32 months. That was far shorter a period when compared with such past crises as "Russia 1997/98" (73 months), "South Korea- 1989" ( 184 months) and "the Great Depression" (304 months), as well as the crises that are far from being over: NASAQ-2000 (131 months) and NIKKEI-1989 (253 months).
US-1907 _US-1929 _Japan-1989 _«_Korea 1989
Russia (RTS) -1997 ----US-NASDAQ-2000 _X_US-2007 ——C^— Russia (RTS)-2008
Source: by data of RTS, MICES, and www.finance.yahoo.com
Fig. 1. Depth and Length of Long-Lasting Financial Crises in the World as of January 2011 (peak=110%)
Against the backdrop of the most dramatic short-term turmoils over the past decades, such as the blue chips crisis in the US in 1987 and 2007, the 2000 collapse of the DJIA, the 1994 Mexican crisis, the 1997 crises in Indonesia and Brasil, the current Russian crisis proves more intense, albeit average in terms of its length (Fig. 2).
--£--US-1987 — US-2000 _O_Mexico-1994 ___Russia (RTS) -1997
Indonesia-1997 ------ Brasil-1997 a Russia (RTS)-2008 _■_US-2007
Source: by data of RTS, MICES, and www.finance.yahoo.com
Fig. 2. Depth and Length of Short-Term Financial Crises in the World, as of January 2011 (peak=100%)
Switzerland' Swiss ü
' Japan Nikkei 225 Finland Helsinki General ' th^ftst; inn
FranCe CAC 41
Dow Jones Industrial Average
Bare
Germany DAX Standard & 'Poor's 500 Stock Index Johannesburg All Share Spain Madrid-General Czech Republic Canada TSE -300 Comp BelgiUm BEL-20 Australia All , Ordinaries Warsaw Stock Exchahge Netherlands AEX General Denmark KFX Austria ATX Mexico IPC Nasdaq Comp Malaysia KLSE Comp S. Korea Seoul Comp Chile IPSA iHong Kong Hang Seng Venezuela IBC Pakistan Karachi 100 Philippines PSE Comp Thailand SET Singapore Straits Times Hungary BUX Israel TA Shanhai Stock Exchan India BSE 3
Brazil Bovespa Turkey ISE National-100 Peru Lima General Argentina MerVal K-, ~ MICHE index
-72 4 RTS index
Source: by data of RBK and WFE.
Fig. 3. Yield Rates of Stock Indices Worldwide in 2009-2010, as %
The 2008-09 crisis proved the Russian stock market's reputation of one of the riskiest markets in the world. It falls deeper than other markets, but bounces back at a faster rate. In 2008, the RTS and MICEX indices sank by -72.4% and 67.2%, respectively, thus outpacing all known stock markets worldwide in this regard. In 2009, on the contrary, they reaped the highest yields (see Fig. 3), with the RTS index posting a 128.6% growth and the MICEX index adding 121.1%. In 2010, the RTS index increased by 22.5% and the MICEX index - by 23.2%, which helped the Russian stock market to enter the Top-10 most lucrative markets worldwide.
In 2010, the aggregate capitalization of Russian corporations accounted for USD 938 bln., up by 8.9% vs. the previous year (Fig. 4). Meanwhile, the aggregate volume of trading at Russian exchanges hit the level of USD 1,114 bln. in 2010, up by 23.8% vs. the prior year's figure. However, the market so far has failed to catch up with the 2007 figure of USD 1,206 bln. and the 2008 one (1,405 bln.). The failure to do so can be ascribed to two factors: first, prices of most issuers' papers have so far failed to recuperate to match their pre-crisis figures. As demonstrated below (Fig. 8), according to the Emerging Market Portfolio Research's data, the 2010 volume of attraction of capital to international equity funds, whose activity strongly impacts the dynamics of Russia's stock indices, reached the pre-crisis level only in the end of the year. The slowdown of growth in the number of active domestic investors in the stock market1 and measures on regulation of the rise in trading by means of automated processes FSFM and MICEX began to undertake since mid-2010 hindered growth in the volume of trading with securities at stock exchanges.
a
1600 T
1400 -
1200 -
1000 -
800 -
600 -
400 -
200 -
100,0
I Capitalization (left axis)
I Volume of stock trade at Russian exchanges (left axis) ■Risk (st. square bias, 1998=100%)- to the right
1503
i—i 1405
1710 35 5 4122 29 * ~ 45
OO Cfr
99 99
0 0 0 2
100
90
80
70
60
| 50
| 40 5,0 H- 30
20
23 00 00 22
Source: by data of JSC RTS, S&P, IMF.
Fig. 4. Capitalization, Liquidity and Volatility of the Russian Stock Market
0
1 Mazunin A., Smorodskaya P. Fondovyi rynok fizlitsom ne vyshel. Chislo brokerskykh schetov svidetelstvuyet o snizhenii sprosa na birzhevuyu torgovlyu. Kommersant, 23 December 2010. 90
As in the times of the 1997-98 crisis, the beginning of the 2008-09 crisis was marked with a dramatic increase in the stock market's volatility. In 2008, the indicator of the standard bias of the daily yield rate of the RTS index made up 86.4% of the 1998 figure, while in 2007 it accounted for just 27.4%. In 2010, the indicator slid to 35.0% of its 1998 level, which roughly matches its average annual levels over 2004-2007, when the Russian stock market had been advancing steadily.
In 2010, the Russian stock exchange market managed to retain its global competitive positions in terms of trading with domestic JSCs' shares. That was proved by data on the correlation between volumes of trading with stock and depositary receipts on Russian corporations' shares on national and overseas stock exchanges presented in Fig. 5.
100 90 80 70 60 50 40 30 20 10 0
4,4 4,8 6,2 3,5 3,7
0 NYCEX and NASDAQ (CTCM)
□ German exchanges
□ LSE
¡1 RTS-Standard
□ St. Petersburg Exchange H RTS - stock (T+0) market H RTS-Classic
□ MICEX market
4,5 4,0 2,6 3,2
6,0
Source: calculations by exchanges' data.
Fig. 5. Specific Weight of Exchanges in Volumes of Trading with Russian JSCs' Shares
In 2010, the proportion of Russian exchanges in organization of trading with Russian corporations' shares and DRs was at the same level as in 2009 and accounted for 77.9%. The key development became a notable increase in the proportion held by RTS in the respective volume - it rose from 4.3% in 2009 to 8.0% in 2010. The increase was powered by a growing popularity of the RTS-Standard (RTSS) section, which dramatically changed the system of trades and settlements on the Russian stock market by enabling actors to dump the antiquated system of preliminary depositing of assets by participants in trading prior to the opening of the trading session. The MICEX's attempt to launch in 2010 an alternative system, that is, MICEX+ , so far has failed to change the balance of forces. Meanwhile, the transition from the settlement-backing system and preliminary provisioning of assets to the system of guarantees of trade settlement by a clearing center as of the moment T+N put the market participants before the dilemma of modernization of their own system of guaranteeing clients' transactions. The only viable option seems to be unification of the transactions guaranteeing systems at both exchanges, which became one of the factors expediting implementation of the decision on their merger.
3.2. Factors Determining the Dynamic of the Russian Stock Market
An examination of the 2008-09 crisis and the financial market's subsequent recovery allows a greater understanding of key factors that affect prices of Russian shares. One of them is oil price. During both crises, a dramatic downfall in oil prices ultimately resulted in the collapse of the national stock market. Furthermore, the fall in stock quotations, as a rule, anticipates the downfall in oil prices, as international investors keep a close eye on superheated local markets and withdraw investments under a tiniest sign of a volte-face of trends.
As noted above in comments to Table 1, a longer fall of the RTS index in 1997-98 vis-à-vis its fall in 2008 should be ascribed to the fact that the downfall in oil prices over the former crisis was lasting for 24 months, while during the latter one - just 5 months (see Fig. 6). At the same time, it took oil prices 11 months to bounce back after 1998, while after the collapse in 2008, as of January 2011, it has been already for 25 months that they failed to hit their past peaks, with their highest values accounting for 72.2% of the peak value registered in June 2008. As the future developments showed, in the aftermath of the crisis of the 1990s, oil prices had a practically 20-fold upside potential. By contrast, regardless of a far faster pace of the stock market's recovery, presently the growth potential of oil prices has been practically exhausted. Furthermore, given scenario-based conditions and main parameters of the long-term forecast of Russia's socio-economic development for the period through 2030 (hereinafter referred to as scenario-based conditions-2030) designed by the RF Ministry of Economic development, oil prices may repeat their absolute peak of June 2008 only as early as by 20301. Meanwhile, it should be understood that projecting oil prices poses a special, extremely challenging problem, which no one has so far managed to satisfactorily crack.
Source: by data of IFS IMF.
Fig. 6. Downfall and Recovery of Brent Prices during Financial Crises in Russia (Peak of the Price = 100%)
1 Kuvshinova O., Tovkaylo M. Rasti ili kopit. Vedomosti 10 February 2010. On Vedomosti's homepage, the article was complemented with the text of the Executive Summary to the Scenario-based conditions by the RF Ministry of Economic Development. 92
That the dynamics of oil prices and stock indices are intertwined is evidenced by data of Fig. 7, which presents results of changes of the correlation ratio between monthly relative changes in the RTS index and Brent prices over a 12 month-long period. The distinguishing feature of the moving correlation curve is that it mirrors a strengthening or weakening of the correlation between the indices in question with the 12-month lag.
The correlation between relative changes in oil prices and the RTS index appears clearly cyclic. While the index is climbing up to its pre-crisis peak or right in between its passing that peak and prior to the rise of the acute phase of the crisis the correlation ratio plunges momentarily and become negative. In other words, the oil price and the value of the index suddenly begin to change in different directions. During the collapse of the stock market, the positive correlation between changes of the index and oil prices begins to revive. Once the economy hits the bottom, the correlation is on the rebound to minus 1.
3000 T
2500
2000 --
1500 --
1000
500 --
April 2009
9^(^00000000000000000000000000000000000000000-
DhO fi spj ^ fi QHO ¡^ fi QHO fi QHO ^ fi QHO fi spj fi QHO ¡^ fi fi spj fi QHO ¡3 fi ¡pj ^ fi ¡pj ¡3 fi ¡^O ¡3 fi ¡^O ^ fi ¡^O
u es 3 u <ues 3 u <ues 3 u <ues -3 u <ues -3 u <ues 3 u <ues 3 u <ues 3 u <ues 3 u <ues 3 u <ues 3 u <ues 3 u <ues -3 u <ues -3 u <ues auu
RTS index (09.1995=100% )- left axis
Brent price (09.1995=100% )- left axis
"Annual correlation (right axis)
Source: calculated by data of IFS IMF and the RTS Exchnage
Fig. 7. Correlation between Changes in the RTS Index and Prices of Brent between September 1995 and February 2011
During the 1997-98 crisis, the RTS index hit its peak value in July 1997. Prior to that, the correlation ratio had been in the negative zone between -0.21 and 0.36. Between August and September 1997, the ratio plunged further to -0.55 to -0.67. Subsequently, it was being in the region of zero for another several months. Between January and July 1998, during the acute phase of the crisis, the correlation ratio hit the level between 0.46 and 0.68, ie. oil prices and stock prices were synchronized divers. In September 1998, the RTS index hit its bottom at the level of 438 points. Between August 1998 and late 1999 the correlation was close to zero, which exposes the absence of simultaneity in the indices' dynamics.
After the crisis of the late 1990s, the Russian stock market had been rising practically uninterruptedly between late 2001 and May 2008. The most notable milestone in the dynamic of the correlation, however, was July 2005, when the trend of the index underwent a drastic change. Between August 2004 and July 2005 the correlation ratio had been within the range
93
of 0.22 to 0.49. Between August 2005 and March 2008 the correlation ratio was steadily in decline and reached -0.53 in October 2007. That is to say, since August 205 and through the moment the stock market went downhill since the second half 2008 the stock prices and oil prices had taken different courses. Since April 2008, the correlation ratio had been positively high for nearly 2 years and hit its peak of 0.82 in April 2009. Since May 2009, the correlation began languishing and plunged to the levels between 0.08 and 0.15.
We believe the cyclicality of the correlation between relative changes in oil prices and quotations of Russian corporations' shares should be ascribed to a substantial influence of in-and outflows of foreign portfolio investors' capital. The most accurate indicator of the flows are data of EPMR which reveal weekly and monthly in- and outflows of foreign investment funds' investments in Russian issuers' stock1. Fig. 8 presents data on rises in oil prices and stock prices in conjunction with totals of foreign funds' capital invested in/withdrawn from Russia.
Increase in the RTS index (left axis) Increase in Brent prices (lef axis)
■Inflow/outflow of capital in/from funds, Investing in Russia (right axis)
2000
1800
1600
1400
£ 1200 e
S 1000
rt
SS 800
April 2006
600 400 200 0
mrnzm.
7000 6000 5000 4000 J 3000 Q 2000 1000 0
-1000 -2000 -3000
as is j §3 s
as is j sg sis;
ag is j y sis;
ag is j y sis;
Source: calculated on IFS IMF, RTS data and EMPR resource.
Fig. 8. Increase in the RTS Index, Oil Prices, Inflow (Outflow) of Resources
in Funds Investing in Russia
The data on capital flow allows understanding of why there is no correlation between oil prices and stock prices in the periods between July 2005 and March 2008, and April 2009 and late 2010.
1 In this particular case, indicators of capital in-and outflow regularly published by CBR bear less informational value as far as the stock market is concerned, for it is capital invested on the market for Rb.-denominated fixed income instruments. Perhaps, the financial market regulator and monetary authorities should be in need for establishment of a national system of monitoring in-and outflow of portfolio investors' capital on the stock and bonds market, for the EMPR resource is commercial and its data are not available for most Russian investors and government representatives. 94
Between July 2005 and April 2006 investment funds investing in Russia dramatically boosted volumes of attraction of capital: in span of just 10 months, the funds attracted new capital worth a total of USD 4.8 bln. Meanwhile, oil prices changed from USD 66.68/b to just 69.0/b. The spike in short-term investment capital in Russia at the time is explained by granting the country with investment ratings. Specifically, FITCH did so on 17 November 2004, followed by S&P's move on 31 January 2005. Plus, on 31 May 2005 the court rendered the first verdict on the Khodorkovsky case, and numerous portfolio investors were in the mood for buying Russian authorities' assurances of the uniqueness of the case in question.
The euphoria had been lasting until April 2006, with the RTC index adding 15.5% just in one month. Since May 2006 the capital inflow in investment funds investing in Russia was replaced by its outflow. Capital flight from Russia between May 2006 and March 2008 accounted for USD 4.6 bln. Meanwhile, oil prices rose from USD 73.28/b to USD 112.71/b. In all likelihood, the capital flight was fueled by analysts' increasing concerns about risks associated with the overheating of emerging markets due to the looming signs of a crisis on the market for sub-prime mortgage securities. In August 2006, the US reported the first substantial decline in real estate prices; meanwhile, at the IMF conference in September 2006, N. Rubini publicly announced a looming financial crisis in the US.
The outflow of portfolio investments from Russia kicked off in May 2006, followed by a brief intermezzo in mid-2008, with the investment funds seeing a capital inflow in April, May and June - most likely, under the impact of the pre-crisis oil price boom. Between July 2008 and March 2009 investors withdrew as much as USD 6.bln. from the investment funds investing in Russia. The average oil price tumbled from USD 123.45/b to USD 65.8/b over that period. As a result, the correlation between the index and oil prices soared to 0.83 in March 2009. Since that time the oil prices were on the upswing, and the next month saw the renewed capital inflow in the funds investing in Russia. Because of those reasons, the RTS index was reviving pretty fast and the level of the correlation between changes in oil prices and changes in stock prices remained high.
In span of 24 months between April 2009 and February 2011, it was just one month when foreign equity funds reported capital withdrawals. Overall, in the period in question, the funds collected USD 9.1 bln. from investors. While the average oil prices surged from USD 65.8/b in April 2009 up to USD 112.1 in February 2011, the growth in question was unstable on a month-on-month basis. By contrast, the rise in investments in the funds investing in Russia was steady. As a result, in the second half 2010, the correlation between oil prices and stock prices plummeted once again.
Differences in the intensity of depreciation of Rb. during the two crises concerned determined different dynamics of the RTS and MICEX indices' revival. The assessment of shares in the portfolio of the MICEX index is made in Rb. equivalent, while that of the RTS index -in USD equivalent. That is why after the 5-fold more depreciation1 of the Russian currency in 1998 the pace of the subsequent recovery of the MICEX index was greater than the one of the RTS index (Fig. 9). The MICEX index had bounced back to its pre-crisis peak already by May 1999, ie. just in 8 months after the economy passed the bottom of the crisis. By contrast, it took the RTS index 59 months to fully recover after passing its bottom value during the crisis.
1 Over the period between 1998 and 2003.
.Russia (RTS)-1997
Russia (MICEX)-1997
- USD/Rb. exchange rate as ofend-month
Source: by data of JSC RTS, MICEX and Bank of Russia.
Fig. 9. Changes in the USD Exchange Rate, the RTS Index and the MICEX Index during the 1997-98 Crisis (July 1997 = 100%)
During the 2008-09 crisis, the maximal level of Rb. depreciation accounted for 50% (Fig. 10), followed by the appreciation of the Russian currency. That is why the RTS and MICEX indices were recuperating practically at the same speed, with the latter index slightly outpacing the former one. In January 2011, the RTS index hit 76.0% of its peak value of May 2008, while the MICEX one - 89.5%.
.Russia (RTS)-2008
Russia (MICEX)-2008
USD/Rb. exchange rate as ofend-month
Source: by data of JSC RTS, MICEX and Bank of Russia.
Fig. 10. Changes in the USD Exchange Rate, the RTS Index and the MICEX Index during the Crisis between May 2008 and January 2011 (May 2008 = 100%)
600
500
400
— 300
200
100
0
Domestic developments in Russia, as a rule, have recently had a loose effect on price changes for Russian corporations' stock. The simplest explanation behind the phenomenon lies in a drastic increase in volumes of short-term foreign investment in the domestic equity market, as demonstrated by Fig. 8. In this sense, it is interesting to examine the VEB's record of implementation of anti-crisis measures on support of the domestic stock market in 2008-09, which are often subject to a biting criticism. For example, Mr. Vladislav Reznik, Chairman of the State Duma Committee for financial markets believes, "...this measure clearly was irrelevant and excessive", "it distorted the real market picture"1. Such assessments are partly determined by the fact that both VEB and the RF Ministry of Finance have failed so far to provide any publicly available account of how the funds were used and what was their effect on the market.
Source: by data of MICEX.
Fig. 11. Proportion of Private and Public Brokers in the Volume of Stock
Trading at MICEX, as %
It is on record that in October 2008 VEB was given Rb. 175 bln. in a subordinated loan under 7% annualized. The loan was extended for the sake of supporting the equity market. The bank repaid the loan, along with the interest, on 15 December 2009. The amount in question is roughly equivalent of USD 6 bln. According to the EMPR, it was the same amount foreign investment funds withdrew from Russian issuers' stock between July 2008 and March 2009, with some 3.8 bln. out of the said amount being withdrawn between July and September 2008, ie. prior to the start of VEB's interventions on the financial market. Before the start of the VEB's interventions, the capital outflow from foreign funds investing in Russia had been fading notably. In April 2010, foreign funds already began attracting new capital onto the market.
1 Rushailo P. Razgovor nedeli. Vladislav Reznik: v kakoy-to moment pridyetsya uvelichit pensionny vozrast. Kommersant Dengi, № 7, 21.02-27.02. 2011, p. 30.
53535323534853535353484853535353484853
The data on the start and the end of the VEB's intervention on the market allows evaluation of the state-owned banks and their affiliated structures'1 trading activity at MICEX. The data are presented in Fig. 11. The peak of the public structures' activity fell on the period between October and December 2008. At the time, VEB was likely to acquire Russian issuers' shares, thus supporting the market. As stated in the VEB annual report, as of 1 January 2009, the Bank owned a securities portfolio acquired at the expense of the national Welfare Fund's resources that totaled Rb. 159.7 bln. That is to say, over 90% of the capital allocated on support was spent during the period concerned. Meanwhile, over the same three months foreign investment funds cashed in USD 1.9 bln., or Rb. 60 bln. from sales of stock.
Fig. 12 demonstrates that the MICEX index hit the bottom in December 2008; in October, November and December 2008, its values accounted for 731.96, 611.32 and 619.53 points, respectively, while in January 2009 it made up 624.9 points. The RTS index hit the bottom in January 2009; between October and December 2008 its values stood at 773.37, 658.14 and 589.79 points, while in January and February 2009 - at 535.04 and 544.58 points, respectively. This might evidence that the VEB's massive buys of nosediving shares in the late 2008, perhaps, did help have the jitters investors, primarily domestic ones, to get rid of their stock at the bottom of the crisis. That, perhaps, kept the market afloat and saved it from yet a deeper fall by another percentage points. But, had there been no VEB investments at the time, nothing yet more daunting would have occurred with the Russian stock market. Those who ran scared and wanted to get rid of their shares at any price would have faced a low liquidity of the market, which might have cooled them down. The economy began to gradually recover in March-April 2009, and the market saw a new inflow of foreign portfolio capital.
4000 3500 3000 2500 2000 1500 1000 500 0
3911
120 100 80 60 40 20 0
l l Volumes of private stock broker firms (left axis)
] Volumes of trading of public structures (left axis) ■MICEX index (right axis)
Source: calculated by the MICEX data.
Fig. 12. Dynamic of the Index and Volumes of Trading of Different Groups of participants in the Exchange Market of MICEX between May 2008 and January 2011
1 VEB, VTB, VTB Kapital, VTB 24, Gasprombank, Sberbank, KIT Finans, Svyaz-bank, and Bank of Moscow 98
The situation with the VEB's reversing sale of the shares is not clear. In its 2009 annual report, the bank reckoned that it had sold a fraction of the stock package acquired at the expense the aforementioned loan from the National Welfare Fund yet in the second half 2009. As demonstrated by Fig. 11, at the time, the state-owned structures showed no increased activity on the exchanging market for shares, except for July, which was in sharp contrast with the period when VEB was buying those shares. Plus, taking away USD 6 bln. from the market between July and December 2009 should have become a knife in the back of its gradual upwards dynamic. There was nothing like that at the time, either. All that allows assumption that VEB did not sell the full package of shares in question, while the Rb. 175 bln. it returned to the RF Ministry of Finance in late December 2009 was taken from some other source. In general, it can be asserted that the government's financial interventions to support the market were unjustifiable. Such interventions might have smoothed the gradient of the market's fall, but they failed to affect the trend itself. In this case, it looks like the public bank swung a lucrative "marginal" deal by using a very generous by its term and conditions loan, rather than the state gave an upper hand to the stock market and investors.
1 800
Source: calculated basing on the MICEX data.
Fig. 13. Herfindahl-Hirschman Index
In addition to the process of revival of the stock market's capitalization and liquidity (Fig. 4 ), the secondary exchanging stock market saw the level of its concentration decline, which proves stability of performance of the market-based pricing on the domestic market. This is
proved by data of Fig. 13, which contains data on the Herfindahl-Hirschman Index1 (HHI) of turnover on the market for shares, corporate and regional bonds at MICEX between January 2005 and February 2011. According to FAS's approach, the market is a low concentrated one under HHI value being under 800, moderately concentrated with 800 < HHI < 1,800, and highly concentrated with HHI making up 1,800 plus 2.
The Russian securities market has recently been low concentrated, with the HHI value drifting below 800. It was only during the crisis, between August 2008 and March 2009, that the HHI values sometimes were over 800, as far as stock and Rb.-denominated bonds are concerned. But even that HHI on shares sky-rocketed in February 2009 was a result of 16 REPO deals worth a total of Rb. 1,620 bln., which some brokers erroneously stroke with Gasprom ordinary shares on 2 February 2009. The Arbitration Commission under JSC MICEX consequently annulled the deals with its decision of 18 February 2009.
Interestingly, during the 2008 crisis and in its aftermath the HHI values on corporate bonds remained steadily lower than those on the stock market. That is likely to mirror the existence of a more diversified circle of participants in the market for corporate bonds vs. the stock market. In February 2011, the HHI on shares hit 460.8 vis-à-vis 205.6 posted by the HHI on corporate bonds. Back in 2001, the HHI on regional bonds was steadily over 800, which allows attributing the market to moderately concentrated ones, whose array of participants is fairly limited. In February 2011, the HHI on regional bonds accounted for 908.5.
Fig. 14 exhibits data on changes in the structure of transactions with shares on MICEX. They reveal a trend to a post-crisis recovery in the structure of exchanging equity deals associated with the REPO segment. By using REPO transactions on the stock market brokerages, as a rule, draw short-term borrowed capital for a subsequent marginal lending. In December 2008, the proportion of REPO transactions accounted for 68% of the aggregate cost of exchanging deals with shares at MICEX; the subsequently figure slid to 50% at the end of the year and bounced up to 59% in February 2011. The upsurge in the proportion of REPO deals evidences the marginal lending to transactions involving securities has got a fresh start. This, on the one hand, means investors are keener to ride the market for risky assets, while it serves an indicator of the rising speculative activity on the national stock market, on the other.
The growing popularity of systems of short-term, primarily algorithmic, trading and engagement of trading robots has emerged as an important avenue of the exchanging stock market's development. This is proved by results of "Best Private Investor" contests RTS and MICEX were running in the late 2010. The victor was a trader who used robots. According to the Russian exchanges' data cited by Kommersant, up to 90% of trading claims and 50% of the turnover at the RTS FORTS fall on robots; at the MICEX's spot stock market, hyperactive trading robots hold 45% of claims and 11-13% of volumes of trading, with 95% of the said
1 Herfindahl-Hirschman Index is calculated by squaring the percentage share of each given participant in the volume of exchanging trading and summing up the results: HHI = (D1) 2 + (D2) 2 + ... + (Dm) 2,
where Di - share on the market of i-th participant in percentage equivalent;
1 = 1, 2, ..., m.
2 See p.2.6.4. of the Methodological recommendations on the procedure for conduct of evaluation and assessment of the state of competitive environment at the financial services market approved by the RF Ministry of Anti-Monopoly Policy with Executive order of 31.03.2003 № 86.
applications subsequently being withdrawn without concluding a deal1.: "... The problem of algorithmic trading does exist, and a great number of robots seems spooky; the rise in their number overloads the exchanges' gateways, which, theoretically, can entail technological problems"2, Mr. V.D. Milovidov is quoted as saying in the same article. Responding to the challenge, in the late July 2010, MICEX sent out to its participants a proposal to approve amendments to the exchanging trading procedures that provided for identification of robots that put forward trading claims outnumbering 1% of the aggregate number of claims put by all the participants, ie. over 40,000 claims a year. The exchange will block such hyperactive robots' operations in the event they pose a threat to the normal functioning of the exchanging trading system. In March 2011, MICEX kept taking on trading robots: since 1 March 2011, the exchange set a minimal commission fee of Rb. 0,18 per deal. Plus, it established requirements to the minimal size of the round lot at an amount of no less than Rb. 1,000, which should result in enlargement of most stock and shares round lots. The measures focus on encouragement of conclusion of large deals and minimization of the number of deals exempt from commission fee3.
□ Auction (Negotiated) regime DNegotiated deal E3REPO transactions regime
Source: by MICEX data.
Fig. 14. Structure of Deals with Stock on MICEX, as %
1 Smorodskaya P. MMVB vzyalas za robotov: birzhevuyu torgovlyu distantsiruyut ot avtomatov. Kommersant, 20 July 2010.
2 Ibid.
3 Trifonov A. MMVB ne khochet melochyitsya. Vedomosti, 8 February 2011.
Fig. 15 presents data on the number of deals and the average volume of one deal in the regime of market (anonymous) stock trading at MICEX. The data show that during past two years, the average monthly number of deals soared from 6.8 mln. in December 2008 to 10.6 mln. in February 2011, or by 55.9%. Meanwhile, the average volume of market deals involving shares at the exchange was notably down, despite the ongoing process of stock prices' recovery. In September 2009, the average size of the deal involving stock under this particular regime of trading at MICEX accounted for Rb. 145,200, while in February 2011 -117,300, or down by 19.2%. The advancement of the algorithmic trading manifests itself primarily in the rising tide of claims in the trading system. However, a notable increase in the number of exchanging deals in tandem with the fall in their average volume also witnesses investors growing increasingly keen to engage in speculative trading strategies.
1 one transaction value, thousand Rb
400 350 300 250 £ 200 150 100 50 0
transactions, number T 14 000 000 -- 12 000 000
10 000 000 £
8 000 000 «
tA a
6 000 000 I
CS
4 000 000 g 2 000 000 0
Source: by MICEX data.
Fig. 15. Market Deals with Stock at MICEX
During the crisis, FSFM took a pro-active stand and in an attempt to fence the market participants from overly risky operations, interfered with the trading. Due to the market's increasing volatility, on 18 September 2008, the regulator banned short interests for brokers. The ban was lifted on 26 September 2008, re-imposed on 30 September 2008 and remained effective through 15 June 2009. Since 25 September FSFM also limited the use of leverage for margin deals1 stricken by brokers' clients. Once introduced, the regulator's restriction resulted in leverages on marginal transactions for all investors capped with the 1:1 ratio. The right to use of the previous ratio of 1:3 was restored solely for "qualified investors" since 15 June 2009, albeit with some additional restrictions. Introduction of such limitations demanded
1 A margin transaction is the one the broker's client enters into to buy securities at the expense of a loan granted to him. In contrast to short interest used for a hit-and-run entry, marginal trading strategies are used, as a rule, on a bull market to ensure extra profit from the use of the leverage. 102
for a FSFM's permanent and efficient supervision, which in reality was non-existent1. At that juncture, in a 2009 paper, the Institute's experts suggested that while brokers somehow observed with the margin lending limitations, short interests thrived, regardless of the regulator's bans2.
The year of 2010 saw adoption of critical decisions in the financial market regulation area. They centered on tightening requirements to the professional market participants, size of their own capital, countering manipulations with prices of financial assets, championing consolidation of the stock infrastructure, introducing prudential supervision provisions. The move can be characterized as a course to strengthening of the state's role on the stock market, its direct interference with its participants' core operations.
On 30 July 2009, FSFM approved the Executive Order "On approving changes introduced in capital adequacy ratio of participants in the securities market, as well as managing companies of investment funds, mutual investment funds and non-state pension funds approved by Executive Order of FSFM of 24.01.07 № 07-50-pz-n". In compliance with the document, the regulator raised the capital adequacy ratio for professional participants in the securities market which exercise:
- Brokerage and securities trust management - from Rb. 10 mln. up to 35 mln. from 1 July 2010 and further up to 50 mln.- from 1 July 2011;
- Dealer operations- from Rb. 5 mln. up to 35 mln. from 1 July 2010 and further up to 50 mln.- from 1 July 2011;
- Depository operations (except for settlement depositories)- from Rb. 40 mln. up to 60 mln. from 1 july 2010 and further up to 80 mln. from 1 July 2011;
- Operations on maintenance the registers of owners of registered securities - from Rb. 10 mln. up to 100 mln. from 1 July 2010 and further up to 150 mln.- from 1 July 2011.
Today, FSFM has not yet abandoned the practice of mounting pressure on the financial intermediaries' operations. In March 2011, on its web-page, the regulator posted a draft executive order on modifying license requirements to registrars. Instead of the effective requirement to a registrar to service at least 50 issuers with the number of shareholders over 500, it is proposed to have each registrar service at least 20 issuers with the number of shareholders over 500 and no less than 250,000 non-zero nominee accounts. Experts suggest that roughly a half of the 45 currently operating registrars will fail to qualify the requirement3. Following its inspections in 2010, FSFM revoked licenses from such large registrars as JSC "Aktsionerny capital" and JSC "Tsentralny Moskovsky Depositariy". On 28 August 2010, the regulator also revoked a license for the right to exercise activities in the capacity of a specialized depository from Depositariy Irkol, one of the leaders in the sector of pooled investment.
1 The authors of the Report on results of the control measure "Examination of efficacy in 2008 of the effective law and normative and legal base on the financial market and the securities market for the purpose of stabilization of the financial system at the Federal Service for Financial Markets, the RF Ministry of Finance (on request)" conducted by the Accounting Chamber of RF believe that, " the government agencies do not carry out the systemic analysis of the situation on the stock market on a permanent basis, do not track down and analyze large financial institutions' operations on the stock market, which results in the RF Government and the country's leadership lacking a comprehensive and actual information of the environment of, and situation at, the Russian financial market». The Bulletin of the Accounting Chamber of RF, 2010, №1, p. 100. Posted at: http://www.ach.gov.ru/userfiles/bulletins/05-buleten_doc_files-fl-1855.pdf.
2 Rossiyskaya ekonomika v 2009 godu.Tendentsii i perspektivy (vypusk 31)- M., IEPP, 2010 pp. 148-151.
3 Smorodskaya P. Registratoram vystavily nenulevoy schet. Kommersant, 1 March 2011.
The FSFM's efforts, which are aimed at a substantial tightening of requirements to professional security market participants' own capital, are a part of the regulators community' concerted attempt to raise requirements to banks and insurance companies' capital. Since January 2010 banks had to boost their capital to match the mandatory mark of Rb. 90 mln. and further up to 180 mln. by 2012. The government is currently crafting amendments to the Civil Code of RF, which suggest tighter requirements to the minimal amount of economic companies' authorized capital. The regulators' common logic is likely to be driven by the desire to bolster the Russian corporations' level of efficiency by raising administrative barriers to market entry and encouraging, in the up-bottom mode, processes of concentration of businesses. It is not accidental that these measures concurred with the economy and the financial market exiting the crisis and looking for new drivers of businesses' efficiency.
The FSFM's assessments of the impact of the tighter requirements to the capital adequacy ratio appear different from those made by the stock market participants. The regulator forecasted that the new requirements would compel some 8-10% of professional participants to quit the market1. Naufor in turn estimates the respective figure to make up over 20%2. The Federal Antimonopoly Service officially objected the FSFM's stance, but the regulator ultimately turned victorious in the higher echelons of power.
The data on the number of licensed brokers, dealers and participants in exchanging trading at MICEX are given in Table 2. The data show that in the aftermath of the implementation of the new requirements, between 1 July 2010 and 1 March 2011 the number of brokers dwindled 8.2%, the one of dealers - 9.4%, while the number of participants in exchanging trading at MICEX even posted a 0.4% growth. That said, the figures do not quite accurately mirror the impact of the FSFM's decisions have had on the market participants. They are to face yet tighter requirements to the capital adequacy ratio since 1 July 2011. Besides, in the course of a looming examination of the market participants' reports on the amount of their own capital the wave of revoked licenses should be rising further on. So, it seems that NAUFOR's projection is more adequate and, perhaps, even too conservative, and the figure is highly likely to be passed by a substantial margin.
Table 2
The Number of Professional Participants in the Stock Market
2007 2008 2009 01.07.2010 01.03.2011
1. The number of organizations holding a license from
FSFM on the right to carry out:
1.2. Brokerage services 1445 1475 1335 1318 1210
change to the prior period, as % 2.1 -9.5 -1.3 -8.2
1.3.Dealer operations 1422 1470 1337 1318 1194
change to the prior period, as % 3.4 -9.0 -1.4 -9.4
2. The number of participants in the exchanging trading 460 463 477 481 483
at MICEX
change to the prior period, as % 0.7 3.0 0.8 0.4
Source: by data of FSFM, NAUFOR and MICEX
Too little time passed to evaluate consequences of the impact of the regulator's move on efficiency of financial intermediaries' operations and protection of investors' interests. At the moment, there is an array of problems which cannot help but raise concerns.
1 Askar-zade. N. Za malenkogo brokera. Vedomosti, 28 July 2010.
2 Smorodskaya P. Brokery budut zhit po sobstvennym sredstvam. Trebovaniya FSFR obretayut silu zakona. Kommersant, 1 October 2010.
Tightening requirements to the capital adequacy ratio does not go in pair with visible moves to enhance the transparency of the financial intermediaries' operations. Their financial reporting and key performance indicators remained unavailable for the public at large. Traditional research into how greater barriers to market entry and exit tell on a greater efficiency of businesses require intermediaries to unveil such indicators as labor compensations costs, profit, the proportion of borrowed capital, among others. As most of these indicators are hard to calculate using the official reporting data and they are not published, it is impossible to run an objective evaluation of efficacy of regulator's measures using traditional international methodologies. This allows an assumption that the regulator acts blindfold and without the much-needed analysis of respective consequences. Such a spontaneous change of rules of the game can grow into a genuine factor of instability of the business environment and hinder market investments into the sector.
Not backed by real moves in the area of the policy aimed at development of the financial market, the aforementioned measures on a sizeable growth in compulsory requirements on the businesses' capitalization can engender consequences other than the regulators hope for. In addition to supplanting licensed small brokers, dealers and trust managers from the market, FSFM dumped efforts on a further championing of the law on investment consultants. Hence, the legal forms of delivery of investment and financial services to the population have become extinct, particularly, in the provinces. New rules limit possibilities for the rise in the national market of "niche brokers" who specialize on servicing certain segments of the market, and that poses another obstacle to innovations in the sector. Local brokers, dealers and trust managers can be replaced by black hats: unlicensed shadow brokers for private investors, Ponzi scheme operators, unlicensed forex market operators, gaming clubs, and Internet-based ser-vices1. As evidenced by the record of the national stock market back in the mid-1990s, financial pyramids flourish where legal forms of financial intermediation do not function2.
While dramatically increasing risks of the rise of illegal financial services, the government's measures do not solve another significant problem, either, - that is, boosting the domestic financial institutions' competitiveness and nurturing national leaders in the financial services sector. To make the financial intermediation sector competitive, one should have an extensive network of financial intermediaries, which should be in close proximity to most small investors. Large companies, national champions emerge under a ruthless competition and with the economic environment fostering innovation, thus allowing innovative companies to cash in an extra business rent. There are no such conditions on the Russian market.
Since 1 July 2011 the brokers and dealers should increase their own capital up to Rb. 50 mln., or USD 1.7 mln. That is way tighter the requirements than those in the US and EU. In the US, it is just brokerages that keep clients' assets, which are obligated to maintain the USD 250,000 capital in combination with prudential requirements. Requirements to capital for brokerages that operate using the sub-agent scheme with the clients' assets deposited with a higher-level brokerage's depository imply their own capital should be between USD 50,000 and 100,000, depending on whether such companies fulfill their clients' orders on their own, or transfer them to another broker. In the EU, financial companies that deposit their clients'
1 According to Mr. R. Goryunov, President of RTS, "the number of unlicensed brokers will be rising, unless we foster growth in the number of decent participants". Maltsev O. Regionlnaya fondovaya chistka. Finans. №10, 22-28.03.2010. p. 59
2 Biyanova N., Nikolsky A. Mavrodi prinyal vyzov. Vedomosti, 12 January 2011; Yurischeva D., Nantay V., Mazunin A., Trifonov V. Sergei Mavrody splel finansovuyu set. Kommersant, 11 January 2011.
assets should maintain their capital at the level of Euro 125,000, while companies which are not engaged in depository operations shall have their own capital no less than Euro 50,000.
Such low requirements to financial intermediaries' capital in the US and Europe ensure the investor community's access to versatile investment and financial products. In the US, SEC and FINRA are tasked to oversee operations of some 5.1000 brokerages and dealer companies that run individual and corporate accounts of some 110 mln. investors. Plus, SEC has registered to date 11,000 investment consultancies that run 14 mln. clients' assets worth a total of some USD 38 mln. Lastly, on the state level, as many as 275,000 private individuals and some 15,000 corporations were registered as investment consultants1.
Meanwhile, it is just five companies - Fidelity Investment, Charley Schwab, Ameritrade, E*Trade and Scottrade which hold some 80% of the market for retail brokerage services for private persons. An analysis of the background of such companies as Fidelity and Schwab evidences that behind their success stories and leadership in the investment retail has been a continuous strive for innovation in the area of products and services. The legislature and regulator's mission in this regard is to focus on creation of innovation-friendly conditions and to make sure corporations can hold an innovation rent from introduction of innovations, without which there are no incentives to advancement and prowess in this field.
In Russia, 60% - plus of brokerages' clients and active clients who strike at least one exchanging deal a month are serviced by seven largest brokerages (Fig. 16). However, when compared to the largest investment houses and brokerages in the developed countries or those in China, India or Brazil, none of them has so far qualified for the leadership in the sector. One of the reasons for such a situation is imperfect national law and an absence of the government's commitment and resolve to foster a business climate which would propel a prompt expansion of the most innovative companies.
Legislators are keenly aware of the uncompetitive nature of Russia's legal environment in the financial sphere. Mr. D. Ananyev, Chairman of the Federation Council Committee for financial markets and money circulation, admits that, "...Russian financial law does not appear flexible enough, but overly imperative, and investors find it hard to build on its basis convenient forms of doing business, for property rights are not secured efficiently and informational transparency is insufficient"2.
Lastly, one should not help but underestimate the impact of the enacted against the market participants and SROs' will decision on raising requirements to capital adequacy ratio on deterioration of the business climate both in the economy on the whole and the financial market in particular. The decision in question appears just a link in the string of state's numerous direct interferences with business. As a consequence, the business climate in the country has lately worsened and the capital flight has been on the upswing. In 2010, the media tattled of a possible sale of Troika Dialogue, one of the largest private investment banks, to a state-owned one. Meanwhile, Mr. R. Vardanyan, Troika's founder, publicly voiced his desire to quit the company as early as in 2013. Given his reputation both in Russia and overseas and caution he, as an investment banker, exercises in his assessments and statements, his explanation of the current processes in the business and financial spheres appears fairly provocative. For example, he cites that, ". there is no understanding of how decisions are made both in business
1 U.S. Securities and Exchange Commission. Study on Investment Advisers and Broker-Dealers. January 2011, p.6-8. Posted at: www.sec.gov
2 Chuvilyaev P. Dmitry Ananyev: bolshinstvo systemnykh problem v finansovom zakonodatelstve ostayutsya nereshennymi. Kommersant Dengi, № 24, 21.06.-27.06. 2010, p. 16.
106
and in the government"; "the civil servants' attitude to business worsened"; "the crisis demonstrated there is no capitalism but some kind of pseudocapitalism"; "for any business the planning horizon is limited by one year or three years at best"; you should be prepared for different things, for example, "receiving a request to sell business and be prepared for having your license revoked or for everyone been instructed not to work with you any longer"1.
70
60
50
40
■u
30
■% of registered clients
■ % of active clients
jeilwl
\mm 2010
2007
2008
2009
Source: calculated by MICEX data
Fig. 16. The Share of Top 7 Brokerages in Clients' Assets, as %
That private financial structures have grown increasingly concerned about the state's interference in their business was evidenced by acquisition in 2001 by Zoulian Trustees Limited (Cyprus) of 99.5% of voting shares in JSC Investment Holding Finam. The acquisition was approved by the RF Federal Anti-Monopoly Service. A Finam representative commented that, ".so far we have not faced a hostile takeover, but anything can happen in Russia."2 The statistics of the banking sector also illustrate growing doubts over the domestic market's prospects. In 2009-2011, shareholders of ten foreign banks3, such as International Personal Finance, Santander, Rabobank, Barclays, Swedbank, HSBC, KBC Group, Morgan Stanley, to name a few, announced scaling back on their presence on the Russian market. Meanwhile, numerous investment companies and banks in Russia declared they would hence focus on wealthy individuals as an alternative to financial retail services. Thanks in large measure to a direct involvement of FSFM, the Bank of Russia and the RF Ministry of Finance in negotiations between professional participants in the stock market in February 2011, the two largest
1 Askar-zade. N, Safronov B. Krizis pokazal, chto kapitalizma u nas net. Vedomosti, 30 September 2010.
2 Zhelobanov D., Gubeidullina G. "Finam" ukhodit v ofshor. Vedomosti, 1 July 2010.
DementyevaK., Khvostik E. Inorodnoye telo. Kommersant, 9 March 2011.
domestic exchanges, MICEX and RTS, decided to merge. The decision on the merger and the Bank of Russia's retirement from the MICEX's capital prior the end of 2011 was made on 29 December 2010 at a meeting on establishment of an international financial center. Consequently, on 1 February 2011, the top five RTS's shareholders - that is, Troika Dialogue, Aton, Alfa-Bank, Renaissance Broker and Da Vinci Management Company - signed an agreement on their intention to sell their stakes in the exchange. The deal suggests that MI-CEX acquires a control bloc in RTS with a subsequent merger of the two exchanges. RTS was appraised to cost USD 1.15 bln. Its 35% stake will be bought for cash, while the rest will be swapped for shares in JSC MICEX at the ratio of 1:351. It is symbolical that all that was made public on the premises of the Bank of Russia. At the height of the consolidation of the Russian exchanges, in late 2010, there popped up information of their possible merger with Deutsche Borse. Media sources suggested that the information evidenced that in the frame of the work on establishment of an international financial center the matter was discussed by individuals close to government structures behind the RTS and MICEX top management and shareholders' back2.
Creation of a consolidated exchange on the basis of MICEX and RTS, can, other conditions being equal, ensure a positive effect in the form of concentration of liquidity, greater efficiency in transactioning in different segments of the financial market, cuts in direct and indirect transaction costs for participants in trading and investors, and solidification of Russia's standing on international capital markets. However, there persist some risks, too. Monopoly can affect an exchange's innovational activity, result in higher tariffs for infrastruc-tural organizations' products and services, push participants in the Russian markets to more vigorous entering overseas markets. Meanwhile, the major risk a consolidated exchange structure would face could lie in a government structures' greater influence on its operations. Formally, the Bank of Russia should withdraw from the exchange within 2011. However, government structures have plethora of informal leverages to influence the exchange and the settlement infrastructure through votes of subordinated to them state-owned banks, control over appointment of heads of infrastructural organizations, and adoption of regulatory documents. That is why a major challenge the consolidated exchange will see in the short run will lie in shaping such a corporate governance system which should establish a legitimate balance of interests between private corporations and public structures in regard to the new exchange's operations. That said, as government structures have lately intensified their interference in business, such a balance will be hard to strike in the years to come.
As to legislation, the year of 2010 saw enactment of several federal acts which may have a positive effect on advancement of the national financial market. Specifically, Federal Act of 27 July 2010 № 224-FZ "On countering the improper use of insider information and market manipulation and on introducing amendments to individual legislative acts of Russian Federation" reads that the national financial, forex and commodity markets have now become subject to control over the use of insider information and market manipulation. The Act established the definition of insider information, identified the circle of individuals who qualify for insiders, formulated signs of insider trading and activities that fall under market manipulation, and determined measures on their restraint. Criminal and administrative responsibility for the
1 Smorodskaya P. RTS storgovali s MMVB. Gosudarstvo sklonilo birzhi k obyedineniyu. Kommersant, 2 February 2011.
2 Maltsev O. Ministerstvo birzhevoy torgovli. Istoriya s Deutsche Borse. Finans, № 47-48, 20.12.2010-16.01.211, p. 56.
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improper use of insider information and market manipulation was introduced in the form of amendments to the Criminal Code of RF and the Code of RF of Administrative Violations. In compliance with by-laws to the Federal Act, FSFM suggests to obligate stock exchanges to daily produce calculations, on the basis of special formulas and with the use of their databases, on exchanging transactions and to report suspicious deals to the regulator.
The other novelty became Federal Act of 27 July 2010 № 208-FZ "On consolidated financial reporting". The Act reads that credit, insurance and other organizations, whose papers float at stock exchanges and with other organizers of trading on the securities market, are bound to publish their annual consolidated financial report according to IFRS. This means that from 2010 on, all issuers, with their outstandings, rather than the previous 20-25 ones, should publish their reports according to IRFS. Since 2015 the requirement will become binding for all corporate issuers whose bonds were permitted of trading. Let us hope this positive practice will expand shortly to embrace all the professional participants on the security market and companies that manage pooled investments. It is also imperative to urge issuers to compile and disclose the IRFS-based reports quarterly, for that would allow a comprehensive fundamental evaluation as a pillar to investment decision making on the domestic market.
Lastly, last year saw adoption of a number of amendments to the Tax Code of RF, which concerned operations on the stock market and the market for pooled investment. The novelties comprise, in particular, personal income tax benefits for private individuals and corporate profit tax benefits for legal entities that invest in start-ups and venture projects. The said categories of taxpayers are now exempt from the respective taxes on incomes generated by sales (redemption) of participation shares and stock in Russian organizations which are not traded on organized securities markets, provided the shares sold belonged to the taxpayer for more than five years, while over-the-counter stock belonged to their owner for long. According to some other amendments introduced to Art. 378 of the Tax Code, assets transferred to the mutual investment fund are now subject to the property tax collected from the managing company. Also, amendments were introduced to Art. 388, which now reads that land lots assigned to the MIF are subject to the land tax payable by the managing company out of the assets that form the fund.
So, the year of 2010 witnessed the state bolster its reign as the regulator of financial markets and institutions. However, in addition to its traditional market control and oversight functions, government structures started engaging more vigorously in governing infrastructural organizations, dictating conditions of doing business, participating in the largest banks and investment companies' property structure. It is yet premature to judge to the full extent efficiency of these moves; however, it can be ascertained now that the financial market, as well as other sectors of the economy, has faced increasingly unfavorable conditions of doing business and the private sector has increasingly clearly sensed risks and increased costs of doing business in Russia.
The mounting administrative pressure makes one contemplate mechanisms which might secure a reasonable balance between the government's interests and the business structures' ones. Such a mechanism might take the form of obligating public structures to pursue a development policy that would suggest employment of indicative forecasts of quantitative indicators of the sector's advancement, simplification of the effective law to bolster innovational activities by businesses, the government structures' contribution to implementation of strategic projects aimed at creation a more favorable business climate. These and other problems are highlighted in a greater detail in the concluding part of the present Section.
3.3. Financial Institutions: Seeking for a New Growth Concept
3.3.1. Residual Forms of Support to the Financial Sector
During the recession period of 2008-2009 the federal government was acting as a good administrator which manually managed to maintain the financial system facing bad loans and low liquidity. One may say that the state learned from the lesson of the previous recession, when it failed to save large banks and was held liable for being a source of the problems faced by private institutions ten years ago. The state had to spend USD 212 bln from the international reserves to support banks to balance their foreign exchange assets and liabilities through long-term loans to state-owned banks. To strengthen the resource base of the banks, the state took a risk, from the economic point of view, by ensuring repayment of bank deports in the amount of RUB 700 K. When the recession was in full swing, the state granted a total of RUB 2,5 t loans to the banks.
In 2010, most of these measures were discontinued unlike at many developed economics which had to actively pursue a quantitative relaxation monetary policy. Only a few of the measures continued, namely the guarantee to repay RUB 700 K of bank deposits. Some of the state-owned entities began to repay a part of their outstanding working capital loans. In December 2009, VEB reported repayment of RUB 175 bln, a loan which the bank obtained as part of the antirecession stock market support. Sberbank of Russia repaid about RUB 200 bln, or 40% of the total antirecession support, to the Ministry of Finance in H1 2010. The bank is likely to continue repaying in the course of privatization deals scheduled for a period between 2011 and 2013. Rosselkhozbank will repay its public loans through IPO. Rosselkhozbank obtained a public contribution of RUB 30 bln to replenish its charter capital during the recession period. In September 2009, the Government of the Russian Federation purchased from VTB an additional issue of RUB 180 bln as part of the antirecession support, at a par value of 4,8 kopeks per share. During IPO which was held on February 17, 2010, the state sold 27.9% of the issue at par value of RUB 9,1468 per share thus gaining RUB 95,7 bln, including a profit of RUB 45,5 bln1 on this block of shares. It is obvious that the antirecession debt owed by VTB will be paid in full after the subsequent sale of a 10% interest in VTB during a new SPO.
In 2010, with a view of stimulating banking lending, the refinancing rate of the Central Bank of Russia was reduced from 8.75% as of the beginning of the year to 7.75%, a historically lowest rate in modern Russia. The rate increased to 8.00% on February 28, 2011. The crediting rate on direct REPO deals, which represents actual refinancing rate of banks in Russia, was even lower, 5 to 6% at the 2010 year-end. The mandatory bank reserve requirements remained at a lower level against the recession period. On December 27, 2010, President Medvedev D. A. signed a federal law which extended till July 1, 2011 the moratorium on exclusion of banks from the deposit insurance system for non-observance of the requirements to a package of estimates related to appreciation of capital, assets, profitability and liquidity, as well a series of mandatory requirements.
In general, one may say that as of the beginning of 2011, the Russian banking system suffered from excess of short-term loans and outrunning growth in bank deposits against lending growth rates rather than from lack of such loans.
1 Asker-zade N.. A Good Bargain. Vedomosti. February 14, 2011. 110
3.3.2. Liquidity and Current Stability of the Banking System
From the very onset of the recession period between August and September 2008, Russian banks became a target of large-scale support from the Bank of Russia and the Ministry of Finance. The model of financing through carry trading was replaced by the model of financing through loans from monetary and public authorities. Such a support was given on the basis of repayment financing. As early as late 2009, main bridge financing recourses were withdrawn from the banking system. In 2010, not only did the banking system recovered but also outran the level of its pre-recession short-term liquidity through predominantly domestic borrowings in the form of back deposits, reinforcement of corporate bank accounts, public spending growth (see Fig. 17).
Source: based on the data published in the Credit Institutions Review of the Bank of Russia.
Fig. 17. Bank support assessment, bln RUB
In July 2008 net claims to the Bank of Russia and public agencies totaled nearly RUB 1,5 t, i.e. banks were creditors of the Central Bank of Russia and public agencies. The amount of money which banks maintained on deposit and correspondent accounts with the Central Bank of Russia, in bonds of the Bank of Russia and government securities, exceeded by the foregoing amount a small size of the loans obtained from the Bank of Russia and deposits of public agencies. Beginning with September 2008, the situation changed drastically as the Central Bank of Russia and public agencies became net creditors of banks. At the onset of the recession it was decided to reduce mandatory reserves requirements, allocate temporarily budget and state-owned corporations' idle money in banks, support the practice of loans to banks from the Bank of Russia through direct REPO deals and then unsecured and other types of loans. The support to banks was focused on loans from the Bank of Russia. net liabilities owed by banks to the Central Bank of Russia and public agencies totaled RUB 975 bln as early as October 2008 and RUB 1,3 t in November. In January 2009 net liabilities owed by
banks reached a maximum of RUB 1,5 t. Hence banks as net creditors of public agencies, RUB 1,5 t, turned into net debtors owing the same amount to the public agencies, which means that maximum support to banks through lending totaled nearly RUB 3 t.
Beginning with February 2009, i.e. from the moment when the Russian Stock Market resumed its growth, the Ministry of Finance and the Bank of Russia launched a policy of gradual "withdrawal" from the banking system. In December 2009 banks resumed to be net creditors of the Bank of Russia and public agencies, RUB 703 bln and RUB 584 bln, respectively. In December 2010 these figures reached RUB 2546 bln and RUB 823 bln, respectively. Excessive liquidity which was accumulated in the banking system, became a new problem thereby increasing substantially risks of inflationary pressure on the economy.
Fig. 18 shows the same data by volume of banks' net claims to the Bank of Russia and public agencies in relative terms against assets of the banking system. The data also shows that the net creditor status against the Ministry of Finance and the Central Bank Of Russia is a typical situation, save for deviations from the situation amidst financial crises. However, both sources and trends of allocation of excessive banking liquidity changed substantially. Late in the 90s - early in the 00s, most of the banking liquidity was spent to purchase government securities, in many cases in prejudice of lending to the real sector. Therefore, decrease in bank loans to the Ministry of Finance reflected a positive, upward trend in lending to the real economy in general. Obviously, this was a positive event as soon as the trend resumed after the recession period between 2008 and 2009.
Slower recovery of banks as creditors in relative terms after the current financial crisis against the crisis of 1997-1998 reflects serious changes in the sources of bank credit resources. While it was cheap and short-term foreign exchange loans in external markets that served as such source on the eve of the crisis in 1998 and between mid-2000s and the crisis of 2008, liquidity of the banking system was generated by relaxing the domestic monetary policy by financial authorities in 2009-2010. Keeping this in mind, it seems that beginning with the late 90s, the vector of development of the banking system was heading the right direction in general, i.e from lending to the Ministry of Finance through the risk-bearing carry trading strategy towards lending to the real sector through the same strategy and, finally, towards an attempt to grant retail and corporate loans through internal financial recourses. The problem is whether or not the banking system is able to keep this development vector.
Fig. 19 provides analysis of different form of loans to banks from the Bank of Russia. Unsecured loans which the Bank of Russia began to grant on October 20, 2008, were the main type of credit support to banks during the recession period. This type of lending is not traditional for the central banks in other countries, given a serious credit risk to which the Bank of Russia is exposed. Lack of relationship between these tools and size of credit portfolios of banks, save for loans secured by different assets (Fig. 13), was typical of the credit support which the Bank of Russia offered to banks during the recession period. This may be a reason for such strong support to banks by the Bank of Russia which assumed a serious risk exposure, the retail and corporate credit portfolio of banks failed to grow in the recession period. Beginning with September 2010, different programs on bank support from centralized loans were nearly discontinued, which is not surprising amidst a fast growth in liquidity at banks in 2010.
Source: based on the data published in the Credit Institutions Review of the Bank of Russia.
Fig. 18. Banks' net claims to public agencies and the Bank of Russia (as % of assets (liabilities) value)
Source: based on the data published by the Bank of Russia.
Fig. 19. Bank of Russia loans to banks, RUB mln
Short-term loans to banks through direct REPO deals was the most traditional method which the Bank of Russia applied intensively to stabilize the banking system during the recent recession period. Fig. 20 shows three periods in the development of the Russian banking sys-
113
tem, where each period depends a specific source prevailing in support of liquidity. The first period, which lasted from the beginning of the 2000s till 2003, was characterized as moderate liquidity after the recession of 1998 , when banks were funded preliminary with internal sources and interest rates were very high in the interbank market. The second period, which lasted from 2004 till July 2008, was marked by a boom of the carry trading strategy, when banks could borrow cheap in foreign markets. Inflow of foreign cheap short-term money resulted in excessive liquidity in the banking system and low loan interest rates in the interbank market. The third period began in August 2008, i.e. from the onset of the current financial crisis. The period is characterized by temporal discontinuance of the carry trading strategy, which resulted in a fast growth in loan interest rates as well as subsequent state intervention which replaced non-resident money with public funds thereby smoothing the situation in the interbank market. Later, when the market began to recover, banks generated sufficient liquidity, interbank loan interest rates resumed the previous, pre-recession level. Beginning with July 2010, volume deals in the direct REPO market slumped and such loans became irregular due to thin market in December of the same year and discontinued in January 2011. "Exhausted" direct REPO loans coincided with revocation of the banking license from International Industrial Bank, which allows one to suppose that the Bank of Russia used intensively this tool to support the financial situation in this problem bank in 2009 and H1 2010.
1 400
25,0
a 3
600
03
S 800
1 000
1 200
200
400
0
IJi rsS3 rs-s u^pg rs-a u^pg rs-s u^pg isjs ra? iB-pS Ssjg rs-s u^pg rg-s ug-pg rs-s u^pg rs-s ug-pg rai is
i i Monthly average c/a balances of banks
i iMonthly average banks' deposits with the Central Bank of Russia —■—Interest rates in the interbank loan mar-ket, 2 to 7 days O Interest rates in the interbank loan market, 8 to 30 days
Source : based on the data published by the Bank of Russia.
Fig. 20. Average monthly bank liquidity and interest rates in the interbank loan market in 2001 - January 2011
Fig. 21 shows relation between interest rates in the interbank loan market with direct REPO. In the period of growing liquidity the Bank of Russia employed direct REPO deals only in specific cases and in moderate scale. From the onset of the financial crisis, direct REPO deals were more frequent for the purpose of stabilizing the situation in the interbank loan market. Such deals began to close on a regular, daily basis and their volumes increased rapidly against the prerecession figures. Stabilization of the situation with short-term liquidity at banks in 2010 resulted in reaching the pre-recession interest rate in the interbank loan market, and eventually the Bank of Russia refused to employ direct REPO on an intensive basis.
à
35 30 25 20 15 10 5 0
Recession and market recovery
1200 1000 800 600 400 200 0
banks' c/a balances with the Central Bank of Russia I Direct REPO
Interest rates in the interbank loan mar-ket, 2 to 7 days Interest rates loans through direct REPO
3
m §
Source: based on the data published by the Bank of Russia.
Fig. 21. Using direct REPO for regulating bank liquidity in 2003 - February 2011
3.3.3. Towards Recovery of International Reserves
As shown in Fig. 22, in July 2008 the international reserves reached a maximum of USD 597 bln. When the recession was in full swing in February 2009, the international reserves reduced to USD 384 bln., i.e. by USD 212 bln. Most of the reduction resulted from sale of foreign exchange by the Bank of Russia in the course of the so-called "regulated devaluation" of the Ruble, when the RUB weakened against the US dollar from RUB 23,45/1USD in July 2008 to RUB 35,45/1USD or by 51.2% in February 2009. Unlike August 1998, the devaluation was extended for as long as six months to allow banks and individuals to exchange some of their ruble assets with US dollars or restructure foreign currency debts.
The fact that the Bank of Russia sold foreign exchange, even at undervalued exchange rate, in the period of regulated devaluation didn't imply complete loss of the international reserves, as a part thereof was simply converted into growth of the Bank of Russia's ruble assets, which were used for a large-scale lending to the banking system (see Fig. 17 and 19). Between February and October 2009, the RUB strengthened against the US dollar from RUB 35,45/1USD to RUB 29,05/1USD or by 18.7%. The large-scale granting of ruble loans to banks concur-
115
rently with a visible strengthening of the RUB in 2009 served as additional channel for growth in profitability of banking operations as well as incentive to convert a part of banks' ruble assets into foreign exchange to reach balance between bank's foreign exchange assets and liabilities.
Source: based on the data published by the Bank of Russia and the Ministry of Finance Russia.
Fig. 22. International reserves of the Russian Federation, bln USD.
In 2010, the Bank of Russia managed to recover a part of the international reserves (i.e. total international reserves net of the Reserve Fund and the National Wealth Fund which is controlled by the Ministry of Finance of Russia) almost at the prerecession level due to repayment of loans owed by banks to the Bank of Russia and a favorable foreign economic situation. The size of the National Wealth Fund stabilized at a level of USD 85-90 bln. It was only the Reserve Fund that saw a substantial reduction in funds due to the fact that the state had to finance the federal budget deficit which resulted from a rapid growth in social security expenditures of the Government of Russia. The Fund reduced in size to a maximum of USD 142,6 bln in August 2008, USD 26,0 bln in January 2011. The international reserves totaled USD 484,7 bln in January 2011 while a maximum of USD 596,6 bln was reached in July 2008.
Considerable volumes of international reserves is an important factor for macroeconomic stability in this country. It is important, however, that the method of investing in the international reserves also allow modern competences of Russian financial institutions to be increased, because weak domestic financial institutions fail to allow the existing surplus of finances in the country to be utilized effectively for economic growth. This is why it would be
reasonable in perspective to engage the largest Russian financial institutions in management of the international reserves portfolios.
3.3.4. Deposit Base Growth and Banks Deleveraging
The fact that the state assumed obligations for increasing the amount of retail deposit from RUB 400 K to RUB 700 K which is guaranteed for repayment, as applied to a deposit per bank, was one of the most effective antirecession measures aimed at supporting the banking system было принятие. When individual investors began to dispose of risk-bearing assets such as shares, units of unit investment funds and junk corporate bonds, this measure resulted in heavy inflow of retail deposits to banks amidst recession. Retail deposits increased from RUB 5850 bln to RUB 5907 bln or by 1.0% when the recession was in full swing between August 1, 2008 and January 1, 2009. As of the 2009 year-end, retail deposits reached a total of RUB 7485 bln, i.e. increased by 26.7%; in 2010 retail deposits totaled RUB 9818 bln, or grew by 31.2%.
Amidst decline in 2009 and slow growth in the credit portfolio in 2009 - 2010 (see Table 3) deleveraging of the banking system took place (see Fig. 23), i.e. decrease in the value of banks' net claims to individuals and businesses against total bank assets from 19.3% on the eve of the recession on August 1, 2008 to 9.1% in 2009 and 5.2% in 2010. On the one hand, such a rapid deleveraging means lower liquidity risks in the banking system. On the other hand, however, it means that banks became less capable of investing deposits in loans, because borrowings became more expensive than in the prerecession period.
Source: based on the data published by the Bank of Russia.
Fig. 23. Deleveraging (as % of banks' assets (liabilities) value)
3.3.5. The Issue of Converting Liquidity into Loans
As seen in Fig. 24 and Table 3, the credit portfolio of banks resumed growth in 2010. Loans to non-banking businesses increased by 12.8% whereas retail loans by 14.3%. In 2009, the non-banking credit portfolio increased by mere 0.3%, whereas retail credit portfolio reduced by 11.0%. However, it is too early to say that the tool of banking loans recovered. In the period between 2009 and 2010, the credit portfolio recovered at slower rates than after the
117
financial crisis of 1998. Corporate and retail loans increased by 48.3% and 37.6% in 1999 and 71.5% h 61.9%, respectively in 2000. After 1998, devaluation of the national currency resulted in rapid growth in competitive position of Russian businesses, and business environment was more favorable that today in terms of corruption, direct intervention of the state in the business and ownership structure. In 2010, the credit portfolio increased at much slower rates than in the prerecession years. In 2006 and 2007, growth rates of corporate loans accounted for 38.6% and 64.3%, retail loans - 75.1% and 43.9%.
Source: based on the data published in Credit Institutions Review of the Bank of Russia.
Fig. 24. Loans granted, bln RUB
Growth in the credit portfolio in 2010 was less than the monetary authorities expected. For example, as early as May 28, 2010, Head of the Bank of Russia S. Ignatyev said that the credit portfolio was estimated to grow by 15% in 2010. In fact, total growth in the corporate and retail credit portfolios was 13.1%. It should be taken into account that as of the beginning of 2011, the relaxed monetary policy represented by leveled down requirements to reserves, refinancing rates and interest rates on interbank lending, continued in the economy in spite of visible risks of inflation growth.
The reasons for slow recovery of the credit portfolio after the recession of 2008-2009 against the recession of 1998 can be found among the factors such as low business investment demand, slow economic recovery and global nature of the recent recession (crisis).
Table 3
Corporate and Retail Loans in 1998-2010
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Loans to non-
banking busi-
nesses:
RUB bln 300 445 763 1 191 1 613 2 300 3 189 4 188 5 803 9 533 12 844 12 879 14 530
% of growth 48,3 71,5 56,1 35,4 42,6 38,7 31,3 38,6 64,3 34,7 0,3 12,8
against the previ-
ous year
Share in GDP,% 11,4 9,2 10,4 13,3 14,9 17,4 18,7 19,4 21,6 28,7 31,1 33,2 32,7
Retail loans:
RUB bln 20 28 45 95 142 300 619 1 179 2 065 2 971 4 017 3 574 4 085
% of growth 37,6 61,9 111,6 50,2 110,8 106,5 90,6 75,1 43,9 35,2 -11,0 14,3
against the previ-
ous year
Share in GDP,% 0,8 0,6 0,6 1,1 1,3 2,3 3,6 5,5 7,7 8,9 9,7 9,2 9,2
Source: the estimates were made based on the data published in the Banking Statistics Bulletin of the Bank of Russia for a period of several years and the data published by Rosstat.
The reasons for slow recovery of the credit portfolio after the recession of 2008 - 2009 against the recession of 1998 can be found among the factors such as low business investment demand, slow economic recovery and global nature of the recent recession (crisis).
3.3.6. Carry Trading Outlooks as a Growth Driver for the Banking System
On the eve of the recession 2008 - 2009, like the previous financial crisis in Russia, the key driver of bank growth was a speculative strategy called carry trading (CT), when credit institutions were involved in active foreign-exchange borrowings in the developed foreign markets at low interest rates, which were invested in high-yield ruble holdings. On the eve of the financial crisis of 1998, such holdings were represented as public short-term bonds (PSTB), and prior to August 2008 - retail loans, ruble cooperative bonds and loans to the largest corporations1.
The CT strategy is a very risk-bearing strategy; should the national currency is devaluated, stock jobbers' ruble holdings would devaluate instantly while foreign-exchange liabilities owed to non-residents become hard to discharge. A bank would get into the "liquidity trap" or become insolvent. According to IMF experts, banks involvement into CT for the purpose of funding growth in retail loans in developing countries is one of the main risks in the financial markets of such countries2.
What are the carry trading strategy threats for Russia? First, it provides less incentives for bankers to make lower-yield investments in the real economy. Second, the banking system is exposed to a huge risk which eventually results in misbalance between banks' foreign exchange assets and liabilities as an earnest of their liquidity crisis, as was evidenced on the eve of both financial crises. Third, carry trading results in financial bubbles in the market of ruble
1 Carry trading strategies, including their preconditions and risks in the Russian market, were discussed in our previous publications. The Russian Economy in 2008. Trends and Outlooks. (Issue 30) - M.: IET, 2009, pp. 524-534; Recessionary Economy in Modern Russia: Trends and Outlooks / A. Abramov, E. Apevalova, E. Astafiyeva [et al.]; sc. editor. E.T. Gaidar. - M.: Prospect, 2010, pp. 524-534].
2 IMF. Global Financial Stability Report. Financial Market Turbulence: Causes, Consequences, and Policies. September 2007, pp.22-25.
corporate obligations and overload in the field of retail lending. Forth, the strategy may result in securitization of financial relations thus turning "smart lending" banks into investors in the bond market and "credit factories", where borrowers are qualified by machines rather than human beings. The banking system becomes less experienced in lending which requires skilled personnel and knowing the borrowers. As a result, banks can lose their potential for modernization. Finally, carry trading undermines the internal saving system, making it unprofitable for borrowers which are "funded in rubles" (individuals, unit funds, nongovernment pension funds, insurance companies, etc.) to invest in ruble bonds, because such investments often generate a negative real yield.
The scope of bank involvement in the CT strategy is well illustrated by the deficit (-) and surplus (+) figures of foreign assets held by banks against the value of non-residents' rights to claim against banks, as compared with total value of bank assets, as shown in Fig. 25. In 1997, on the eve of the banking crisis of 1998, liabilities to non-residents exceeded the value of banks which is equal to 5.0% of the balance-sheet total of the banking system. One-time triple devaluation of the national currency made banks insolvent. The balance was restored through bankruptcy of some of the largest private Russian banks and freezing (or, in other words, default) discharge of liabilities owed to non-residents, which the government had to legalize by adopting a regulation which prohibited banks from discharging their liabilities owed to non-residents. As a result, the balance of foreign-exchange assets and liabilities was restored, an excess amount of banks' foreign-exchange assets over liabilities accounted for 1% of the value of banks' assets in 1998. However, the reputation of the national banking system remained damaged abroad for years to come.
246,5
Surplus (+) and deficit (-) of bank foreign-exchange assets over liabilities (as % of banks' assets (liabilities) value)
^^^Movement of nominal USD exchange rate in RUB (right-side axis)
Source: the estimates were made based on the data published by the Bank of Russia.
Fig. 25. Surplus (+) and deficit (-) of bank foreign-exchange assets over liabilities
As of August 1, 2008, deficit of bank foreign-exchange assets against claims reached 10.7% of the balance-sheet total of the banking system, which is doubled the level preceding the August banking crisis in 1998. The carry trading strategy was booming at Russian banks in the period between early in 2004 and July 2008. Had it not been for the public support to banks, devaluation of the national currency, which began in the fall of 2008 and resulted in a 50% devaluation (see Fig. 9), would have repeated the 1998 collapse scenario of the banking system. Owing to the loans from the Bank of Russia and public agencies, as well as a policy of smooth devaluation of the national currency, banks were provided with the money and time required to restore the misbalance between their foreign exchange assets and liabilities.
This is not to say that all these years regulators, namely the Bank of Russia, have been watching indifferently how the СТ was leading the banking system to a new crisis. In 2004 the Bank of Russia introduced mandatory reserves requirements (MRR) for credit institutions' ruble and foreign-exchange liabilities owed to non-resident banks в размере (2.0%) and other credit institutions' ruble and foreign-exchange liabilities (3.5%) (Fig. 26). As the misbalance in foreign-exchange assets and liabilities increased in the banking system these MRRs increased up to 4.5% each on July 1, 2007, 5.5% and 5.0% on March 1, 2008, 7.0% and 5.5% on July 1, 2008. However, these regulations failed to stop CT growth which in part can be explained by the fact that CT-related borrowings served as main drivers of heavy credit expansion in 2004 - H1 2008 and one of the key sources of financial soundness of the banks.
Net foreign-exchange assets as % of banks' assets (left-side axis)
MRRs to credit institutions' ruble and foreign-exchange liabilities owed to non-resident banks (right-side axis) MRRs to credit institutions' other ruble and foreign-exchange liabilities (right-side axis) MRRs to foreign-exchange liabilities owed to non-resident legal entities (right-side axis) MRRs to ruble liabilities owed to individuals (right-side axis) _MRRs to credit institutions' other foreign-exchange liabilities (right-side axis)_
Source: the estimates were made based on the data published by the Bank of Russia.
Fig. 26. Regulation of carry trading by the Bank of Russia
The banking crisis which began in August 2008, made banks and the Central Bank of Russia balance assets and liabilities which happened because solution of this issue was the matter of survival for each bank amidst the crisis rather than introduction of any new regulations and requirements. To avoid collapse of the banking system, executive authorities and the Bank of Russia had to create economic conditions so that banks can resolve the issue. Nevertheless,
upon the crisis the state adopted a whole system of economic countermeasures against CT. Three new MRRs to foreign-exchange liabilities owed to non-resident legal entities, to ruble liabilities to individuals and other foreign-exchange liabilities, each 2.5% of the value of liabilities, were adopted on November 1, 2009 instead of the two previous MRRs.
On October 13, 2010 the Central Bank of Russia extended the floating operational corridor for the value of the dual currency basket from RUB 3 to 4 and reduced the amount of accumulated interventions (symmetrically, by 50 kopeks for the lower and upper limits), which shifted by 5 kopeks the limit of operational interval, from USD 700 mln to USD 650 mln. This meant that a wide fixed currency rate corridor of RUB 26 to 41 per dual currency basket was officially abolished. On March 1, 2011, the Bank of Russia expanded the limits of the dual currency basket to RUB 1, setting the lower and upper limits of the corridor at RUB 32,45 and RUB 37,45, respectively. These measures were aimed at making foreign exchange rate less predictable whereby making it hard to apply CT.
On July 16, 2010, the State Duma adopted an amendment to Article 269 of the Tax Code of the Russian Federation which was intended to make external borrowings less attractive for companies and banks. In 2011 - 2012, the upper limit for foreign exchange loans which are regarded as costs incurred on reducing the profit tax, will be reduced from 15% to 0.8% of a refinancing rate set by the Bank of Russia (6.4% p. a. from February 28, 2011)1. The upper rate on ruble loans is planned to be increased from the current 1.1 to 1.8 of the refinancing rate, i.e. up to 14.4%. Lawmakers and executive authorities believe that this would increase the private business demand for ruble loans and limit application of the CT strategy. It should be noted, however, that in applying the CT strategy in practice, borrowings from nonresidents are obtained at an interest rate less than 6%. In 2010 a system of monitoring over external liabilities owed by state-owned corporations was launched, and today decisions on large borrowings from foreign entities by state-owned companies should be made subject to approval by public representative participating in management bodies of such companies.
Realizing the threat of carry trading, but due to changes in their previous opinion on that developing countries must not prevent inflow of foreign capital, IMF experts recommended that these countries apply different tools designed to limit inflow of short-term foreign investments in order to prevent financial bubbles in the stock market and real estate market2. Among other countermeasures against CT, the IMF recommends to apply a flexible foreign exchange rate policy, accumulate foreign exchange reserves in sovereign national wealth funds, reduce interest rates as adjusted to inflation, harden the fiscal policy, strengthen prudential supervision3.
Russian financial and monetary authorities followed in part these recommendations. On the one hand, after the crisis a range of CT countermeasures was markedly widened. However, no effective measures such as reduction of inflation and hardening of fiscal policy were taken. The higher internal inflation, the wider the spread between internal loan rates and the value of borrowings from foreign countries, and the more effective is CT for financial specu-
1 Visloguzov V. The State Duma Suggests to Obtain Ruble Loans; Foreign-Currency Loans Will be Made Less Attractive for Companies. July 16,2010.
2 Osty J., Ghosh A., Habermeier K. Capital Inflows: The Role of Control. IMF Staff position note. February 19, 2010, SPN/10/04. http://www.imf.org/extemal/pubs/ft/spn/2010/spn1004.pdf .
3 IMF. Global Financial Stability Report. Chapter 4. Global liquidity expansion: effect on "receiving" economies and policy response options. April 2010, p.1.
lations. A trend towards strengthening of the national currency amidst growth in oil prices which emerged at the end of 2010, will also encourage this process.
Even if the Ministry of Finance and the Bank of Russia manage to effectively resist CT, an equally knotty problem arises as to what should replace cheap foreign borrowings, even risk-bearing, short-term, but still popular in promoting lending and economic boost. A new, third wave of CT became more visible in the economy as early as mid-2010. In spite of the already existing debt load, Rosneft borrowed RUB 52,5 bln from China Development Bank in Q2 2010 thus increasing its total outstanding debt to RUB 346,3 bln. The oil company pays 3.62% p. a. on the Chinese loan and generates a substantial profit from financial speculations by allocating the money to bank deposits at 6.22-8% p. a. According to the US GAAP reports, Rosneft held 3,12 bln USD on bank deposits as of June 30, 2010 .1 Another example is related to subsidiaries of foreign banks, which, according to the bank deposit market review in H1 2010 published by ACB, reduced interest rates on ruble and foreign currency retail deposits to 4-5% p. a. and 0.6% p. a., respectively. According to a manager from Nordea Bank, "financing by the parent company ... is much cheaper than retail deposits"2.
Hence the risk that the financial system may go back to CT remain very high. As shown in Fig. 25, the banking system avoided this strategy for 5 years after the crisis of 1998. As early as 2002 the value of bank foreign-exchange assets exceeded liabilities owed to non-residents by a factor of 5.1% of the value of assets of the banking system. After the recession of 2008, the excess amount of foreign-exchange assets over liabilities was found to be much less. As early as 2010, this indicator decreased to 1.9% of the total bank assets against 3.1% in the preceding year. These changes demonstrate that the banking system is ready to go back to the previously applied risk-bearing forms of funding and growth.
Another potential source of growth in the financial system is increase in the level of mone-tization of the Russian economy. Money growth in the economy promotes lending and economic growth. According to the concept of long-term socio-economic development of the Russian Federation for a period till 2020, which was approved by the Order of the Government of the Russian Federation on November 17, 2008, No. 1662-r (Long-Term Development Concept 2020), monetization of the economy is supposed to increase from 28.3% in 2006 to 60-65% in 2015 and 70-75% of GDP in 2020. As a result, credit expansion of banks would increase, enterprises would generate more money as net profit and amortization, savings and investment potential of the state and households would increase. This implies transition to new monetary tools designed to provide economic demand for money which is based on growth in liquidity through refinancing of banks by the Central Bank of the Russian Federation. According to the Scenario-Based Conditions-2030, it is retail deposits growth as well as refinancing operations that are going to be the main resource base for banks3.
The advantage of CT is that it is habitual for the financial system, offers less inflation risks, because it provides short- and medium-term investments at interest rates better than inflation rate. However, CT will not offer long-term resources sufficient for modernization. Fur-
1 Derbilova E. Bankers from Rosneft. Vedomosti, August17, 2010.
2 Dementiyeva S., Deventiyeva K. A Back-Breaking Contribution: Subsidiaries of Foreign Banks Need no Retail Deposits any More. Commersant, August 16, 2010.
3 The Ministry of Economic Development and Trade. An explanatory note on scenario-based conditions and basic parameters of the long-term forecast of social and economic development of the Russian Federation for a period till 2030. Posted on the website of Vedomosti as an attachment to the article "Grow and Save" published by Kuvshinova O., Tovkailo M. Vedomosti, February 10, 2010.
thermore, it results in regular, serious financial crises and hampers the development of internal financial institutions and personal investments. Though the accelerated monetization strategy implies orientation on internal resources, it is exposed to serious inflation risks which can be avoided by adopting a policy aimed at developing business environment and improving rapidly the quality of state governance. CT is likely to be resumed with renewed vigor unless a clear development strategy appears in Russia in a year or two.
3.4. Ruble Bond Market
Fig. 27 shows monthly data on volumes of issues and turnovers in the secondary market of ruble corporate obligations in the MICEX from 2001 till January 2011. The figure also shows data on bank liquidity as bank balances on correspondent accounts and deposit accounts with the Bank of Russia, as well as shows how the onset of the financial crisis of August 2008 resulted in visible decrease of bank liquidity, stock market trading volumes and placement of corporate obligations. In September 2008, the lack of risk management system for REPO deals in the MICEX resulted in a temporary crisis caused by defaults on REPO deals by a few large players. Nevertheless, the bond market managed to avoid a system crisis, because the Bank of Russia intervened in settlements and rehabilitation of the banks which were found to be insolvent.
The market of corporate obligations recovered in full in 2010. Floatation of corporate obligations in the domestic market totaled RUB 917 bln in 2009 and RUB 854,9 bln in 2010, thus exceeding substantially the prerecession levels: RUB 465,3 bln in 2006 and RUB 457 bln in 2007. During the recession period and post-recession recovery, corporate bonds allowed the non-financial sector to compensate for stagnation and slow growth of the corporate loan portfolio in 2009 and in 2010 (Table 3). The number of new defaults in the market of corporate obligations decreased from 26 in 2008 and 76 in 2009 to 9 in 20101.
In 2010, volumes in the secondary market of corporate obligations increased up to RUB 23,0 t against RUB 9,3 t in 2009 and RUB 11,3 t in 2008. Given the restrictions imposed on application of the CT strategy, this means a new factor of rapid growth in liquidity in the ruble bond market. In 2010, rapid growth in short-term liquidity of the banking system as a result of accelerated growth in monetization of the Russian economy became such a factor.
A share of banks in the structure of sources of financing of corporate bonds increased from 31.9% in 2008 to 41.5% in 2009 and 41.4% in 2010. However, further growth in the market of long-term ruble bonds through short-term internal liquidity seems to be a very risk-bearing strategy. Should the monetary authorities have to reduce monetization of the economy due to inflation, it may cause serious problems in the corporate bond market.
The fact that most players use the corporate bond market to invest idle cash or obtain short-term loans rather than make long-term investments makes itself evident in the structure of deals with corporate bonds in the MICEX (Fig. 28). From the beginning of 2005 till August 2008, a share of REPO deals grew rapidly to reach 84% of the trading turnover. Due to the crisis in the REPO market in September 2008 - February 2009, the share reduced markedly but then began to grow as the securities market recovered, to reach 83% in February 2011. A share of market deals accounted for mere 5%.
1 Department of Surveys and Information of the Bank of Russia. Financial Stability Review. 2010, p.13. Posted
on the webside of the Bank of Russia: www.cbr.ru.
m §
<D T3
1= o m
3 000 000 2 800 000 2 600 000 2 400 000 2 200 000 2 000 000 1 800 000 1 600 000 1 400 000 1 200 000 1 000 000 800 000 600 000 400 000 200 000
] Secondary trading ] Public offering ■Bank liquidity
1 800
1 600
1 400
1 200 M
m
5
1 000 pi
£
T3
800 'H
600 a
m
400 200
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOHHHHH i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i
Source: based on the data published by the Bank of Russia and the MICEX Stock Exchange.
Fig. 27. Corporate bond operations and bank liquidity in 2001 - Jan. 2011
100 j
90 -: 80 -: 70 -[ S3
60 -50 -40 - i. 3 6
000 1 7
5
2005 2 00 5 2 00 2 008 2009 201 0 011
□ Auction (market) mode □ Negotiated deal mode □ REPO deal mode
Source: based on the data published by the MICEX Stock Exchange.
Fig. 28. Structure of deals with corporate bonds in the MICEX Stock Exchange, %
Even more eloquent are the figures in the structure of stock-exchange deals with regional securities, as shown in Fig. 29. In February 2011, 91% of all the deals with regional securities were accounted for REPO operations in the stock exchange. With REPO deals, multiple pledge of bonds banks can use a credit leveraging of nearly 1:1 or 1:2, i.e. per RUB 1 of initial investments in bonds they can borrow from RUB 1 to RUB 2 of loans secured by bonds.
100 90 80 70 60 50 40 30 20 -10 -0 -
86
:87:
39
□ Auction (market) mode
□ Negotiated deal mode
□ REPO deal mode
Source: based on the data published by the MICEX Stock Exchange.
Fig. 29. Structure of deals with regional bonds in the MICEX Stock Exchange, %
Fig. 30 shows analysis of a share of different groups of traders (private financial companies, state-owned companies, and the Bank of Russia) in stock-exchange deals with corporate bonds in the MICEX in all modes, including market negotiated deals and REPO deals. Beginning with March 2009, a share of state-owned companies increased visibly in the volume of corporate bonds trading; the Bank of Russia as a large supplier of liquidity trough REPO and other deals joined in April. Between April 2009 and January 2010, the Bank of Russia accounted for 0.7% to 14.3% of trading volume s with corporate bonds in the MICEX. From January 2011 MICEX ceased to include the Bank of Russia into monthly its reporting on trading volumes, which might mean that the Bank of Russia discontinued operations with securities in the MICEX Stock Exchange. On May 2010, a composite share of state-owned companies in volumes of deals with corporate bonds reached the pre-recession level.
Fig. 31 shows a share of state-owned companies and the Bank of Russia in trading volumes with regional securities. Though no the market saw no serious changes in a share of state-owned companies and the Bank of Russia in the period between August 2008 and January 2010, we can see that the share accounted for nearly 35-40% of the total volume of deals with regional securities, which was very important for supporting this segment in the bond market.
9
2005
2006
2007
2008
2009
2010
Source: based on the data published by the MICEX Stock Exchange.
Fig. 30. A share of private and public brokers in trading volumes of deals with corporate bonds in the MICEX Stock Exchange, %
100
90
80
70
60
50 40
30
20
10
2005
2006
2007
2008
□ State-owned companies, excl. the Central Bank of Russia
2009
I Bank of Russia
2010
2011
□ Other traders
Source: based on the data published by the MICEX Stock Exchange.
Fig. 31. A share of private and public brokers in trading volumes of deals with regional bonds in the MICEX Stock Exchange, %
Fig. 32 shows data on the number of dials and the value of a single deal with corporate bonds in stock-exchange (order-driven) trading mode in the MICEX Stock Exchange. As opposed to the market segment of stock trading (Fig. 15), a downward trend in the number of market deals with corporate bonds was observed as the average volume of deals increased in 2009 - early in 2011, which means that this market segment, unlike stock trading, provides at least less developed algorithmic trading and trading robots. On the other hand, growth in short-term liquidity allows volume of deals to be increased. Inflow of foreign portfolio investors who become more interested in the ruble bond market, as it offers a higher yield against global market interest rates amidst an acceptable macroeconomic stability in Russia, also may become a growth factor in volumes of deals in this market segment.
Fig. 33 shows analysis of REPO deals with corporate bonds in the MICEX Stock Exchange. Unlike the market trading mode in the REPO segment, deals grew rapidly in 2009 -early in 2011with a decrease in the average deal size beginning with mid-2009. This means that the REPO market became a more popular source of short-term funding as the economy recovered. The number of participants in this mode grew constantly.
Fig. 33. REPO deals with corporate bonds in the MICEX Stock Exchange
Fig. 34 shows analysis of placement volumes of not only corporate obligations, but also regional ruble bonds, as well as federal securities. Until 2010, placement volumes of corporate obligations exceeded visibly volumes of issues of federal securities. For example, a total of RUB 457 bln of corporate obligations and federal loan bonds (OFZ) and RUB 271 bln of state saving bonds (GSO) were placed in the 2007 pre-recession year. The situation began to change beginning with 2009, when the gap between corporate bonds and federal bonds began to narrow. В этом году было размещено of A total of RUB 917 bln of corporate obligations, RUB 519 bln of OFZs and GSOs were placed at the same year. It was for the first time over the recent years when in 2010 the volume of issue of federal bonds - RUB 861 bln - exceeded the volume of placement of corporate obligations - RUB 855 bln. In general, this is a positive phenomenon for the Russian stock market. The existence of a liquid government securities market is important not only for financing a moderate federal budget deficit. Making federal securities a main tool to service the interbank loan market could make the latter more stable as well as strengthen the position of corporate obligations as a tool of long- and medium-term fundraising.
With regard to issues of regional obligations, Fig. 34 shows that they fall behind the corporate and federal bond market. Nevertheless, their role may become more important in the future, because the state will have to engage more actively regional authorities in modernization of the economy, which would inevitably make the regions more economically and financially independent thereby strengthening their activity in the bond market.
2 000
1 800
1 600
1 400
J3 1 200
3
m 1 000
pi 800
600
400
200
855
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
□ GKO-OFZ-GSO
□ Regional bonds
□ Corporate bonds
Source : based on the data published by RTS OJSC and IMF.
Fig. 34. Volume of placements of ruble bonds
Amendments to the pension legislation, в результате которых a part of the funded pension accruals can be invested in non-government bonds were an effective measure of support to the ruble corporate bond and regional bond markets in 2009. The Federal Law No. 182-FZ "On Amendments to the Federal Law "On Non-Government Pension Funds" and Federal Law "On Investments to Finance Funded Work Pension in the Russian Federation" became effective on 18 July 18, 2009. Under this federal law, Vneshekonombank (VEB), being in the capacity of public asset manager, is entitled to invest pension accruals in an extended investment portfolio which also includes Russian corporate bonds, state-insured ruble and foreign exchange deposits with credit institutions, mortgage securities, bonds of international financial institutions. At the 2009 year-end, a total of RUB 12,9 bln of pension accruals were invested in corporate bonds, including 7,8 bln RUB from the VEB managed portfolio. At the end of 9 months in 2010, these investments increased up to 57,8 bln RUB and 45,9 bln RUB, respectively.
The largest state-owned companies became the offer-drivers in the ruble corporate bond market due to amendments to the legislation on securities, which made it easier to issue stockexchange bonds by using simplified listing procedure for securities in stock exchanges instead of the Federal Financial Markets Service Russia. To strengthen stability of the corporate bond market, the maturity on stock-exchange bonds was extended from one year to three years. Not only open joint-stock companies, but also other economic agents, including state-owned corporations, were allowed to issue stock-exchange bonds.
Table 4 shows data on placements of corporate bonds by specific issuer in 2009 and 2010. Because of numerous defaults the bond market was closed for "third-echelon" issuers. The largest public and private companies became primary issuers of corporate obligations in the post-recession period. For many of them the domestic bond market became a tentative replacement for external borrowings which were hard to obtain because of credibility crisis in this market segment.
Table 4
The largest issuers of ruble corporate obligations in 2009
2009 2010
Issuers Issuers
RUB bin % RUB bin %
1 2 3 4 5 6 7
1 RZHD 145 15.8 FGC UES 50 5.8
2 Transheft 135 14.7 Rosselkhozbank 35 4.1
3 Vneshekonombank 60 6.6 Rosnanotech 33 3.9
4 Lukiol 50 5.5 EurazHolding 30 3.5
5 Atomenergoprom 50 5.5 AIZHK 29 3.3
6 Bashneft 50 5.5 Vneshekonombank 27 3.2
7 AFK Systema 39 4.3 Alrosa 26 3.0
8 MTS 30 3.3 MTS 25 2.9
9 AIZHK 28 3.1 Mechel 25 2.9
10 VTB ( VTB 24) 23 2.5 Wimm-Bill-Dann 24 2.8
11 SIBMETINVEST 20 2.2 VTB ( VTB 24) 20 2.3
12 Gazpromneft 18 2 Gazpromneft 20 2.3
13 VTB-Leasing Finance 15 1.6 VympelCom-Invest 20 2.3
14 Mechel 15 1.6 RZHD 15 1.8
15 MMK 15 1.6 Severstal 15 1.8
16 Gazprom 15 1.6 Globex Bank 15 1.8
17 NLMK 15 1.6 Norisk Nickel 15 1.8
18 Severstal 15 1.6 Unicredit 15 1.8
19 NIA VTB 001 14 1.6 EBRD 14 1.6
20 Bank Petrocommerce 11 1.2 MMK 13 1.5
21 МБРР 10 1.1 Bank St. Petersburg 13 1.5
22 Rosbank 10 1.1 Aeroflot 12 1.4
23 Rosselkhozbank 10 1.1 Transcredibank 12 1.4
24 VympelCom-Invest 10 1.1 Atomenergoprom 10 1.2
Other issuers 113 12.3 Other issuers 342 40.0
Total 917 100 855 100
Source: based on the data posted on www.cBonds.ru , www.rusbonds.ru and published by the MICEX Stock Exchange.
In 2009, 24 largest issuers accounted for 87.7% of the value of corporate bond issues whereas only 60% in 2010, which means that a wider range of issuers offer bonds in the market. In 2007, however, of a RUB 476,7 bln of placements of corporate bonds, the 24 issuers accounted for mere 42.1% whereas other issuers for 57.9% of the value of issue. In other words, the primary market of corporate bonds was not recovered yet to reach the pre-recession levels in terms of accessibility of corporate bonds for a wide range of companies.
3.5. Key Risks in Financial Market
The key risks of financial market crisis as per results of 2008-2009 are based on the following factors: the strong dependence of the economy in general and the stock market in particular on oil prices; outstripping growth of external borrowings by banks and non-financial sector; risks of foreign capital outflow; RUR devaluation; the growth of trading volumes in the futures market at the background of an insufficient level with transactions, increase of the risks in the REPO market ; small capacity of financial security services market, preventing the capitalization of financial intermediaries.
3.5.1. Dependence of the stock market on oil prices
As shown in the comments to Fig. 7 and 8, the Russian stock market depends on oil prices. Inflow or outflow of the short-term portfolio investments from abroad only occasionally suspends the interdependence between the dynamics of changes in the stock indices and prices. However, the flow of foreign investments ultimately depends on the dynamics of oil prices in the world. Dependence of the stock market on oil prices is illustrated in Fig. 35, which reflected the coefficient between the absolute monthly value of the RTS index and the price of Brent crude oil for the entire period of existence of the stock index for December 2010. Coefficient of determination (R2) between these parameters is 0.87, what indicates a very close relationship between them.
The current level of dependence of the Russian stock market on oil prices is one of the main sources of investors' risk. According to the scenario conditions of 2030, an average price of Urals crude oil in 2020 will reach 101 dollars per barrel, and in 2030 - only USD 140 per barrel (See Fig. 36). Basing on the regression equation, demonstrating the relationship of the RTS index and the annual oil price, we can estimate the average value of RTS index for the future 10 years. The average annual value of the RTS index in this case will reach 2000 points, which is only slightly above the average level recorded in 2007. It means that the domestic stock market is expected to stagnate for 10 years, which however, does not preclude its high volatility, if modernization and diversification of the Russian economy does not take place.
Brent Oil, USD per barrel
Source: estimates on the FS IMF and RTS stock exchange data.
Fig. 35. Dependence of the RTS index on Brent crude oil price from September
1995 to December 2010
Average annual RTS index (left axis) — ■• — RTS index at the end of the year (left axis)
A Average annul Brent oil price, WB estimates for 2010-2020 right axis)
Source: estimates on the basis of MED forecast for the Concept of long-term development - 2030 and RTS stock market data.
Fig. 36. Forecast of the RTS index up to 2020 based on the World Bank
estimates for oil prices
In the previous survey, basing on the links formula of the RTS index and oil prices, we were estimating an average annual value of the index at 1,503 points, but in fact it is equal to
1 510. That is, this relationship is working and can help to predict the average annual values of stock indices very accurately. At the same time, we would like to recall once again, that oil prices predicting is an extremely difficult task, which is still unresolved.
3.5.2. Risks of foreign capital outflow
During the last two or three years, various foreign capital flows were moving in opposite directions in the Russian market. As shown in the comments to Fig. 8, according to the EMPR, from April 2009 to February 2011 overseas investments have been steadily growing mainly in speculative funds, investing in Russia. As a result, the Russian stock market is quickly recovering after the crisis. There is a risk that the inflows of foreign funds investing in Russia is unlikely to continue all the time, especially in view of the fact that in February 2011 the oil prices have already grown close to their limit. Any shock in the global financial markets associated with the insolvency of one or two countries in Europe, natural disasters, the collapse of a major financial institution or a slowdown in global economic recovery that inevitably will deploy the flow of funds investing in Russia. This was the case in May 2006, when at the very first signs of the crisis in the market of unsecured bonds, foreign capital flows to Russia turned the other way for virtually 2-2,5 years. A similar scenario with a change of direction of speculative capital in Russia is very likely in the second half of 2011,
which can provoke a long-term correction in price correction in the stock market of the Russian companies1.
Another flow of foreign capital is recorded by the bank in Russia. They are portfolio, foreign direct and other investments in different segments of the financial market. In 2008-2010 and in the first two months of 2011 there is a predominating tendency of foreign capital export, including FDI (foreign direct investments). The tendency is decaying, which gives us a hope that in 2011 we will experience a net inflow of capital or a zero balance in capital inflows. In 2008, capital outflow from Russia amounted to USD 133.9 billion, in 2009 - USD 56.9 billion in 2010, according to the Bank of Russia estimates - USD 22.7 billion. In this case, for two consecutive years, there was recorded a negative balance of FDI amounting to 7.7 billion dollars in 2009 and 7.4 billion dollars in 2010.
According to the estimates for January-February 2011, the Bank of Russia also notes the outflow of capital level of USD 13 billion2. Fixed by the Bank of Russia level of foreign capital outflow in 2009-2010 and early 2011 did not prevent the steady growth of the stock market and the ruble-denominated bonds. However, the risk of continuing outflow of portfolio investments and FDI from Russia is that it will hinder the growth and modernizing of the economy, increasing its dependence on the prices of exported raw materials. In this case, the risks of depending on the stock market of oil prices and short-term capital will only increase.
3.5.3. Ruble devaluation risk in the medium term
Since February 2009, ruble strengthened from RUR 35.72 to RUR 28.94 for USD 1. However, in the medium term, there is a risk of its devaluation. Fig. 37 shows that since mid-2009 there began a rapid growth of M2 monetary base as compared with an increase in international reserves in the economy. As a result, the official exchange rate became more and more deviate from the estimates, which can be determined by dividing the M2 by the value of international reserves. The long-term history of financial market demonstrates that the more rapid growth of the ruble money supply as compared with the international reserves in Russia often serves as a sign of the national currency devaluation. Foreign investment funds are always sensitive to the risks of currency devaluation. Expectations of devaluation in addition to adverse events for investors in global financial markets may cause long-term outflow of foreign investors from funds that invest in Russia. This may entail a new stock market collapse.
1 The probability of a positive trend in the dynamics of the Russian stock market may be confirmed by March 2011 weekly review of the futures market SmartFORTS made by investment company ITinvest, where a rare for a stock index futures on the RTS phenomenon of Backwardation was noted, when the values of stock indices in calculating the price of futures contracts are lower than the data values of stock indices in the spot market (A. Berezin. Concentration of liquidity. Weekly Review of futures market SmartFORTS of March 9, 2010. Published on the Internet site of the investment company ITinvest).
2 A. Shapovalov A. Oil does not cover the risks, Kommersant, March 9, 2011. 134
Fig. 37. Relationship between the nominal and notional (estimated) RUR exchange rates against USD
3.5.4. Risk of excessive foreign borrowings accumulation by banks and real sector companies
The foreign indebtedness of the private sector is practically equal to the total foreign exchange reserves of the Russian Federation (see Fig. 38) and remains one of the significant risks for the national financial system. Herewith, the amount of external debts of Russian business, with the exception of 2008-2009., was roughly equal to the value of assets of Russian participants in the rating of dollar billionaires in the world of magazine Forbes.
Source: balance of payments data for a number of years.
Fig. 38. Growth in private sector debt, public excessive financial reserves and assets of the Russian participants in the rating of dollar billionaires in the world of magazine Forbes
600 1
500 --
400 --
300 --
200 -'
100
281,4 291,3
255,3 294,1
160,7
20,0
21,4----------
24,8
124,9
44,8
127,2
:29 5^^S£334,4
□ CB estimates □ Government management authorities □ Banks □ Non-financial agei
Source: balance of payments data
Fig. 39. Foreign debt of the Russian Federation, 1998-20010, billions of dollars
0
3.5.5. Operational market and algorithmic trading risks
Fig.15 and comments thereto show that in response to the growing number of transactions in the exchange market, as a result of trading robots and application of algorithmic trading, government institutions and infrastructure agencies are taking measures aimed at limiting the growth of small transactions. This is justified, because such activity increases the operational risks of the bidders as a result of disruption of trade and settlement systems.
Source: OAO"RTS" trading system.
Fig. 40. Trading volumes and number of transactions at the RTS futures market from September 1, 2001 to December 31, 2011
In addition to the operational risk, an advanced growth of trade volume, as compared with customers' assets, means compulsion of often not prepared for this client to excessive operating activity. Unfortunately, commercial systems currently do not disclose the value of clients' assets, reserved before the trading session. Brokers are not accountable for the value of the assets of their clients as well. Meanwhile, occasionally published in the media volumes of customer transactions and the values of client assets are sometimes astonishing. For example, here is a short message from "Interfact" on BCS plans. In 2009, the aggregate brokerage company turnover amounted to RUR 9.2 trillion, and client assets of the company were worth RUR 46.8 billion. In 2014 it is planned that that data will achieve RUR 30 trillion and about RUR94 billion1. This means that the rate of portfolio turnover of an average customer of this company will grow from 197 times per year in 2009 to 320 times per year in 2014. Similar figures of portfolio turnover allow customers to calculate the publication in the media investment bank "Discovery": in 2008, the average client portfolio was turned over about 250 times
1 BCS plans. Vedomosty, June 22, 2010.
a year in 2008 and 126 times a year in 2009. For comparison, the largest actively-managed unit investment trust funds shares portfolio turnover in 2009 is 1-2 times per year.
RTS futures market raises concerns of a similar nature. The number of trades and trading volumes in it are growing rapidly, customers' assets are growing more slowly. As shown in Fig.40, the Russian futures market, concentrated mainly in the RTS stock exchange, having survived the fall of cost volumes, started to recover quickly. In 2009, the increase in the volume of futures contracts amounted to 45.4%, in 2010 - to 104.9%; options trading volume decreased by 7.1%, in 2009 and in 2010 increased by 168.0%. The number of transactions in the futures market has grown by 162.2% in 2009 and by 56.5% in 2010; in options, the corresponding figures were 18.3% and 136.1%
Herewith, there was reduction in security of futures and options contracts, as evidenced by data in Fig. 41. Here are the details on the amount of open positions in futures and options markets, as well as the security of transactions on each market segment, which is calculated by dividing the average monthly volume of open positions in the trading volume by the respective futures contracts. Recovery of trading volume in futures and options markets since March 2009 was accompanied by a decline in security futures transactions with 10% of trading volumes in December 2008 to 5% in December 2010 in the options market over the same period from 146% to 74%.
300 000 250 000 200 000 150 000 100 000 50 000 +
Open positions in futures transactions I Open positions in options transactions
245
t 250
-- 200
-- 150
-- 100
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO^H^H^H^ X)
'U^SO'U^SO'U^SO'U^SO'U^SO'U^SO'U^SO'U^SO'U^SO
Source: OAO "RTS" trading system.
Fig. 41. Open positions and transaction coverage in the RTS forward market from February 1, 2002, to January 31, 2011 In 2010, we have expressed concerns about the rise of operational risks of trading systems in relation to the faster growth of the operating activity of the participants, which are fully justified. The first failure in the RTS occurred on March 9, 2010. From June 8 to 22, 2010, there happened 4 operational failures in the trading and clearing system of the RTS1. Major operational failure in the RTS also occurred on October 18, 2010. According to A. Shcheglov,
1 Zhelobanov D., G. Gubeydullina FORTS with butter. Vedomosti, June 22, 2010. 138
CEO of Zerich Capital Management, such problems arise because "the system of exchange market works on the core, which is overburden for many years". According to his words, the exchange market is fascinated by the development and does not stop in order to improve the reliability and quality1.According to "Vedomosti" to V.D. Milovidov, the Head of the Russian Federal Financial Markets Service, the massive influx of players and robots to the futures market has led to manifold increase in speed and load on the RTS market and trading system: "the exchange market does not manage to pay attention to its development "2. Due to technical failures in the RTS, the Head of the Russian Federal Financial Markets Service was forced in October 2010 to send a letter asking to suspend the annual "Best Private Investor"3 to the exchange market.
3.5.6. Risk in repo transactions
The rapid development of the financial crisis in the stock market since August 2008, was marked by crisis, in repo market, during which several major market participants have failed to fulfill their obligation to repay the debts. Systemic payments crisis was avoided only thanks to the intervention of the Bank of Russia, which helped to resolve the problem of mutual nonpayments. The cause of this crisis was that the conclusion of repo transactions on MICEX was not accompanied by creation of a mechanism of guarantees execution of the second part of the repo transactions, i.e., the return of funds by debtors. Financial community have been made in general the right conclusions, MICEX has established a system of guarantees on the obligations under repo agreements and transferred to settlements through a single counterparty.
However, improving the system of payments and guarantees under repurchase agreements does not remove from the agenda the question of the risks of over-development of this market segment. Outpacing growth of repo transactions has an economic explanation. This is an important tool for refinancing the banking system by the Bank of Russia and the banks that have excessive liquidity. Often, however, banks quite aggressively use this mechanism for refinancing, building up investments in bonds by a pyramid scheme, continuing repurchase transactions. In 2010, the second place in the largest circulation of securities in the MICEX took the Bank Centrocredit with a turnover of RUR 7.7 trillion, which was only a few steps back of the Sberbank of Russia, the sales of which amounted to RUR 8.9 trillion. That bank in 2010 accounted for nearly one-third of all deals with regional bonds. According to experts, these records were achieved by banks through the use of repo transactions. It is impossible to verify, what kind of papers is involved by bank through repo. In March 2010, the rating agency "Expert RA" has warned about the danger of a "pyramid repo agreements" in the banking sector: by the beginning of the year 17 Russian banks (including Centrocredit) the share of assets with encumbrance exceeded 20%4.
Thus, investments in long-term bonds are often funded with short-term loans. An increasingly narrow segment of the market trades in bonds does not allow to assess their real market value. For this reason, very conventional ways of assessing the value of bonds are used for repo transactions. This increases the systemic risks of investing in ruble-denominated bonds,
1 Verzhbitsky A. Innovative failure. RTS can not keep up with its technologies. RBC daily, October 19, 2010.
2 Askar-Zade. N., G. Gubeydullina RTS lagged behind the market. Vedomosti, June 25, 2010.
3 Federal Financial Markets Service suspended contest Rs. Kommersant, October 21, 2010.
4 RBC daily, March 23,2010.
which in case of sudden insolvency of one or a group of large emitters could lead to a systemic crisis of defaults, which will not be in force to handle even the clearing. Perhaps, along with the repo market, the Bank of Russia should think about developing other ways to refinance the banking system.
3.5.7. Low capacity of the internal market for financial services
To make the Russian financial intermediaries competitive so that they could provide financial services in compliance with the world standards, it is necessary that their market capitalization, i.e., their value of business, sought to meet the performance of similar foreign agencies. Attempts to solve this problem by increasing the administrative requirements to the own means of professional market participants are unlikely to be successful. The main problem here is the low capacity of the financial services market. Centralization of 70% savings at the level of sovereign wealth funds, inefficient system of pension savings, the lack of incentives for people to save and other factors not yet allow us to hope for a prompt solution to this problem.
In 2009-2010. HSE research university work has carried out the work on assessment the capacity of the Russian financial market in 2010-2020. Based on a variety of sources and expert surveys, there was assessed value of the assets, which are, by the estimates of different categories of individual and institutional investors, held at brokerage accounts, transferred to trust management, including mutual funds. There were also estimates of the market of investment services of offerings of various securities in the implementation of mergers and acquisitions. After that, the amount of income from the provision of intermediary non-bank financial services was made by years, which ultimately allowed for the DCF-model to identify potential business capitalization of investment banks, brokers and trust managers (see Table 5). These assessments were performed under three scenarios: optimistic, close to the Concept of long-term development of Russia-2020; the basic one, targeted at the current trend of GDP growth and market capitalization; moderate one, envisaging a virtual stagnation in the growth of economic and financial parameters.
Table 5
Capitalization forecasts for the Russian businesses involved in investment services on the basis of cash flow capitalization in 2010-2020
USD, mln Scenarios
optimistic basic moderate
Capitalization of the retail business 8 190 4 930 3 254
including: Brokerage services 4,530 2,992 1,745
Individual trustees 1,877 998 806
Trustees of collective investment 1,661 857 652
Insurance brokerage 122 84 51
Capitalization of institutional business 19,457 15,601 8,561
including Underwriting arid Consulting 9,530 8,090 4,299
Trust and Brokerage 9,928 7,511 4,263
TOTAL CAPITALIZATION 27,647 20,531 11,815
For reference:
NPF capitalization 1,687 968 631
Source: estimates made by HSE research university experts.
Thus, the whole business of Russian investment banks, brokers and trust managers is valued at USD 27.6 billion under an optimistic scenario, at USD 20.5 billion under the basic sce-
nario and at USD 11.8 billion under a moderate scenario. Summary data on the quantitative parameters of the Russian financial market in 2010 suggest that its development is carried out on a trajectory close to the moderate scenario. This is the source of the increased risks for investors, emitters and the economy in general. The solution to this problem requires the government and businesses to achieve breakthroughs in the field of strategic management, innovation, incorporation of Russian financial institutions in the global chain of international financial markets, decision-making that will provide a real impact on the capacity of the domestic financial market.
Therefore, gradual recovery of the stock market, record levels of liquidity and the volume of domestic bond offerings in 2009-2010 do not remove the issue of the risks inherent in the Russian financial market. It remains vulnerable to external shocks and domestic risk factors.
3.6. Problem of attracting conservative institutional investors
The Russian stock market remains unattractive to the most highly capitalized conservative investors, especially to foreign pension funds. To understand the reasons for this, one may refer to the experience of the largest U.S. pension fund, California Public Employee's' Retirement System (CalPERS), the value of which reserves is approximately USD 200. Before 2007 for many years, CalPERS applied the methodology for ranking emerging markets in terms of the possibility of investing in the assets of the fund. This technique was public and was based on the studies of reputable organizations, including Freedom House, World Economic Forum, Oxford Analytica, the Heritage Foundation, as well as Wall Street Journal and many other research centers.
The technique involved the assessment of CalPERS investment opportunities in emerging markets is based on two groups of factors - country risks and the risks inherent to a particular financial market.
Country risks were estimated by CalPERS under the following criteria:
• political stability - a state of civil liberties, the independence of the judicial system and political risk;
• information openness, including an assessment of press freedom, the level of disclosure of information on monetary policy and budget, quality of stock exchange listings and the effectiveness of international financial reporting standards (IFRS);
• compliance with labor laws with international standards of labor relations - the ratification of ILO Convention, compliance with labor laws with ILO standards, the effectiveness of law enforcement.
In other words, the assessment of country risks involves the investment climate and institutions as the fundamentals of the financial markets. The second group of criteria involves the assessment of quantitative and qualitative parameters of developing capital markets, including the following indicators:
• liquidity and volatility of the stock market, including an assessment of market capitalization and its growth rates, coefficient characterizing the ratio of monthly turnover of exchange trade to market capitalization, number of companies included in the listing, the volatility of the stock market and the coefficients of the risk/returns on investment;
• evaluation of banking supervision effectiveness and enforcement in the stock market, the level of the rights of creditors and shareholders protection;
• assessment of the degree of openness to foreign investments, regulations liberality of banks and financial institutions, restrictions in the purchase of securities;
• assessment of the stock market settlement mechanisms effectiveness and the level of transactions cost, primarily in terms of tax liabilities, in the securities market and in regard to payments to the owners thereof.
The maximum score for this or that market, is three. If the country obtains 2.0 or more points, it was entered in the list of markets admissible for CalPERS assets. Otherwise, the market of a country was classified as prohibited to invest the assets of that pension fund. In 2007, according to CalPERS approach, the Russian stock market was rated at 1.91, i.e., less than two points, which made it impossible to invest in reserves of the pension fund. Fig. 42 provides an analysis of key factors that have prevented the Russian market to reach the maximum assessment in three points by the method of CalPERS.
Fig. 42. Factors that interfere with the investment in the Russian pension fund maximum assessment by CalPERS (USA) techniques in 2007
Country risk factors, including political stability, information transparency and compliance of labor legislation with international standards, accounted for 66% shortage Russia estimation points. Political stability in the country received a score of 1 out of three possible ones. The main reason for such a low rating are associated with a low estimates of civil liberties, judicial independence and security of property rights, as well as the stability of the political system in Russia. The level of transparency in Russia is estimated at 2.0 points. In this regard, the main claims to Russia were imposed in terms of media freedom and the efficiency of application of IFRS (or US GAAP).
In contrast to the conservative evaluation of the effectiveness of institutional factors, quantitative and qualitative characteristics of the Russian stock market look quite respectable. However, Russia did not reach 34% of the required up to two points in this factor as well. Here the following problems occurred. The quality of market regulation in banking activity and stock markets in Russia is estimated at an average level of 2.0 points. Obtaining a higher score in this area prevent a lack of effective banking supervision and law-enforcement in the
stock market, as well as shortcomings in the protection of creditors' rights. According to the criterion of openness of capital markets, a low score of 1.7 points was obtained due to the restrictions in entering the market for banks and insurance companies.
In 2007, CalPERS has changed the methodology for making decisions about investing in emerging markets. Portfolio Managers were granted the right to choose companies from emerging markets for investment on their own, with regard to the risks inherent to the different countries and stock markets. In 2008 and 2009, CalPERS implemented a series of investments in the shares of the Russian companies (Table 6).
Table 6
CalPERS investments in the Russian companies, USD mln
2008* 2009*
Gazprom 144.7 46.0
Lukoil 189.1 93.5
Mechel 9.1 1.0
GMC "Norilsk Nickel" 4.6 1.4
Novatek 20.6
Novorossiysk Commercial Port 10.3 8.4
Rosneft 11.4 31.4
Police Gold 5.5
Rostelecom 3.4
Sberbank of Russia 5.5 30.8
Severstal 7.0 4.7
AFC System 9.7 3.8
Surgutneftegas 4.5 20.5
Wimm-Bill-Dann 20.2
Magnet 7.3
MMC 6.1
VTB 31.6 6.9
LSR 2.9
Shares of Russian companies , total 427.4 314.4
Shares in foreign and domestic markets 122 281.2 80 728.6
The proportion of shares of Russian companies in CalPERS portfolio 0.35 0.39
The proportion of shares of Russian companies in the world capitalization 1.21 1.85
*fiscal year, ending in June.
Source: CalPERS investment reporting for a number of years.
The values of CalPERS investments in the shares of Russian companies are symbolic. As of June 2008, they were estimated at USD 427 million, or 0.35% of the value of a portfolio of shares, in June 2009 - USD 314 million, or 0.39% of the value shares portfolio. For comparison, the share of Russian companies in the world capitalization amounted to 1.21% in 2008 and to 1.85% in 2009.
However, there are no positive changes in the main criteria, which prevented CalPERS from investing in the Russian equities at the time when they officially declared the selection criteria of emerging markets for investment. Fig. 43 shows the global competitive ratings for several years, highlighting the areas where Russia received the lowest evaluation in terms of the old method of CalPERS.
Place in the GCI WEF: independence of the judiciary system
-L16_115_
7?_ 76
20102011
Place in the GCI WEF: protection of minority investors' rights
140 ,„„ 132
Place in the GCI WEF: compliance with auditing and reporting standards
Place in the GCI WEF: depth of the local stock market
010-;011
Place in the GCI WEF: regulation of stock exchanges
Place in the GCI WEF: banks' safety 123-
Source: Global competitiveness of the World Economic Forum rating over the years
Fig. 43. Places of the BRIC countries in the global competitiveness ratings under a number of criteria, essential for decision-making by conservative portfolio investors
In terms of the most problematic issues, i.e., the independence of judiciary system, the level of protection of minority investors' rights, the compliance with audit and reporting standards, the depth of the stock market, effective regulation of stock exchanges and banks' safety, Russia is far behind other BRIC markets. Herewith, the majority of these criteria are steadily deteriorating over the past four years, including the rating of evaluation of the Russian market as of October 2010.
3.7. The role of the stock market in the economy modernization and innovation promotion
The crisis has exposed deep problems and contradictions of the Russian economy, its lack of readiness for the challenges of globalization. By the end of 2009, the country's leadership and society in an explicit form have formulated policy of economic modernization. A key role in its implementation has to play the financial market, but is it ready for such ambitious goals?
3.7.1. Yield of financial and non-financial investments
In the long-term, the growth of capital markets follows the dynamics of basic indicators, such as net earnings of companies and gross domestic product. For example, our estimates of the growth in the dynamics of the stock markets and leading economic indicators in 12 developed capital markets over the past 50 years demonstrate that the average growth of stock indices tend to match the average growth rate of nominal GDP1. In emerging markets, equity markets as a rule, tend to grow somewhat faster than nominal GDP growth due to attracting investments from abroad.
Fig. 44 shows the ratio of the rate of growth of the RTS index, GDP and profits of the Russian companies. They show that on the eve of both the Russian crises, the growth rate of stock indices were sharply away from GDP growth. Then, as the market recovered, the stock indices were trying to catch up with production and profit indicators.
Source: RTS and Russian Statistical Service. Fig. 44. The growth of the stock market compared with the growth fundamental indicators
The most vulnerable point of the Russian stock market is that earnings on investments are substantially higher than the profitability of productive assets - fixed assets and current assets.
1 Section 1.3. Report of National Securities Market Participants. The Russian stock market and creation of an international financial center. Ideal model of the Russian stock market over the long term (until 2020). Moscow, 2008. Published on the website www.naufor.ru.
As a result, instead of attracting investments to create new production capacity, the stock market from time to time starts to play the role of "pump", sucking resources from the real economy. High yield of investments in such market is ensured mainly by the resources of the new-coming investors to a lesser degree of profit growth issuers. Meanwhile, emphasizing the link between investment and economic growth, Paul Samuelson, Nobel laureate in economics, noted that "investments will only occur when a real capital is available"1 In other words, the generator of economic growth is the real capital, but Russia contributes very little in the accumulation of the Russian stock market.
Fig.45 shows the profitability of investing in the stocks of the portfolio as the RTS index and the profitability of productive capital that can be used as a criterion for making investment decisions on the effectiveness of investments in the growth of productive capacity.
—O— RTS index —■-Return on fixed as s ets
----Linear (Return on fixed assets) .......Linear (RTS index)
Source: RTS and Russian Statistical Service.
Fig. 45. Profitability of investments in shares and return on assets in the economy
In 1996-2010. in only three years out of 15 years (1998, 2000 and 2008-m), the return on investment in shares is substantially lower than the return on fixed assets. And, despite the fact that the linear trends of profitability of investments in the RTS index and manufacturing assets converge, the gap between these rates is still significant, which creates a substantial risk of outflow of domestic capital in the real economy in the short-term investments in the financial market.
3.7.2. Contribution of the corporate bond market in real capital growth
A surprising phenomenon of 2000. was the rapid development of the ruble bond market (Fig. 46). Capitalization of the ruble bond market grew from 0.6 trillion rubles in 2000 to 5.9 trillion rubles in 2010, or nearly 10.0 times. Corporate bonds market was the fasters in growth
1 Samuelson, Paul E., William D. Nordhouse, Economics: translation from English: 16 ed.: Publishing house
"Williams", 2005. - P. 389.
among all ruble bonds. Their combined market capitalization has grown from 46 billion rubles in 2000 to 3.0 trillion rubles in 2010, or 65.2 times.
Source: Russian Ministry of Finance and Cbonds.ru.
Fig. 46. Volume of ruble-denominated bonds in circulation
The rapid growth of the corporate bond market relies heavily on various external and internal of growth mechanisms. Underlying growth in the corporate bond market since the beginning of 2004 to July 2008 lay strategy «carry trading», carried out by Russian banks and foreign hedge funds. From August 2008 to the present growth of the ruble bond market is based on monetary liquidity is concentrated in banks, first by providing them with support for anti-crisis state, then with a significant mitigation of monetary policy. One of the factors of growth of the corporate bond market in 2009-2010 was also slow recovery of the loan portfolio, which allowed the last shift of resources from the loan market in bonds. Catalyst for the growth of the ruble bond market since the mid 2000's was playing the market repo with the Bank of Russia and interbanking repo, through which banks could borrow short-term resources for long-term investments in bonds.
One of the prerequisites for corporate bonds in most cases was a guarantee of emitters in the form of an offer, granting the owners of bonds the right to present them for redemption by the issuer within one to three years from the date of placement. Similar offers essentially changed the nature of long-term bonds, turning them into instruments of relatively short-term financial resources. Resources attracted by issuing bonds that are actively used by issuers to implement the financing of mergers and acquisitions, credit refinancing, active business expansion and other relatively short-term objectives. Because of the short-term bond financing and low profitability of investments in new fixed assets and other productive assets, the role of bonds in the financing of real capital has been and still remains minimal.
Table 7 demonstrates the parameters of the ruble corporate bond market in 2000-2010, recalculated in dollar terms. Despite the rapid growth in placements of corporate bonds from 1.1 billion dollars in 2000 to 28.2 billion dollars in 2010, the volume of resources addressed
to basic capital formation was very low. For example, if the total placements of bonds in 2010 amounted to 28.2 billion dollars, only 0.03 billion dollars of this sum, or 0.1% of the placed bonds was addressed to the purchase of fixed assets. Overall, in the 2000-s the share of the volume of corporate bond addressed to fixed assets, ranged from 0.00% to 6.7%.
Table 7
Structure of the ruble corporate bonds market (USD billion)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Capitalization 1,6 2,5 3,3 4,8 8,9 17 33,2 49,2 67 79,7 98,8
Secondary mar- 0,2 1,1 2,3 8,2 14,7 44,2 134,9 371,1 457,4 293 756,8
ket, including
repurchase
Allocation 1,1 0,8 1,5 2,6 4,9 9,2 17,1 17,9 16,1 29,0 28,2
Fixed capital 0 0 0,1 0,1 0,1 0,3 0,1 0,2 0,2 0,1 0,03
Same, as% of 3,0 2,1 1,1 1,8 0,3 0,4 0,3 0,1 0,03
capitalization
Same, in% by 6,7 3,8 2,0 3,3 0,6 1,1 1,2 0,3 0,1
volume place-
ment
Source: estimates based on the MICEX, cBonds, the Bank of Russia and the Federal State Statistics Service.
3.7.3. Effect of IPO shares on the economy
More effective tool for raising funds to finance capital assets than the issue of corporate bonds, are public offerings in the form of an IPO and SPO. This is due to the fact that the proceeds from the IPO are more long-term. Table 8 shows the parameters of the market shares of Russian companies. They show that the most active IPO shares were held in 2006 and 2007, when companies raised 17.0 billion dollars and 33.0 billion dollars respectively. From the amount of proceeds from IPO-SPO in 2006, 18.8 % was addressed by the companies for acquisition of fixed assets, and in 2007, this indicator fell down to 10.9%. In some years, for example, in 2008, 110.5% was allocated in the fixed assets, and in 2009 - 117.6% of the volume of IPO. This is due to the fact that some investments in fixed assets the companies received through a private placement of shares, rather than through IPO-SPO. In 2010, Russian companies, including those registered offshore RUSAL and Mail.ru, attracted 6.3 billion dollars with IPO-SPO, whereas in total through the issuance of shares, 2.6 billion dollars were invested in fixed assets, or 46. 0% of the volume of IPO-SPO. A significant portion of the resources involved in the stock market has been addressed to purchase the business from their former owners, refinancing of debt service and mergers-acquisitions, including acquisition of major shareholdings. Meanwhile, volumes of IPO and investments in real capital by issuing shares are much smaller than mergers and acquisitions1. From 2000 to 2010 the total amount of IPO-SPO of the Russian companies amounted to 70.7 billion dollars, while the volume of mergers, acquisitions made 564.3 billion dollars, which is 8 times more.
1 For example, here is the comment of Prime Minister Vladimir Putin at a meeting on the problems of energy on Feb. 24, 201:, the use of utilities (JAG and TGK), assets from the additional emission amounting to 450 billion rubles. Of the total amount it is invested about 270 billion rubles, nearly 100 billion rubles are still kept at the accounts, and 66 billion rubles "are addressed at the ongoing activities, the purchase of non-core assets and simply "consume" or, frankly, were aimed at speculative purposes". Malkov I., A. Peretolchina. "Investors are accelerated". Vedomosti, February 25, 2010, p. 1. 148
Therefore, it is early to say that the major part of proceeds from the IPO, and from corporate bonds are contributing to the modernization of economy and sustained economic growth1. The amount of funds that companies are attracting by placement of shares and corporate bonds, and then address at the purchase of fixed assets, make only a tiny portion of fixed assets financing.
Table 8
Structure of the Russian companies' corporate bonds market (USD billion)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Capitalization 40,7 74,6 105,5 176,3 230,0 548,6 1057,2 1503,0 397,0 861,4 938,3
Secondary market, including foreign exchange 46,7 49,4 86,8 188,3 541,3 374,0 914,2 1687,1 1982,5 1155,7 1430,5
IPO 0,5 0,2 1,3 0,6 3,0 5,2 17,0 33,0 1,9 1,7 6,3
Fixed capital 0,2 0,1 0,2 0,2 0,1 3,2 3,2 3,6 2,1 2 2,9
Same, as% of capitalization 0,5 0,1 0,2 0,1 0,0 0,6 0,3 0,2 0,5 0,2 0,3
Same, in % to IPO volume 40,0 50,0 15,4 33,3 3,3 61,5 18,8 10,9 110,5* 117,6* 46,0
The volume of mergers, acquisitions 5,0 12,4 17,9 32,3 27,0 60,4 61,9 125,9 110,4 56,1 55,0**
* - value greater than 100% because some share of investments in fixed capital could be made through private placements;
** estimated by www.mergers.ru.
Source: estimates based on the MICEX, the Bank of Russia, the Federal State Statistics Service,
www.mergers.ru
The main sources of fixed assets financing remain the property accumulated by the company, budget assets, extra-budgetary funds and bank loans. Their share in 2010 accounted for 69.6% of all sources of investments in fixed assets. The share of bank loans in the sources of fixed assets financing in 2009-2010 was steadily declining, from 11.8% in 2008 to 10.3% in 2009 and to 8.7% in 2010. This suggests that, despite the increased liquidity, the banking system has not yet recovered from the point of credits in the economy.
During the 2000-s. the share of funds attracted by bonds and shares issues in the funding sources of capital ranged from 0.1% in 2001 to 3.4% in 2005. In 2009 and 2010 this indicator amounted to 1.1% and 1.4%.
1 For some reason the rule «q-Tobin» works badly in Russia, according to which in case of high coefficient characterizing the ratio of market capitalization to recovery price of business, then it becomes more profitable to invest in the real capital. (Mishkin F.. Economic Theory of Money, Banking and Financial Markets. 7th edition: Translation from English. - Moscow.: JSC «I..D. Williams», 2006, p. 738. It is interesting that from other developing countries, according to the IMF Report on Global Financial Stability, we differ by lower coefficient P/BV (ie, ratio company's capitalization to its balance value), which does not promote investment in real capital. Russia's problem is dual: first, shares' price is overvalued, second, great value of inefficient assets.
3.7.4. Private equity and venture capital funds
Problem of the Russian economy from the perspective of modernization is the weakness of the industry of private equity funds and venture capital funds. These categories of funds, working with Russian companies can be divided into funds established offshore abroad (Sva-rog Capital Advisors, Russia Partners, Delta Private Equity Partners, Baring Vostok Capital, etc.) and closed investment funds, carrying out activities on the basis of Federal Law "On Investment Funds". As of mid-2009, according to the magazine "Finance", the value of the first group of funds was about USD 3 billion1, and the second one, according to the National League managers - about RUR 75 billion2.
The causes of the weak level of direct investment funds in Russia are shown in the results of a survey among global investors of 72 private equity funds, performed by international audit company KPMG from December 2008 through February 2009 3. To the question whether Russia looks more attractive to you than other BRIC countries, 58% of respondents gave a negative answer. Among the main reasons preventing the transactions of these funds in Russia in 2009-2010, investors mentioned: macroeconomic instability - 89% of the respondents, legal / regulatory constraints - 30%; unrealistic price expectations of vendors (from the English. vendor - dealer, trader) - 23% political risk - 16%, the lack of qualified managers - 16%. One has only to add that the market for private equity deals is currently being "monopolized" by large oligarchic corporations, which makes entry into it independent of market structures, including the largest global private equity funds that artificially restrain competition in this area and attraction of foreign advanced technologies.
With respect to private equity investment funds, the prospects for their development are in doubt yet. In accordance with the law on private investment funds, any information on mutual funds as private equity funds that are intended only to qualified investors at the end of 2009, ceased to be public. As required by Federal Financial Markets Service of Russia, stock exchanges establish specialized sections of trades for qualified investors, the members of which will have an access to information on these funds.
In this situation, it is unclear what information will be available on existing and new equity mutual funds to potential investors who do not have the status of "qualified", including foreign investors. These funds were out of view of analysts and experts from academic institutions. In our opinion, artificially imposed by Russian Federal Financial Markets Service information barriers on the activities of mutual funds of direct investments will only lead to a sharp decline in interest in them to potential investors, which will negatively affect the development prospects of these funds in Russia.
Currently in the country, according to the Ministry of Education and Science, there registered more than 80 technological parks, and even more - innovation and technology centers, more than 100 technology transfer centers, 10 national innovation and analytical centers, 86 centers of scientific and technical information, more than 120 business incubators, 15 centers of innovation consulting, as well as other organizations of the innovation infrastructure. Such abundance of innovative structures is difficult to accept as reasonable. Further development of
1 A. Golovin Direct investments are dying. Finance, № 27-28 (310-311), 27.07.-16.08.2009.
2 To date, according to requirements of FSFR of Russia PIFs direct investments are assigned to the category of funds for qualified investors, whose advertising in banned. Due to this fact, public information resources on PIFs www.nlu.ru h www.investfunds.ru stopped publishing statistics on this category of PIFs.
3 A. Golovin Direct investments are dying. Finance, № 27-28 (310-311), 27.07.-16.08.2009. 150
innovation requires the establishment of centralized structures with their regional representatives, who would have assumed responsibility for coordinating the efforts of numerous structures on promotion the advancement of new technologies in the economy, as well as for disclosure of information about opportunities for business innovation organizations in different fields.
3.8. Impact of the crisis on the system of domestic savings
To maintain high growth and modernization rates of the Russian economy should maintain a high domestic savings rates. However, if the savings rate in Russia is relatively high and second only to individual countries in the Asian region, the rate of savings, i.e., investment in fixed assets and inventory are significantly lower than in many developing and developed countries. Fig. 47 shows the rate of savings in Russia in 1995-2010.
% total accumulation % to GDP —O— Total savings, % to GDP
Source: estimates based on the Federal State Statistics Service.
Fig. 47. The rate of savings in Russia in 1995-2010 years,% of GDP
The difference between the rate of savings and accumulations from year to year is 5-10 percentage points The main reason for the fact that a part of domestic savings in the country turns into a real capital, lies in the fact that the bulk of the surplus savings falls into sovereign funds, which are located abroad. This is a forced phenomenon, because at present the Russian financial system is incapable to ensure the level of development of financial institutions and investment climate in the country, these provisions make it work for economic growth and modernization. The system itself needs to be modernized, acquiring new knowledge and skills. This problem should be the focus when developing a new long-term strategy development for the period up to 2020. In addition, the accumulation of these funds should be implemented to reduce the dependence of the Russian economy on external economic conditions.
Other reserve growth stocks is to increase the savings rate of households. According to official statistics, Russia's Federal State Statistics Service of households are saving 14-15% of their income (see Fig. 48). In the leading countries in economic growth and modernization of the rate of household savings to disposable income is much higher. According to the information resource Euromonitor International, the average for 2000-2009, in Singapore, it made 33.9%, in China - 31.9%, in Hong Kong - 30.7%, in India - 30,1%. Social and demographic situation in these countries, of course, different from Russia, but it must be recognized that any large-scale modernization involves reliance on domestic financial resources. Besides, the high rate of consumption in Russia in the current environment actually means stimulating the expense of domestic demand by foreign manufacturers.
We are not talking about enforcement measures to improve the savings rate of the population. To accomplish this, as well in the case of the reserves of the state, we need effective financial institutions and reducing inflation. This problem was hardly solved in previous years, as evidenced by the Table. 9.
Table 9
A summary of the development level of institutional investors in Russia
The number of countries in the samplelCI1 and OECD Russia's place -in the samples The share of assets, % of GDP avera§e 2010 for2000-10
Assets of the open-ended investment funds* 45 44 0.3 0.3
Reserves of private pension funds** 47 43 1.0 1.4
Assets of insurance companies*** 32 32 1.0 1.1
*Russia - open and interval mutual funds. **Russia - NPFRossiya - NPFreserves ***Russia - insurance provisions
Against those countries where there is domestic stock market, Russia is the only country that is a world outsider in terms of development of all three forms of collective investments. Among 45 countries, for which statistics is kept on the assets of open-ended investment funds, Russia has occupied the 44 seat; according to the criterion of the relative level of development of private pension funds, It is the 43-th place out of 47 countries; assets of insurance companies - 32 place out of 32 countries. In 2010 the share of assets of open and interval mutual funds to GDP in Russia was 0.3%, reserves NPF - 1.4%, the assets of insurance companies - about 1.1%. This suggests that in Russia, there is almost no working mechanism of savings through institutional investors. In contrast to all other countries, in the world of the main ways of saving the Russian population are housing and bank deposits.
Therefore, in order to increase the rate of accumulation, it is necessary, on the one hand, gradually to build new and modernize old institutions of development, ensuring that they receive current knowledge, investment, technology, skills and technologies, as well as to achieve real progress on improving the business climate. On the other hand, it is necessary to establish the financial mechanism, which would create real incentives for people to voluntarily increase the savings rate by limiting the consumption and export of savings abroad. To this end, it is necessary to create a technologically effective system of private pension funds, based on corporate pension plans and individual investment (retirement) accounts, to achieve
1 Investment Company Institute. 152
a lower cost per square meter of housing under construction through the elimination of administrative corruption and rent, and encourage competition among the construction companies, to make available to the public mortgage credits, when the purpose of principal repayment and servicing for individuals will be no more than 30% of their monthly income.
Fig. 48 analyzes various indicators of population trend to save. The overall rate of household savings is assessed on the basis of published Rosstat balance income and expenditures. These savings include the increase (decrease) in ruble and foreign currency bank deposits of population, purchase of securities, changes in the accounts of individual entrepreneurs, the change in the debt of individuals on credits, real estate acquisition. This rate increased from 7.6% of household income in 2000 to 14.7% in 2010.
If these articles of savings are replenished with additional disclosed by Russian Statistical Service item of purchasing foreign currency and growth of cash rubles kept by the population, then we obtain the total rate of savings and cash growth with population. This savings rate increased from 16.8% in 2000 to 20.2% in 2010. The determined by us estimated rate of savings in financial assets consist of the increase (decrease) in ruble and foreign currency bank deposits, purchase of securities from the population, growth (decrease) in reserves of foreign currency and rubles cash on hand, changes in the debts on personal loans. This savings rate fell from 8.8% in 2000 to 8.4% in 2010. Finally, the estimated rate of aggregate savings includes savings in financial assets and purchase of real estate. This indicator increased from 10.0% in 2000 to 16.9% in 2010.
Fig. 48. Disposition of population to save in 1998-2010,(% of income)
Structure of financial savings in financial assets is shown in Fig. 49. Crisis of 2008-2009 has significantly changed the structure of citizens' savings. At the beginning of the crisis in 2008, inspired by the sharp fall in equity prices and the devaluation of the ruble, population has reduced the amount of the stored rubles and even reduced the ruble-denominated savings deposits in the banks. At the same time, cash reserves and deposits in foreign currency have
significantly increased. With the decrease of the devaluation and the resumption of the ruble significant growth in the ruble bank deposits, decreased propensity to save in the form of foreign currency deposits and foreign currency. In 2010, the main form of household savings were denominated bank deposits, constituting 7.6% of population income.
□ a) Bank deposits in RUR 3v) Securities of Russian emitters B d) Foreign currency in cash
□ b) Bank deposits in foreign currency D g) Rubles in cash
□ e) Additional savings (growth of credits to individuals
14 -12 -10 -8 --
1,1
0,4 .
=4,6=
2,8
4,1
6,4
=4,7=
3,6
:1,7= 1,4
4,1
0,4 0,3
7,6
2,1
2 1997 (998 1999 20000 - - 2001 - - 2t0°7L
2003
:2004
-4 --6 -
2005:
2006:
2007
2008:
2009
-0,6
2010
1,1
0,5
11,2
3,8
1,8
0,3
2,8
6 -
1,8
4
6,3
4,8
2 -
4,1
3,7
2,3
1,2
0
Source: Estimates s per Central Bank and the Federal State Statistics Service.
Fig. 49. Disposition to save in financial assets in 1997-2010
Unlike bank deposits and real estate investments, other forms of savings do not work in fact. Propensity to save in securities, even during the crisis has not significantly changed and remains at a low level of 0.3-0.5% of population income. The main reason for this situation is not that the Russian stock market is excessively volatile, but that people do not trust the financial institutions that provide non-banking investment services.
The financial crisis has not changed the investment quality of shares. Shares of the Russian companies, along with real estate investments, now remain the only investment assets in the domestic market, which bring a positive real rate of return to long-run investments. According to our estimates, the average annual real return on investments in equity portfolio of the RTS index for 2000-2010 is amounted to 25.4% per annum in residential real estate in Moscow (index IRN) 8,3%. Unchanged after the crisis are the parameters of maximum, minimum and average nominal yield of the portfolio of the RTS index for different investment horizons. Fig. 50 shows the portfolio returns of different maturity during the period from September 1995 through December 2009. For comparison, the dashed lines show similar curves for the period from September 1995 to July 2008, i.e., prior to the latest financial crisis.
The most risky of an investment portfolio are the investments in the RTS index for the term of one year. Over 16 years under review, the maximum return on this portfolio amounted to 363% per annum, and the worst result was the reduced cost of the portfolio by 91%. On average, over the entire period of investments in the annual portfolio, there were brought 45% per annum. As can be seen on the chart, as prolongation of the average annual investment yield of the portfolio got stabilized, the gap between the worst and the best results in portfo-
lios yield were shrinking. When investing in a 7-year portfolio of the worst-case scenario, which the investor reaches with investments in the RTS index, is positive, equal to 1% per annum, the average yield on this portfolio is 27% per annum. This means that only when investing in the RTS index for 7 years and more investors would be faced with the fact of reducing the market value of the portfolio. It is for this reason that the minimum reasonable term of investment in a diversified portfolio of stocks in the Russian market should be 7 years or more. Herewith, as seen in Fig. 50, the dotted curves, showing assessments for a similar portfolio for the period preceding the crisis of 2008-2009, practically coincide with the curves, showing the crisis impact. This suggests that the current crisis did not affect the minimum requirements for the term of investments in the Russian market and the key indicators of profitability of long-term portfolios.
Fig. 50. Yield (% per annum) portfolios of "RTS Index" of different maturity for the period from September 1995 to February 2011
Unfortunately, the benefits of long-term investment in the Russian stock market remains virtually out of demand. The bulk of investors are guided by relatively short-term strategy. When entering into agreements with financial intermediaries, using brokerage services and asset management in the securities market the minimum acceptable timeframes for individual investors to invest in instruments with high market risk are not taken into account.
Fig.51 demonstrates available data on the number of accounts of individual investors with brokers and the number of personal accounts in registries of Privatization Investment Funds (PIF). Unfortunately, currently the National League does not disclose the number of market-based mutual PIF shareholders. However, if we assume that the number of shareholders of PIFs in 2009-2010 has not significantly decreased as compared with 2008, then we can assume that the number of individual investors who trade in securities directly or through collective investments in 2010 reached one million. Herewith, 2010 is distinguished by a mani-
155
fested trend of reduction of the number of brokers' clients registered in the MICEX trading system. If in 2009 the growth in the number of registered customers during the year amounted to 112.2 thousand persons, the relevant figure in 2010 was only 42.8 thousand. The number of active clients and brokers declined from 114.1 thousand to 113.7 thousand. This may reflect the fact that the model to attract customers to the Russian stock market, effective up to now, begins to exhaust itself. The number of people involved in the stock exchange speculation in any country is limited. The new growth model requires the involvement in the market the long-term investors, which cannot be done without an effective system of retirement savings and restructuring the model of service delivery by financial institutions.
800 000 700 000 600 000
500 000 400 000 300 000 200 000 100 000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 jan
Source: estimates based on the MICEX, National Securities Market Participants and National League . Fig. 51. Number of market-based retail customers of management companies and brokers
3.9. Banking System in the Russian Federation
3.9.1. Key Macroeconomic Figures which had an Impact on the Russian Banking Sector in 2010
The year 2010 was of paramount importance for recovery and qualitative transformation in the Russian banking system following the financial crisis and economic downturn. In 2010, owing to a favorable foreign economic situation and gradual recovery of the domestic demand, Russian banks resumed lending to the real sector as the quality of credit institutions' assets improved. The problem of liquid assets deficit in the banking sector was overcome in the previous year: deposits of the Central Bank of Russia decreased rapidly in the banking sector as corporate and retail deposits increased. It is the growth in the real household disposable income, recovery processes in the production sector and retail sale that can be attributed
□ PIF shareholders, persons
□ Brokers' clients, persons
□ Active brokers' clients, persons
* PIF shareholders: 2007-2008- estimates; 2008-2009 - data is not available
133 217
63 183 - 64 112 -
082 6 612 11 958
29 519
95
714295 719378
342 000
14 103 111370 105
6
to the key macroeconomic preconditions which governed the recovery dynamics in the banking business. Growth rates in the construction industry and dynamics of investments in fixed assets contributed as much to recovery in non-financial institutions' demand for borrowings. It is worth mentioning briefly the values of the macroeconomic indicators which had an impact on the development of the banking sector in the past year.
According to the data published by the Federal State Statistics Service (Rosstat), real household disposable income increased by 4.3% as of 2010 year-end, which, on the one hand, promoted decrease in overdue accounts under previous loans and the number of new credit products sold by banks in the past year, and, on the other hand, increase in retail deposits.
Industrial production increased at a level of 108.2% in 2010 against 2009. Enterprises of the processing industry contributed most, 11.8%, in annual terms. Recovery of the processing industry had a great impact from the point of view of diversification of the corporate credit portfolio at banks. According to the data published by the Central Bank of Russia, as of January 1, 2011, ruble-denominated loans issued by banks to companies in the processing industry accounted for 19.7%. This category of business activities was ranked number one in terms of weight in the industrial production sector (e.g., enterprises operating in the mineral extraction industry and production and distribution of gas and water accounted for mere 2.1 % and 4.2% of the portfolio, respectively) and number two in terms of aggregate corporate credit portfolio after retail sales companies which accounted for 23.5% of the ruble-denominated loans issued by banks to the real sector (as % of the aggregate ruble-denominated corporate portfolio of the banking system with due account of loans from VEB (Vnesheconombank).
Retail turnover, which governs directly the need of households for short-term loans and sales companies for working assets, increased by 4.4% in 2010 against the figures reported in 2009 which was hit by recession.
Fixed capital expenditures create the demand for "long" loans in the banking sector. Bank loans accounted for 9.1% of the structure of capital investments of non-financial institutions in January - September 2010. Fixed capital investments at the 9-month period-end was reported to grow at a level of 3.7% y-o-y. It is noteworthy that large banks, which can borrow inexpensive assets in international markets, continued to grant most of investment loans.
Before proceeding with analysis of banking aggregates in the past year-end, let's describe most remarkable events which in our opinion had a material effect on the development of the sector in 2010.
The regulator reduced intensively the refinancing rate. Throughout the entire 2010 the Bank of Russia made four decisions on reduction of the refinancing rate which finally decreased to a historical minimum of 7.75%.
From July 1, 2010 the Central Bank of Russia abolished recession-related benefits for creation of provisions for losses while maintained the moratorium on excluding banks from the deposit insurance system.
Following the Central Bank of Russia, banks began to intensively reduce deposit rates.
In 2010 the Bank of Russia intensively rolled back the recession counter package designed to support the banking system. The following events can be regarded as most remarkable. First, unsecured loans for a period of more five weeks decreased in volumes; second, the Lombard list of securities which the Central Bank of Russia accepts as security for loans was shortened.
From January 1, 2010, the minimum capital requirements to credit organizations were increased up to RUB 90 mln, which, however, failed to result in any visible reduction in the
number of existing banks. From 2012 the requirements are expected to be strengthened once again, up to RUB 180 mln, whereby promoting a trend towards consolidation in the Russian banking sector.
Upcoming partial privatization of the largest banks in which the state holds an interest, through sale of a part of the block of shares held in VTB and Sberbank, can be regarded as a remarkable event of the past year.
3.9.2. Analysis of Annual Data on the Banking System: Balance Sheet
According to the data published by the Central Bank of Russia, the assets of the Russian banking system increased by 14.9% in 2010, thus exceeding the most optimistic expert expectations. However, the structure and quality of the increase was found to be very heterogeneous. Banks increased volumes of corporate lending, which contributed most to the growth of assets in the banking system in 2010. The corporate credit portfolio increased by RUB 1,5 tln in nominal terms during the same year, thereby resulting in a 34.8% cumulative growth in assets. A share of corporate lending in the assets decreased by 1 p.p., from 42.6 to 41.6%, in the past year-end. It is an intensive growth in bank investments in securities in 2010, that was most responsible for reduction in loans to non-financial institutions amidst remaining high credit risks, this type of investing in the banking system of Russia became the second, in order of importance, in terms of promoting annual growth in the assets. According to the published data, the banks' portfolio of investments in securities increased by RUB 1,5 tln in 2010. Investments in bonds developed most intensively. Increase in the bond portfolio resulted in an annual growth of 23.8% in the assets of Russian banks. Retail lending was the third in order of importance driver of growth in the assets of the banking system in 2010, which developed at outstripping growth rates against corporate lending: 14% against 7.2% as of 2010 year-end. However, the portfolio of loans to individuals was found to contribute much less, a mere 12%, to a total growth in the assets in terms of volumes. Dynamics of the assets in the banking system in 2010 are shown in Fig. 52.
7 000 6 000 5 000 4 000 3 000 2 000 1 000
2
29 430
Q
C _Q
TO <U
< 5
33 805
5 829
35 000 34 000 33 000 32 000
4 085 31 000 30 000
2 921 29 000
28 000
27 000
26 000
Investments in securities
Loans to individuals Loans to legal entities •Assets, right scale
CTlOOOOOOOOOOOO
O'H'H'H'H'H'H'H'H'H'H'H'H
M a.
< on O
> u O
2 Q
Data Source: the Central Bank of Russia.
Fig 52. Dynamics of assets in the banking system of the Russian Federation, bln RUB
Foreign exchange structure of the corporate and retail credit portfolios changed insignificantly in 2010. In both cases, banks increased ruble-denominated retail and corporate loans by 2,5 and 1,3 p.p. respectively. Foreign exchange loans decreased for the two basic reasons: due to negative revaluation of the foreign exchange portfolio as a result of strengthening of the Russian ruble against other currencies (the RUB average weighted exchange rate decreased against the dual currency basket from RUB 35.96 to 35.16 in 2010) and low demand for foreign currencies from the private sector due to uncertainty of currency risks that might arise in the post-recession economy (Fig. 53).
Data Source: the Central Bank of Russia.
Fig. 53. Structure of corporate and retail credit portfolios denominated in foreign currencies and rubles
Bank lending also differed in intensity in the sectoral structure. Traditional lending drivers - fuel and energy and metal mining industries - showed no substantial demand for credit resources yet, which, on the one hand, can be explained by the ongoing cost optimization policy, and, on the other hand, growth in prices of primary commodities.
The chemical, food production, metallurgical, pulp and paper industries, as well as public utilities sector (including power engineering) are the most active borrowers. The processing industry, though it is ready to show demand for credit resources, has no high credit potential due to unstable growth and low profitability (Fig. 54).
In 2010, the Government of the Russian Federation also linked the decrease in retail lending to the recovery of mortgage lending. The remaining credit risks and lack of acceptable interest rates on long money borrowings, whose principal source was the international money market prior to the recession, became the key factors which constrained returning to the pre-recession growth rates in mortgage lending in 2010. As of 2010 year-end, however, the average weighted mortgage rate decreased from 14.6% as of January 1, 2010 to 13.4% as of December 31, 2010.
In 2010 the issue of insufficient liquidity in the banking sector ceased to be relevant. Bank borrowings obtained from individuals, corporate customers and interbank market were sufficient to cover lending transactions. In addition, investment of borrowings in alternative sources given the remaining credit risks in the real sector, became a relevant issue. The ratio
of loans to investments in the banking system of Russia in 2010 (Fig. 55) is shown in the figure below.
Automobile production Trade industry Construction industry Food production Agricultural industry Metallurgical production Chemical production Production of fuel and energy natural resources.
Data Source : the Central Bank of Russia.
Fig. 54. Specific types of business activity in the RUB corporate credit portfolio of the Russian banking system with due regard to loans issued by VEB, b %
Fig. 55. The aggregate investments to aggregate borrowings ratio in the banking system, %
Retail deposits remain the principal resource base for banks. It is the RUB 2,333 bln growth in retail deposits that resulted in a 53% cumulative growth in liabilities of the banking sector in 2010. Two reasons are responsible for a 31% increase in retail deposits. First, re-
2,3% 2,1%
25,0% 23,5%
01.01.2010 01.01.2011
maining uncertainty in the economy maintains a high level of supports thrift propensity of individuals, whereas the domestic demand is only beginning to recover. Second, a considerable growth in bank deposits in 2010 is related to the effect of a recession-driven growth in retail deposits. Bank deposits for a period of one year or beyond which were opened in the period of high interest rates, were intensively replenished in 2010. It is the higher interest of depositors in replenishing their "recession" deposits that resulted in material changes in the fixed-term structure of the deposit portfolio. In fact, replenishment of a deposit opened in the recession period replaced risky investments in the stock market, with growth being expected way ahead of the consumer price index. According to the data published by the Central Bank of Russia, retail deposits opened for a period of more than one year accounted for 65% of the total deposits as of January 1, 2011. Growth rates slowed down drastically in the fixed-term structure of foreign currency deposits, with even a decrease in balances being reported in specific cases. For example, in 2010 the volume of retail deposits for a period of up to 30 days and ruble-denominated call deposits increased by 46%, whereas the foreign exchange part of such deposits increased by only 9% and decreased by 27% in the structure of deposits for a period of 31 days to one year.
In general, a similar situation took place with the bank deposits placed by non-financial organizations, though volumes of such deposits are normally much smaller. According to the official data, corporate deposits in 2010 totaled a mere RUB 569 bln, accounting for 13% of total growth in the total balance on the liabilities side in the banking system. Like retail deposits, corporate deposits for a period of up to 30 days and for a period of more than one year were reported to become most intensive as of 2010 year-end. The former were mostly short-term deposits of free working capital, the latter mostly resulted from replenishment of long-term deposits by exporters ( the foreign exchange part accounts for more than a half of nominal growth: RUB 259 bln of RUB 490 bln ).
Fig. 56. Dynamics of MosPrime 3M rate in 2010
The volume of bank borrowings in the interbank loans market increased by 20% or RUB 637 bln in nominal terms in 2010. The two principal sources of borrowings became ruble-denominated deposits from resident banks, which increased by RUB 388 bln, and foreign exchange borrowings, an equivalent of RUB 152 bln, from non-resident banks.
Substantial reduction of the regulator's money on deposits with commercial banks became one of the main trends describing post-recessional development of the banking system in the Russian Federation. Throughout the entire 2010 the Central Bank of Russia systematically reduced its balances from RUB 1,423 bln as of January 1, 2010 to RUB 326 bln as of January 1, 2011. Meeting the liquidity crisis at all levels of the banking system as well as a considerable decrease in interest rates in the interbank loans market were mostly responsible for decreased activity of the Central Bank of Russia. For example, the MosPrime 3M indicative rate decreased rapidly from 7 to 4% (Fig. 56) in 2010.
3.9.3. Quality of Assets
Expecting a potential, serious deterioration in the quality of the credit portfolio of the banking system was one of the key concerns which analysts expressed in 2010. A delayed negative effect of a large-scale deterioration in loan servicing could resulted from a campaign dedicated to restructuring of impaired loans which banks carried out in the H2 2009. In fact, the specifics of the Russian accounting system allowed banks to partially "hide" impaired assets and thereby hide the real situation with adequacy of provisions, potential growth of interest revenues, etc. Fortunately, no catastrophe took place. Economic recovery in 2010 slowed down drastically the process of creating provisions for losses at banks. In addition, record-breaking volumes of revenues were obtained through, including, but not limited to, split-up of the provisions across the entire banking system. Growth in overdue accounts in 2010 slowed down substantially in the retail credit portfolio and stopped in the portfolio of loans to non-financial institutions. According to the data published by the Central Bank of Russia, overdue accounts in the retail portfolio decreased from 6.8 to 6.9%, and in the corporate credit portfolio dropped from 6.1 to 5.3% as of 2010 year-end (Fig. 57)
Fig. 57. Dynamics of overdue accounts
Situation with the quality of loan servicing in the corporate sector was heterogeneous in 2010. A share of overdue accounts under loans to enterprises of the fuel and energy mineral extraction industry in the portfolio remained minimum in the banking system and even decreased from 1.4 to 1.3% in 2010. By the end of 2010, most of the problem borrowers, in terms of overdue accounts, were concentrated in the automobile industry (overdue accounts accounted for 19.2% of the portfolio), woodworking industry (18.8%), air transport sector (12.9%), retail and wholesale trade (9.7%). Manufacture of nonmetallic mineral products (+ 1.6 p.p.) as well as manufacture of machinery and equipment (+ 1.3 p.p.) were among the leaders in growth rates of overdue accounts in 2010.
The structure of the corporate credit portfolio by category of quality in the group of the 30 largest Russian banks can be another factor which supports the assertion of improved quality of the credit portfolio. In 2010 a share of standard loans increased by 3,1 p.p. here. A share of loans of 2nd category of quality - substandard loans - decreased by almost the same value. In turn, a share of impaired and unrecoverable loans (4th and 5th category of quality) decreased by 2 p.p. as a share of impaired loans increased by 2.1 p.p. Two conclusions can be made based on the afore described dynamics of changes in the structure :
- first, increase in a share of standard loans resulted mostly from new loans to financially reliable borrowers in 2010 ;
- second, decrease in a share of loans of the 4th and 5th category of quality resulted from "write-off' of bad loans from the banking system's balance sheet due to both improved previously desperate conditions of specific borrowers and sale of impaired assets of special non-bank institutions (Fig. 58).
Data Source: the Central Bank of Russia.
Fig. 58. Structure of the credit portfolio at the 30 largest banks, by quality category of loans
Reduction in growth rates in provisions for impairment losses on loans had a direct impact on the improvement of the quality of bank assets in 2010. According to the data published by the Central Bank of Russia, on-balance residues of provisions in the banking system increased by only RUB 141,4 bln in nominal terms (+ 6.9%) in 2010, which was far below the growth
163
in the preceding year. During the recession in 2009 the stock of provisions increased by RUB 1,027 bln or 100% in the same year. Split-up of provisions was one of the factors which had a material impact on generation of a record-breaking profit in the banking system of the Russian Federation in 2010.
3.9.4. Profit and Loss in the Banking System
According to the data published by the Central Bank of Russia, pre-tax profit in the banking sector totaled RUB 581 bln in 2010, of which Sberbank of Russia OJSC generated about RUB 225 bln. Contribution of net interest income to the financial performance of the banking system decreased by RUB 31,5 bln against the preceding year. It is the decrease in the net interest income from retail lending that became most responsible for reduction in interest income at banks in 2010. As expected, a substantial growth in bank deposit rates in Q3 and Q4 2009 had a delayed adverse effect on the interest income of banks in 2010. Throughout the entire period in 2010 banks continued to pay "recession-driven" interest rates to depositors. The situation was aggravated by replenishment of high interest rate deposits which were opened for a period of more than two years. As a result, costs on interest payable on retail deposits increased by 23.5% in 2010 against the previous year, whereas costs on non-financial institutions decreased by 36% in the same year. Analysis of average weighted interest rates on borrowings and investments confirms that banks had an extra interest rate to pay to retail depositors in the H1 2010. For example, interest spread between ruble-denominated loans to individuals and deposits of up one year narrowed from 25.5 to 20.1 p.p. in the period between January and June 2010, and only in June began to show a stable upward trend. Replenishment of long-term bank deposits also slowed down growth in interest margin on retail loans and deposits for a period of more than one year. At the same time, an outstripping decreased in interest rates on ruble-denominated non-financial institutions' deposits for a period of more than one year allowed interest margin to be increased by 2.5 p.p. on corporate loans granted for a period of more than one year (Fig. 59).
Net fee and commission income in the banking sector in the Russian Federation increased by RUB 35 bln or 8.5% in 2010, which was directly related with the number of newly granted loans. At the same time, the decision made by a series of large banks to charge no fees during loan administration became one of the key events which governed the dynamics of the fee and commission income in the banking system in 2010.
Banks' income from foreign exchange operations was reported to decrease by RUB 113 bln in 2010, which can be explained by a relatively low volatility in the money market. Steady growth in the stock market allowed banks to earn RUB 360 bln from transactions with securities, which in general was comparable with the earnings (369 bln RUB) gained in 2009. By all means, split-up of provisions became one of the key sources of income for banks in 2010. According to the data published by the Central Bank of Russia, in 2010 banks reduced costs on creation of provisions down to RUB 233 bln against RUB 1,051 bln in the preceding year (Fig. 60).
Fig. 59. Dynamics of interest margin on average weighted lending and borrowing rates, %
-719,9
581,2
11 051,6 net interest income
net fee and commission income net income from transactions with securities net income for foreign exchange transactions other net income costs incurred on provisions operational costs pre-tax profit
Fig. 60. Profit and loss in the banking system in the Russian Federation in 2010, bln RUB
3.9.5 Analysis of the 500 Largest Russian Banks
By banking specialization
To be able to gain an insight into the processes which took place in the Russian banking system in 2010, let's analyze the 500 largest Russian banks by specialization in the banking market and by type of ownership banks.
We relied on a given bank's credit portfolio structure as of 1 July 2010 as the factor to identify the type of specialization of the bank. We employed the following method of identification of banking specialization: a bank was recognized as a corporate bank if loans to non-financial institutions accounted for or more than 80% of the aggregate credit portfolio of the bank; a bank was recognized as a retail bank if retail loans accounted for or more than 80% of the aggregate portfolio of the bank. For the purpose of this survey, the rest of the banks were recognized as full-service commercial banks.
As of January 1, 2011, the assets of the 500 largest banks of the Russian banking system totaled RUB 32,793 bln (accounting for 97% of the total bank assets). It is noteworthy that it was retail banks that increased their assets as of 2010 year-end, with annual asset growth accounting for 21% (Fig. 61). In spite of such a growth, the retail-group banks still had an insignificant effect on cumulative growth in assets in the banking system of the Russian Federation. Full-service commercial banks and corporate banks were found to be the key drivers for asset growth in the Russian banking system in terms of banking specialization.
As of January 1, 2011, corporate banks accounted for 49% of the assets of the 500 largest Russian banks, with a 16% annual growth rates. VTB, Gazprombank, Alfa Bank, Bank of Moscow were the key players in the corporate banking.
Sberbank of Russia OJSC, Rosbank, Uralsib, Raiffeisen Bank were the leaders among full-service commercial banks. Full-service commercial banks accounted for 46% of the total assets of the 500largest banks as of January 1, 2011. Growth rates in the assets of this group of banks reached 16% in 2010.
Data Source: the Central Bank of Russia, official financial statements published by banks (f-101).
Fig. 61. Assets the 500 largest Russian banks, by banking specialization, bln RUB
As of 2010 year-end, the corporate credit portfolio in the group of corporate banks increased by 14% (or RUB 934 bln), whereas the corporate portfolio of full-service commercial
banks increased by 12% (or 672 bln RUB) in the preceding year. Full-service commercial banks were leading in terms of growth volumes, especially owing to Sberbank (Fig. 62).
Corporate loans, bln RUB 7 536
6 60
mi 01.01.2010 □ 01.01.2011
105 101
6 267 5 595
Corporate Retail banks Full-service banks banks
Data Source: the Central Bank of Russia, official financial statements published by banks (f-101).
Fig. 62. Corporate and retail loans granted by the 500 largest Russian banks, by banking specialization, bln RUB
Dynamics of overdue accounts were heterogeneous as indicator of the quality of credit portfolio in terms of banking specialization in 2010. The quality of portfolio of loans to non-financial institutions improved visibly in the group of corporate banks in 2010, as evidenced by a smaller share, a decrease from 5.8 to 4.5%, of overdue accounts in the corporate credit portfolio as of January 1, 2011.
A share of overdue loans in the corporate portfolio of full-service commercial banks remained the same: 6.1% as of 2010 year-end against 6.2% as of the beginning of the previous year. The group of full-service commercial banks showed no improvement in the quality of credit portfolio servicing in the field of retail lending: a share of overdue accounts also increased from 5.3 to 5.5%.
In retail banks, a share of overdue accounts decreased from 10 to 9.2% in 2010, thus maintaining the highest level in the banking system.
The structure of residues of provisions for impairment losses on loans corresponded to a large extent to the foregoing data on a share of overdue accounts in the credit portfolio of the groups of banks. For example, the group of full-service commercial banks showed the highest growth, 11.2%, in such provisions in 2010. It should be noted that the December decrease, nearly RUB 20 bln, in the provisions of Sberbank - one of the principal players in the group of full-service commercial banks - slightly improved the final dynamics of provisions in this group. The group of corporate banks showed a 9.1% growth in provisions in 2010, while retail banks, which had the highest provisions-to-overdue-accounts ratio, increased residues of provisions by 7.5%, thereby showing the lowest result in terms of banking specialization among the groups of banks (Fig. 63).
1 200 1 100 1 000 900 800 700 600 500 400
+7,5%
■corporate banks ■full-service commercial banks ■retail banks (right-side scale)
160 140 120 100 80 60 40 20 0
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11
Data Source: the Central Bank of Russia, official financial statements published by banks (f-101).
Fig. 63. Dynamics of provisions for impairment losses on loans at the 500 largest Russian banks, by banking specialization, bln RUB
Full-service commercial banks were found to be leading borrowers in terms of growth in deposits in 2010, mostly through a steady growth of deposits at Sberbank of Russia OJSC. It is the replenishment of the deposits which were opened at high recession-driven interest rates for a period of more than one year that became the key growth factor in retail borrowings. In 2010, volumes of deposits at full-service commercial banks totaled RUB 1,388 bln (+ 27% against 2009). Corporate banks increased their corporate borrowings portfolio by 20% (+ RUB 1,050 bln). The largest banks, namely VTB Bank and Gazprombank, were responsible for "the lion's share of" growth, and growth in assets on current corporate accounts had an average effect of nearly 40% on total growth in borrowings from non-financial institutions accounted (Fig. 64) in 2010.
Retail borrowings, bln RUB
m 01.01.2010 □ 01.01.2011
6 499
5 11
2 376 1 728
............
522 812
............. I
Corporate banks Retail banks
Full-service banks
Data Source: the Central Bank of Russia, official financial statements published by banks (f-101).
Fig. 64. Corporate and retail borrowings by the 500 the largest Russian banks, by banking specialization, bln RUB
A combination of a much less intensive growth in costs incurred on creation of the provisions and a steady growth in volumes of loans in the corporate and retail banking sectors increased considerably financial performance of the banks in 2010. As of 2010 year-end, the group of full-service commercial banks, which earned a total of RUB 299 bln, was ranked number one in terms of accumulated profit. Corporate banks, which managed to earn a total of RUB 207 bln in 2010, were ranked number two in terms of annual financial performance. The group of retail banks earned a total of RUB 53 bln in the preceding year.
By type of ownership
The maximum interest which the owner holds in the charter capital or equity of a bank as of July 1, 2010 was used as the factor for recognizing the bank as pertaining to a certain type of ownership (private, public or foreign). We aggregated the data on the banks on the basis of the information specified in forms 101 and 102 of mandatory reports posted on the website of the Central Bank of Russia.
Fig. 65. Assets of the 500 largest Russian banks, by type of owner, bln RUB
The following ratio by type of ownership was observed within the 500 largest Russian banks by January 1, 2011 (in terms of asset size): banks in which the state holds an interest (including Sberbank of Russia OJSC) accounted for 53.7% (against 54.3% in the preceding year), foreign banks for 12% (the same as of January 1, 2010), and private banks for 34.3% (against 33.7% in the preceding year). The foregoing statistics show that private banks were more active than public and foreign banks in 2010. However, state-held capital kept prevailing over private and foreign banks across the entire system, mostly because of Sberbank, VTB Bank, Gazprombank. Dynamics of assets at the 500 largest Russian banks in 2010 by type of ownership is shown in Fig. 65. As of 2010 year-end, private banks increased their assets most rapidly, with an annual growth rate of 18%. In 2010, Alfa Bank, the largest Russian private bank increased its assets by RUB 226 bln or 34%; TransCreditBank reported a 53% growth in its assets by a total of RUB 134 bln, the assets of NOMOS-BANK increased by RUB 92 bln.
Foreign banks were ranked number two in terms of intensive growth in assets (by 16% ) in 2010, which was 1 p.p. above the overall growth in the assets across the entire banking system of the Russian Federation. UniCtredit Bank (a 31% growth in assets, + 164 bln RUB), Citibank (+ 30%, + 59 bln RUB), ING Bank (Eurasia) (+ 42%, + 37 bln RUB), Nordea Bank ( + 22%, + 35 bln RUB) contributed most to the growth in the assets at foreign banks in Russia in 2010. A 21% growth in the assets of Sberbank (RUB 1,617 bln), 28% at VTB24, and 5% at VTB Bank should be highlighted among the backbone banks in which the state holds an interest.
Competition between banks for reliable corporate got stronger in the year that followed the post-recession year. It was the interest rates that became the key argument in this struggle. Specific features of the Russian banking system, which include high concentration of inexpensive resources at public banks, effected the growth structure in the field of corporate lending in 2010. Public banks kept leading in terms of growth in corporate loans in 2010: a growth of RUB 856 bln against RUB 589 bln at private banks and a mere RUB 157 bln at foreign banks. It is noteworthy that private Russian banks remained to be leaders in terms of growth rates of corporate loans through increase in the number of sales of credit products in the SME segment. In turn, foreign banks were most active in retail lending. According to the official reports published by banks, the portfolio of loans which private Russian banks granted to non-financial institutions in 2010 increased by 16% to reach RUB 4,319 bln. Banks in which foreign companies hold an interest, increased their retail credit portfolio by 17%, from RUB 684 bln to RUB 801 bln (Fig. 66).
Data Source: the Central Bank of Russia, official financial statements published by banks (f-101).
Fig. 66. Corporate and retail credit portfolios at the 500 the largest Russian banks,
by type of owner, bln RUB
The interbank loans market became one of the top-priority investment goals among foreign banks in 2010. For example, in the group of foreign banks, 37% of the biggest growth in the assets at UniCtredit Bank was gained through transactions related to lending to financial institutions. In the same year, WestLB Vostok Bank's portfolio of loans to other banks increased by RUB 30,5 bln, while Citibank added RUB 10 bln to its interbank credit portfolio.
In 2010, private Russian banks were found to be most effective in terms of improved quality of credit portfolio. A share of overdue accounts reduced in both corporate and retail credit
portfolios of private banks in the same year. The most relevant quantum jump was reported in the corporate portfolio of the banks in this group. A share of overdue accounts in this group decreased from the historical maximum reported late in 2009, from 8.7 to 5.2%. We are reminded that it was the private banks that happened to face most of the issue of large-scale, negative revaluation of companies' loan collaterals and had to launch a large-scale loan restructuring campaign. Even now private banks maintain the maximum level of provisions to cover overdue accounts in the banking system of Russia. For reference, the value of the foregoing coverage ratio for private banks as of January 1, 2011 was 195%, whereas for public banks it was equal to 169%, and a 167% for foreign banks. A share of overdue loans in the retail portfolio at private banks decreased by 0.8 p.p in 2010. As of 2010 year-end, foreign banks reduced a share of overdue accounts in the corporate portfolio by 1.6 p.p. At the two largest foreign banks specializing in corporate lending - UniCredit Bank and Raiffeisen Bank - a share of overdue accounts decreased from 5 to 3% and from 7.5 to 5.5%, respectively. On the other hand, public banks reported growth in a share of overdue accounts in both corporate and retail portfolios in 2010. Sberbank and VTB, the two largest state-owned banks, had a substantial share overdue loans in the loans to non-financial institutions. In year-end, a share of overdue accounts was 5.8 and 7.8%, respectively (Fig. 67).
3,7%
A share of overdue loans in the corporate credit portfolio, %
- 01.01.2010 ■01.01.2011
6,5%
5'2% 4,6%5,0%
Private banks Public banks Foreign banks
Share of overdue loans to
individuals in retail credit portfolio,
%
10,3%
101.01.2010
01.01.2011
9,4%9,7%
5,9% ^M I
■J ■ I
Private banks Public banks Foreign banks
Data Source: the Central Bank of Russia, official financial statements published by banks (f-101).
Fig. 67. A share of overdue accounts in the corporate and retail credit portfolios at the 500 largest Russian banks, by type of owner, %
In general, dynamics and intensity of growth in provisions for impairment losses on loans corresponded to a trend towards changes in a share of overdue accounts. Year-end provisions increased much faster in the group of public banks, by 17%, against 4.3% in the group of foreign banks, and a mere 2.4% in the group of private banks. It should be noted, that in December 2010 the provisions at Sberbank of Russia decreased considerably by nearly RUB 20 bln in, which slightly improved annual dynamics of provisions in the public banking sector.
Following is a breakdown of the groups of banks by type of ownership as of 2010 year-end: public banks accounted for 63% (RUB 353 bln, of which RUB 225 bln was earned by Sberbank) of the total profit of the 500 largest banks, private Russian banks accounted for 20% and foreign banks for 17% of the total profit.
Hence the following basic trends emerged in terms of type of ownership in 2010:
1) public banks were least aggressive in increasing their credit portfolios while kept accounting for the biggest share of overdue accounts in the banking system. Most of the profit accumulated in the banking sector was concentrated in this sector owing to large volumes and relatively inexpensive liabilities in this sector ;
2) private banks intensively developed corporate lending and managed to improve considerably the quality of assets as of 2010 year-end. High level of allocation of loans in this group could allow additional profit to be generated from decrease in provisions under ongoing trend towards improvement of borrowers' solvency ;
3) foreign banks still accounted for a smaller share in terms of assets. Return of foreign capital to the Russian Federation under a favorable macroeconomic scenario in 2011-2012 could encourage inflow of inexpensive liabilities from parent companies located abroad and, as a consequence, further increase in foreign banks' market share. The level of overdue accounts under retail loans in this group remained beyond the market average. The end of excessive liquidity period in the banking system could provide extra benefits to foreign banks actively crediting in interbank loan market. The created provisions for impairment losses on loans are unlikely to undergo an additional, substantial reduction at foreign banks, because the provision coverage ratio was the lowest in this group of banks against public and private banks.
3.10. The Market of Municipal and Sub-Federal Borrowings
3.10.1. The dynamics of market development
In 2010, the consolidated regional budget and budgets of territorial public extra-budgetary funds had a deficit in the amount of RUR 99.3 billion (0.22% of the GDP). As compared to the year 2009, the amount of the deficit of the consolidated regional budget decreased by 75% of the GDP. In 2009, the deficit of those budgets amounted to RUR 329.3 billion (0.84% of the GDP).
In 2010, constituent entities of the Russian Federation had a budget deficit of RUR 88.1 billion, while urban districts, a budget deficit of RUR 15.1 billion, intracity municipal entities of Moscow and St. Petersburg, a budget deficit of RUR 0.1 billion and municipal districts, a budget deficit of RUR 1.2 billion; at the same time the budgets of urban and rural settlements were drawn with a surplus of RUR 4.5 billion.
Table 10
The ratio of surplus (deficit) of territorial budgets to budget expenditures (%)
_Year_Consolidated regional budget_Regional budgets_
2010 -1.4 -1.6
2009 -5.3 -5.3
2008 -0.7 -0.7
2007 0.8 0.6
2006 3.7 4.4
2005 1.6 2.3
2004 1.1 1.6
2003 -2.6 -2.3
2002_-2.7_-3.0_
* with public extra-budgetary funds taken into account.
The source: calculated on the basis of the data of the Ministry of Finance of the Russian Federation.
In 2009, constituent entities of the Russian Federation had a budget deficit of RUR 276.9 billion, while urban districts, a budget deficit of RUR 39.7 billion, intracity municipal entities of Moscow and St. Petersburg, a budget deficit of RUR 0.07 billion and municipal districts, a budget deficit of RUR 18.9 billion; at the same time the budgets of urban and rural settlements were drawn with a surplus of RUR 6.2 billion.
Table 11
The ratio of surplus (deficit) of territorial budgets to budget expenditures
in the 2007-2010 period ( %)
Year Budgets of intracity municipal entities of Moscow and St. Petersburg Budgets of urban districts Budgets of municipal districts Budgets of urban and rural settlements
2010 -1.12 -1.16 -0.11 1.72
2009 -0.63 -3.32 -1.88 2.63
2008 -1.47 1.09 -0.26 2.72
2007 5.34 1.23 -0.04 2.34
The source: calculated on the basis of the data of the Ministry of Finance of the Russian Federation
As of January 1, 2011, sixty-three constituent entities of the Russian Federation (against 61 regions in 2009) had a deficit of the consolidated budget (including that of territorial public extra-budgetary funds). The aggregate deficit volume amounted to RUR 202.5 billion or 5.2% of the revenue side of the budgets of those constituent entities (in 2009 it amounted to RUR 377.9 billion or 7.8%).
The median level of the budget deficit amounted to 3.9% of the revenues of the respective budget. The highest ratio of the budget deficit to the revenue side of the budget was registered in the Chukotsky Autonomous Region (25.3%), the Republic of Mordovia (23.3%), the Sakhalin Region (16.1%), the Republic of Udmurtia (14.7%), the Novgorod Region (14.6%) and the Vologda Region (14.2%). (Table 14).
In 2010, in twenty constituent entities of the Russian Federation (as against twenty-two ones in 2009) there was a surplus budget. The aggregate surplus volume in the above regions amounted to RUR 128.9 billion or 3.5% of the value of the revenue side of the budgets of those constituent entities (in 2009 it amounted to RUR 4.6 billion or 3.9% of the revenue side of the budgets of those constituent entities). The median value of the budget surplus amounted to 3.7% of the revenue side of the budget.
The highest ratio of the surplus to the level of revenues of the consolidated budget was registered in the Yamal Nenetsk Autonomous Region (10.2%), the Irkutsk Region (6.4%) and the Moscow Region (5.8%). Over a half (51.1%) of the aggregate surplus of the consolidated regional balance was ensured by the following three constituent entities of the Russian Federation: Moscow (20.7% or RUR 21.4 billion), the Moscow Region (19.5% or RUR 20.2 billion) and the Yamal Nenetsk Autonomous Region (10.2% or RUR 11.2 billion).
3.10.2.Changes in the Structure of the Accumulated Debt
In 2010, the value of the accumulated debt of the consolidated regional budget as regards borrowings increased by RUR 225 664.0 million or 0.51% of the GDP (Table 12). The external debt of regional consolidated budgets decreased by RUR 1.6 million, while the domestic one rose by RUR 225 665.6 million.
Table 12
Net borrowings of regional and local budgets (% of the GDP)
Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Borrowings of sub- 0.33 0.15 -0.29 -0.04 0.47 0.37 0.26 0.09 0.21 0.17 0.29 0.74 0.51
federal authorities and
local authorities, in-
cluding :
reimbursable loans -0.09 -0.11 -0.03 0.04 0.12 -0.1 -0.02 -0.03 -0.04 -0.01 0.03 0.33 0.37
from budgets of other
levels
Sub-federal (munici- -0.01 -0.05 -0.27 -0.07 0.16 0.31 0.29 0.09 0.14 0.08 0.17 0.24 0.07
pal) bonds
Other borrowings 0.43 0.31 0.01 -0.02 0.19 0.6 0.03 0.11 0.10 0.09 0.17 0.07
The source: calculated on the basis of the data of the Ministry of Finance of the Russian Federation.
The structure of borrowings
In 2010, the total volume of borrowings of the regional consolidated budget amounted to RUR 708 700.1 million, including RUR 782.2 million of the external debt. As in 2009, the Republic of Baskortostan was the only region which took external loans.
The aggregate volume of domestic borrowings of regions and municipal governments amounted to RUR 707 917.9 million. On the domestic market, the largest borrowers (which accounted for 49.0% of all the borrowings) were the Moscow Region (RUR 121.9 billion), Moscow (RUR 88.2 billion), the Nizhny Novgorod Region (RUR 46.9 billion), the Omsk Region (RUR 34.4 billion), the Republic of Tatarstan (RUR 29.2 billion) and the Saratov Region (RUR 26.8 billion). As compared to 2009, the volume of the domestic borrowings in nominal terms increased by RUR 74 250.6 million, that is, a 2.6% increase in real terms.
In the total volume of the domestic borrowings of the consolidated regional budget, issue of securities accounted for 15.7%, while loans from budgets of a higher level, for 24.0% and other borrowings (loans from commercial banks and international credit institutions), for 60.3%.
Relative growth in borrowings from credit institutions with a drop in the share of securities issue from 28.5% in 2009 to 18.1% was the most significant change in the structure of borrowings of regional budgets. (Table. 13).
Table 13
Structure of domestic borrowings of sub-national budgets (%)
2010 2009 2008
Regional consolidated budget Regional budgets Municipal budgets Regional consolidated budget Regional budgets Municipal budgets Regional consolidated budget Regional budgets Municipal budgets
Issue of securities Loans from budget Other borrowings 15.7 18.1 4.3 24.9 28.5 4.4 43.7 51.9 1.9
24.0 60.3 29.0 53.0 95.7 26.9 48.2 31.5 40.0 0.4 95.3 5.0 51.4 5.9 42.6 0.2 97.8
The source: calculated on the basis of the data of the Ministry of Finance of the Russian Federation
The highest ratio of the net borrowings to the budget revenues was registered in the Republic of Mordovia (21.6%), the Vologda Region (14.3%), the Udmurt Republic (14.0%) and the Novgorod Region (13.7%) (Table. 14).
The largest net borrowers were Moscow (RUR 57.9 billion), the Republic of Tatarstan (RUR 20.4 billion) and Krasnodar Territory (RUR 18.3 billion).
The accumulated debt was reduced to a great extent by the Moscow Region and the Irkutsk Region, a decrease of RUR 13.1 billion and RUR 1.6 billion, respectively.
Table 14
Execution of consolidated budgets of constituent entities of the Russian Federation in 2010.
Budget revenues (thousand RUR.) Deficit (+). Surplus (-) of the budget (thousand RUR) Ratio of the deficit (surplus) to revenues, % Ratio of borrowed funds to revenues, % Ratio of net borrowings to revenues, % Ratio of the expenses related to repayment of the debt to revenues, % Ratio of net borrowings to the deficit (surplus) . %
1 2 3 4 5 6 7 8
The Central Federal District
Belgorod Region 65 566 654 148.13 1 546 542 556.15 2.36 6.19 2.41 3.78 102.22
Bryansk Region 34 675 737 106.05 1 033 262 450.28 2.98 12.40 1.87 10.53 62.76
Vladimir Region 45 274 258 575.14 1 820 055 163.34 4.02 2.75 2.61 0.14 64.98
Voronezh Region 74 979 306 077.64 1 759 286 114.09 2.35 4.18 2.79 1.39 118.89
Ivanovo Region 30 860 666 218.59 1 605 217 141.91 5.20 12.77 5.50 7.27 105.74
Tver Region 48 908 692 548.20 4 174 321 256.94 8.53 16.50 4.00 12.50 46.88
Kaluga Region 40 327 003 832.70 2 065 374 109.22 5.12 16.08 10.16 5.92 198.46
Kostroma Region 21 936 949 766.21 2 280 207 919.18 10.39 29.08 10.75 18.33 103.40
Kursk Region 39 094 815 213.48 -1 553 167 024.19 -3.97 2.22 2.05 0.17 -51.58
Lipetsk Region 39 905 530 230.33 1 463 616 369.14 3.67 7.27 2.94 4.34 80.04
Moscow region 348 090 262 623.50 -20 179 038 812.07 -5.80 35.02 -3.75 38.77 64.69
Orel Region 24 048 982 091.11 316 209 227.31 1.31 4.48 2.26 2.22 171.75
Ryazan Region 39 373 544 597.75 2 140 839 564.03 5.44 43.70 7.91 35.79 145.42
Smolensk region 30 411 257 064.16 3 376 385 199.24 11.10 30.74 10.31 20.43 92.85
Tambov Region 33 781 066 358.39 1 037 262 111.07 3.07 7.19 1.95 5.24 63.46
Tula Region 51 627 916 764.12 3 412 590 136.28 6.61 24.04 5.58 18.46 84.35
Yaroslavl Region 53 606 108 974.56 4 536 257 456.89 8.46 24.21 4.93 19.29 58.22
Moscow 1 164 517 113 636.11 -21 419 664 867.72 -1.84 7.58 4.97 2.60 -270.45
Total 2 186 985 865 826.17 -10 584 443 928.91 -0.48 14.04 3.45 10.59 -712.67
The North —Western Federal District
Republic of Karelia 33 674 528 779.01 543 518 438.17 1.61 28.82 7.78 21.04 481.90
Republic of Komi 52 336 510 862.93 -1 037 414 279.59 -1.98 9.82 -0.23 10.05 11.58
Archangelsk Region 64 667 507 726.30 328 660 682.50 0.51 17.96 6.19 11.77 1 217.94
Vologda Region 47 915 534 299.77 6 824 805 954.23 14.24 17.64 14.34 3.30 100.65
Kaliningrad Region 39 969 507 872.08 2 922 152 698.31 7.31 14.15 10.28 3.87 140.62
Leningrad Region 74 212 863 062.88 -2 135 240 069.22 -2.88 0.99 -0.26 1.24 8.95
(continued) table 14
1 2 3 4 5 6 7 8
Murmansk Region 54 557 192 452.17 -2 395 396 611.28 -4.39 6.56 4.61 1.95 -105.04
Novgorod Region 24 348 917 509.07 3 545 736 448.03 14.56 20.97 13.70 7.27 94.06
Pskov Region 23 619 723 931.39 679 575 542.80 2.88 6.03 5.39 0.64 187.19
St. Petersburg 363 179 989 863.93 11 915 661 459.80 3.28 1.36 1.36 0.00 41.42
Nenetsk Autonomous 11 747 109 329.99 -310 862 790.00 -2.65 0.32 0.05 0.27 -1.93
Region
Total 790 229 385 689.52 20 881 197 473.75 2.64 7.14 3.71 3.42 140.58
The Southern Federal District
Republic of Kal- 9 684 290 135.96 138 973 374.04 1.44 14.54 -0.03 14.56 -1.82
mykia
Krasnodar Territory 176 330 759 388.06 13 748 019 998.95 7.80 12.03 10.38 1.65 133.13
Astrakhan Region 28 985 998 680.31 3 703 941 135.57 12.78 49.46 11.30 38.16 88.40
Volgograd Region 79 270 869 463.83 2 492 564 272.18 3.14 14.91 4.02 10.89 127.85
Rostov Region 129 111 754 297.58 2 377 148 088.81 1.84 2.45 2.44 0.00 132.78
Republic of Adygeia 13 102 722 476.38 504 924 626.70 3.85 2.88 2.86 0.02 74.32
(Adygeia)
Total 436 486 394 442.12 22 965 571 496.25 5.26 11.98 6.48 5.50 123.19
The Privolzhsky Federal District
Republic of Bashkor- 125 675 303 475.47 2 767 545 399.40 2.20 5.53 3.27 2.26 148.46
tostan
Republic of Marii El 20 266 454 970.46 1 511 194 115.17 7.46 16.56 7.86 8.69 105.43
Republic of Mor- 32 112 996 393.40 7 467 395 991.26 23.25 23.71 21.57 2.14 92.75
dovia
Republic of Tatarstan 182 085 911 826.03 17 670 329 704.75 9.70 16.01 11.20 4.81 115.41
(Tatarstan)
Udmurt Republic 45 912 486 846.57 6 754 296 824.87 14.71 21.29 13.98 7.32 95.00
Chuvash Republic 35 634 072 325.55 1 836 695 595.32 5.15 11.20 5.86 5.34 113.68
Nizhny Novgorod 115 736 572 781.59 9 042 084 105.90 7.81 40.55 7.39 33.16 94.62
Region
Kirov Region 49 090 707 884.99 1 332 558 447.56 2.71 11.08 3.97 7.10 146.36
Samara Region 124 326 175 253.97 1 501 396 819.58 1.21 9.25 1.01 8.24 83.97
Orenburg Region 71 250 615 599.60 4 561 554 168.59 6.40 4.56 4.18 0.38 65.28
Penza Region 43 682 105 936.00 1 226 855 395.77 2.81 14.99 3.01 11.98 107.08
Perm Territory 100 268 098 762.62 8 545 033 942.99 8.52 0.58 0.55 0.03 6.45
Saratov Region 70 672 143 825.41 9 259 372 151.96 13.10 37.90 11.88 26.02 90.70
Ulyanov Region 38 962 252 704.98 1 860 434 091.99 4.77 4.73 2.71 2.02 56.84
Total 1 055 675 898 586.64 75 336 746 755.11 7.14 15.51 6.40 9.11 89.72
The Ural Federal District
Kurgansk Region 31 975 214 990.55 102 275 378.75 0.32 2.01 1.89 0.11 592.10
Sverdlovsk Region 168 552 373 386.37 -5 377 091 247.79 -3.19 1.62 1.25 0.37 -39.32
Tyumen Region 147 543 784 720.04 -3 213 481 225.89 -2.18 0.22 0.21 0.00 -9.81
Chelyabinsk Region 114 998 659 299.37 876 537 772.63 0.76 1.29 0.58 0.71 76.14
Khanty Mansiisk 173 618 321 659.92 2 576 613 009.12 1.48 0.73 0.28 0.44 18.94
Autonomous Region
Yamal Nenetsk 109 988 721 688.39 -11 220 191 039.30 -10.20 0.00 -0.14 0.14 1.34
Autonomous Region
Total 746 677 075 744.64 -16 255 337 352.48 -2.18 0.86 0.54 0.32 -24.86
The Siberian Federal District
Republic of Buryatia 41 144 616 734.40 1 621 596 081.37 3.94 16.16 10.40 5.76 263.79
Republic of Tuva 15 827 539 562.24 237 880 541.73 1.50 1.52 1.24 0.28 82.36
(continued) table 14
1 2 3 4 5 6 7 8
Altai Territory 77 362 709 183.82 -4 989 059 841.31 -6.45 1.20 -0.02 1.23 0.36
Krasnoyarsk Terri- 184 697 369 470.07 -9 787 388 123.69 -5.30 4.39 -1.22 5.61 23.05
tory
Irkutsk Region 104 706 951 762.25 -6 721 990 150.30 -6.42 2.54 -1.54 4.08 24.00
Kemerovo Region 119 151 656 505.64 3 823 279 098.20 3.21 4.91 2.22 2.69 69.15
Novosibirsk Region 105 691 604 894.93 2 142 346 572.03 2.03 15.90 1.92 13.98 94.66
Omsk Region 62 307 401 477.62 1 076 680 871.75 1.73 55.15 0.58 54.57 33.46
Tomsk Region 45 008 301 064.94 -308 298 635.17 -0.68 10.26 0.51 9.76 -74.16
Republic of Altai 13 858 853 947.65 1 432 374 113.70 10.34 5.27 1.35 3.92 13.04
Republic of Khakasia 20 049 671 053.75 641 221 121.41 3.20 13.85 6.41 7.45 200.30
Zabaikalye Territory 47 579 572 337.54 252 736 415.57 0.53 5.92 2.98 2.94 561.34
Total 837 386 247 994.85 -10 578 621 934.71 -1.26 10.34 1.04 9.29 -82.59
The Far Eastern Federal District
Republic of Saha 108 254 934 041.65 -3 751 876 391.60 -3.47 3.43 1.26 2.16 -36.42
(Yakutia)
Primorsk Territory 100 039 138 492.55 8 968 112 885.81 8.96 2.34 0.97 1.36 10.85
Khabarovsk Territory 79 326 103 684.95 -3 682 681 101.75 -4.64 0.56 -1.14 1.69 24.51
Amur Region 47 627 008 616.44 364 355 768.00 0.77 10.34 6.07 4.27 793.22
Kamchatka Territory 45 808 643 868.40 -1 963 432 773.58 -4.29 2.81 -0.20 3.01 4.70
Magadan Region 21 743 356 709.77 -1 067 188 564.91 -4.91 5.69 0.00 5.69 0.07
Sakhalin Region 56 692 992 485.91 9 114 315 769.08 16.08 5.90 0.96 4.94 5.96
Jewish Autonomous 9 846 763 310.10 -289 985 272.01 -2.94 0.31 0.29 0.02 -9.76
Region
Chukotka Autono- 13 799 337 565.98 3 488 925 629.59 25.28 0.00 -0.21 0.21 -0.82
mous Region
Total 483 138 278 775.75 11 180 545 948.63 2.31 3.58 0.99 2.59 42.73
The North Caucasian Federal District
Republic of Dagestan 67 238 418 632.32 2 055 680 189.90 3.06 4.80 4.80 0.00 157.08
Republic of 23 603 459 127.10 713 400 782.83 3.02 5.67 2.53 3.14 83.70
Kabardino-Balkaria
Republic of North 18 608 730 067.87 2 006 212 975.77 10.78 20.15 7.09 13.07 65.73
Osetia -- Alania
Ingush Republic 16 587 911 010.22 1 499 708 988.07 9.04 0.00 0.00 0.00 0.00
Stavropol Territory 78 554 605 557.52 1 860 369 936.76 2.37 10.43 0.25 10.69 10.71
Republic of Kara- 14 232 629 140.00 1 043 593 237.15 7.33 7.86 7.86 0.00 107.14
chaevo-Cherkessia
Chechen Republic 67 184 090 766.74 844 632 637.50 1.26 2.05 2.05 0.00 162.91
Total 286 009 844 301.77 6 302 858 874.46 2.20 6.65 2.60 4.05 118.04
Total 6 822 588 991 361.46 99 248 517 332.10 1.45 10.39 3.31 7.08 227.37
Russian Federation
The Source: calculated on the basis of the data of the Ministry of Finance of the Russian Federation.
The Domestic Bond Loans
In 2010, prospectuses for bond issue by 17 constituent entities of the Federation and six municipal entities were registered while in 2009 only 10 regions and 5 municipal entities issued bonds).
In 2010, registered with the Ministry of Finance of the Russian Federation were prospectuses of following constituent entities: the Republic of Karelia, the Republic of Khakassia, the
Republic of Komi, the Republic of Sakha (Yakutia), the Udmurt Republic, Krasnoyarsk Territory, Krasnodarsk Territory, Moscow, St. Petersburg, the Volgograd Region, the Nizhny Novgorod Region, the Murmansk Region, the Ryazan Region, the Sverdlovsk Region, the Tver Region, the Tomsk Region, the Yaroslav Region, the Volgorgard Region, Kazan, Tomsk, Novosibirsk, Ufa and Krasnodar.
In 2010, the total volume of the bonds placed amounted to RUR 111.1 billion as compared to RUR 158.1 billion in 2009 (that is, a reduction of RUR 47.0 billion in nominal terms or by 30.7% in real terms). Within a year, the volumes of issue of sub-federal bonds and municipal bonds fell from 0.41% to 0.25% of the GDP (Table. 15).
Table 15
The volume of issue of sub-federal and municipal securities (% of the GDP)
Year 1996 1997 1998 1999 o 1 S S t m 6 7 8 9 o
SS N SS N o N o N SS N SS N SS N SS N SS N SS N SS N
Issue 0.63 0.77 0.47 0.31 0.19 0.17 0.27 0.46 0.47 0.37 0.28 0.26 0.43 0.41 0.25
Redemption 0.47 0.56 0.48 0.36 0.46 0.23 0.10 0.15 0.19 0.28 0.14 0.18 0.26 0.16 0.18
Net financing 0.16 0.22 -0.01 -0.05 -0.27 -0.07 0.16 0.31 0.29 0.09 0.14 0.08 0.17 0.24 0.07
The source: calculated on the data of the Ministry of Finance of the Russian Federation.
The largest securities issues were carried out by Moscow (RUR 71.8 billion or 64.6% of the volume of the aggregate issue of territories), Krasnodar Territory (RUR 5.1 billion or 4.6%), the Nizhny Novgorod Region (RUR 5.0 billion or 4.5%), the Yaroslavl Region and St. Petersburg (RUR 3.0 billion, each or 2.7%) and the Volgograd Region (RUR 2.6 billion or 2.3%).
Thus, the six largest issuers accounted for 80.4% of the total volume of issues of regional and municipal bonds offering. (Table. 16).
Table 16
Placement of sub-federal and municipal securities in 2010.
Volume of issue (thousand RUR) Share of the issuer in Ratio of the volume of issue
Constituent entity of the Federation the total volume of the issue (%) to domestic borrowings (%)
1 2 3 4
The Central Federal District
Belgorod Region 221 000 000.0 0.2 5.4
Tver Region 3 000 000 000.0 2.7 37.2
Kaluga Region 956 000 000.0 0.9 14.7
Kostroma Region 927 375 310.7 0.8 14.5
Moscow Region 8 482 620.6
Ryazan Region 2 100 000 000.0 1.9 12.2
Yaroslavl Region 3 044 952 985.7 2.7 23.5
Moscow 71 798 101 881.7 64.6 81.4
The North-Western Federal District
Republic of Karelia 2 000 000 000.0 1.8 20.6
Republic of Komi 2 077 950 000.0 1.9 40.4
St. Petersburg 3 000 000 000.0 2.7 60.6
The Southern Federal District
Republic of Kalmykia 14 109 000.0 0.0 1.0
Krasnodar Territory 5 100 000 000.0 4.6 24.0
Volgograd Territory 2 599 886 000.0 2.3 22.0
(continued) table 16
1 2 3 4
The Privolzhsky Federal District
Republic of Bashkortostan 749 857 500.0 0.7 12.2
Republic of Tatarstan (Tatarstan) 2 000 000 000.0 1.8 6.9
Udmurt Republic 2 000 000 000.0 1.8 20.5
Nizhny Novgorod District 5 000 000 000.0 4.5 10.7
The Siberian Federal District
Tomsk Region 1 308 603 000.00 1.2 28.3
Republic of Khakasia 1 200 000 000.00 1.1 43.2
Tomsk Region 1 308 603 000.00 1.2 28.3
The Far Eastern Federal District
Tomsk Region 1 308 603 000.00 1.2 28.3
Republic of Khakasia 1 200 000 000.00 1.1 43.2
Tomsk Region 1 308 603 000.00 1.2 28.3
Russian Federation — total: 158 114 034.3 100 25.0
The source: the IET calculations on the basis of the data of the Ministry of Finance of the Russian Federation.
By now, the highest level of securitization was registered primarily with the largest issuers: Moscow (89.9%), the Khanty-Mansiisk Autonomous Region (75.0%) and Krasnoyarsk Territory (67.6%).
In 2010, the aggregate volume of net borrowings on the regional securities market amounted to RUR 29.8 billion, that is, a reduction of RUR 68.1 billion or by 72.2% in real terms as compared to 2009. At the same time, the volume of the redeemed municipal bonds exceeded by RUR 2.5 billion that of the newly issued bonds (Table. 17).
Table 17
The volumes of net borrowings on the market of domestic sub-federal and municipal securities (thousand RUR)
Consolidated regional budget Regional budgets Municipal budgets
1 2 3 4
2010
Net borrowings 29 774 599.3 28 611 970.0 1 162 629.3
Borrowed funds 111 106 318.3 105 854 346.2 5 251 972.1
Repayment of the principal debt 81 331 719.0 77 242 376.2 -4 089 342.8
amount
2009
Net borrowings 95 457 576.8 97 916 509.1 -2 458 932.3
Borrowed funds 158 114 034.3 153 992 570.1 4 121 464.2
Repayment of the principal debt 62 656 457.5 56 076 061.0 6 580 396.5
amount
2008
Net borrowings 68 851 271.9 72 984 947.8 -4 133 675.9
Borrowed funds 178 565 731.4 177 324 359.3 1 241 372.1
Repayment of the principal debt 109 714 459.5 104 339 411.5 5 375 048.0
amount
2007
Net borrowings 25 867 011 23 691 970 2 175 041
Borrowed funds 84 159 197 79 889 761 4 269 436
Repayment of the principal debt 58 292 185 56 197 791 2 094 394
amount
2006
Net borrowings 36 489 742 35 161 627 1 328 115
Borrowed funds 73 288 653 66 524 832 6 763 820
(continued) table 17
1 2 3 4
Repayment of the principal debt 36 798 911 31 363 205 5 435 706
amount
2005
Net borrowings 20 887 596 16 939 894 3 947 703
Borrowed funds 81 220 540 75 016 756 6 203 783
Repayment of the principal debt 60 332 944 58 076 863 2 256 081
amount
2004
Net borrowings 47 880 300 44 470 128 3 410 172
Borrowed funds 79 436 708 74 995 965 4 440 743
Repayment of the principal debt 31 556 408 30 525 837 1 030 571
amount
2003
Net borrowings 41 908 199 40 043 511 1 864 688
Borrowed funds 61 712 635 59 012 901 2 699 734
Repayment of the principal debt 19 804 436 18 969 390 835 046
amount
2002
Net borrowings 17 696 530 17 153 760 542 770
Borrowed funds 29 141 777 28 169 158 972 619
Repayment of the principal debt 11 445 247 11 015 398 429 849
amount
2001
Net borrowings 6 601 447 6 667 592 -66 145
Borrowed funds 15 123 785 14 226 931 896 854
Repayment of the principal debt 8522338 7 559 339 962 999
amount
2000
Net borrowings -1 877 328 -2 286 175 408 847
Borrowed funds 13 042 220 10 090 208 2952012
Repayment of the principal debt 14 919 548 12 376 383 2 543 165
amount
The source: calculated on the basis of the data of the Ministry of Finance of the Russian Federation.
Most regions which issued debt securities on a regular basis kept issuing them in 2010, as well. The Volgograd Region has been issuing bonds each year since 1999, while Krasnoyarsk Territory, since 2003 and the Republic of Karelia and the Nizhny Novgorod Region, since 2004. (Table. 18).
Table 18
Registration of prospectuses for issuing of sub-federal and municipal securities in the 1999-2010 period
Issuer 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
1 2 3 4 5 6 7 8 9 10 11 12 13
Constituent entities of the
Federation
Volgograd Region * * * * * * * * * * * *
Krasnoyarsk Territory * * * * * * * *
Republic of Karelia * * * * * * *
Nizhni Novgorod Region * * * * * * *
Tver Region * * * * * * * *
Moscow * * * * * * * * * * *
St. Petersburg * * * * * * * * * * *
Tomsk Region * * * * * * * * * *
Republic of Saha (Yakutia) * * * * * * * *
Yaroslavl Region * * * * * * *
Udmurt Republic * * * *
Republic of Komi * * * * * * * * *
Krasnodar Territory * * *
(continued) table 18
1
10
11
12
13
Murmansk Region Ryazan Region Sverdlovsk Region Republic of Khakassia Chuvash Republic Irkutsk Region Samara Region
Khanty-Mansiisk Autonomous Region
Moscow Region Lipetsk Region Kaluga Region Penza region Ulyanov Region Belgorod Region Kurgan Region Stavropol Region Republic of Bashkortostan Voronezh Region Novosibirsk Region Kostroma Region Ivanovo Region Republic of Kalmykia Tula Region Khabarovsk Territory Republic of Kabardino-Balkaria
Leningrad Region Yamalo-Nenetsk Autonomous Region
Bryansk Region Republic of Mordovia Sakhalin Region Kursk Region Primorsk Territory
Municipal entities
Volgograd
Kazan
Tomsk
Novosibirsk
Ufa
Krasnodar Krasnoyarsk
City of Elektrostal, Moscow
region
Smolensk
Lipetsk
Magadan
Bratsk
Novorossiisk
Yekaterinburg
Klin District of the Moscow
Region
Noginsk District of the Moscow Region Blagoveschensk Cheboksary
City of Balashikha of the Moscow Region_
2
3
4
5
6
7
8
9
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
_(continued) table 18
_1_ 2 3 4 5 6 7 8 9 10 11 12 13
Odintsovo District of the Moscow Region Astrakhan Bryansk Voronezh
City of Orekhovo-Zuevo of the Moscow Region Yaroslavl
Yuzhno-Sakhalinsk Novocheboksarsk Angarsk
Vurnar District of the Chuvash Republic
City of Shumerlya of the Chuvash Republic Barnaul Perm
Nizhni Novgorod Kostroma Archangelsk
Dzerzhinski_
The source: The Ministry of Finance of the Russian Federation. Credit rating
In 2010, Russia's sovereign rating assigned by Standard&Poor's, an international credit rating agency as regards foreign currency bonds remained unchanged at the "BBB" level with a credit rating forecast being "stable". At the same time, Fitch Ratings, a credit rating agency upgraded the forecast evaluation of Russia's "BBB" credit rating from the "stable" level to the "positive" one.
In the first six months of 2008, Russia was assigned by both the rating agencies the "BBB+" credit rating with a "positive" forecast.
In 2010, Standard&Poor's upgraded the credit rating of the Irkutsk Region, Surgut, the Tomsk Region, the Yamalo-Nenetsk Autonomous Region and the credit rating forecast of the Leningrad Region, Novosibirsk, the Republic of Saha (Yakutia), the Sverdlov Region, the Tver Region and the Khanty-Mansiisk Autonomous Region.
At the same time, the credit rating of the Novgorod Region was withdrawn (Table. 19).
Table 19
Standard&Poor's international credit rating in the 1st quarter of 2011.
Name of the issuer In foreign currency / Forecast In national currency / Forecast
1 2 3
Sovereign ratings Russian Federation BBB/Stable/ BBB+/Stable/
Rating of regional and local authorities Bashkortostan BB+/ Stable / BB+/ Stable /
Bratsk The rating withdrawn
Volgograd Region Vologda Region Urban District of Balashikha BB-/Negative/ BB-/ Negative / The rating withdrawn BB-/ Negative / BB-/ Negative /
* * * * * * *
* * * * * * *
* * *
* *
*
* *
*
*
(continued) table 19
1 2 3
Dzerzhinsk B-/Stable/ B-/Stable/
Irkutsk Region BB-/Positive/ BB-/Positive/
Kaluga Region The rating withdrawn
Klin Region The rating withdrawn
Krasnodar Territory BB/Stable/ BB/Stable/
Krasnoyarsk Territory BB+/Negative/ BB+/ Negative /
Leningrad Region BB/Positive/ BB/Positive/
Lipetsk Region BB/ Stable / BB/ Stable /
Moscow BBB/ Stable / BBB/ Stable /
Moscow Region The rating suspended
Nizhny Novgorod BB-/Positive/ BB-/Positive/
Novgorod Region The rating withdrawn
Novosibirsk BB-/ Positive / BB-/ Positive /
Omsk The rating withdrawn
Samara Region BB+/Negative/ BB+/ Negative /
St. Petersburg BBB/ Stable / BBB/ Stable /
Saha (Yakutia) BB-/ Positive / BB-/ Positive /
Sverdlov Region BB/ Positive / BB/ Positive /
Stavropol Territory B+/ Stable / B+/ Stable /
Surgut BB/ Positive / BB/ Positive /
Tatarstan The rating withdrawn
Tver Region B+/ Stable / B+/ Stable /
Tomsk Region B+/ Positive / B+/ Positive /
Ufa BB-/ Stable / BB-/ Stable /
Khanty-Mansiisk Autonomous BBB-/ Positive / BBB-/ Positive /
Region
Chelyabinsk Region BB+/ Stable / BB+/ Stable /
Yamalo-Nenetsk Autonomous Region BBB-/ Stable / BBB-/ Stable /
The source: The Standard&Poor's.
