13Section 3. Financial Markets and Financial Institutions
3.1. The Russian Financial Market Post-Crisis Recovery
In 2010, it seemed that after the 2008-2009 collapse, the Russian market will bounce back to its pre-crisis values faster than it had done after the 1997-1998 crisis. However, the 2011 fell short of justifying the hopes. During the year, the Russian indices tumbled once again: specifically, RTS plunged by 21.9% and MICEX - by 16.9%. The indexes' recovery trajectory was increasingly less resembling the V-shaped form and beginning to gradually drift closer to the W-shaped one.
The fall of indexes during the 2008-2009 crisis proved less intense and shorter vis-à-vis the one noted back in 1997-1998 (Table 1). In the late '90s, the RTS index plummeted by 91.3% and the MICEX index - by 73.0%; the intensity of the fall of both indices in 2008-2009 was 78.2% and 68.2%, respectively. In 1997-1998 the RTS index has been tumbling for 14 months, while the MICEX index - for 13 months; by contrast the duration of the indexes' fall over 2008-2009 was 8 and 7 months, respectively.
Table 1
Financial Crises of 1997/98 and 2008/09 and the Subsequent Recovery of the Market
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. Time-line, months
RTS index 14 8
MICEX index 13 7
2. Recovery, months
RTS index 58 36
MICEX index 8 37
Source: the RTS and MICEX data as of 01.02.2012.
However, it has become increasingly evident that the process of recovery of stock quotations during the recent financial crisis has been delayed. During the 1997-1998 crisis, because of a 5-fold depreciation of the Ruble, the MICEX Rb-denominated index bounced back to its pre-crisis peak values just in 8 months, while the RTS exchange index did it in 58 months. In 2008-2009 the Ruble depreciated by about 50% and won back roughly a half of the fall in the course of its subsequent appreciation. For this reason, both indices are now recovering at a roughly equal pace: the RTS index has done so for 36 straight months, while the MICEX index - for 37 months.
Against the background of major long-term financial crises of the last century (see Fig. 1) the Russian 2008-2009 financial crisis appears a short one, being even shorter in terms of duration of the "peak-to-recovery" than the domestic crisis of 1997-1998. When it comes to the W-shaped trajectory it is gaining, the crisis in question can be compared with the Korean 183 month-long financial crisis of 1989, albeit Russia's current slump to recovery process has thus far lasted for 44 months. As of January 2012, the RTS index recovered by 64.1% of its peak value reported in May 2008. The change in its recovery path from V- to W-shaped trajectory does not appear critical as yet. That said, given accumulation of challenges facing the
global economy (the looming new wave of recession in numerous economies, the global economic growth running out of steam, the Eurozone crisis, among others), it should be remembered that in the modern history, stock market indices have not always been capable to bounce back to their earlier peak values. After its fall in 1989, Japan's Nikkei-225 has been struggling for 265 months to clear a bar above 22.6% of its pre-crisis value. In a three-year span, the index would be able to beat the 303 month-long recovery record DJIA had set in the wake of the Great Recession of 1929-1933. NASDAQ has likewise struggled to recover for 143 months and in January 2012 ended up being at just a 59.9% level of its peak value of 2000.
120 100 3? 80
1 60
s
Q 40 20 0
Russia (RTS) - 2008; Russia (RTS) - 1997; ^rea _ ^g, 183 months USA (DJIA) - 1929; 1 months; 64.1% 72 months 303
V!^ -1 J. (NASDAQ) -
f ffiTA/P^ " .a/montlTsr------------------
I ^f^^Srd ______59.9% ^^v _ _ _ Japan - - -
Months
4 7 0 3 6 9 2 5 8 1 4 7 0 3 6 9 2 5 8 1 4 7
^CM-^LOCD^OTO^CO'^i-OI^OOC^OCMCO'^CDI^OOO
» USA - 1907 USA - 1929 -Japan - 1989
Korea - 1989 —Russia (RTS) - 1997 ---USA (NASDAQ) - 2000
-X-USA - 2007 ^I^Russia (RTS) - 2008
Source: the RTS and MICEX data, and www.finance.yahoo.com.
Fig. 1. Intensity and Duration of Long-Lasting Global Financial Crises as of February 2012
Against the background of the strongest over past decades short-term shocks, such as the "blue chips" crises in the US in 1987 and 2007, the fall of the DJIA in 2000, the 1994 Mexican, 1997 Indonesian and 1997 Brazilian crises (Fig. 2), the Russian current crisis appears more intense and one of the most long-lasting ones. By its length it can be compared with the 1997 Indonesian crisis when it took the local market 55 months to recover.
In 2011, the dynamics of the MICEX-RTS indices was atypical vis-à-vis other nations' indicators. Yield-wise, Russian stock indices typically hold leading positions, or, on the contrary, trail behind other markets. In 2008, the RTS and MICEX plunged by 72.4% and 67.2%, respectively, thus outpacing all other markets worldwide by intensity of the fall. In 2009, the Russian indices boasted the highest return in the world: specifically the RTS index was up 128.6% and the MICEX index - 121.1%. In 2010, the RTS index added 22.5% and the MICEX index - 23.2%, which catapulted the Russian stock market into the Top Ten most profitable markets worldwide (Fig. 3). In 2011, against the background of a significant fall of indices across nearly all the countries, because of the new wave of recession, with their rates of return of -21.9% and -16.9%, respectively, the RTS and MICEX indices found themselves in the middle of the list. The reason behind the failure was that at that time the impact of a relatively favorable situation with international oil prices in 2011, which would usually help the Russian stock indices to keep leading positions growth-wise, was largely neutralized by
such unique for the situation factor as the outflow of foreign investments from Russia and bank liquidity challenges which exacerbated in H2 of the year.
— -A — USA - 1987 — -A-Indonesia - 1997 - • USA -2000 -- - Brazil - 1997 ■ —O^—Mexico - 1994 Russia (RTS) ^^"Russia (RTS) - 2008 -■-USA (DJIA) - - 1997 2007
Source: the RTS and MICEX data, and www.finance.yahoo.com.
Fig. 2. Intensity and Duration of Short-Term Financial Crises as of 2012/09 (Peak value=100%)
Cyprus SE Greece General Share Austria ATX Luxembourg SE Shenzhen Stock Exchange Index Finland Helsinki General Argentina MerVal Czech Republic India BSE 30 Sensex Turkey 1SE National-100 RTS index
Shanghai Stock Exchange Index Warsaw Stock Exchahge Hungary BUX Hong Kong Hang Seng Belgium BEL-20 Brazil Bovespa NASDAQ OMX Nordic Copenhagen Japan Nikkei 225 Singapore Straits Times France CAC 40 MICEX index Peru Lima General Australia All Ordinaries Chile IPSA Germany DAX Spain Madrid General Netherlands AEX General Canada TSE 300 Comp S. Korea Seoul Comp Switzerland Swiss Mkt UK FTSE 100 Pakistan Karachi 100 Mexico IPC Nasdaq Comp Thailand SET Johannesburg All Share Standard & Poor's 500 Stock Index Malaysia KLSE Comp Philippines PSE Comp Dow Jones Industrial Average
_-80 -60 -40 -20_0_20_40_60_80
Source: RBC and WFE data.
Fig 3. Yield Rates of Stock Indices Worldwide in 2010-2011, %
, 1 1 1 1
I '
■ 22,5
-21,9 Ly.^r^:.^: 1 1 □ 2010
-3,3 -16,9 1 □ 2011
1-- ■ 23,2
■-f
In 2011, the aggregate capitalization of Russian companies amounted to $1,131 trillion, down 18.0% when compared with the previous year (Fig. 4). The volume of trading on Russian exchanges in 2011 reached $1,717 trillion, up 54.1% vis-à-vis the 2010 figures. The advancement of stock exchange trading found itself arrested by a slowdown of growth in the number of active domestic investors on the stock exchange, decline of stock prices, no real progress made with attraction of new institutional investors, as well as measures to streamline the growth of high-frequency trading at stock exchanges. For example, on March 1, 2011, MICEX set new tariffs providing for a minimum, Rb. 0.18, commission fee with regard for transactions across all the trading regimes, except for REPO transactions1. In 2011, the volatility index rose from 36.0% in 2010 to 42.0% (the 1998 as 100%)
cd ■ ■ Capitalization (left axis)
o
' 1 Trading volume at the Russian stock exchange (left axis)
Source: by MICEX-RTS, S&P, IMF data.
Fig. 4. Capitalization, Liquidity and Volatility of Russian Stock Market
Trading-wise, the Russian stock exchange market has thus far managed to keep up with its global competitors. This is evidenced by data on the trading volume in equities and depositary receipts for Russian corporate stock on the national stock exchanges to those at foreign stock exchanges ratio (see Fig. 5). In this context, a positive development to maintain the Russian stock exchanges competitiveness was the stock exchange holdings MICEX and RTS merging into a single company, JSC "MICEX-RTS," which was closed on December 19, 2011.
1 Trifonov A. MICEX is not up to nickeling-and-diming. Vedomosti, 8 February 2011.
96
BNYCEX and NASDAQ (CTCM)
□ German exchanges
□ London exchange B RTS-Standard
□ St. Petersburg Exchange ■ RTS - stock (T+0) market
□ RTS-Standard OMICEX market
Source: calculated on the basis of Russian and foreign exchanges' data
Fig. 5. Specific Weight of Exchanges in Volume of Trading in Russian Equities
The proportion of the merged MICEX-RTS in the organization of trading in shares and receipts for Russian corporate stock plunged from 77.9% in 2010 to 65.9% in 2011 on a year-on-year basis. The Russian stock exchange's equity market for shares is dominated by two segments - namely, the main market of MICEX and RTS-Standard. The share of each of them plummeted from 69.9% to 59.7% and 7.7% to 6.0%1 respectively over the year. The contraction of the MICEX - RTS's proportion in volume of trading in Russian issuers' equity instruments is not yet critical. However, a tendency to a string of major issuers walking away from the exchange due to relocation of their HQ to overseas, transforming a company's status from public into private and corporate insolvency, which manifested itself in 2011, may emerge as a real threat to competitiveness of Russian organizers of trading.
The weak link of the Russian stock exchange remains the market for IPO-SPO, as the share of MICEX-RTS in the total volume of public offering of Russian corporations remains close to zero. According to Dealogic, in 2011 Russian companies ran IPO-SPO worth a total of $11.3bn. At the same time, NAUFOR suggests that Moscow-based MICEX-RTS ran only two IPOs amounting to $0.75bn2. Furthermore, according to NAUFOR, MICEX-RTS faced an adverse tendency of large issuers delisting their stock. A number of companies (JSC "Po-lymetal", OJSC "Polyus Gold") completed restructuring and moved their headquarters abroad. It is only equities of their foreign subsidiaries, Polymetal International and Polyus Gold International Ltd, that continue being quoted, but they are set for delisting soon, nonetheless. Other issuers (RBC "Information Systems", Ufaneftekhim, Ufaorgsintez, Red October, LOMO, Power Machines, Tulamashzavod, JSC "Concern" Kalina", to name a few) are busy carrying out or have already completed delisting for other reasons, including restructuring,
1 The way correlation between the main market and the merged MICEX-RTS's Standart one is going to unfold will form one of major intrigues on the market for Russian equities, as the main market is an embodiment of a clearly outdated system of guarantees of execution of deals basing on advance reservation of assets by parties to a transaction. Meanwhile, the Standart market is a prototype of a more modern system of guarantees of execution of exchange deals to a pre-set date without advance reservation of assets. Transition to the more modern system of settlements is most likely to suggest an advanced expansion of the Standart segment vis-à-vis the main market of MICEX-RTS.
2 Improving the securities issuance procedure (the NAUFOR report). December 13, 2011. The document is posted on the NAUFOR website:http://naufor.ru/tree.asp?n=9411&hk=20111216
more stringent requirements to listing introduced by the merged stock exchange vis-à-vis the earlier JSC RTS's ones, among others.
3.2. Russian Equity Market
As in the previous years, the main drivers of the price dynamics corporate stock were the global commodity prices, primarily the ones of oil and gas; the foreign portfolio investors' behavior, the Ruble exchange rate; the tumultuous global economy and the swelling financial crisis in Europe. Most of these factors are independent of the Russian authorities' economic policy.
3.2.1. Dependence on the Global market prices
The dependence of the Russian equity market on oil prices is hardly a surprise. The coefficient of determination (R2) between the absolute monthly values the RTS index and the Brent crude price between September 1995 and December 2011 depicted in Fig. 6 makes up 0.86, thus evidencing a very intimate relationship between the said indexes.
Source: by IFS IMF and MICEX-RTS data.
Fig. 6. Dependence of RTS index on Brent Prices from September 1995
through December 2011
According to the international financial organizations and the RF Ministry of Economic Development's forecasts, no rapid rise in oil prices is anticipated in years to come. Moreover, due to the looming global economic recession, it looks like that since mid-2008 the dynamic of oil prices was taking a W-shaped trajectory (Fig. 7). When compared with the 1997-1998 crisis, it is going to take the current prices far longer time to recover and hit their pre-crisis (June 2008) values. Whether they are able to do so, time will show. According to the RF ministry of Economic Development's innovation-based scenario forecast of February 8, 2011, which formed the basis of the Strategy-2020, the price of Urals oil in 2020 would remain at the level of $ 109/b. The average 2012 oil price per barrel is projected to tumble from the today's $ 111 to about $ 100.
—Russia 1997-1998 ^^Russia 2008-2009
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43
months
Source: by the IFS IMF data.
Fig. 7. Downfall and Recovery of Brent Prices during Financial Crises in Russia (the Price Peak = 100%)
A more adequate picture of the correlation between stock prices and oil prices can be drawn from an analysis of relative changes in the said indices. Fig. 8 depicts results of changes in the correlation coefficient between the monthly relative changes of the RTS index and prices of Brent crudes during the 12-month period. The peculiarity of a moving correlation curve lies in its reflecting intensification or weakening of the link between the two indicators with one-year lag.
The curve of the correlation between changes in the RTS index and the oil price has cyclical nature. The correlation coefficient is down and becomes negative once the index is on its way to the precrisis peak or right in between it having passed the peak and prior to the acute phase of the crisis. This means that the oil price and the value of the index suddenly begin to change in different directions. During the collapse of the stock market a positive correlation between changes in the index and oil prices is back, while once the crisis developments are on their way to the bottom phase, the correlation value once again heads to "minus" one.
The dynamic of the correlation curve in the last decade allows a clear distinguishing of five periods:
- between the early 2000's. and July 2005 - an increase of correlation coefficients from the level -0.2 to 0.5, the oil price and the RTS index are on the uprise;
- between July 2005 and April 2008 - the correlation coefficient is down from 0.5 to -0.5, the oil price and the RTS index are on the upsurge, in H2 2006 and H1 2007 oil prices are down;
- between April 2008 and April 2009 - the correlation coefficient skyrockets from its level of -0.5 up to 0.8, and the period in question sees oil prices and Russian equities collapse;
- between April 2009 and April 2011 - the correlation coefficient is down from the level of 0.8 to 0.2, the oil price increases moderately and remains volatile, while the RTS index is experiencing a rapid recovery growth;
- between May 2011 and December 2011, the RTS index is down drastically , while the oil prices slide fairly insignificantly.
3000 2500 -2000 -1500 -1000 500
April 2009
July 2005
1,0
0,8 0,6 0,4 0,2 0,0 -0,2 -0,4 -0,6 -0,8
QpO C QpO C QpO C Q-o ^ C Q-o ^ C Q-o ^ C Q-o ^ C Q-o C Q-o ^ C Q-o ^ C Q-o ^ C Q-o ^ C Q-o C Q-o ^ C Q-o ^ C Q-o ^ C Q-o
RTS index (09.1995=100%)- left axis ■Annual correlation (right axis)
I Brent price (09.1995=100%) - left axis
0
Source: calculated by data of IFS IMF and the MICEX-RTS Exchange.
Fig. 8. Correlation between Changes in the RTS Index and Prices of Brent between September 1995 and January 2012
3.2.2. Cash inflow / outflow of foreign portfolio investment
The cyclicality of the correlation between relative changes in oil prices and Russian corporate stock quotations is explained by a significant impact on the latter by outflows and inflows of foreign portfolio investors' monies, as documented by the Emerging Portfolio Fund Research (EPFR)1. In terms of its impact on Russian stock prices this factor is equivalent of oil price dynamics, as evidenced by data in Fig. 9.
Back to the five aforementioned periods during which the nature of the correlation between changes in the RTS index and the oil prices dynamics was changing, it is an analysis of investment accumulated by foreign funds specializing in Russia which can explain the phenomenon in question.
The growth in the correlation coefficient between changes in the index and the oil price between the early 2000's and July 2005 was due to the fact that during that period, both factors that affect the dynamics of the stock market - namely, oil prices and cash inflow into foreign
1 The EPFR data of in-and outflow of funds in/out of foreign funds whose profile is investment in Russia can be regarded as an indicator of investment behavior pattern of larger foreign portfolio investors, including global and regional funds. By our estimates, the specialized funds' portfolios make up some 50% of regional and global investment funds' investment in Russia. Should, for instance, investors in a specialized fund withdraw their investments therefrom, that does not yet mean capital flight out of Russia. Capital flight would occur only when a fund begins selling out its investments in Russian equities to honor its obligations before its investors. If cash is withdrawn out of global or regional funds, it is practically impossible to quantify the impact of this transaction on contraction of these funds' investment in Russian equities, which accounts just for a fraction of the funds' aggregate portfolio. That said, if cash is withdrawn out of foreign funds specializing in Russia, global and regional portfolio investors are most likely to be scaling back on their investments in Russia too. 100
funds investing in Russia - exhibited a unidirectional effect. Oil prices were being on the rise, portfolio investments were pouring in, and the RTS index was climbing up steadily. As shown in Table 2, between November 2000 and June 2005 the specialized funds cashed in $ 1.5bn of investors' money.
2000 1800 1600 1400 1200 1000 800 600 400 200 0
April 2006
—IOJ2J 2J 2J 2J OJ CO COCO CO CO CO'
^lOlOlOL0L0L0t06D6D6D6D6Dt—t—t—t—t—t—d080COCOCOCOcJiG©ffiro(JiOOOOOO-
9000 t000 5000 8000 1000 -1000 -S000
I^I^IJtil^lJtil^lJti^
] Increase in the RTS index (left axis) ] Increase in Brent prices (left axis)
■Inflow/outflow of capital in/from funds, Investing in Russia (right axis)
Source: by data of IFS IMF, MICEX and EPER.
Fig. 9. Increase in the RTS Index, Oil Prices, Inflow (Outflow) of Resources
in Funds Investing in Russia
The fall of the correlation coefficient between July 2005 and April 2008 to -0.5 was driven by multidirectional dynamics of oil prices and foreign portfolio investors' funds. Between July 2005 and April 2006, despite the increase in the volatility of oil prices, the funds investing in Russia absorbed new investments worth a total of $ 4.8bn (see Table 2 and Fig. 9). Behind the spike of the inflow of short-term investments was international investment rating agencies awarding Russia their investment ratings. More specifically, FITCH did that on November 1t, 2004, and S&P followed the move on January S1, 2005. Besides, on May S1, 2005, the first verdict on the first of Mikhail Khodorkovsky's trials was rendered, and many portfolio investors bought the Russian authorities' assurances that the case would be an exception. However, since April 2006 through nearly April 2008, investors in the foreign funds drastically revised their preferences. Despite a steady increase in oil prices, the funds investing in Russia began seeing a hectic withdrawal of funds (see Fig. 9). As a result of the portfolio investment outflow, the RTS index growth rate decelerated significantly vis-à-vis a rapid rise in oil prices.
Between April 2008 and April 2009, the increase in the correlation coefficient up to 0.8 fell on the stock market's collapse. At the time, a sharp decline in oil prices was accompanied by a vigorous withdrawal of cash out of the foreign funds investing in Russia, while the RTS index was likewise sent nose-diving over the period in question.
The fall of the correlation coefficient, as well as of the oil price index to -0.2, between April 2009 and April 2011 was once again due to the fact that the accelerated growth of the RTS index was based largely on an active cash inflow in the foreign funds in parallel with a
moderate rise in oil prices. During that period, the funds received a new $10.2bn of investors' funds.
That the coefficient of the correlation between the index and oil prices between May and December 2011 bounced back to 0.8 should be ascribed to the fact that the oil price factor and the foreign investment one once again began working unidirectionally. Oil prices were down in the second half of the year, and private investors began to withdraw their cash from the funds that invested in Russian equities. Between May and December 2011 the funds lost $ 4.6bn and the RTS index, accordingly, was notably down, too.
Table 2
Cash Inflow/Outflow in/from Foreign Funds Investing in Russian Equities according to EPFR
Inflow (+)/ Outflow (-) in/from the funds, as $ mn
November '00 - June '05 1,538
July'05 - April '06 4,769
May '06 - March '09 -9,005
April' 09 - April '11 10, 255
May '11 - December '11 -4, 560
Source: calculated on the EPFR data.
Displayed in Fig. 9, the graph of cash flows accumulated by foreign investment funds specializing in investments in Russia shows that radical changes in the investors' behavior were there in May 2006 and May 2011 This allows identification of main factors that affect major portfolio investors' decisions, as well as estimating volumes of cash flows that can generate price shocks across the market for Russian equities. According to Table 2, between May 2006 and March 2009 as much as $ 9.0bn was withdrawn from the foreign funds that specialize in investing in Russian equities, and another $ 4.6bn was withdrawn between May and December 2011. Even if one doubles the estimates with account of a possible similar behavior of managers of regional and global funds which were disinvesting in Russia at the time, it turns out that shock changes in stock prices on the Russian market can engender a gradual withdrawal of an amount equal to an aggregate 1-2-day volume of trading on the MICEX-RTS.
A provocative explanation of factors which predetermine adverse changes in the behavior of foreign investors in funds specializing in investment in certain markets was offered by the IMF experts in the September 2011 Global Financial Stability Report1.They employed the EPFR data on the in- and outflow of cash in/from special investment funds for the period between January 2005 and May 2011 across equity funds worldwide, in Asia, Latin America, Europe and the Middle East, and in developed economies. According to the study, the most substantial factors with the significance rate at a level of 1% with regard to cash in- and outflow were:
- official projections of real GDP growth rates (with «+»);
- volatility of GDP growth rates (with «-»);
- volatility of exchange rate(s) (with «-»);
- indicator of expected volatility in the stock market - index VIX (with "-"). Meanwhile, the indicators of the level of interest rates and strictness of forex regulation
proved to be among loosely significant factors.
1 IMF. Financial Stability Report. September 2011, p. 11-18. Posted at: www.imf.org. 102
These factors can be regarded as harbingers of future crises on financial markets. Investment funds' portfolio managers specializing in certain markets fairly successfully employ such factors. Interestingly, the said IMF study maintains that the strongest shock in the form of a maximum amount of $ 4.4bn withdrawn from funds investing in Europe, Middle East and Africa fell right on June 2006. It was the very month when, as displayed in Fig. 5, there occurred a reverse in the tendency that concerned the funds investing in Russian equities. In the circumstances, in April 2006, the IMF report on the global economy noted a trend to reduction in GDP growth rates in H2 of the year in the most significant developed and emerging economies1 as well as disturbances of VIX index that became visible since Q2 20052. Both phenomena might signal an outflow of portfolio investors' funds. Spikes of volatility of projections of GDP growth and stock price hikes mirrored experts and markets' concerns about disproportions of national trade balances, the looming crisis on the U.S. market for mortgage-backed securities and other factors that ultimately led to the 2008 recession.
Interestingly, while withdrawing cash out of the funds investing in European equities, including Russian, Middle-East and African corporations, in June 2006, global portfolio investors displayed a phenomenal foresight, thus outrunning in this regard the most courageous prophets of the future financial crisis. The famous statement by Prof. N. Rubini about the looming mortgage crisis at the IMF meeting was made only in September 2006. At the Davos meeting in February 2008, Mr. A. Kudrin, Russia's Finance Minister, argued that Russia was going to be a safe harbor amid the global financial crisis. However, foreign investors began running out of Russia and the other emerging markets already as early as in May 2006.
The causes behind the capital outflow from the funds investing in Russia in May 2011 proved in many ways similar to those noted back in May 2006. Last time, global portfolio investors were likewise alerted by the increasing volatility of the global economic growth projections and the international financial organizations having cut their projections of GDP growth rates in the biggest economies.
3.2.3. Forex Rates
The differences in the intensity of depreciation of the Ruble during the crises in question determined different dynamics of the RTS and MICEX indexes' recovery. As equities in the portfolio MICEX index are valued in the Ruble equivalent, while those in the RTS index's -in the USD equivalent, the subsequent recovery of the MICEX index following a more than 5-fold depreciation of Ruble3 in 1998 was outpacing that of the RTS index (Fig. 10). It was already May 1999 when the MICEX index bounced back to its pre-crisis peak value, i.e. just in 8 months after it had hit the bottom of the crisis. By contrast, it took the RTS index 58 months to recover after a similar plunge.
1 World Economic Outlook (WEO), April 2006, Fig.1.8. Posted at: www.imf.org.
2 In his book, "Fault Lines" (Moscow, Delo Publishers, 2011, p. 272) R.Rajan noted that between Q2 2005 to Q2 2007 two-year implied volatility of S&P500 option price was at 30-40% above the short-term one-month volatility.
3 Between 1998 and 2003.
Source: MICEX-RTS and the Bank of Russia.
Fig. 10 Changes in the USD Exchange Rate, the RTS Index and the MICEX Index during
the 1997-98 Crisis (July 1997 = 100%)
During the 2008-2009 crisis, the peak level of the Ruble devaluation accounted for 50% (Fig. 11), followed by its appreciation. For that reason, the RTS and MICEX indexes had been recovering at a practically equal pace, with the latter index slightly outpacing the former one. In January 2012, the RTS index hit 64.1% of its peak value registered back in May 2008, while the MICEX index climbed up to 78.6% of its respective peak value.
—■—Russia (RTS)-2008 —□—Russia (MICEX)-2008 —C^USD/Rb. exchange rate as of end-month
Source: by data of JSC RTS, MICEX, and the Bank of Russia.
Fig. 11. Changes in the USD Exchange Rate, the RTS Index and the MICEX Index during the Crisis between May 2008 and January 2012 (May 2008 = 100%)
3.2.4. Competition on the Domestic Equity Market
The year of 2011 saw a notable increase in public corporations and agencies' influence on the stock market, which manifested itself in expansion of the proportion of state-owned financial institutions in the volumes of equity trading, their role in managing the merged MICEX-RTS exchange, public agencies' powers with regard to regulation of, and control over, infrastructure organizations, and enactment of the law on insider trading on the financial market.
Fig. 12 displays results of state-owned banks and their associated structures'1 equity transactions on the major MICEX-RTS market. At the peak of the crisis, between September 2008 and July 2009, this segment of the market witnessed a notable increase in state-owned players' activity. In December 2008, their proportion in the volume of market equity transactions surged to 50.9%. It was in many ways determined by the process of transition of a string of large agents (KIT-Finance, Svyaz-bank) under state-owned banks' control, as well as by implementation by VEB of the stock market support program with the use of a repayable loan of Rb 175bn from the National Welfare Fund. During the market recovery period, the share of state-owned banks and their related structures in the volume of equity trading tumbled, but the tendency has reversed since February 2011, and the said share hit the level of 36.1% in December 2011. This can be ascribed to Troika Dialogue having transited under Sberbank of Russia's control in tandem with the rise in the company's trading activity.
□ State-owned structures, less CBR □ Other participants □ CBR
Source: calculated by the MICEX-RTS data.
Fig. 12. Shares of Private and Public Brokers in Volumes of Stock Trading
at MICEX-RTS, as %
The presence of a considerable number of players on the stock exchange market, including servicing non-residents, a vigorous application of algorithmic trading patterns and other short-term strategies ultimately resulted in a highly competitive domestic stock market, despite of
1 VEB, VTB, VTB Capital, VTB24, Gazprombank, Sberbank, KIT Finance, Svyaz-bank, the Bank of Moscow, Transcreditbank, and Troika Dialogue (since 2001).
the rise in the proportion of public structures operating therein. The finding is proved by data in Fig. 13, which comprises information of the dynamic of the Herfindahl-Hirschman Index (HHI)1 with regard to turnover at the MICEX-RTS securities market between January 2005 and January 2012. According to FAS, the market appears low concentrated with the value of HHI being below 800, moderately concentrated in the event 800 < HHI < 1,800, and highly concentrated with HHI above 1,8002. Throughout 2011, HHI with respect to transactions on the major MICEX-RTS stock market was steadily being at a level in the region of 500.
Source: calculated by the MICEX-RTS data.
Fig. 13. Herfindahl-Hirschman Index by Volume of Secondary Stock Exchange Trading on the Major MICEX-RTS Market (All the Regimes)
Fig. 14 comprises data on the proportion held by Top 7 brokerages in the overall number of registered and active clients3 of participants in stock trading at the Major Market Section at SE MICEX. During 2010-2011, the said share in both indexes has been soaring steadily and, as of December 2011 hit 65%.
1 The Herfindahl-Hirschman Index (HHI) is a commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in a market, and then summing the resulting numbers. The HHI number can range from close to zero to 10,000. The HHI is expressed as: HHI = (D1) 2 + (D2) 2 + ... + + (Dm) 2, where Di- the market share of i- participant expressed in percent; i = 1, 2.....m.
2 See item 2.6.4. of the Methodological Guidelines on the procedure of conduct of analysis and assessment of the state of the competition environment on the market for financial services as approbated by Executive Order of the Anti-Monopoly Ministry of RF of 31.03.2003 No. 86.
3 According to the MICEX-RTS rules, a client who completes at least one deal a month at the SE MICEX qualifies for the "active client" status.
As % of registered clients —O—As % of active clients
Source: calculated by the MICEX-RTS data
Fig. 14. The Share of Top 7 brokerages in Clients' Assets, as %
Fig. 15 provides reference to the change in the structure of transactions with equities at MICEX-RTS. The data exposes existence of a tendency to post-crisis recovery of the proportion of REPO deals in the structure of market equity transactions. By using REPO deals on the stock market, brokerages, as a rule, attract short-term borrowed resources to carry out a subsequent marginal lending to their clients. In January 2012, the proportion of REPO deals hit 72.8% of the volume of trading in the major market section of JSC MICEX-RTS, thus outstripping the 69.9% pre-crisis (September 2007) record-breaking level. The expansion of the proportion of REPO transactions evidences renewal of marginal lending of securities trading. This, on the one hand, means that investors are getting increasingly keen on the market for risky assets, while on the other hand, exhibits growing risks of speculative activity of the Russian equity market. The data on the correlation between market transactions and REPO ones are of interest because they allow an indirect assessment of the degree of advancement of marginal transactions on the stock market. The fact of the matter is using REPO deals on the exchange market for equities, participants in the trading obtain resources for marginal lending. An increase in the proportion of REPO transactions means a surge in the volumes of marginal loans to strike deals under the market regime. Data in Fig. 15 show that the period between 2010 and 2011 saw volumes of marginal lending be on the upsurge, even despite the fact that equity prices were falling in 2011, which should have lowered the need in marginal loans, which are used, as a rule, to implement trading strategies on the bullish market.
A critical aspect of advancement of the stock exchange market is the growing popularity of short-term and, primarily, high-frequency, trading, and deployment of trading robots. This is evidenced by outcomes of "The Best Private Investor" contests RTS and MICEX ran separately in 2010 and jointly, as MICEX-RTS, in 2011. It was traders who deployed trading robots who won the contests. According to the Russian exchanges' data quoted by Kommersant daily, up to 90% of stock market orders and 50% of turnovers on the RTS FORTS spot market fall on robots; on the MICEX's spot market, hyper-active trading robots hold 45% of orders and 11-13% of trading volumes. Meanwhile, 95% of the said orders at MICEX are sub-
sequently called off with no deals stricken1 in their wake. In March 2011, MICEX kept on attempting to regulate trading robots' operations. Since 1 March 2011, the exchange set up a minimum commission fee of Rb 0.14 per transaction; plus, its management established requirements to a minimum size of the lot with regard to stocks and shares in an amount of no less than Rb 1,000, which should result in consolidation of most lots on stock and shares issues2. The measures aim at encouraging large-scale deals and minimizing the number those not charged a commission fee.
Source: calculated by the MICEX-RTS data
Fig. 15. Structure of Equity Transactions on the main MICEX-RTS Market, as %
Fig. 16 displays data on the number of transactions and an average size of an individual transaction in the market (anonymous) regime of stock trading at MICEX. The data show that several recent years have witnessed a steady tendency to the rise in the number of such transactions vis-à-vis a notable dimunition in their volumes. In the past three years, the average monthly number of transactions increased from 6.8m in December 2008 up to 10.6m in February 2011, or by 55.9%. Meanwhile, the average volume of market exchange equity transactions was down notably, despite the continuous process of stock quotations' recovery. In September 2009, the average amount of the equity transaction in the said trading regime at MICEX was Rb 145,200, while in February 2011 - Rb 117,300 or down 19.2%. The rise of the algorithmic trading manifests itself, in the first place, in an increase in the flow of orders in the trading system. However, in 2010-11, the amount of market equity transactions discon-
1 Smorodskaya P. MICEX took on robots: the trading is distanced from automats. Kommersant, 20 July 2010.
2 Trifonov A. MICEX is not up to nickeling-and-diming. Vedomosti, 8 February 2011. 108
tinued plummeting, which may be ascribed to private investors losing appetite for high-frequency trading against the background of the stagnating inflow of brokerages' new active clients.
Ü
400 350 300 250 200 150 100 50 0
16 000 000 14 000 000 12 000 000 10 000 000 8 000 000 6 000 000 4 000 000 2 000 000 0
I Value of the deal, Rb Thos.
■Value of the deal, Rb Thos.
Source: calculated by the MICEX-RTS data.
Fig. 16. Market Equity Transactions on the MICEX-RTS Main market
With its new Head in office in 2011, FSFM adjusted its requirements to capital adequacy ratio of professional operators on the securities market. On 30 July 2009, the agency approved an Executive Order regarding modifications introduced in capital adequacy standards for professional participants in the securities market, as well as managing companies of investment funds, mutual funds and non-government pension funds. In compliance with the document, capital adequacy rates were raised for professional participants in the security market who exercise:
- brokerage and securities trust management - from Rb 10mn up to Rb 35mn effective since
1 July 2010 and further up to Rb 50mn - since 1 July 2011;
- dealer operations - from Rb 5mn up to Rb 35mn effective since 1 July 2010 and further up to Rb 50mn - since 1 July 2011;
- depository operations (except for clearing depository) - from Rb 40mn up to Rb 60mn effective since 1 July 2010 and further up to Rb 80mn - since 1 July 2011;
- operations on running registers of owners of registered securities - from Rb 10mn up to Rb 100mn effective since 1 July 2010 and further up to Rb 150mn - since 1 July 2011. Against the background of the discontinuation of expansion of investment and managing
companies' client bases, the absence of a real progress with adoption of tax measures to encourage the residents' long-term investments, the current concentration of financial services in the hands of a narrow circle of participants represented by state-owned banks and companies, the measure in question could have resulted in a mass exodus of brokers, dealers, trust and pooled investment managers. The decision on raising the standards since 1 July 2011 was abrogated, and the standard rates were kept at the level effective as of 1 July 2010.
Because of the above conditions unfavorable for expansion of financial intermediaries' businesses, the year of 2011 saw the process of contraction of the number of professional participants in the securities market continue, nonetheless, as evidenced by Table 3. In 2010 alone, particularly due to introduction of increased capital requirements effective as of 1 July 2010, the number of brokers was down by 9.1%, and that of dealers - by 10.4%, while the number of participants in trading at MICEX plunged by 0.8%. According to NAUFOR (the Russian National Association of Securities Market Participants), at year-end 2010 FSFM revoked 236 licenses for their former corporate holders' non-compliance with the agency's capital adequacy requirements1. According to Mr. A. Timofeev, head of NAUFOR, "those actions yielded no positive results"2. In 2011, the number of brokers and dealers shrank by 10.6% and 9.4%, respectively, while the number of participants in MICEX trading slid by 2.3%.
Table 3
The Number of Professional Stock Market Participants
2007 2008 2009 2010 2011
1. The number of organizations awarded a FSFM license to exercise:
1.1. Brokerage 1,445 1,475 1,335 1,213 1,084
change in % vs. the previous period 2.1 -9.5 -9.1 -10.6
1.2. Dealer operations 1,422 1,470 1,337 1,198 1,085
change in % vs. the previous period 3.4 -9.0 -10.4 -9.4
2. The number of participants in MICEX trading 636 669 654 649 634
change in % vs. the previous period 5.2 -2.2 -0.8 -2.3
Source: by data of FSFM, NAUFOR, SE MICEX.
Unfortunately, the absence of publicly available financial reports of brokers, dealers, trust managers, and requirements to their mandatory submission in compliance with the IFRS standards does not allow an objective assessment of the impact increase or lowering of barriers to entry/exit this kind of business have on its efficiency. Without such an analysis, any decisions on tightening or loosening requirements to capital adequacy will be doomed to remain subjective. Yet greater concerns about effects of drastically intensified regulatory influences on financial institutions' business are stirred by the fact that the governmental measures have not yet been coupled with real steps to implementing an adequate stock market development strategy. The beefing-up of regulatory and oversight measures, with no robust efforts in the business development area missing, may entail just a rise in public structures' monopoly, supplanting of legal forms of financial mediation by illegal ones, particularly in regions, and domestic investors increasingly picking foreign financial service providers.
That private financial structures are increasingly concerned about public agencies' interferences in their business is evidenced by acquisition, upon FAS's consent, by Zoulian Trustees Limited (Cyprus) of 99.5% of voting stock of JSC "Investment Holding "Finam". The Finam representative commented on the deal in the following manner: ".. .we have not faced any hostile takeover, but anything may happen in Russia."3. The banking sector statistics also mirrors growing doubts about the domestic market' prospects. Between 2009 and 2011 shareholders of as many as ten foreign banks4 announced scaling back on their presence in Russia, including International Personal Finance, Santander, Rabobank, Barclays, Swedbank, HSBC, RBC Group,
1 Trifonov A. No indulgency for managers. Vedomosti, 23 June 2011.
2 Smorodskaya P. Capital adjustment. Kommersant, 16 May 2011.
3 Zhelobanov D., Gubeydullina G. "Finam" is going off-shore. Vedomosti, 1 July 2010.
4 Dementieva K., Khvostik E. A foreign body. Kommersant, 31 March 2011. 110
Morgan Stanley. Numerous investment companies and banks in Russia declared personal banking services to wealthy Russians as the most preferred alternative to retail banking.
3.2.5. Consolidation of Stock Exchanges and their Transition under the Control of the Bank of Russia and State-Owned Banks
The year of 2011 saw the MICEX and RTS merger deal close. The merger will have a huge impact on the future development of Russian stock market. The establishment of a single exchange on the basis of MICEX and RTS can, given other conditions being equal, ensure a positive effect in the form of liquidity concentration, acceleration of conclusion of transactions across different segments of the financial market, saving participants in trading and investors' direct and indirect transaction costs, solidification of Russia's standing on international capital markets. The merger can also ensure a synergy effect by saving on staff, market makers, IT systems maintenance, operational costs and other costs. By end year-2011 MICEX-RTS had already joined Top-20 largest global exchanges and Top-10 leading platforms in terms of the derivatives market turnover.
The substance of the merger is as follows: for the sake of merging, JSC RTS was appraised at $1.15bn, or Rb 34.5bn, while CJSC MICEX - $3.45bn, or Rb 103.5bn. The reorganization is exercised in the form of takeover of RTS by MICEX. In the course of the takeover RTS's shareholders have been given a possibility to sell 35% of their stock to CJSC MICEX and convert the remaining stock into JSC MICEX shares. Meanwhile, ordinary and preferential registered uncertified shares in JSC RTS are converted into ordinary registered uncertified shares of CJSC MICEX redeemed from the CJSC MICEX shareholders and into additional ordinary registered uncertified shares of CJSC MICEX placed for the sake of conversion. While completing the takeover, the conversion of the JSC RTS stock into the CJSC MICEX one was run using the following ratios: 0.309393 ordinary registered uncertified shares of JSC RTS with face-value of 1 Rb each and 0.309393 preferential registered uncertified shares of JSC RTS with face-value of 1 Rb each were converted into one ordinary registered uncertified shares of CJSC MICEX with face-value of 1 Rb each. The number of CJSC MICEX stock to be allocated to each shareholder in JSC RTS is calculated by dividing the number of shares of a given category he/she has in JSC RTS into a respective conversion ratio. The milestones of the merger are presented in Table 4.
Meanwhile, the first fruits of the deal raise certain controversies among different market participants. "Company" magazine labeled the deal as the "Deal of the Year". By contrast, when between 29 June and 1 July www.exchange-integration.ru ran a survey "How do you feel about the merger of the exchanges?", as many as 73% out of a total of 849 visitors of the resource who took part in the ballot responded negatively to the question.
Behind concerns about a positive impact of the merger there is a string of factors. First, the merger eliminated the long-lasting competition between them MICEX and RTS which had long been a major driver of their development. Mr. A. Savatyugin, the RF Deputy Finance Minister, cited this factor in an interview to the "Securities Market" journal1. The dream that in that case the domestic competition between the exchanges would be substituted by the competition between MICEX-RTS and foreign exchanges may not come true, as most participants in trading currently appear loosely integrated in the global market. To this end, on
1 I am confident in the correctness of the existing market regulation system. The Securities Market, 2012, No.1, p. 19.
4 August 2011 FSFM registered and submitted to the RF Ministry of Justice an Executive Order which allows circulation on foreign exchanges of 100% (vs. the previous maximum of 25%) of Russian issuers' stock in the form of receipts, except for strategic corporations for whom the ceiling is 25% and companies associated with mineral production, whose cap is 5%. However, it is envisaged that the Order shall take effect as of the date of enactment of a federal law which regulates conditions and procedure of the central depository's operations.
Table 4
Russian Exchanges Merger Milestones
29 December 2010 At a meeting on creation of an international financial center, market participants and representatives of agencies concerned ruled to merge to exchange holdings and have the Bank of Russia withdraw from the MICEX's capital until the end of 2011
1 February 2011 The Top five shareholders of JSC "SE RTS" - Troika Dialog, Aton, Alfa Bank, Renaissance Broker and the managing company Da Vinci Capital - who combined owned 53.7% of the exchange's capital, signed an agreement on intention to sell their shares in the capital. The deal suggested that CJSC MICEX would acquire a control stake in JSC SE RTS and the two exchanges would then merge. RTS was appraised at $1.15bn, and it was suggested that 35% of its stock would be purchased for cash, while the remaining packages will be swapped for CJSC MICEX stock with the 1 to 31. Symbolically, the event was held on the Bank of Russia's premises
10 March 201. To complete the transition to the single share within the exchange holding shareholders of CJSC MICEX ruled to increase the authorized capital by placing additional ordinary shares to be swapped for those of CJSC SE MICEX
22 June 2011 FSFM registered a report on the outcome of the issuance of JSC MICEX's shares in the frame of the transition towards the single share
29 June 2011 Signing of the deal on the merger of MICEX with RTS by taking over JSC SE RTS by CJSC MICEX.
5 August 2011 The deal and its parameters were approved at general shareholder meetings of JSC SE RTS and CJSC MICEX, with 93.4% of MICEX's shareholders and 99.7% of RTS's shareholders having voted in favor of it. Those shareholders who voted against the deal or failed to take partake in the voting became eligible for putting option. More specifically, it was representatives of Eurofinans Capital who voted against the merger. Plus, the RTS's shareholders voted in favor of acquisition of assets of non-commercial partnership "SE RTS" and planned to spend $37mn on that. Meanwhile, the MICEX's shareholders decided to run an additional stock issuance to redeem an RTS stake worth a total of Rb 553.3mn
9 September 2011 FAS approbated the deal
19 December 2011 The two exchange holdings merged legally, and MICEX-RTS kicked off its operation
Q4 2012 Takeover of settlement and clearing structures of the RTS Group (the Clearing House of RTS and the Depository Clearing Company) by NCO JSC "NSD"
Until mid-2013 JSC MICEX-RTS going for IPO
The exchange merger deal resulted in an excessive strengthening of the influence the state-owned structures and banks exert on the stock market infrastructure to the detriment of private corporations' interests. Furthermore, according to Mr. A. Savatyugin, the merger was carried out under administrative pressure on market participants2.
According to our estimates (Table 5) the Bank of Russia and the public banks basically have managed to retain their share in the merged exchange. But because of the merger, the exchange "JSC RTS", where private structures would control managing bodies, sank in nonexistence. As a result, according solely to open sources, the newly formed exchange is at 53.53% controlled by the Bank of Russia and the four public banks, without regard to the share of controlled by Sberbank Troika Dialog. That is to say, the united group is controlled by public structures and the Bank of Russia in the first place. One of deputies to the CBR
1 Smorodskaya P. RTS was traded with MICEX. Government has disposed the exchanges to merger. Kommer-sant, 2 February 2011.
2 I am confident in the correctness of the existing market regulation system. The Securities Market, 2012, No.1, p. 19.
Chairman presides over the Board of the exchange1. At the first stage of the deal, it was envisaged that the Bank of Russia would quit the group of owners of the exchange as early as in 2011 - now it is envisaged this is going to happen between 2013 and 20152.
Table 5
The pre- and post-Merger Structure of MICEX and RTS Shareholders
Prior to the restructuring Post-restructuring, as of 13.02.2012
JSC "RTS" $1,150mn JSC MICEX-RTS
Aton LLC 9.82% The Bank of Russia 24.33%
Renaissance Broker LLC 8.21% Sberbank of Russia 10.36%
JSC Deutsche Securities3 9.00% VTB 5.35%
JSC MC Troika-Dialog 10.00% VEB 8.71%
JSC Alfa-Capital 9.59% Gasprombank 4.78%
KIT Finance LLC4 10.03% CJSC UniCredit Bank 9.59%
Da Vinci Capital 14.9% EBRD 6.29%
Other shareholders 28.45% Other shareholders* 30.59%
CJSC "MICEX" $3,450mn
The Bank of Russia 28.60%
Sberbank of Russia 7.51%
VTB 7.08%
VEB 10.52%
Gasprombank 6.15%
CJSC UniCredit Bank 11.59%
Other shareholders 28.45%
*By RBC data of 27 January 2012, EBRD and the Russian Equity Fund were going to acquire 7.54% of the MICEX-RTS stock combined, with EBRD getting 6.29% and REF - another 1.25%, according to the exchange's press release.
Source: calculated by the data of the exchanges' reporting.
The merger in question does not appear to have been quite transparent from the perspective of the property structure. As of today, the information the exchange disclose about its stockholders does not allow one to understand who makes key decisions and how the balance of interests between government and private structures, banking and non-banking institutions is maintained. It seems that the effect of item 72 of the Statute on operations on organization of trading on the securities market approbated by Executive Order of FSFM of 28 December 2010 No. 10-78/pz-n, which provides for the commitment for organizers of trading to disclose information solely about ownership of stock packages of above 5%, is an outdated one. Stock exchange is a major infrastructure organization on the stock market and as such it has a strategic significance. In this context it was not accidental that in the summer of 2010 FSFM and FSB of Russia blocked an attempt by KIT Finance to sell a stake in JSC "SE RTS" to a foreign bank (EBRD). Thanks to their interference, an 11% stake was ultimately acquired by a structure of the MICEX group.
1 According to the RBC daily Publishers of 9 February 2012, MICEX-RTS is to change the composition of its Board of Directors prior to the IPO. According to a source close to the Government, one of frontrunners will be A.S. Voloshin, the head of the task force on creation of the International Financial Center. Furthermore, he may become the Chairman of the Board in his capacity of an independent director.
2 Ulyukaev A. We have underperformed with regard to oversight. An interview to Vedomosti Daily of 6 June 2011; presentation of the Bank of Russia "On merging CJSC MICEX with JSC RTS" and the procedure of the Bank of Russia stepping out of the list of shareholders in CJSC MICEX
3 According to mass media, this stake was acquired in favor of IC Troika Dialog proceeding from an appraisal of JSC RTS at an amount of $920mn (Asker-Zade N. How to part from RTS. Vedomosti, 21 February 2011)
4 The stake was acquired by MICEX FINANS LLC proceeding from an appraisal of JSC RTS at an amount of $840mn. (Smorodskaya P. Investors play the merger. Kommersant, 21 February 2011).
Stock exchange should remain exemplary when it comes to high standards of information about the shareholder structure. The Bank of Russia currently demand from banks to fully disclose the list of their beneficiaries, while FSFM is keen to encourage all shareholders of Russian JSC to disclose themselves as beneficiaries under to the threat shareholders who fail to disclose themselves in the register of suspension of the right to vote at general meetings. Against such a background the lenient requirements to exchanges with respect to disclosure of the structure of their owners seem incongruous.
The merger deal was accompanied with withdrawal of sizeable amounts out of both exchanges' equity capital:
- payment of Rb 1.5bn in dividends to stockholders of JSC RTS by results of the 2010 performance, per the memorandum of understanding between MICEX and RTS, for the sake of "equalization of valuation of both exchanges" ;
- a sum to redeem JSC RST stock from shareholders who joined the takeover deal and voted for it (in a volume no more than 35% of the shareholders' packages, with the rest of the stock to be converted into the united exchange's stock); according to the current calculations, this volume should not exceed Rb. 8.9bn2;
- a sum to redeem JSC MICEX stock from shareholders who voted against the takeover of JSC RTS in an amount of Rb 5.6bn (in compliance with p.1 of Art. 75 of the Federal Law "On joint-stock company", no more than 10% of the amount of the company's net assets as of the last reporting date, i.e. Rb 56bn)3;
- payment of Rb 81.6mn in interim dividends to shareholders of JSC RTS for H1 2011;
- payment of $20mn, or some Rb 0.6bn, towards acquisition of assets of non-commercial partnership "SE RTS", including the RTS Plaza trading system and the data processing center;
- payment of Rb 11.7bn in dividends to shareholders of JSC MICEX payable partly in shares of JSC "SE RTS" and partly in cash4;
- in the event the merged exchange fails to complete an IPO by mid-2013, the RTS shareholders would be able to sell their stakes in JSC "MICEX-RTS" proceeding from the current valuation of RTS in an amount of $1.15bn plus a 12.5% annualized interest; the amount in question can total some Rb 36.4bn.5
So, given all the dividends due, including those payable in the form of JSC RTS stock, the aggregate amount of payments made in favor of shareholders in the process of preparation for, and completion of, the deal on reorganization of the stock exchange holdings made up some Rb. 28.4bn, or a. $1bn. Plus, in the event of a failure with the IPO, the MICEX-RTS exchange will have to pay its participants up to Rb 36.4bn. In this context it was not accidental that, according to media sources, the acquisition of a 6.29% stake in the merged exchange by EBRD and another 1.25% stake by REF was made at a discount in the region of 10%6.
1 Smorodskaya P. RTS is sold in pieces. Kommersant, 13 April 2011
2 www.exchange-integration.ru/voprosyotvety
3 Ibid.
4 Ibid.
5 Rudenko P. The two-in-one exchange. Kommersant, 19 December 2011
6 Butrin D., Rudenko P., Mazunin A. A national security stockholder. Kommersant, 31 January 2012 114
According to Mr. A. Ulyukaev, First Deputy Chairman of the Central Bank, and MICEX-RTS representatives, in the course of the upcoming IPO the united exchange is going to hit the level of capitalization of $6bn\
Fig. 17 illustrates the dynamics of change in the exchanges' equity capital as the deal on their merger progressed. The amount of the equity capital was very volatile, which may stir potential investors' concerns. Perhaps the official statement should be appended with explanations of such sizeable changes in accounting data.
Source: calculations by data on equity capital posted on the MICEX-RTS's homepage on the Internet.
Fig. 17. The Russian Exchanges' Equity Capital
The formal legal merger of the exchanges does not mean as yet establishment of an integral infrastructure of trading and settlements on the spot and futures market. Since the completion of the merger, 19 December 2011, there still have operated two parallel sections of the futures market, the two technological platforms remained different and clearing and depository and settlement operations have not been consolidated in a single center.
Integration of the IT, trading and clearing systems appears a slower process vis-à-vis the pace of the legal and administrative merger. The problem manifested itself in serious operational failures in 2011. More specifically, on 9 August, trading was halted for an hour and a half at the futures section of RTS. The same occurred on 17 August at SE MICEX, with no updates available over the first quarter of an hour after the failure occurred2. Subsequently, because of glitches, SE MICEX suspended operations on 1 and 8 November, with an incorrect interaction between software components of a string of nodes that ensure participants' access to the trading system cited as a cause behind a two hour-long suspension of trading on 1 November and an incorrect mirroring of information of cash balances of participants in trading as a main reason for an hour-long suspension of trading on 8 November3. On 24 November 2011, JSC RTS delayed trading sessions on the futures market RTS and the RTS Standart market for a half an hour, and they kicked off at 7-30pm, instead of 7pm. The day of the legal merger of the exchanges, 19 December 2011, was darkened by an unprecedented failure in the futures market section, with unauthorized transactions starting to run after the clearing by re-
1 Rudenko P. The exchange overvalued the placement. Kommersant, 13 February 2012.
2 Mazunin A., Rudenko P. MICEX partly shut down America. Kommersant, 19 August 2011.
3 Trifonov A. The morning without an exchange. Vedomosti, 9 November 2011.
sults of main session across participants in trading was over. As a result, numerous private investors suffered losses1.
Meanwhile, the exchange's executives and numerous brokers through whom the deals were concluded argued that they were not bound to compensate for such investors' losses2. The exchange staff asserted that the cause for the glitch was that after completion of settlements by the main session, inaccurate data about the participants' trading and monetary positions were uploaded onto the trading system. According to Mr. D. Pankin, head of FSFM, as MICEX and RTS were busy with financial and legal aspects of the merger, they failed to ensure uninterruptable trading sessions.3
3.2.6. The Increase of the Role of the Government in the Area of Regulation and Oversight
In 2011, the Government firmed up the regulating authorities' functions on the securities market and replaced the previous head of FSFM, Mr. V. Milovidov, with Mr. D. Pankin. In compliance with Decree of the RF President of 4 March 2011 No.270 "On measures on improving of state regulation in the sphere of financial market of Russian Federation", the Federal Insurance Oversight Service (Rosstrakhnadzor) was integrated in the structure of FSFM. At the same time, the Ministry of Finance was granted powers with regard to normative and legal regulation of the financial market, thus sharing these powers with FSFM. The Decree also reads that in its capacity of a body of executive power FSFM reports directly to the RF Government.
On 31 August 2011, Prime Minister V. Putin approved reallocation of responsibilities between the Ministry of Finance and FSFM. The respective Resolution was signed on 29 August and posted on the RF Government's homepage on 31 August. The major principle underpinning the reassignment is delegation to the Ministry of Finance the power to develop the government policy and normative and legal regulation in the sphere of financial markets, including powers with regard to development of strategic avenues of advancement of the securities market. Meanwhile, FSFM will exercise normative and legal regulation aiming at improvement of oversight and control in an established form of operation. The current authority sharing by FSFM and the Ministry of Finance does not appear an optimal one, as, in our view, it means scattering the regulatory powers across various organizations and gives rise to a conflict of interest for the Ministry of Finance in its capacity of the securities market regulator and a participant therein. Once the new division of powers took effect, it decelerated the pace of adoption of new bills advocated by numerous market operators, in particular, draft amendments to the Federal Act "On Investment Funds" which concerns index funds. It is not accidental that in the follow-up of the meeting of the International Advisory Council on creation and development of the international financial center in Russian Federation of 28 October 2011, the RF Government was tasked to submit by 1 February 2012 proposals on extension of the FSFM's powers with respect to prevention of abuses on financial markets, protection of investors' interests, in particular, in the court of law, as well as on granting it the right to design and submit to the RF Government federal bills and other drat normative and legal acts in the financial markets regulation area.
1 Rudenko P., Mazunin A. Stock-Majeure. Kommersant, 20 December 2011.
2 Rudenko P., Mazunin A. MICEX-RTS's clients were wasted. Kommersant, 21 December 2011.
3 Verzhbitsky А. Dmitry Pankin is displeased with failures. RBC daily, 17 November 2011. 116
The year of 2011 witnessed adoption of three fundamental federal acts on infrastructure organizations- namely, Federal Act of 7 February 2011 No. 7-FZ "On clearing and clearing operations" (The Law on clearing), Federal Act of 21 November 2011 No. 325-FZ "On organized trading" (The Law on trading) and Federal Act of 7 December 2011 No.414-FZ "On the central depository" (The Law on central depository). The main positive impact of the above acts is that they establish legal grounds for operation of a centralized system for conclusion of deals, running clearing and settlement operations on the domestic market for investment assets. That said, the aforementioned federal acts have failed to dissipate concerns about the growing impact public agencies and the state-owned banks have on infrastructure organizations' operation. As the operating clearing organizations and settlement depositories are at nearly 100% subsidiaries to the JSC MICEX-RTS, it is regulation of the exchange which is worth exploring in the first instance.
We believe the Law on trading substantially strengthened the public agencies' leverage effect on the exchange. Whereas the Law on trading changed dramatically the concept of organizer of trading, stock exchange and items traded at the exchange, after its adoption, MICEX-RTS will have to claim a new license in 2012. The Law on trading does not contain any restrictions for public structures and the Bank of Russia in their capacity of stockholders of the exchange. In compliance with p.9 Art.6 of the Law on trading, election (appointment) of the person who exercises functions of the sole executive body and other top managers of the exchange is permitted only upon a preliminary consent of the federal body of executive power in the financial markets area (FSFm of Russia). In accordance with Art.6, the principal managing body of the exchange is its Board of Directors, which at MICEX-RTS is currently dominated by public structures and companies, while decisions of the exchange Council, which is at 75% formed by participants in trading (Art. 10), are recommendatory. In accordance with Art.25, practically all the exchange's operations and entitling documents are subject to FSFM's approval. What is more, Art.25 holds that the regulatory body even sets up the index calculation procedure.
The Law on the central depository has been designed and enacted in the atmosphere of heated debate. The swords were crossed over the issue of the central depository's exclusive right to open the nominal holder's accounts with the registers and the mandatory requirement to keep the central depository as a sole structure1. In 2012, it is envisaged to accredit one of the currently operating clearing depositories - most likely the National Settlement Depository (NCD) - as the central depository. The Law on the central depository does not restrict public agencies' participation in its authorized capital, either. Like the exchange's tariffs, those of the central depository should be set up by the Board of Directors, while the central depository should coordinate them with FSFM. Granting the status of the central depository falls under the FSFM's purview, per the procedure established by the Ministry of Finance.
On 31 July 2011, a number of provisions of Federal Act of 27 July 2010 No. 224-FZ "On countering illegal use of insider information and manipulation of the market and on introducing amendments to individual legislative acts of Russian Federation" became effective. In furtherance of the Law, FSFM adopted a series of normative and legal acts. The financial market participants were to submit to the exchanges insider lists until 31 December 2011. According to the FSFM Head, in 2011 the regulator held three audits and exposed just 16 cases of ma-
1 Mazunin A., Rudenko P. Depository memorandum. Kommersant, 22 August 2011; Rudenko P. A center for securities has popped up. Kommersant, 10 October 2011.
nipulation. The documents were forwarded to law-enforcement agencies and a number of individuals who had committed manipulations were brought to administrative responsibility1. These facts suggest that the oversight of compliance with the insider law has thus far been limited.
One of the challenges to advancement of the stock market is establishment of a favorable tax regime for domestic market agents and residents. The Strategy of Development of the Financial Market of Russian Federation for the period through 2020 approved by Resolution of the RF Government of 20 December 2008 No. 2043-p (Development Strategy) meant to address the problems, but unfortunately, like in the prior year, in 2011 regulatory bodies once again failed to effectively tackle problems in the taxation area. On 23 June 2011, there took effect Federal Act No. 132-FZ "On introducing amendments into Art. 95, Section One, Section Two of the Tax Code of Russian Federation with regard to formation of favorable tax environment for innovation activity and Art. 5 of the Federal Act "On introducing amendments to Section Two of the Tax Code of Russian Federation and individual legislative acts of Russian Federation", which abrogated the tax on foreign investors' income from sales of publicly traded stock. In the past, such incomes were taxed at a rate of 20% which was withheld by the broker in his capacity of tax agent. The abrogation of the tax concerns legal relations arisen since 1 January 2011.
In December 2011, the RF Ministry of Economic Development designed a draft Resolution of the RF Government on exemption of long-term venture investors in innovation corporations' equity from the corporate profit tax2. But other than that, there have been no more serious moves in the taxation area, albeit the problem of tax incentivizing of private investment is one of critical challenges facing Russia's stock market. While presenting at the "Government Hour" at the Federation Council on 9 November 2011, Mr. D. Pankin, Head of FSFM, reckoned that his agency was on the same page with the Ministry of Finance in regard to reinstatement of tax benefits for long-term investors who have owned papers for more than three years3.
3.3. Financial Institutions in Search for New Ideas for Growth
3.3.1. Constraints to the Carry Trading Strategy and Increase of the Financial Leverage
The year of 2011 saw the RF authorities search for a sustainable development pattern for the domestic banking system in the conditions of a constrained implementation of the carry trading (CT) strategy. The constraints were determined by the closure of global financial markets for borrowers from emerging economies, the capital outflow from Russia, and the effect of measures on limiting implementation of the strategy by Russian banks. The magnitude of engagement of banks in CT is exhibited by the indicators of deficit (-) and surplus (+) of banks' foreign assets vis-à-vis costs of non-residents rights of claim to banks compared with the overall value of banks' assets displayed in Fig. 18. The year of 2011 became the third year in a row when the cost of banks' forex-denominated assets proved to be in excess of the amount of their liabilities to non-residents and accounted for 3.6% of the amount of banks' assets.
1 Trifonov A., Voronova P. The driver of quotations. Vedomosti, 27 December 2011.
2 Visloguzov V. Tax benefits take a long time to come. Kommersant, 6 December 2011
3 Rudenko P. FSFM recommended to "hold". Kommersant, 10 November 2011. 118
Fig. 19 displays that in H1 2011, the Bank of Russia raised its reserve requirements (RR) to liabilities before corporate non-residents in forex equivalent by 2.5% up to 5.5% of costs of the liabilities. As for liabilities before private individuals in the RF currency and other forex-denominated liabilities, RR over the period in question were raised from 2.5% up to 4.0%. That has had a notable effect on the rise of the excess of forex-denominated assets over liabilities. The CBR's strategy of a freer oscillation of the Rb exchange rate in the frame of a gradual transition to inflation targeting proved an efficient move to constrain attractiveness of CT. In March and December 2011, the Central Bank announced broadening the trading band against dual-currency basket from Rb 4 to 5 and from Rb 5 to 6, respectively.
9 j 6 —4,7
3 --
0
-3 t ~
-6-30,7
-9 --12 --
3,6
-8,5 -6,8
0,1
250 220 190
160 I 130 I
X O)
100
70 <u ' 1 ' hfi
40 10
-20
o
] Excess (+); deficit (-) of the share of foreign assets over liabilities - Change in the $ nominal exchange rate in Rb equivalent (right axis)
Source: calculated by the CBR data.
Fig. 18. Excess (+) and Deficit (-) of Banks' Forex-Denominated Assets over Liabilities (Proportion of the Value of Banks' Assets (Liabilities) as %)
•Net foreign assets to banks' assets, as % (left axis)
■ RR by COs' liabilities to non-resident banks in the RF currency and in forex (right axis) -RR by COs'other liabilities in the RF currency and in forex (right axis) "RR by forex-denominated liabilities before corporate non-residents (right axis) -RR by liabilities before private individuals in the RF currency (right axis) RR by other forex-denominated liabilities (right axis)
Source: calculated by the CBR data.
Fig. 19. Regulation of Carry Trading by the Bank of Russia, as of 1 January 2012
The 2011 restrictions on CT were exercised in tandem with the trend to discontinuation of deleverage of the banking system1, as shown in Fig. 20. In other words, the banking system saw renewal of the advanced increase in credit portfolio against the deposit base. We believe that the combination of the said tendencies generated problems with funding of banks, thus having become a critical factor behind exacerbation of the problem with bank liquidity in H2 of the year. The other reason that aggravated the bank liquidity problem was a notable increase of the federal government borrowing on the domestic stock market in 2010 by issuing government bonds (for more details, see the section on the bond market).
Fig. 20. Excess of Loans over Deposits - Deleverage (as % of the Value of Banks'
Assets (Liabilities))
3.3.2. Liquidity and the Current Stability of the Banking System
As shown in Fig. 21, Russian banks entered 2011 with a sizeable surplus of short-term liquidity. In December 2011, their net claims to the Bank of Russia accounted for Rb 2.5 trillion, while those to public administration agencies - Rb 0.8 trillion. But by end-November 2011, the said amounts of net claims shrank to Rb 0.5 trillion and 0.2 trillion, respectively. That de facto meant that the size of short-term injections government and monetary authorities made in the banking system accounted for some Rb 2.6 trillion by the end of 2011, i.e. the value comparable to the one the banks received during the 2008 crisis. In December alone, thanks to a drastic increase in federal budget expenditure, as much as about Rb 2.0 trillion poured in the domestic market2. Bank deposits increased by roughly the same amount, while M2 grew from Rb 22.0 trillion up to Rb 24.5 trillion, or by 11.7%. Extra bank liquidity was sterilized thanks to the amount of banks' net claims to the Bank of Russia being up to Rb 1.2 trillion and those to public administration agencies - up to Rb 1.0 trillion.
1 Index of costs of banks' net claims to residents and businesses relative to banks' aggregate assets.
2 According to Mr. A. Siluanov, the RF Minister of Finance, in December 2011 the federal budget spending was set to increase 2-fold vs. the average size of budget expenditures over the year and account for a. Rb 2 trillion. (Sapozhkov O. The 2012 budget overhang exceeds a usual size 2012. Kommersant, 7 December 2011).
Fig. 21. An Estimate of Amount of Support to Banks, as Rb bn
Fig. 22 displays findings of an analysis of forms of the CBR's support of banks during the 2008-09 crisis and in the year under review. During the crisis, it was non-collateral loans, whose disbursement kicked off on 20 October 2009, which became a major form of credit support to banks. Various bank support programs at the expense of centralized lending have been practically stopped since September 2010. However, once the liquidity crisis exacerbated in H2 20l1, the Bank of Russia began to vehemently disburse loans to banks in the form of direct repo operations, the debt on which is displayed in the graph in the form of debts on other loans. According to a CBR spokesperson, had the liquidity crisis intensified, the monetary authorities were ready to consider a renewal of non-collateral lending to banks1.
While attracting borrowed funds from the Bank of Russia and the Ministry of Finance, in the period of exacerbation of the situation with bank liquidity it was state-owned banks that found themselves in an advantageous position. According to Fitch Rating, they consumed 84% of the total volume of placed funds, while their proportion in the aggregate volume of the banking sector's assets accounts for some 55%2.
A traditional method of the Bank of Russia's influence on stability of the banking system is lending to banks by means of direct repo transactions. Fig. 23 displays two periods in development of Russia's banking system depending on prevalence of different sources of maintaining bank liquidity. The first period - between 2004 and July 2008- was the heyday of the carry trading strategy, with banks enjoying the opportunity to raise cheap money on foreign markets. In the period of increasing liquidity, the Bank of Russia resorted to direct repo only occasionally and in a relatively moderate scale. The second period encompasses the 2008 crisis and the subsequent recovery of the market. During the acute phase, direct repo deals were increasingly in use to stabilize the interbank lending market. They were carried out on a regular basis, and their volumes surged drastically vis-à-vis the pre-crisis figures. The stabilization of the situation with short-term liquidity in banks in 2010 drove the interbank lending rates
1 Dementyeva S. Money is served. Kommersant, 28 October 2011.
2 Public funds have been dispersed across state -owned banks. Kommersant, 2 December 2011.
down to the pre-crisis level, while the Bank of Russia discontinued an active use of direct repo. However, once the situation with liquidity aggravated in H2 2011, repo deals became a principal means for the CBR to provide lending to banks. In a number of cases their volume in 2011 was in excess of maximum volumes of lending to banks with the use of repo deals at the peak of the 2008 crisis.
3 000 000 -
2 500 000 2 000 000 1 500 000 1 000 000 500 000
□ Volume by other loans
□ Volume of intra-day loans
□ Lombard loans
□ Volume by other loans
I Arrears by overnight loans
Source: by the Bank of Russia's data.
Fig. 22. The Bank of Russia's Lending to Banks, as Rb mn.
35 30
25 -20 15 10 + 5 0 A
The period of rising liquidity and carry trading
Liquidity problems
1800 1600 1400 1200 1000 800 600 400 200 0
Cash balances on corresponding accounts and deposits with CBR I Repo
- - - ■ IBL interest rates for the term of 2-7 days o Interest on loans in the form of Repo
0
Source: by the Bank of Russia's data.
Fig. 23. Use of the Repo Mechanism for Regulation of Bank Liquidity between 2003 and December 2012
3.3.3. Lending on the Rise
The instability of the resource of funding of banks in 2011, which manifested itself in a limited employment of Carry trading, a slower pace of expansion of the deposit base, a compelled attraction of short-term resources from the Bank of Russia and public administration bodies, did not hamper the renewal of banks' lending activity nonetheless (Fig. 24).
While in 2010 the volume of lending to the non-banking sector was up 12.8% and loans to the population - up 14.3%, at year-end 2011, the increase in the said credit portfolios accounted for 39.3% and 54.0%. That was lower than the average growth rates of the credit portfolio over the pre-crisis 2000-2007 which accounted for 47.3% for the non-banking sector and 81.3% for private residents, but far greater than an annual 25% growth rate which is considered internationally to be a pace sufficient for a normal, without overheating, advancement of the banking sector.
Source: by data of the Bank of Russia's Review of Credit Organizations.
Fig. 24. Russia: the Volume of Credit Disbursed, billion of Rb as of 1 January 20102
So, in 2011, despite the reinvigoration of lending activity, the banking sector, whose proportion in the overall volume of Russian financial organizations' assets stands at a. 95%, has thus far failed to find resources sufficient to ensure its sustainable progress. Its funding to a significant degree remains reliant on the Bank of Russia and public administration agencies' short-term financial resources, which generates substantial risks for the financial system.
3.4. Governmentalization of the market for Rb-Denominated Bonds
3.4.1. An Adanced Growth of Placement of Government Bonds
The government notably increased its role on the domestic bond market in 2011, primarily in its capacity of one of key operators on the market in question. That manifested itself in an accelerated rise in public borrowing on the domestic market, a greater impact the state has on the exchange infrastructure, the Bank of Russia and public structures' growing activity with regard to trading in bonds, prevalence of state-owned corporations in their capacity of bor-
rowers on the market for corporate bonds and a growing activity of state-owned banks in the segment of investment and banking services. As well, the year of 2011 witnessed adoption of the document entitled "The fundamental objectives of the public debt policy of Russian Federation for 2012-20141. The document holds that, ".development of the debt market is regarded as an absolute priority of the public debt policy in the medium term". The MinFin plans that the federal budget deficit would be met at 90% at the expense of domestic public borrowing. We believe this means a domestic bond market's growing dependence on risks engendered by an imbalanced state budget.
The data dispalyed in Fig. 25 evidences that in 2011 the aggregate volume of placement of government bonds posted a higher pace of growth than the aggregate volume of placement of corporate bonds. While in 2010 the volume of placement of government papers worth a total of Rb 861bn was just slightly above the volume of issued corporate bonds, which accounted for Rb 855bn, in 2011 the value of new issues of government papers hit the mark of Rb 1,374bn, a way up vs. a Rb 855bn- worth aggregate value of placed corporate bonds. However, at this point, we should make a reservation that the estimate of the 2011 volume of the government bonds issuance was made with account of the value of the issue of 15-year OFZ bonds worth a total of Rb 295 bn, which the MinFin placed by way of a closed subscription in the frame of a Bank of Russia's rehabilitation program, the control stake in which was acquired by VTB. That said, the development testifies that MinFin's need in attraction of funds on the debt market are on the rise, and in 2011 it was in many ways associated with the RF Government's decision to employ resources attracted by issuing government papers on the domestic market, rather than resources spent out of the Reserve Fund, as a source of meeting the Pension Fund's budget deficit. The decision in question enabled the MinFin to transfer some Rb 1.0 trillion of oil-and-gas revenues to the Reserve Fund in early 2012 and compensate for those funds by boosting up borrowings on the bond market.
Source: MICEX-RTS and IMF data.
Fig. 25. Volume of Placement of Rb-Denominated Bonds
1 Posted on the MinFin web-site.
124
The MinFin plans an increase in placement of government bonds in 2012, too. According to a preliminary schedule of auctions on placement of OFZ for Q1 2012, it is planned to raise Rb 285bn, or nearly 8-fold above the figure reported in the same period of the previous year.
The growing attractiveness of the market for government bonds is driven by measures the MinFin undertakes to enhance the level of transparency and ensure a greater predictability for investors operating on this particular market, simplify and beef up the clearing system's reliability, unify the procedures of trading in, and depository servicing of, government, corporate and regional bonds. The above concerns the transition to a regular publication of quarterly schedules of OFZ placement and yields to maturity of new bond issues, cancelation of requirements about a preliminary depositing of cash on the day the auction is held, and transition to placement of benchmark issues of OFZ. Since 13 February 2012 all transactions involving OFZ have been transferred to the main trading regime at MICEX-RTS, which, according to the exchange's estimates, will allow increase of the number of participants in trading in this particular instrument from 304 go 6401. That also allowed a substantial simplification of, and bringing depository operations on the organized security market in consistency with, the rules on the market for equities and corporate bonds. More specifically, the head depository for GKO-OFZ is no longer bound to maintain duplicated data on custody accounts of owners of papers run at dealers' sub-depositories together with the head depository in the frame of the so called Dealer Sub-Depository Technical Provision Center. Uniformity of procedures of running depository operations across all the segments of the securities market facilitates solving the task of attraction of non-residents to the domestic market for GKO-OFZ. To this end, the major attraction for investors will be the possibility to open an account of a nominal holder of international clearing organization with the Russian central depository.
The successful placement of government papers in 2011 was also fueled by a favorable situation in the national economy, with inflation rates going down notably and having hit their all- time lows (6.1%) by the end of the year. For the first time in a multi-year history of OFZ placement, their yields at an auction and on the secondary securities market were substantially above the inflation rate (Fig. 26) since August-September 2011. Meanwhile, it can be assumed that despite the declining inflation rates, the MinFin did not opt for lowering the borrowing rates in H2 2011, thus creating a competition pressure on free cash resources on the financial market.
Let us note that the continuous expansion of government papers on the domestic financial market entails ambiguous consequences. A positive effect of the process is the rise of a liquid market for robust financial instruments which for the first time over a long-lasting period began playing the role of an indicator of risk-free rate of borrowing. In addition to tackling fiscal challenges, this is important as an impulse to growth in long-term domestic savings and expansion of the financial services sector. Meanwhile, given a narrow array of domestic institutional investors and sources of bank liquidity, an increase in public borrowings under market terms forms a substantial hurdle to corporate and regional borrowers. More than this, we believe that the rise in public borrowing on the domestic market in H2 2011 was one of the factors behind the temporary crisis of bank liquidity which did not let banks compensate for the closure of the "credit window" on the global markets by bolstering borrowing on the domestic debt market.
1 Mazunin A. Investors came for a long Ruble. Kommersant, 9 February 2012.
- Long-term rate
- Medium-term rate
- Yeilds by the weighted-average auction price, as % annulized* "Inflation (by months, as % annualized)
* averaged over the month average-weighted rate by results of auctions weighted with account of placed bonds. Source: by data of the Bank of Russia and Rosstat.
Fig. 26. The Average Monthly Rates on the OFZ Market and Inflation
3.4.2. The State of the Corporate Bond Market
Ha Fig. 27 displays monthly data on volumes of issues of Rb-denominated corporate bonds and the turnover of the respective secondary market at MICEX between 2001 and January 2012. In addition, Fig. 27exhibits data on bank liquidity which is presented as average monthly cash balances on banks' correspondent accounts and deposits with the Bank of Russia. In 2011, the volumes of the secondary market for corporate bonds soared up to Rb 36.3 trillion vs. Rb 23.0 trillion in 2010 and 9.3 trillion in 2009. For many years, despite frequent roller-coaster effects on the global market, the secondary exchange market displayed a phenomenal starch and was expanding steadily. In the pre-crisis years, when liquidity was on the upsurge, the rise of corporate bonds was secured largely by the carry trading strategy. In 2010, the growth factor became a rapid inflow of short-term liquidity as a consequence of an accelerated increase in monetization of the economy. The shrinkage of bank liquidity in 2011 was once again accompanied by an increase in the number of transactions on the secondary exchanging market for bonds, as it was repo transactions using which banks borrowed short-term capital in the form of interbank loans and from the Bank of Russia.
Another peculiarity of the corporate bond market has become the fact that significance of the secondary market has been constantly on the rise vis-à-vis the role played by the bond placement process. In 2010, with volumes of issues of corporate bonds plunging 6.8%, the turnover of the papers in question on the secondary market was up 147.0%. In 2011, the value of the respective transactions soared by 8.1% and 58.0%, respectively. On the one hand, an outstripping growth rate in liquidity of the secondary market for corporate bonds has a positive effect on the term and rates of borrowing, while funding long-term loans with short-term resources bears greater risks for the market, including the risk of issuers' lower possibilities to refinance their loans in the future.
-Q
K
4 000 000 3 600 000 3 200 000 2 800 000 2 400 000 2 000 000 1 600 000 1 200 000 800 000 400 000
111111111 Ml ffi
-Q
800 «
m a
m
-coBcocoaroœrooooo-
oooooooooooooooooooooooooooooooooooo— S tP3 ^ S P3 o S P3 o S 0,3 o S P3 o S [P3 o S P3 o S P3 o S 0,3 o S P3 o S P3 o \
' 'O 1 'O 1 'O 'O-
rvs////i Secondary trading
] Placement
■Bank Liquidity
Source: by data of the Bank of Russia and MICEX-RTS.
Fig. 27. Transactions with Corporate Bonds and Bank Liquidity between 2001 and January 2011
The markets for public and corporate bonds face the most pressing and yet unresolved challenge of attraction of domestic and external investors' long money. It was banks that thus far have prevailed on this market as a source of capital: their share in the structure of sources of financing of corporate bonds first rose from 31.9% in 2008 to 42.7% in 2010 and then plummeted to 37.7% in 2011. An effective measure to support the market for Rb-denominated corporate and regional bonds became the passing of amendments to the law on pension system. The amendments resulted in the possibility to invest a fraction of money from the savings system in non-governmental bonds. In compliance with Federal Act of 18 July 2009 No. 182-FZ "On introducing amendments to the Federal Act "On investing of funds for financing the savings part of the labor pension in Russian Federation", the state-owned managing company whose functions are exercised by VEB was granted the right to invest residents' pension savings in an extended investment portfolio, which is formed by Russian issuers' corporate bonds, guaranteed by the state Rb- and forex-denominated deposits with credit organizations, mortgage-backed papers, and international financial institutions' bonds, among others. The proportion of VEB and private managing companies' investments formed by pension savings in 2009 accounted for 0.5% of the aggregate value of corporate bonds in circulation. In 2010 and by results of the 9 months of 2011, it surged up to 3.5% and 3.9%, respectively. The share of mutual investment funds and the money market in financing corporate bonds has been negligible and accounted for 0.3% of the value of capitalization of corporate borrowers' bonds in 2009, 0.5% - in 2010 and 0.6% - in 2011.
That the corporate bond market has increasingly turned into an instrument of servicing interbank lending deals vs. the long-term nature of corporate bonds per se is demonstrated by the structure of transactions with corporate bonds at MICEX-RTS (Fig. 28). At the peak of the problem with bank liquidity, in November 2011, the proportion of repo deals in the aggregate value of exchanging deals with corporate bonds hit its all-time highs and accounted for 92%. That the corporate bond market has increasingly turned into an instrument of servicing interbank lending deals vs. the long-term nature of corporate bonds per se is demonstrated by the structure of transactions with corporate bonds at MlCEX-RTS (Fig. 28). At the peak of the problem with bank liquidity, in November 2011, the proportion of repo deals in the aggregate value of exchanging deals with corporate bonds hit its all-time highs and accounted for 92%. Today, only less than 5% of transactions with corporate bonds are market ones, i.e. are used indeed for the sake of portfolio formation and restructuring. The risk of the current situation with corporate bonds is that should market participants switch to government bonds as a naturally simpler and more efficient mutual lending instrument on the repo market, they would trigger a systemic crisis on the market for corporate borrowings.
100 -90 -80 -70 -60 -50 -40 -30 -20 -10 -0 -
□ Auction (market) regime □ Negotiated deal regime □ Repo transaction regime
Source: by data of MICEX-RTS.
Fig. 28. Structure of Transactions with Corporate Bonds at MICEX, as %
In contrast with the corporate bond market, the structure of exchanging deals with regional bonds (Fig. 29) displays positive changes. In early 2011, the share of repo deals on this particular market accounted for some 92%; however, it slid to 51% in H2 of the year, with the proportion of market deals hitting 22% in 2011. This evidences that regional bonds proved to a lesser degree be engaged in interbank lending and, per haps, investors more vigorously use them to shape up and restructure their portfolios
□ Auction (market) regime □ Negotiated transaction regime □ Repo transacti
Source: by data of MICEX-RTS.
Fig. 29. Structure of Transactions with Corporate Bonds at MICEX, as %
3.4.3. Competition on the Market for Corporate and Regional Bonds
Fig. 30 displays findings of an analysis of proportions of different groups of participants in trading (private and state-owned corporations1, and the Bank of Russia) in volumes of exchanging trading in corporate bonds at MICEX-RTS in all the regime, including market, negotiated deals, and repo transactions. The share of public structures in the volume of transactions with corporate bonds underwent practically no change throughout 2011; that said, between August and December, it was Bank of Russia which held the lion's share of volumes of transactions with the said instrument, for in the period of exacerbation of the situation with liquidity, the Bank of Russia has been crediting banks by means of repo deals with corporate bonds. In so doing, the magnitude of the said operations proved to be greater than during the acute phase of the 2008 crisis.
100 90 80 -70 60 50 -40 30 -20 10 -0 -
□ Public structures, less CBR ■ The Bank of Russia □ Other participants in trading
2005
Source: by data of MICEX-RTS.
Fig. 30. Proportion of Private and Public Brokers in Volumes of Trading in Corporate
Bonds at MICEX-RTS, as %
1 VEB, VTB, VTB Capital, VTB24, Gazprombank, Sberbank, KIT-Finance, Sviaz-Bank, Bank of Moscow, Transcredit, and from 2011 IC Troika Dialogue.
Fig. 31 shows the proportion of public structures and the Bank of Russia in volumes of exchanging trading in regional bonds. During the last four months 2011, the Bank of Russia has been vigorously participating in transactions with regional bonds, and during some periods would hold up to one-third of volumes of deals with regional bonds.
100 80 -60 -40 -20 -
- ■ ■ . - 1 - ■ :
■ 1
= j s s s — = ¡45- j g S s g 3 ■S ! = g ^ E S ■si = g •S S S s S s g 3 ■S g •S j s ^ E 3 ■s ! = g •S H
2005 2006 2007 2008 2009 2010 2011 2
□ Public structures, less CBR ■The Bank of Russia □Other participants in radin g
Source: by data of MICEX-RTS.
Fig. 31. Proportion of Private and Public Brokers in Volumes of Trading in Corporate Bonds at MICEX-RTS, as %
The market for corporate bonds appears substantially different from the one for regional bonds in terms of level of concentration measured by Herfindahl-Hirscmann Index (Fig.13). The corporate bond market appears low concentrated, with its HHI index value being nearly twice as low as the one of the equity market at MICEX-RTS. This can be ascribed to the fact that in the conditions of an insufficiently liquid OFZ market, corporate bonds are used largely as an interbank lending mechanism. It is vigorously employed by all banks, which is why the circle of participants in trading in corporate bonds at the exchange is a very broad one. By contrast, the market for regional bonds in 2010-11 was moderately concentrated, with its monthly HHI values fluctuating within the band between 800 and 1,800. It was only in November 2011 that HHI on transactions hit above the 1,800 mark and the market for a while became highly concentrated. There are a few players on the market (Sberbank, VTB, Bank of Russia, Centrocreditbank, among others), and it is used at least as a platform for interbank lending.
Fig. 32 displays data on the number of transactions and the value of an average transaction with corporate bonds on the order-driven market at MICEX-RTS. In contrast to the market segment with trading in stock (Fig. 16), the number of market transactions with corporate bonds has been in decline between 2009 and mid-2011, with the average per-transaction volume being on the rise. This evidences that in contrast to the market deals with equity, this particular segment of the market exhibits a lesser degree of advancement of high-frequency trading. The fall in the number of transactions and the value of the average market deal in H2 2011 is explained by the effect of "dying" trading activity in the segment of order-driven transactions in the period of exacerbation of the problem with liquidity.
Source: by data of MICEX-RTS.
Fig. 32. Market Transactions with Corporate Bonds at MICEX
Findings of an analysis of the segment of repo transactions with corporate bonds at MI-CEX-RTS presented in Fig.33 evidence that in contrast to the market regime of transactions, in the period of aggravation of the situation with liquidity in 2011, the number of transactions and the average transaction value in the repo segment were on the rise, which apparently mirrored the banks' increasing demand for loans against corporate bonds. The value of an average repo transaction proved to be roughly twice as high as the value of a market deal with corporate bonds. That is hardly surprising, as the amount of a bank loan extended to a financial company cannot be small.
I I Value of transaction, Rb Thos ^^Transactions, pcs
Source: by data of MICEX-RTS.
Fig. 33. Repo Transactions with Corporate Bonds at MICEX
As concerns placement of corporate bonds, the drivers of expansion of the respective market for several years have been large, primarily state-owned, corporations. Table 6 demons-rates that the proportion of issues placed by Top-24 largest issuers in the aggregate value of corporate bond issues in 2009 was 87.7%, in 2010 - 60% and in 2011 - 59%. In 2007, of the
131
overall volume of placement of corporate bonds worth a total of Rb 476.7bn the share of their issues accounted for just 42.1%, while all other issuers'- 57.9%. In the 2009 and 2010 lists, out of the top ten corporations therein 6 ones were state-owned, while in 2011 there already were 7 of them.
Table 6
The Largest Issuers of Rb-Denominated Corporate Bonds in 2009-2011 rr.
2009 2010 2011
Issuers Rb bn. % Issuers Rb bn. % Issuers Rb bn. %
1 Russian Railways 145 15.8 FSK UES 50 5.8 Rosselkhozbank 62 5,7
2 Transneft 135 14.7 Rosselkhozbank 35 4.1 FSK UES 55 5.0
3 VEB 60 6.6 Rosnanotech 33 3.9 Uralkaliy 50 4.6
4 Lukoil 50 5.5 Evrazholding 30 3.5 Rostelecom 39 3.5
5 Atomenergoprom 50 5.5 AHML 29 3.3 AHML 35 3.2
6 Bashneft 50 5.5 VEB 27 3.2 Rosnano 33 3.0
7 AFK Systema 39 4.3 Alrosa 26 3 VEB 30 2.8
8 MTS 30 3.3 MTS 25 2.9 Gaspromneft 30 2.8
9 AHML 28 3.1 Mechel 25 2.9 Rusal Bratsk 30 2.8
10 VTB ( VTB 24) 23 2.5 Wimm-Bill-Dann 24 2.8 Veb-Leasing 25 2.3
11 SIBMETINVEST 20 2.2 VTB ( VTB 24) 20 2.3 Mechel 25 2.3
12 Gaspromneft 18 2 Gaspromneft 20 2.3 Oboronprom 21 1.9
13 VTB-Leasing Finance 15 1.6 Vympelkomlnvest 20 2.3 Mortgage agent AHML 20 1.9
14 Mechel 15 1.6 Russian Railways 15 1.8 Gasprombank 20 1.8
15 MMK 15 1.6 Severstal 15 1.8 NLMK 20 1.8
16 Gasprom 15 1.6 Globex Bank 15 1.8 RusHydro 20 1.8
17 NLMK 15 1.6 Norilsk Nickel 15 1.8 AFK Systema 20 1.8
18 Severstal 15 1.6 Unicredit 15 1.8 NK Alliance 17 1.6
19 NIA VTB 001 14 1.6 EBRD 14 1.6 Uranium One Ink 17 1.5
20 Bank Petrocom- merz 11 1.2 MMK 13 1.5 Gasprom Capital 15 1.4
21 MBRD 10 1.1 Bank Saint Petersburg 13 1.5 EvrazHolding 15 1.4
22 Rosbank 10 1.1 Aeroflot 12 1.4 Kuzbass-Energo Finance 15 1.4
23 Rosselkhozbank 10 1.1 Transcreditbank 12 1.4 MMK 15 1.4
24 VympelkomIn- vest 10 1.1 Atmoenergoprom 10 1.2 Moscow Credit Bank 13 1.2
Other issuers 113 12.3 Other issuers 342 40.0 Other issuers 448 41.2
Total 917 100 855 100 1089* 100
* - including non-public offering.
Source: by data of www.cbonds.ru,www.rusbonds.ru and MICEX-RTS.
The corporate bond market has increasingly shaped up as a process locked between public structures: state-owned corporations borrow funds from their peers, while it is mostly state-owned banks in tandem with the Bank of Russia which steer the secondary market. More than this, it also is public investment banks which become underwriters and investment consultants in the course of corporate offerings. This is evidences by data of Table 7. In 2007, state -owned banks rendered underwriting services to 36.3% of bond issues (value-wise); in 2008, their proportion surged 46.8%, in 2009 - 62.4%. In 2010 it slid to 46.0%, but in 2011 bounced back to 62.4%.
The situation with investment banking services on the market for regional bonds appears different. In 2008 and 2009, the share of state-owned banks in the value of these bond issues rose from 14.2% in 2007 up to 58.7% and 85.6%, respectively. But in the next two years, 2010 and 2011, it slid first to 75.4% and then to 14.4%. The cause behind such a drastic decline in the proportion of state-owned structures in regional offerings in 2011 lies in the ter-
mination of Mosfinagency's operation - once a key player on the market for regional loans, the Moscow City Hall has revised its budget strategy priorities.
Table 7
Proportion of State-Owned Investment Banks in Volumes of Rb-Denominated Bond
Issues on the Domestic Market
2007 2008 2009 2010 2011
Rb mn share, % Rb mn share, % Rb mn share, % Rb mn share, % Rb mn share, %
Corporate bonds
Total 467970 100.0 469 792 100.0 994 022 100.0 855 035 100.0 994 844 100.0
Public investment banks 169 668 36.3 219 892 46.8 620 044 62.4 393 743 46.0 620698 62.4
Other 298 302 63.7 249 900 53.2 373 978 37.6 461 292 54.0 374 146 37.6
Regional bonds
Total 53 032 100.0 71 943 100.0 155 836 100.0 114 901 100.0 53 944 100.0
Public investment banks 7 551 14.2 42 227 58.7 133 325 85.6 86 613 75.4 7767 14.4
Other 45 481 85.8 29 716 41.3 22 511 14.4 28 288 24.6 46 177 85.6
Source: by data of ratings of organizaers of bond placements www.cBond.ru over 2007-2011.
3.5. The Main Risks on the Financial Market
The main risks of the financial market are related to the following factors: stagnation of the equity market due to a halt of the growth in prices on energy carriers; risks related to the outflow of foreign capital; depreciation of the ruble; advanced growth in external borrowings by banks and the non-financial sector; growth in the volume of trading on the term market with insufficient level of surety of deals; growing risks on the REPO market and low capacity of the financial services market which hindered growth in financial intermediaries.
3.5.1. Halt of the Growth in the Equity Market Due to the Pricing Factor
As shown in Section 3.2.1. (Fig. 6 and 8), the Russian stock market is dependent on oil prices. That price is an indicator of the state of the global economy, stability of the financial system and the level of cash liquidity in it, political stability in oil exporter countries and other factors. The current forecasts of the Ministry of Economic Development and international financial institutions - which forecasts all point to the fact that in the mid-term prospect no growth in oil prices is expected - reflect concerns over both the slowdown of the global economic growth and risks to stability of the global financial system due to the outstanding problem of sovereign debts, Euro-zone crisis, insufficiently stable banking system and other factors.
If an equation of correlation between the price on oil and the index shown in Fig. 6 is applied to the short-term forecast of oil prices of the Ministry of Economic Development in the 2012-2014 period there will be a stagnation of the equity market as shown in Fig. 34. The RTS Index will be volatile, but its average value will stop at the level of 1900 points. To renew the stock market's growth, new ideas of economic growth are required and even if they are implemented it is unlikely that they start working at once1.
1 In different versions of Strategy-2020, such ideas include a radical change in the business climate, a new industrial policy and innovations.
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Average annual RTS index (left axis) — — RTS index as of the year-end (left axis) Annual average Brent oil price, the 2010-2020 forecast of the Ministry of Economic Development (hand axis)
Source: calculated on the basis of the data of the forecast of the Ministry of Economic Development and MICEX-RTS.
Fig. 34. The forecast of the RTS index until 2014 on the basis of the forecast of oil prices of the Ministry of Economic Development
On the basis of the equation of correlation between the RTS index and prices on oil, in the
2009 report1 in 2010 the annual average value of the index was expected to be at the level of 1503 points, while the actual one was equal to 1510. When analyzing the market results of 2010, the average annual oil price per barrel was expected to grow in 2011 from $80 to $1052. Actually, it grew more to nearly $111 per barrel. However, instead of the expected growth in the annual average value of the RTS index to 2017 points in 2011, that index actually grew merely to 1748 points. Furthermore, as of the year-end the RTS index fell from 1770 points in
2010 to 1381.87 in 2011 (a decrease of 21.9%). The factor behind the difference between the actual data and the expected one is a more sizable capital outflow from Russia than it was expected.
According to our evaluations, in 2012 with an insignificant drop in the average annual prices on oil the average annual value of the RTS index will grow from 1748 points to 1842 (an increase of 5.4%). Multidirectional dynamics of average values of oil prices and the index will be explained by a slowdown in volumes of the capital outflow from Russia.
3.5.2. The Risks of the Outflow of Foreign Capital
In Section 3.2.2., correlation between the Russian equity market and the flow of cash funds of foreign investment funds which invest in Russia was analyzed. As was shown with reference to the IMF survey, investment decisions of portfolio investors are based on the dynamics and volatility of the GDP growth rates forecasts of international financial institutions, evaluations of volatility of foreign exchange rates and indices of the expected volatility of the developed and emerging markets.
As was shown in Fig. 9, the outflow of capital from foreign funds specializing in investments in Russia - which outflow was registered in May-December 2011 - was replaced in January 2012 by a trend of inflow of resources to those funds. It remains to be seen if a
1 The Russian Economy in 2009. Trends and Prospects. M.: IEP, 2010, p.154.
2 The Economic and Political Situation in Russia. 2011 , No.7, Trends and Prospects. M.: Publishing House of the Gaidar Institute, 2011, p.154.
change in the trend of portfolio investors' behavior took place. In our opinion, there are no prerequisites for that so far. In particular, in the latest Report on the State of the Global Economy whose update was published on the Internet site in January 2012 the dynamics of the IMF forecasts as regards the GDP of the world's largest economies point to that fact, too. In that Report, as compared to the forecast of September 2011 the IMF revised downward the forecasts of the GDP growth rates in 2012 for the global economy from 4.0% to 3.3%, Japan from 2.3% to 1.7%, Germany from 1.3% to 0.3%, the UK from 1.6% to 0.6%, China from 9.0% to 8.2% and Russia from 4.1% to 3.5%.
Developments of 2011 point to the fact that there is a correlation between downward revision of GDP dynamics forecasts and behavior of investors of investment funds. As shown in Fig. 35, in April 2011 the IMF revised downward the 2011 forecasts of the GDP growth rates in the USA, the UK and Japan. In subsequent quarters, the forecasts of economic growth were revised downward as regards Germany, China, Russia and the world as a whole. Not surprisingly, according to the data of EPFR in May 2011 portfolio investments started to leave steadily the Russian equity market as a kind of response to the growth in uncertainties in the global economy.
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Fig. 35. The IMF quarterly forecasts of the real GDP growth in 2011, %
More inconsistent are indicators of indices of the expected volatility as regards US equities and equities of developing countries (Fig. 36). In the second half of 2011, the above indices showed a considerable surge which can be taken as warning of growing risks on the equity market. However, in January 2012 the VIX index and the VXY index fell a great deal which situation is evidence of the fact that term market participants expect a drop in volatility of prices on equities of both US companies and companies from emerging markets in the next few months. At the same time, growth in the above indices does not always mean that the risks are getting higher. For instance, a surge of the index in May-June 2010 was not accompanied by the outflow of capital from funds which invest in Russia and other emerging markets.
VIX U.S. (S&P 500) -Emerging Markets (VXY)
Source: on the basis of the data of the WEO IMF January 2012 with reference to the Chicago Board Options Exchange.
Fig. 36. The index of expected volatility
The above approach permits to identify conditions in which the funds of portfolio investors start to come back. It will take place once the IMF and other international financial organizations' forecasts of economic growth rates of large countries are not revised downward and fluctuations of the VIX index have become less volatile. With the looming economic crisis in the European Union and lack of positive changes in the US economy taken into account, it is unlikely to happen in the first half of 2012. So, in that period the outflow of foreign portfolio investments will continue, but, probably, on a smaller scale.
3.5.3. Risks of Depreciation of the Ruble in the Mid-Term Prospect
A trend of a slowdown of the inflow to Russia of new foreign exchange revenues - which trend emerged in 2011 as well - due to both stabilization of prices on the global commodity markets and the outflow of foreign capital which has continued for four years running, a transfer to a more flexible formation of the ruble exchange rate and a switchover by the Bank of Russia to targeting of the level of the inflation rate, primarily, by means of the instruments of the interest rate policy will eventually result in a situation where the dynamics of the money supply is no longer dependent on the foreign exchange reserves. The flow of foreign exchange revenues ceases to have a decisive effect on the money supply growth.
Generally, the above process is a positive one. In 2011, it resulted in the unprecedentedly low level of the inflation rate in this country. However, there is a risk that in case of shocks on financial markets advanced growth in the ruble money supply as compared to the foreign exchange reserves will result in a dramatic depreciation of the national currency. In case of a crisis on the global market or a panic on the domestic financial market when speculative demand by people and companies in foreign exchange has prevailed, the government and the Central Bank may lack foreign exchange reserves to meet such a demand and a devaluation of the national currency will be required.
The data shown in Fig. 37 gives an idea of the extent of such a devaluation. The above data shows the ratio between the official USD exchange rate in rubles as of the end of a month and the clearing rate of the US dollar which is determined by means of division of the
value of the money supply (M2) by the value of the gold and foreign exchange reserve of the Russian Federation. From the end of 2009, the official ruble exchange rate started to fluctuate to a greater extent from the clearing rate, while in December 2011 the difference between those two rates reached the maximum level in the past decade. The clearing rate of Rb 49.2 per one US dollar can be regarded as a potential benchmark for the official ruble exchange rate in case of the most unfavorable development of the situation on the financial market; fortunately, such a development is highly unlikely. However, with the existing difference between the official ruble exchange rate and its foreign exchange provision, the monetary authorities or simply an "invisible hand" of the market will gradually weaken the ruble in the mid-term prospect. Such a scenario would be preferable for the domestic economy as well, since a smooth devaluation of the national currency is one of the most effective instruments of support of national manufacturers and it does not run counter to the WTO principles.
Source: calculated on the basis of the data of the Bank of Russia and the Ministry of Finance of the Russian Federation.
Fig. 37. Dependence of the nominal USD exchange rate in rubles on the clearing rate
3.5.4. Risks of Accumulation of the External Debt by Banks and Non-Financial Companies
The external debt of the non-public sector which is actually equal to the value of the entire gold and foreign exchange reserve of the Russian Federation (Fig. 38) is still one of the main risks of the financial system. A stable relationship between the size of the gold and foreign exchange reserves and that of the external debts of the private sector points to correlation between the above indices. On the one hand, centralization of a portion of the value made by the business in the form of the gold and foreign exchange reserve creates the required margin of safety for the financial system and limits the excessive appreciation of the ruble. On the other hand, in conditions of the global economy withdrawal of such an amount of funds from the
revenues of the business creates inevitable difficulties for businessmen to maintain the expanded reproduction. To maintain it at the same level, they will need to compensate by means of external borrowings a portion of funds allocated to the state's gold and foreign exchange reserves. It is for that reason - despite the crisis and a pressure on the part of the government to make large state corporations reduce external borrowings - a considerable reduction in the volumes of external borrowing fails to be achieved.
Source: on the basis of the data of the balance of payments for a number of years.
Fig. 38. Growth in debts of the private sector, financial surplus of the state and assets of Russian participants in the Forbes rating of billionaires
In Fig. 39, the external debt data is provided separately in respect of banks and nonbanking companies. The external debt of banks increased from $144bn in 2010 to $164bn in 2011 (an increase of 13.9%). The debt of non-banking companies rose from $298bn in 2010 to $330bn in 2011 (an increase of 10.7%). The paradox of the situation with growth in the external debt of the private sector consists in the fact that the debt increased despite the considerable net outflow of foreign capital from Russia (about $85bn) and difficulties related to refinancing of external debts due to growing problems on global financial markets.
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Fig. 39. The external debt of the Russian Federation in the 1998-2011 period, billion $
3.5.5. Operating Risks of the Stock Market and the Term Market
In the past few years, the specifics of the stock market of equities consists in the advanced growth in the trading volumes as compared to assets of market participants and their customers. The data provided in Fig. 16 indirectly points to that fact; it shows growth in the number of anonymous transactions with a decrease in the size of the average transaction on the MICEX-RTS primary equity market. High-frequency trading is getting more popular. Annual contests for the name of the best private investor have actually turned into an indirect advertizing of high-frequency trading. The data on customers' operations which is occasionally published in the mass media permits to believe that private customers with large brokerage companies renew on average their portfolio completely once in two-three days1. Unlike the developed markets, the tariff policy of Russian brokers does not imply any limitations on high-frequency trading by customers irrespective of the extent to which they are prepared to risks2.
Increased trading activity not only impairs often investment results of the bulk of private investors, but also creates higher operating risks to trading systems. In Section 3.2.5., the problem of frequent technical failures at Russian exchanges in 2011 was considered. Each year, the exchange actively makes efforts to process the ever-growing flow of bids in a situation where it is opposed by nearly 600 participants, some of which have got at their disposal enough resources - no less than those of the exchange itself - to buy state-of-the-art computers and software programs which permit to reduce frequency of trading decisions. It is to be noted that the effect of such a competition on growth in capitalization of issuers, attraction of new funds and upgrading of efficiency of investment is not clear at all. So, in the years to come due to operating problems in infrastructure organizations the issue of introduction of balanced measures to regulate high-frequency trading may be raised.
The RTS term market causes similar concerns. The number of transactions and trading volumes in the above market grow at a high rate (Fig. 40), while customers' assets increase at a slower rate and the information on the number of participants in that market and their operating activities is not transparent.
It is to be noted that as compared to the earlier stage of development of the term market in the mid-2000s at present a lower level of surety of futures and options contracts is observed and the data in Fig. 41 points to that effect. Here is the information on the volumes of open positions on the futures and options market as well as surety of transactions in each market segment. The latter index is calculated by means of division of the monthly volume of open positions by the volume of trading in respective fixed-term contracts. From March 2009, recovery of trading volumes on the futures and options markets was accompanied by a drop in the level of surety of futures transactions from 10% of the trading volume in December 2008 to 5% at the present day while in the options market in the same period it fell from 146% to 74%.
1 BKS Makes Plans. Vedomosti, June 22, 2010.
2 Tariffs of US brokers imply charging of a flat brokerage fee in the absolute amount ($5 to $8 per transaction) of the sum of transactions which practice prevents persons who lack substantial assets in a brokerage account from high-frequency trading.
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3.5.6. Risks Related to REPO Deals
Rapid development of the financial crisis on the stock market in August 2008 resulted in the crisis of the REPO market where a number of large market participants failed to meet their financial liabilities. The system crisis of non-payments was managed to be avoided thanks to interference by the Bank of Russia into in settlements and the problem of mutual nonpayments was fixed up. In the period that followed the crisis, the infrastructure of the exchange managed to solve the problem of establishment of a guaranteed system of settlements on REPO deals.
At the present stage, the problem on the REPO market consists in the fact that for individual types of securities, for example, corporate bonds they became a dominating type of transactions. Corporate bonds became an instrument which specializes in provision of sureties in inter-bank lending deals. It has a positive effect as it ensures an influx of short-term liquidity to the market of corporate borrowings and a partial transformation of such liquidity into more long-term investment resources. At the same time, corporate bonds are much less convenient instruments for such a type of operations as compared, for instance, to OFZ. As regards output volumes, liquidity, affordability and reliability, OFZ have either already surpassed or will surpass in the next two years most issues of corporate bonds. It appears that as the strategy of development of the term market is carried out by the Ministry of Finance of the Russian Federation OFZ will become more liquid and popular with many investors. Gradually, they will oust corporate bonds from the inter-bank lending segment. If by that time corporate bonds have failed to find more long-term resources of funding the corporate debts market may collapse.
3.5.7. Lack of the Financial Market Development Strategy
The industry of provision of investment and financial services as well as readjustment of that industry to a long-term private investor requires considerable investments. To do that, financial institutions and investors should be well aware of the prospect of development of the industry in the next few years. So, a strategy of development of the financial market is to be agreed upon both by market participants and state authorities. The existing Strategy of Development fails to perform guideline functions as forecasted indices of the financial market stated in it refer to the distant year 2020. The indices were prepared without breakdown by the year and those indicators which were approved before the crisis have not been revised with taking into account the actual data in the 2008-2011 period. Not surprisingly, on the basis of the results of the strategic audit of development of the Russian financial market the Accounts Chamber of the Russian Federation stated that with current growth rates of indices which characterize the dynamics of development of the financial market "goals can be achieved as regards only two out of twenty target indices of development of the financial market set by the Strategy
Within the frameworks of the course in the economy of non-banking financial brokerage, in the 2009-2010 period NRU HSE carried out evaluation of the capacity of the Russian fi-
1 On January 10, 2012, the Accounts Chamber carried out a strategic audit of development of the financial market of Russia. The Information Department of the Accounts Chamber of the Russian Federation. Published on the Internet site of the Accounts Chamber of the Russian Federation at the following address www.ach.gov.ru
nancial market in the 2010-2020 period.1 On the basis of different sources and expert surveys, the value of assets which different categories of individual and institutional investors keep in brokerage accounts and transfer into trust management, including unit investment funds was estimated. Also, an evaluation of the market of investment services both in offering of different securities and carrying out of merger-takeover deals was made. Then, the amount of intermediaries' income from rendering of non-banking financial services was calculated on a yearly basis and it eventually permitted on the basis of the DCF-model to determine potential capitalization of the business of investment banks, brokers and trustees. The above calculations were carried out in accordance with the following three scenarios: an optimistic one which is close to KDR-2020 (the Concept for the Long-Term Social and Economic Development of the Russian Federation in the Period until 2020) of the year 2008; a base one which is aimed at the current growth path of the GDP and market capitalization and a moderate one which virtually allows for stagnation in economic growth and financial parameters.
On the basis of the results of the research, it was revealed that the entire business of Russian investment banks, brokers and trustees was evaluated at $22.7bn, $20.5bn and $11.8bn according to the optimistic scenario, base scenario and moderate scenario, respectively. In 2011, the above calculations were not updated completely, however, matching of the initial data with the actual outputs in the 2010-2011 period shows that the financial services market is developing according to the trend which is worse than the most moderate scenario.
An illustration of both a drop in demand in financial services and growth in a lack of confidence by the middle class to the domestic financial market in 2011 became a large-scale shutdown of once popular financial publishing houses which were aimed at an average investor. On June 27, 2011, the last issue of the Finans weekly came out. In April 2011, the Zhur-nal D' magazine aimed at persons with work experience on the stock market ceased to exist. Those developments became a continuation of a shutdown of the Smart Money magazine in May 2009 and the Russian Newsweek magazine in October 2010.
With lack of strategy, the entire financial business is doomed to degradation. Without clear and justified goals there are no investments, while without investments into development the financial business turns into industry which is dangerous to the consumer of services where growth in income is achieved not through attraction of new participants and investment assets to the market, but by means of intensifying the pressure of commissions on the existing customers. The present trend of strengthening of the role of state regulation and supervision should be combined with raising of responsibility of representatives of the state for different financial services industries. One of the state authorities should be responsible for the policy of development of financial organizations, including indicative planning of key indices of the industry. In May 2009, Decree of the President of the Russian Federation on the Principles of Strategic Planning in the Russian Federation was signed; at present special legislation on indicative planning is being developed. The ideas of the above documents are topical to the financial market. A center for coordination of the work on development of modern strategies of development of the industry and its participants can become self-regulating entities represented by the National League of Management Companies (NLMC), the Russian National
1 See more detailed results published in the NAUFOR Bulletin (Bulletin of the Russian National Association of
Securities Market Participants), No.3. March 2010.
Association of Securities Market Participants (RNASMP) and the National Securities Market Association (NSMA)1.
3.6. Problems of Attraction of Conservative Institutional Investors
The Russian stock market remains unattractive to the most capitalized conservative investors, primarily, western pension funds. To understand the reasons, it would be expedient to turn to the experience of the California Public Employees' Retirement System (Calpers), the US largest pension fund whose reserves amount to about $200bn. For many years until 2007, Calpers used methods of preparing the emergency markets rating as regards opportunities of investing its assets in such markets. The above methods were public and were based on research of authoritative organizations, including the Freedom House, the World Economic Forum, the Oxford Analytica, the Heritage Foundation, the Wall Street Journal and other research centers. On the basis of Calpers's research, the most important factors which prevent active investment by western pension funds and other conservative investors in the Russian stock market are shown in Fig. 42.
Source: www.calpers.ca.gov
Fig. 42. The factors which prevented Russia from receiving the maximum investment ratings in accordance with methods of the CalPERs Pension Fund (USA) in 2007
In 2007, Calpers changed the methods of making decisions as regards investment in emerging markets; portfolio managers were granted the right to select at their own discretion companies from emerging markets for making investments with taking into account risks incidental to different countries and stock markets. In the 2008-2010 period, Calpers invested in equities of a number of Russian companies (Table 8). Analyzing investments by Calpers in ADR of Russian companies in the above period, it has been found that investments in ADR of
1 According to Academician V.M. Polterovitch "... practically all the countries which managed in the past six decades to become developed states used indicative planning based on a close cooperation between the government and business associations (Strategy of Modernization of the Russian Economy/ executive editor V.M. Polterovitch. - SPb.: Aleteya, 2010, p.57).
Gasprom and Lukoil were reduced as a reaction to sanctions against foreign companies operating in Iran.
Table 8
Investments by Calpers in equities of Russian companies, million $
2008* 2009* 2010*
Gasprom 144.7 46.0 55.1
Lukoil 189.1 93.5 80.6
Mechel 9.1 1.0 1.8
GMK Norilsky Nikel 4.6 1.4 14.3
Novatek 20.6 10.4
Novorossiisky Torgovy Port 10.3 8.4 7.7
Rosneft 11.4 31.4 15.7
Polus Zoloto 5.5 2.3
Rostelekom 3.4 1.0
Sberbank of Russia 5.5 30.8 9.3
Severstal 7.0 4.7 7.0
AFK Sistema 9.7 3.8 62.0
Surgutneftegaz 4.5 20.5 18.9
Wimm-Bill-Dann 20.2 2.2
Magnit 7.3 15.5
MMK 6.1 2.0
VTB 31.6 6.9 14.3
LSR 2.9 4.4
Other open-end joint-stock companies (OAO) 12.9
Equities of Russian companies - total 427.4 314.4 337.4
Equities on the domestic and foreign markets 122 281.2 80 728.6 91 776.3
The share of equities of Russian companies in Calpers's portfolio 0.35 0.39 0.37
The share of Russian companies in the global capitalization 1.21 1.85 1.91
*the fiscal year ending in June; the detailed data on the composition and structure of Calpers's portfolio at its Internet site is published with nearly a year delay, probably, in order to limit strategies of following to that pension fund's portfolio.
Source: on the basis of the report on Calpers's investments for a number of years.
The value of Calpers's investments in equities of Russian companies is a symbolic one. In 2008, it was estimated at $427m or 0.35% of the cost of the equities portfolio of the state pension fund, in 2009, at $314m or 0.39% of the cost of the equities portfolio and in 2010, at $337m or 0.37% of the cost of the portfolio. For comparison, the share of equities of Russian companies in the global capitalization amounted to 1.21%, 1.85% and 1.91% in 2008, 2009 and 2010, respectively.
As regards the main criteria which restrained Calpers from investing into Russian equities when they officially declared the methods of selection of emerging markets for investments, no positive changes have taken place so far. In Fig. 43, the data of the Global Competitiveness Index of the World Economic Forum for a number of years is presented. The above data shows those spheres where Russia received low rating grades in terms of Calpers's former methods.
Position in the GCI WEF: independence of justice Position in the GCI WEF: protection of the rights
of minority shareholders
Position in the GCI WEF: efficiency of the standard of audit and reporting
Position in the GCI WEF: depth of the domestic equity market
Position in the GCI WEF: regulation of exchanges Position in the GCI WEF: reliability of banks
Source: The Global Competitiveness Index of the World Economic Forum for a number of years.
Fig. 43. Position of BRIC states in the global competitiveness index as regards a number of criteria which are important for decision-making by conservative portfolio investors
As regards the most problematic issues such as independence of justice, protection of minority shareholders, efficiency of standards of audit and reporting, depth of the equity market, efficiency of regulation of exchanges and reliability of banks, Russia lags significantly behind other BRIC states. It is to be noted that in 2011 Russia's position changed for the worse as regards two of the above six indices, remained unchanged as regards one index and somewhat improved as regards the remaining three indices.
3.7. The Role of the Stock Market in Modernization of the Economy and Promotion of Innovations
The crisis has revealed deep-rooted problems and inconsistencies of the Russian economy, as well as its unpreparedness to challenges of globalization. Russia has adopted a policy of
145
economic modernization. The financial market should play an important role in implementation of that policy. However, it remains to be seen if it is prepared for such large-scale objectives?
3.7.1. Contribution of the Market of Corporate Bonds in Real Capital Growth
An important financial achievement of the 2000s was development of the market of ruble-denominated bonds (Fig. 44). Capitalization of the market of ruble-denominated bonds rose from Rb 0.6 trillion in 2000 to Rb 7.4 trillion in 2011 or 12.3 times over. Of all ruble-denominated bonds, the market of corporate bonds was growing at a higher rate. Their aggregate capitalization rose from Rb 46bn in 2000 to Rb 3.4 trillion in 2010 or nearly 75 times over.
Source: on the basis of the data of the Ministry of Finance of the Russian Federation and Cbonds.ru.
Fig. 44. Volumes of outstanding ruble-denominated bonds
Such parameters of the market of ruble-denominated corporate bonds in the 2000-2011 period as were recalculated in US dollar terms are shown in Table 9. Despite the rapid growth in volumes of offering of corporate bonds from $1.1bn in 2000 to $31.5bn in 2011, the volume of such funds spent on capital assets growth remains low. With the total volume of offering of bonds in the amount of $28.2bn in 2010, only $0.03bn out of the above amount or 0.1% of the volume of the placed bonds was spent on purchase of capital assets. Altogether, in the 2000s the share of volumes of corporate bonds issues spent on capital assets varied from 0.00% to 6.7%. The data for January-September 2011 reflects positive changes. Only in the first nine months of 2011, for replenishment of capital assets $1.6bn was spent out of the total volume of the corporate bonds offering ($31.5bn), that is, ten times more than in all the previous years altogether.
Table 9
The parameters of the market of ruble-denominated corporate
bonds (billion $)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Capitalization 1.6 2.5 3.3 4.8 8.9 17 33.2 49.2 67 79.7 98.8 117,1
Secondary market, including REPO 0.2 1.1 2.3 8.2 14.7 44.2 134.9 371.1 457.4 293 756.8 1237,2
Placement 1.1 0.8 1.5 2.6 4.9 9.2 17.1 17.9 16.1 29.0 28.2 31,5
In capital assets 0 0 0.1 0.1 0.1 0.3 0.1 0.2 0.2 0.1 0.03 1,6*
the same as % of the capitalization 3.0 2.1 1.1 1.8 0.3 0.4 0.3 0.1 0.03
the same as % of the volume of placement 6.7 3.8 2.0 3.3 0.6 1.1 1.2 0.3 0.1
* for January-September 2011.
Source: calculated on the basis of the data of MICEX-RTS, cBonds, the Bank of Russia and Rosstat.
3.7.2. The Impact of IPO of Equities on the Economy
The more effective instrument of raising funds for financing of capital assets as compared to issuing of corporate bonds is a public offering of equities in the form of IPO and SPO. It is justified by the fact that funds raised by means of IPO are more long-term ones. In Table 10, parameters of the market of equities of Russian companies are shown. As seen from the Table, the most active IPOs of equities were carried out in 2006 and 2007 when companies managed to raise $17.0bn and $33.0bn, respectively. In 2006, 18.8% of receipts from IPO-SPO was spent by companies on purchase of capital assets, while in 2007 that index decreased to 10.9%. In individual years, for example, in 2008 and 2009 110.5% and 117.6% of the volume of IPOs was spent on capital assets, respectively. It can be explained by the fact that a portion of investments in capital assets was received by companies by means of a private offering and not IPO-SPO. In 2010, Russian companies, including RUSAl and Mail.ru -which are both off-shore-registered companies - raised $6.3bn by means of IPO-SPO; generally as a result of issuing of equities $2.6bn or 46.0% of the volume of IPO-SPO was invested in capital assets. In 2011, only in the nine months $1.6bn out of the total value of IPO ($11.3bn) was spent on capital assets. A considerable portion of funds raised on the stock market was spent on buying out of business from former owners, refinancing of debts and serving of merger-takeover deals, including purchasing of large equity stakes. At present, the volumes of IPO and investments in real capital through issuing of shares are much lower than those of merger-takeover deals. From 2000 till 2001, the total volume of IPO-SPO of Russian companies amounted to $72.0bn, while the volume of merger-takeover deals, to $644.3bn, that is 8.9 times more.
However, it is too early to say that a large portion of receipts from offering of equities and, especially, corporate bonds contributes to modernization of the economy and promotion of economic growth1. The volume of funds which companies raise by means of offering of equi-
1 In Russia, for some reason the q-Tobin rule does not work well. Under the above rule, if there is a high coefficient characterizing the ratio of market capitalization to replacement cost of the business it will be profitable for businessmen to make investments in real capital. (F. Mishkin The Economic Theory of Money, Banking and Financial Markets, 7th edition: Translated from English. - M.: 000 I.D. Williams, 2006, p. 738). Interestingly,
ties and corporate bonds and then spend on purchase of fixed-capital assets accounts for a small portion in sources of financing of capital assets. The data in Fig. 45 on the sources of financing of investments in fixed-capital assets points to that effect.
Table 10
Parameters of the market of equities of Russian companies (billion $)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Capitali- 40.7 74.6 105.5 176.3 230.0 548.6 1057.2 1503.0 397.0 861.4 938.3 1130**
zation
Secondary 46.7 49.4 86.8 188.3 541.3 374.0 914.2 1687.1 1982.5 1155.7 1430.5 2221.5
market.
including foreign exchanges
IPO of 0.5 0.2 1.3 0.6 3.0 5.2 17.0 33.0 1.9 1.7 6.3 11.3
equities
In capital 0.2 0.1 0.2 0.2 0.1 3.2 3.2 3.6 2.1 2 2.9 1.6***
assets
the same 0.5 0.1 0.2 0.1 0.0 0.6 0.3 0.2 0.5 0.2 0.3
as % of
capitaliza-
tion
The same 40.0 50.0 15.4 33.3 3.3 61.5 18.8 10.9 110.5* 117.6* 46.0
as % of
the vol-
ume of
IPO
The vol- 5.0 12.4 17.9 32.3 27.0 60.4 61.9 125.9 110.4 56.1 55.7 79.3
ume of
merger-takeover
deals
* - the value is more than 100% because a portion of investments in capital assets might have been carried out through private offering; **- evaluation;
***- for January-September 2011.
Source: calculated on the basis of the data of MICEX-RTS, the Bank of Russia, Rosstat and www.mergers.ru
Throughout the 2000s, the share of funds raised through issuing of bonds and equities in the sources of financing of capital assets varied in the range of from 0.1% in 2001 to 3.4% in 2005. In 2010, the above index amounted to 1.4%, while on the basis of the outputs of the nine months of 2011, to 2.0%.
according to the IMF Report on Global Financial Stability Russia differs from other developing countries by a lower value of the P/BV ratio which fact does not contribute to investments in real capital. It seems that the problem of Russia is of a dual nature: first, prices on equities are overrated and, second, the cost of non-efficient assets is tremendously high.
100% -,
60% -40% -20% -
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s
□ profit at disposal of enterprises
□ loans from banks
□ budgetary and extra-budgetary funds
□ Other
□ depreciation and other own funds
□ funds borrowed from other organizations ■ Issuing of equities and bonds
Source: calculations on the basis of the data of Rosstat.
Fig. 45. The structure of sources of investment in fixed-capital assets
3.8. The Impact of the Crisis on the System of Domestic Savings
To maintain high rates of growth and modernization of the economy of Russia, high rates of domestic savings and accumulation are required. However, if the rate of savings in Russia is relatively high and only below those of some states of the Asian region the rate of accumulation, that is, investments in capital assets and inventories is much lower than in many developing and developed countries. In Fig. 46, the data on the rate of savings and the rate of accumulation in Russia in the 1995-2010 period is presented.
•Gross accumulation, % of the GDP ^^^^Gross savings, % of the GDP
Source: calculations on the basis of the data of Rosstat.
Fig. 46. The rates of savings and accumulation in Russia in the 1995-2010 period, % of the GDP
The difference between rate of savings and the rate of accumulation amounts from year to year to 5-10 percentage points. The main factor that a portion of domestic savings in this country fails to turn into real capital can be explained by the fact that a large portion of the savings surplus is left in the gold and foreign exchange reserve which is deposited abroad. Such a situation is a necessity because at the current level of development of financial instruments and investment climate the financial system is unable to make the above reserves work efficiently in Russia. The system itself needs modernization, new knowledge and expertise. That problem should be attached key importance in development of the new long-term strategy of development of Russia till 2020.
Another reserve of growth in accumulation implies raising of the rate of savings by households. According to the official data of Rosstat, Russian households save 14-15% of their income. In leader-states as regards economic growth and modernization (China, India, Singapore and Hong Kong), the rate of savings by households to the amount of the disposable income is much higher. The social and demographic situation in those countries is, certainly, different from that in Russia, however it is to be admitted that any large-scale modernization is to rely on internal financing. In addition to the above, in the current situation a high rate of consumption in Russia actually means motivation at the expense of the domestic demand of foreign manufacturers.
To raise the rate of savings of households and attract long-term resources, as well as in a case of reserves of the state, conservative institutional investors are required. A relatively low level of development of such investors in Russia (Table 11) is a principal problem to the Russian financial market.
Table 11
The composite data on the level of development of institutional investors in Russia
Average index in the 2001-2010 period as regards mutual funds and in the 2001-2009 period as regards pension funds and insurers Number of countries in samples of ICI1 and OECD Position of Russia in samples Share as % of the GDP
Average in the 20012010 period 2010
Assets of open investment funds* 46 45 0.3 0.3
Reserves of private pension funds** 47 44 1.0 1.4
Assets of insurance organizations*** 33 32 1.0 1.1
* Russia - open-end and interval unit investment funds; ** Russia - reserves of non-government pension funds; *** Russia - insurance reserves.
Source: calculated on the basis of the data of the Investment Company Institute, stat.org OECD and IFS IMF base.
As compared to countries where there is a domestic stock market, Russia is the only country which is a global outsider as regards the level of development of all the three forms of institutional investors. Among 46 countries in respect of which the data on the assets of open-end investment funds is collected, Russia is rated 45th; as regards the standard of the relative level of development of private pension funds, 44th among 47 countries and as regards the assets of insurance organizations, 32nd out of 33 countries. In 2010, the share of assets of open-end unit investment funds and interval unit investment funds to the GDP of Russia amounted to 0.3%, reserves of non-government pension funds, to 1.4% and assets of insurance organizations, to about 1.1%. The above data points to the fact that in Russia the mechanism of mobi-
1 Investment Company Institute.
150
lization of savings through institutional investors does not virtually work. Unlike all other countries, in Russia the main ways of savings are real-estate and bank deposits.
In Fig. 47, the data on the number of accounts of individual investors with brokers and the number of personal accounts in registers of owners of investment shares of unit investment funds is presented. Unfortunately, at present the National League of Management Companies (NLMC) does not promptly reveal the number of market sharers of unit investment funds. However, if is assumed that in the 2009-2011 period the number of sharers of unit investment funds did not decrease as compared to 2008 then it may be concluded that in 2011 the number of individual investors which carry out operations with securities directly or by means of collective investments amounts to about a million investors. It is to be noted that the specifics of the 2010-2011 period was a trend of a slowdown of the growth in the number of brokers' clients registered in the MICEX trading system. If in 2009 the growth in registered clients within a year amounted to 112,200 persons, in 2010 it was equal to the mere 42,800 persons, while in 2011, to 66,500 persons. The number of active clients with brokers fell from 114,100 persons in 2009 to 93,200 persons in 2011. The above data may point to the fact that the existing scheme of attraction of clients to the Russian stock market has started to exhaust itself. The number of people who are attracted by manipulation on stock exchange is a limited one in any country. The new scheme of growth requires involvement of long-term investors, but it cannot be done without establishment of an efficient system of pension savings and restructuring of the pattern of provision of services by financial institutions.
□ sharers of unit investment funds, number of persons
□ brokers' clients, number of persons
□ brokers' active clients, number of persons
Source: calculations on the basis of the data of the MICEX-RTS, RNASMP and NLMC. Fig. 47. Number of retail and wholesale customers with management companies and brokers
Thus, the financial market has exhausted to a great extent the former scheme of growth and it needs to be changed. A particular attention is to be attached to a long-term investor, representative of the middle class. To solve that problem, it is important to work out a new strategy of development of the financial market.
3.9. Development of the Banking Sector in Russia in 2011
3.9.1. The Post-Crisis False Start
The financial sphere of Russia was the first sector of the national economy which was affected by the global economic crisis of 2008. Financial markets were hit first and then the banking sector experienced the liquidity problem to be followed by a full-scale economic crisis in Russia.
The two factors permitted to prevent the collapse of the banking sector: the government's financial aid and growth in households' savings. From the beginning of 2009, within the frameworks of anti-crisis measures the government allocated the largest resources to the banking sector. Households became a prominent participant (though an involuntary one) in rehabilitation of the banking system: during the crisis prevalence of the cautious behavior prompted people to save more money, rather than take loans from banks. In the 2009-2010 period, the growth in households' bank deposits amounted to Rb 4 trillion which figure exceeded the volume of all the consumer loans as of the end of 2009.
Early in 2011, all the factors pointed to the fact that the banking sector overcame the crisis, and it seemed the upward development began. The banking sector had at its disposal huge available resources for expansion of lending to the non-financial sector. The bank savings of the non-financial sector exceeded the volume of loans to industries and households by Rb 1.1 trillion, while the excessive banking liquidity amounted (according to our evaluations) to at least Rb 1 trillion. Thus, there were all the reasons to believe that in 2011 the Russian banking system would keep developing in a balanced way and overcome the structural problems which dated back to the pre-crisis period.
In reality, the situation was different: the balanced development failed, while rather intense growth took place in individual segments of the banking sphere and it was accompanied by dramatic structural imbalances. Lending to the non-banking sector of the economy increased considerably with fairly moderate growth in the depositary base. As a result, in the second half of 2011 the banking sector faced the liquidity crisis. More importantly, recovery of the acceptable level of liquidity will inevitably be accompanied by a decrease in the bank lending to the non-financial sector with the bad debt problem being, probably, aggravated. In reality, to achieve the mid-term curve of sustained development the complete restructuring of the banking sector may be required.
3.9.2. The Structure of Institutional Financial Flows in 2011
The structure of institutional financial flows which are redistributed by the banking sector provides the important information for evaluation of trends both in the financial and real sectors of the national economy. In 2011, the structure of flows actively shifted from the stable condition to the crisis one. If at the beginning of the last year the high level of excessive liquidity and lower growth rates of lending were typical of the banking sector by the end of the year the situation changed the other way round.
On the basis of the results of 2010, growth in loans to industries amounted to 9.8%, while that to households, to 14.4%. In 2011, more than twofold increase in the growth rates of lending took place (24.2% and 36.1%, respectively). A similar speed-up took place in a situation of sustained growth in the depositary base both in 2010 and 2011; the aggregate volume of funds of industries and households in accounts with banks rose by 23% (Fig. 48). That gap
naturally "swallowed" the excessive savings which were accumulated in the 2008-2010 crisis period.
Industries Households
Source: The Central Bank of the Russian Federation and the IEP's Structural Research Center calculations.
Fig. 48. The net credit of households and industries to the banking system of the Russian Federation, billion Rb.
An important trend in 2011 was the outflow of capital from the banking sector: if in 2010 the net capital inflow was registered in the amount of $ 15.9bn in 2011 the net capital outflow amounted to $ 26.2bn. The growing gap between foreign assets and lending to the non-financial sector, on the one hand, and the disposable resource base, on the other hand, was financed at the expense of a decrease in the bank liquidity and attraction of government funds. During the year, the level of liquidity fell by over Rb 600bn (from 8.7% to 5.6% of assets). On the contrary, the deposits of the Ministry of Finance and the loans of the Bank of Russia increased by Rb 1.3 trillion (from 1.4% to 4.3% of the liabilities) (Fig. 49). It is to be noted that the balance value of the own funds of the banking sector increased within a year by the mere 13.7%, while the capital adequacy norm decreased from 18.1% to 14.7% in 2011.
Generally, in 2011 the following principal changes took place in the structure of institutional financial flows in Russia. To start with, the role of households as a net creditor of the banking system decreased: on the basis of the results of the year the amount of deposits placed by households with banks was only Rb 390bn more then the amount of loans which households received, while in the past two years the net credit to banks from households amounted to Rb 2.1 trillion and Rb 1.9 trillion, respectively. As regards the corporate sector, the situation is quite the opposite: the volume of the extended loans exceeded by over Rb 900bn the volume of the attracted funds and deposits. Finally, a net loan of Rb 740bn was granted to the outside world. As a result, in 2011 the net loan to the non-financial sector and the outside world increased by Rb 1.3 trillion. The sources of such a substantial loan were the reduced bank liquidity and government resources.
Note. Government loans - loans of the Ministry of Finance of the Russian Federation, including debt on federal bonds, and the Central Bank of the Russian Federation.
Source: the Central Bank of the Russian Federation and the IEP's Structural Research Center calculations.
Fig. 49. The net credit of the government and the outside world, billion Rb.
3.9.3. The Main Trends in the Banking Sector
Growth in Bank Assets
In 2011, the dynamics of bank assets somewhat accelerated as compared to 2010 (with adjustment to the revaluation of assets in foreign currency the growth amounted to 21.4% against 14.8% in 2010). Such growth rates are quite moderate as they exceed the GDP deflator and the domestic market deflator1 by the mere 6% and 11%, respectively. It is to be noted that in 2011 the growth rates of the bank assets exceeded by the mere 3.4% the growth in the nominal GDP in 2011, and, accordingly, the ratio of the value of bank assets to the GDP increased insignificantly within a year from 74.8% to 76.5%. As it is shown below, even such growth rates of the banks' asset operations were difficult to achieve. The main sources of the banking sector's funds --account balances and customers' deposits - failed to ensure growth rates which were equal to the nominal growth in the economy in general without further participation of government authorities.
In 2011, in the group of the largest banks, the highest growth rates of assets were observed with state banks2 (without the Sberbank - 34%). Undoubtedly, a considerable contribution to the assets growth of the above group was made by the state's participation in the rescue of the Bank of Moscow. In September, the Deposit Insurance Agency (DIA) placed with the Bank
1 Such a volume of goods and services consumed on the domestic market as is determined as the GDP, less the net export.
2 For the purpose of the structural analysis of the banking sector, the following groups of banks were used: Sberbank, large state banks and banks of state companies (VTB, VTB24, GPB (Gasprombank), RSKhB (Russian Agricultural Bank), The Bank of Moscow and Transkredit), large foreign banks, large private Russian banks which are in the top 30 list and other (mid-sized and small banks).
of Moscow a long-term deposit in the amount of Rb 295bn which figure was equal at that time to about 35% of that bank's assets.
The lowest rates were registered with the group of large private banks (14%). It is to be noted that such results conform to the outputs of the polls of Russia's largest banks: 72% of the polled banks believe that in competition on the market of banking services the state banks1 have the best advantages.
Own Funds
A factor behind the insufficiently dynamic development of the banking sector in 2011 was slow-down of growth in the banks' own funds. In 2011, the regulatory capital of the banking sector (calculated in accordance with the methods of the Bank of Russia) rose by 10.7%, which figure is twice as little as the growth rates of assets. As a result, capital adequacy fell from 18.1% as of January 1, 2011 to 14.7% as of January 1, 2012. That level is still far from the minimum admissible benchmark of 10%. However, it is important to take into account the following two factors. Firstly, even with such a seemingly significant average level of capital adequacy its index with individual banks, including large ones may be close to a critical value. For instance, the capital adequacy of the VTB bank - the second largest bank as regards the value of the assets - as of January 1, 2012 amounted to the mere 11.2%. Secondly, capital adequacy of the banking sector fell below 15% only twice before and each time capitalization of the banking sector was supported one way or another by participation of the state. It took place for the first time late in 2006 when capital adequacy of the banking sector fell to the minimum level of 14.4%. Later, bank capitalization grew considerably as a result of placement of equities of Sberbank and VTB. A similar decrease took place for the second time in autumn 2008 (a drop to the level of 14.5%) when the financial crisis was in full swing; after that banks received government support in the form of subordinated loans for which purpose resources of the National Welfare Fund were used.
In 2011, the main factor behind slowdown of growth in own funds was the fact that the banking sector became less attractive to investors and, as a consequence, no new contributions to banks' authorized capital were actually made. In 2011, the amount of the authorized capital and additional capital increased by the mere 4.6%, that is, the minimum rate in the past few years.
Raising of requirements to banks' minimum amount of own funds does not change the situation for the better, either. From January 1, 2012, banks need the capital of at least Rb 180m. Consolidation of small banks could become a factor behind growth in the own funds of the banking sector. However, the dynamics of the value of the authorized capital does not point to the fact that bank owners are seeking to secure their banks against a possible withdrawal of the license. As of January 1, 2012, the own funds of over 100 credit institutions were less than Rb 180m.
Profit and the Rate of Return
Profitability of the banking sector remains low. The maximum level of profitability after the crisis was achieved in summer 2011 and then the rate of return started to go down. As regards ROA, the first half of 2011 corresponds to the year 2003 (2.6% on a year on year basis),
1 A. Vedev, S. Grigoryan. Development of the Russian Banking System in the Current Decade. The Outputs of Polls of Large Russian Banks (http://www.vedi.ru/bank_sys/bank5411_banks%20poll.pdf).
while as regards ROE (21.0%), to the year 2004. In the pre-crisis period of the credit boom (2005-2006) the profitability of the banking sector was much higher (ROA 3%-3.5%, and ROE 25%-30%). In the second half of 2011, the efficiency of the banking sector as regards the return on assets and return on equity went down further and, as a result, the annual figures turned out to be even lower: ROA - 2.3% and ROE - 19.6%.
3.9.4. Raised Funds (Resources for the Banking Activities) Households' Funds
In 2011, in the deposit market the major event was the slow-down of the savings activity of households. In the past year, the volume of funds in deposits grew1 by Rb 1.9 trillion which figure is nearly 20% lower than in 2010 (Rb 2.4 trillion). The growth rates of households deposits in the banking system decreased by over 33.4%: 19.5% against 31.2%.
In 2011, the process of dedollarization of households' accounts and deposits slowed down (virtually stopped) (Fig. 50). If in 2010 the share of deposits in foreign currency in the total volume of households' deposits fell by 7% from 25.7% as of January 1, 2010 to 18.7% as of January 1, 2011 in 2011 it decreased by the mere 1.1 % (to 17.6%). It is to be noted that in the second half of the year the share of accounts in foreign currency increased (from 16.9% as of August 1).
—The share of households' accounts iu foreign currency. % -Th e RUR/USI) exchange rate. Rb/USD
Source: The Central Bank of the Russian Federation and the IEP calculations
Fig. 50. The RUR/USD exchange rate and the share of households' deposits
in foreign currency with banks
Slow-down of growth in bank deposits should not be regarded as evidence of a loss of households' confidence in banks. It rather shows that the norm of households' savings has generally decreased. An alternative instrument of savings can be cash national currency, but in 2011 the demand in cash funds slowed down as well. M0 monetary aggregate (that is, the cash funds outside the banking system) grew within a year by Rb 876bn which figure is 15% lower than a year before (Rb 1,025bn). It is to be noted that the ratio of nominal growth in
1 With adjustment to the USD revaluation of deposits in foreign currency.
156
cash funds in 2011 and 2010 is comparable to a similar bank deposits indicator. It is to be noted that in respect of sales turnover the volume of cash funds remains to be excessive. The value of cash funds is sufficient enough for a three-month consumption of goods and services.
The main factor behind slow-down of households' savings activities was stagnation of households' real disposable income. In 2011, households' real disposable income was only 0.8% higher than in 2010. Simultaneously, ultimate consumption of goods and services in real terms increased by 5.8% (IEP evaluation as regards the aggregate volume of retail trade, public catering and paid services). Stable growth in consumption was supported by simultaneous reduction in the norm of savings and growth in demand in consumer lending (see below).
Stagnation of the depositary base (in August-September 2011 the influx of households' deposits to banks was close to nil) made banks to raise interest rates on retail deposits. The average weighted rate on one-year deposits (except for demand deposits) rose from the minimum values (5% per annum) in July to 7% per annum in December. An indicator of "the maximum interest rate (on deposits in rubles) of ten credit institutions which attract the largest volume of deposits of individuals" - which indicator is monitored closely by the Bank of Russia - rose from the summer minimum of 7.85% per annum to 9.42% per annum in December.
However, proceeding from the macro conditions which justified the frontal decrease in the norm of households' savings it is believed that growth in interest rates on deposits will not have a serious impact on the dynamics of the market of deposits. Individual banks which were more aggressive in raising of deposit rates are likely to strengthen their market positions. But, generally, the growth rates of that type of bank liabilities will be quite moderate in future. In 2012, households' deposits are expected to grow by 15%-18%, including ruble deposits (18%-20% and deposits in foreign currency (7%-10%).
Corporate Customers' Funds
Funds in corporate customers' accounts are prone to serious fluctuations, on the one hand, due to both payment of taxes (a quarterly decrease) and a December surge in budget expenses and, on the other hand, due to the fact that fluctuations in the capital inflow and outflow have an impact on the amount of account balances of corporate customers. In the past few months, the weak dynamics of that type of bank liabilities can be mainly explained by the outflow of capital despite the favorable situation which prevailed on the market of Russia's main export commodities.
Generally, within a year, the funds of industries in bank accounts and deposits rose by 24.8%. However, December - the period of large-scale growth in budget expenses - accounted for nearly a half of that growth (Rb 1.05 trillion out of Rb 2.15 trillion). Within a year, account balances in rubles grew faster than those in foreign currency (28.9% against 3.7%); it is to be noted that virtually all the dedollarization fell into December when account balances in foreign currency decreased by 10%, while those in rubles grew by 16.2%.
The fact that most corporate funds are placed in term deposits, rather than current accounts which serve the economic turnover can be regarded as a negative factor in terms of economic activities. In the second half of 2011, the volume of term deposits of corporate customers exceeded again the amount of funds in settlement accounts. It is to be noted that about 45% of term deposits of industries and entities are placed for the term of over one year, that is, such funds have been withdrawn for a long period of time from companies' current operating plans.
The term deposits of corporate customers exceeded for the first time the amount of current settlement account balances in the mid-2009, that is, in the period of stagnation of the economic activities. At that time, such a ratio in the structure of bank accounts of the corporate sector evidently pointed to the low level of business activities and a lack of motivation to economic development. Companies preferred to receive the minimum return on funds placed in bank deposits, rather than take the risk of expansion of production. In 2010, the volume of industries' current account balances grew faster than the volume of deposits which actually remained stable in nominal terms. As of March 1, 2011, the ratio of the value of term deposits to that of current ones fell to 76%.
Source: The Central Bank of the Russian Federation and the IEP calculations
Fig. 51. Ratio of the volume of funds in term deposits of the corporate sector to the value of current account balances
However, later the banking sector returned to the policy of accumulation of savings in bank deposits. As a result, in 2011 the volume of the current and settlement account balances grew by 10.4%, while that of term deposits, by 40.7%, and the volume of term deposits, that is, funds which are not involved directly in serving of the turnover exceeded again the value of settlement accounts balances (Fig. 51).
Foreign Liabilities
In 2011, external financing did not have a decisive role in formation of the resource base of the banking sector. The inflow of foreign liabilities to the banking sector in 2011 (according to the methods of the balance of payments) amounted to the mere $ 7.6bn which figure is 56.5% lower than in the previous year ($ 17.7bn). It is to be noted that according to the balance statements in 2011 the value of foreign liabilities increased only by $ 11.9bn. Accordingly, banks' foreign liabilities ensured only 4% of the growth in the aggregate resources of the banking sector in 2011. It is to be noted that in the total volume of banks' debt on borrowed funds foreign liabilities amount to 11% as of January 1, 2012. Taking into account the current volatility of the global financial markets it is unlikely that in the short-term prospect banks will manage to return to active external financing.
Forced Growth in State Support in Autumn 2011 - Reaction to the Increased Outflow of Capital
A combination of a relative revival of activities on the credit market (see below) and stagnation of the banking sector's main sources of funds resulted in depletion of the reserve of liquidity which was accumulated during the crisis. Starting from summer 2011, banks started to take an active part in auctions of the Ministry of Finance on placement of temporarily available resources of the budget in bank deposits. In September, simultaneously with their debt to the Ministry of Finance remaining considerably high banks started to show demand in different instruments of liquidity provision by the Bank of Russia.
As a result, as of the end of August the total volume of funds of the monetary authorities placed with commercial banks amounted to Rb 950bn, while by the end of the year, to Rb 1.8 trillion. In 2011, the monetary authorities' total depositing of funds in formation of the resource base of the banking sector amounted to 19%.
Table 12
The structure of liabilities of the banking system of Russia (as of the end of the month), % of the total
12.05 12.06 12.07 12.08 12.09 06.10 12.10 03.11 06.11 09.11 12.11
Liabilities, billion RB. 9696 13963 20125 28022 29430 30417 33805 34009 35237 38443 41628
Own funds 15.4 14.3 15.3 14.1 19.3 19.7 18.7 18.9 18.5 17.3 16.9
Loans of the Bank of Russia 0.2 0.1 0.2 12.0 4.8 1.7 1.0 0.9 0.9 1.3 2.9
Inter-bank operations 4.0 3.4 4.1 4.4 4.8 5.1 5.5 5.2 5.2 5.4 5.7
Foreign liabilities 13.7 17.1 18.1 16.4 12.1 11.5 11.8 11.2 10.9 11.4 11.1
Individuals' funds 28.9 27.6 26.2 21.5 25.9 28.3 29.6 30.0 30.4 29.0 29.1
Funds of industries and entities 24.4 24.4 25.8 23.6 25.9 25.4 25.7 25.1 24.3 24.4 26.0
Accounts and deposits of state and local authorities 2.0 2.2 1.5 1.0 1.0 1.8 1.5 2.3 3.5 4.9 2.3
Issued securities 7.6 7.2 5.8 4.1 4.1 4.2 4.0 4.1 4.0 3.8 3.7
Source: The Central Bank of the Russian Federation and the IEP's Center for Structural Research calculations.
3.9.5. Assets of the Banking Sector
Growth in Retail Lending as a Factor of Support of the Level of Households' Consumption
In 2011, dynamics of retail lending was determined to a great extent by the ratio of households' income and expenses. As was stated above, in 2011 households' real disposable income increased by the mere 0.8% as compared to the previous year, while expenses, by 5.8%. As a result, the share of consumer expenses in households' cash income rose from 68.8% in 2010 to 72.0% in 2011. Such a situation resulted, on one hand, in reduction of the share of the income allocated for savings in cash funds and with banks. On the other hand, support of the consumption growth required additional resources which situation resulted in growth in households' demand in bank loans.
In 2011, the volume of loans was nearly 50% higher that in the same period of 2010 (Rb 5,420bn against Rb 3,649bn). In 2011, growth in extension of new loans to individuals amounted in real terms to 37%. Such a situation resulted in the speed-up of the growth in the
1 Deflated by the average index of consumer prices in that period.
households' aggregate debt to banks. Within a year, its volume grew by 35.9% (against 14.4% a year before).
In the currency structure of retail lending, loans in rubles oust loans in foreign currency. As of January 1, 2012, the share of loans in foreign currency fell to 5.5%, which figure is the minimum level in the entire period of development of the Russian banking sector. The pre-crisis minimum level of lending in foreign currency (10.4%) was registered in summer 2008 in the period of the highest appreciation of the ruble exchange rate (the US dollar cost then less than Rb 24). After the revaluation which was caused by the ruble devaluation late in 2008 and early in 2009, that share rose somewhat (to 13.0% as of March 1, 2009). Simultaneously, the process of restructuring of the households' currency debt to banks began. It is to be noted that the demand in new loans in foreign currency does not exceed the value of the repaid debts from autumn 2008. Such a situation can be regarded as a favorable trend which points to the fact that most retail customers have adopted a more weighted approach to evaluation of currency risks related to lending in foreign currency, particularly, such exotic ones to the Russian market as the Swiss francs and the Japanese yens1.
The speed-up growth in provision of retail loans usually conceals the accumulated problems related to the quality of the banking credit portfolio. In 2011, the share of the overdue loans to individuals fell from 7.1% to 5.3%, while the ratio of the formed reserves for retail loan losses to the aggregate retail credit portfolio, from 9.7% to 7.5%. It is to be noted that both the value of the overdue debt and the volume of the reserves remain at the stable level; such a situation points to the fact that the problem of bad loans accumulated during the crisis actually remains unresolved and is merely concealed by the renewed speed-up growth in the credit portfolio (Fig. 52).
Fig. 52. Indices of the quality of loans to individuals
1 In 2007, in the midst of the credit boom the supply of long-term loans in such currencies to individuals (mostly mortgage loans) rose actively. However, as seen from the experience of the previous crisis the negative effect of the foreign exchange revaluation of loans in those currencies has considerably exceeded the expected profit from low interest rates. 160
Lending to Corporate Customers
Along with active retail lending in 2011, banks increased lending to corporate borrowers as well. During the eleven months of 2011, the volume of new loans to industries and entities rose by 40% as compared to the similar period of 2010 and amounted to over Rb 25 trillion. The growth rates of the loan debt increased from 9.8% in 2010 to 24.2% in 2011. Rise in intensity of lending can be seen in the growth in the ratio of the volume of the extended loans to the total output. In 2011, that index amounted to 27% against 24% in 2010. It means that over a quarter of the economic turnover is carried out with use of credit funds. It is to be noted that in the pre-crisis year of 2008 that index amounted to 33%.
As in the retail segment of the credit market, the process of gradual dedollarization is observed in corporate lending. The share of debt in foreign currency of the corporate customers fell from the peak value of 29%-30% in spring 2009 to 19%-20% by the end of 2011. It is to be noted that the share of foreign currency in the newly extended loans decreased to 11% (in 2009 it amounted to 17%, while in 2010, to 13%).
Dynamics of the quality of the portfolio of corporate loans is similar to a great extent to the situation in the retail segment of the market. Relative indices show positive changes. The share of the overdue debt fell from 5.5% as of the beginning of the year to 4.8% by the end of the year, while the volume of the reserves, from 10.1% to 8.3% of the aggregate portfolio of corporate loans. It is to be noted that within the year the volume of the reserves did not actually change, while the volume of the overdue debt grew by 9%1.
—*—The ov erdue leans, billion Rb —*—Reserves for corporate loans
—n—The share of the overdue loans, the right-hand axis —*—Reserves as % cfthe loans, right-hand axis
Source: The Central Bank of the Russian Federation and the IEP calculations.
Fig. 53. Indices of the quality of corporate loans
The borrowed funds of the corporate sector have the following three main sources Fig. 54 : external borrowings from non-residents, bank loans in rubles and foreign currency and bonds placed in the domestic market. The external borrowings account nearly for the one-third of
1 In 2011, growth in the overdue debt in the banking sector in general was justified by the situation related to the Bank of Moscow. If in general the volume of the overdue debts in the banking sector grew by Rb 60bn within 12 months the volume of the overdue debt in the portfolio of the Bank of Moscow increased in the same period by Rb118bn. Thus, without taking into account the Bank of Moscow the share of the overdue debt in the corporate loans fell to 4.4%.
the aggregate borrowed resources of the corporate sector. It is to be noted that from the beginning of the crisis of 2008 the share of the external financing keeps gradually declining. Before the crisis, the volumes of non-banking corporations' outstanding debt obligations on the domestic market amounted to about 10% of the borrowings on the domestic market (excluding foreign debts) and 6%-7% of the aggregate liabilities of the corporate sector.
30 00 0 7
■ bi""f g n debt □ Loans of Russian banks DRuble-daiotiiinated bonds
Source: The Central Bank of the Russian Federation and the IEP calculations
Fig. 54. Borrowed funds of the corporate sector, billion Rb
In 2009, in a situation where foreign markets were closed and bank lending was stagnant domestic bonds became the main channel for attraction of borrowed funds to the corporate sector. As a result, their share in the total volume of the corporate debt rose to 11% (16% on the domestic market). At present, the unit weight of the market borrowings in the total volume of attracted credit resources remains relatively stable. In the 2010-2011 period, the average growth rates of the volume of outstanding ruble-denominated bonds are almost similar to the growth rates of bank credit portfolios. Accordingly, their share in the domestic borrowings remains at the level of 14%-16%.
It is to be noted that the aggregate investments of banks in corporate debt obligations do not exceed 35%-40% of the market and amount to the mere 4%-5% of the total volume of banks' claims to industries and entities (loans and debt obligations). If in 2011 the growth rates of lending to corporate customers amount to about 22% banks' investments in corporate bonds increase at a slower rate (16%). The outputs of the polls of large Russian banks show that the existing ratio between investments in securities and lending is quite stable. According to the polls of large banks1, over the two-thirds of the polled banks are not prepared to invest in bonds more than 10% of the aggregate portfolio of claims to corporate customers. Bonds do not became a real alternative to a bank loan either for borrowers or banks.
1 A. Vedev, S. Grigoryan. Development of the Russian Banking System in the Current Decade. The outputs of Polls of large Russian Banks (http://www.vedi.ru/bank_sys/bank5411_banks%20poll.pdf) 162
Liquidity
The banking sector entered the year 2011 with excessive liquidity. During the first quarter of 2011 (without taking into account the seasonal peak of January 1) the volume of excessive reserve assets of banks placed in deposits with the Bank of Russia and invested in its bonds amounted to Rb 1.1 trillion- Rb 1.3 trillion or 3.5%-4.0% of the banks' aggregate assets. Meant for lending to the real sector, that volume of resources could ensure growth of 30% in retail lending (which figure is comparable to the actual annual growth in 2011) or growth of 10% in corporate loans (nearly a half of the actual annual growth). With multiplicative factor taken into account, the aggregate volume of the reserve assets as of the end of the 1st quarter was sufficient enough to the banking sector to double the money supply (judged by the pre-crisis structure1 of the money multiplier and the decreased share of cash funds in the money supply).
However, a potential credit boom did not materialize due to changes both in the structure of assets of the non-financial sector and preferences of the banks. Households started to switch over to a credit model of consumption which situation deprived banks of the main institutional creditor. Starting from July, households borrowed more funds than placed in deposits. In the first three quarters of 2011, the aggregate growth in loans to households (Rb 1,059bn with adjustment to revaluation of assets in foreign currency) turned out to be higher than the influx of households' deposits to banks (Rb 1,002bn with a similar adjustment).
However, it was banks' activities that contributed most to transformation of excessive liquidity into a liquidity squeeze, namely - a withdrawal of liquid assets abroad from the Russian economy. So, in 2011 the net foreign assets of the banking sector rose by $24bn or more than Rb 740bn (over 60% of the excessive liquidity at the beginning of the year). On the basis of the results of the year, an excess of foreign assets over foreign liabilities amounted to the record-high level of $46bn, while foreign assets in foreign currency amounted to $185bn.2
The main channels of capital outflow were state banks and subsidiary banks of nonresidents. Out of $24bn of the net foreign assets growth, Sberbank and other state banks accounted for $15bn, while another $9.5bn was withdrawn by foreign banks. Thus, other private banks even ensured insignificant growth of about $ bn in the net inflow of capital.
In 2011, the specifics of the shrinkage of the bank liquidity consisted in its overall nature. The ratio of liquid assets to the aggregate assets kept declining with all the groups of the banks (Fig. 55). However, state banks were still in a more advantageous situation. Only in that group of banks, a drop in liquidity did not amount to the pre-crisis minimum of 2.5%-3.0% having retained a small reserve for a further decline. As regards other groups of banks, liquidity amounted as a minimum to the pre-crisis level with a group of small banks and midsized banks being in the most disadvantageous situation. If in the 2007-2008 period liquidity of those banks did not fall below 9%-10% (due to low diversification of the business small banks need higher liquidity to maintain normal activities) in autumn 2011 that index amounted to the level of 7%-8%. Such a situation points to considerable liquidity shortages
1 In this context, the structure of money multiplier means the aggregate of actual relations between individual components of the monetary base: cash funds, banks' mandatory reserves, correspondent account balances with the Bank of Russia and respective components of the banks' resource base. For mandatory reserves - volumes of reserve liabilities, while for other reserve assets - the aggregate depositary base of the banking sector.
2 Insignificant differences in data with Section 2.1.4 are justified by differences in calculating methods of the balance of payments and banks' balance sheet.
and rising risk level in that group of banks. Due to a lower business diversification, smaller banks need to maintain a higher volume of reserve (liquid) assets for comfort business activities. A further drop in liquidity makes such banks critically dependent on access to refinancing of the Bank of Russia and the inter-bank market.
State banks Foreign banks Large private banks • Other (small and mid-sized banks)
Source: The Central bank of the Russian Federation and the IEP calculations.
Fig. 55. Dynamics of the share of liquid assets in different groups of banks
Table 13
The structure of assets of the banking system of Russia (as of the end of the month), % of the total
12.05 12.06 12.07 12.08 12.09 06.10 12.10 03.11 06.11 09.11 12.11
Assets, billion Rb. 9696 13963 20125 28022 29430 30417 33805 34009 35237 38443 41628
Cash funds and precious metals 2.7 2.6 2.5 3.0 2.7 2.1 2.7 2.2 2.2 2.3 2.9
Funds deposited with the Bank of Russia 7.3 7.5 6.9 7.5 6.9 7.8 7.1 5.9 4.5 3.5 4.2
Inter-bank operations 6.3 5.8 5.4 5.2 5.4 6.2 6.5 6.5 6.4 6.2 6.4
Foreign assets 9.1 9.9 9.8 13.8 14.1 12.7 13.4 13.6 13.8 14.6 14.3
Loans to households 12.1 14.7 16.1 15.5 13.1 13.0 13.0 13.3 14.0 14.2 14.4
Loans to the corporate sector 47.0 45.3 47.2 44.5 44.5 45.1 43.6 44.5 45.3 45.1 44.0
State 6.6 5.2 4.1 2.0 4.2 4.2 5.1 5.7 5.8 6.0 5.0
Property 2.4 2.4 2.2 1.9 2.7 2.7 2.6 2.6 2.5 2.4 2.3
Source: The Central Bank of the Russian Federation and the IEP's Center for Structural Research calculations.
3.9.6. Forecasts of Development of the Banking Sector
In 2012, development of the banking sector in Russia will be determined by a number of factors. On one side, the dynamics of the macro indices which reflect the condition of banks' main customers - industries and households - will have an effect on banks. On the other side, the situation will be determined by solution (or prevalence and aggravation) of acute structural problems inside the banking system.
According to the official forecasts (prepared by the Ministry of Economic Development of the Russian Federation), in 2012 a considerable decrease in the growth rates of the main mac-roeconomic indices is expected: real GDP (from 4.3% in 2011 to 3.7%), industrial production 164
(from 4.7% to 3.6%), retail sales volume (from 7.2% to 5.5%). There is still a direct risk of investment activities being at a low level, but it is clear that growth in material assets will be the minimum (after soaring growth in 2011). The above factors will determine both the decrease in the growth rates of savings of the non-financial sector in the banking system and prevalence of the low demand in bank loans on the part of industries. In addition to the above, growth in households' real disposable income (from 0.5% to 4.5%) which corresponds to growth in the retail sales volume is expected; implicitly, such a situation may result in a decrease in the demand in consumer credit. In general, in 2012 the expected macroeconomic situation in no way contributes to the speed-up of development of the banking sector.
In the second half of 2011, structural problems in the banking sector became more acute -growth rates of the resource base kept consistently falling, while those of lending, increasing. As a result, the Russian banking system turned out to be "loaned up" while expansion of assets and maintaining of the minimum required level of liquidity were carried out by means of refinancing and deposits of the Ministry of Finance.
Generally, it appears that in a situation of moderately positive or moderately negative (depending on expectations) macroeconomic conditions development of the banking sector will be determined by structural problems which prevailed late in 2011. Such problems are characterized by a growing gap between the resource base of the banking system and volumes of loans which are financed by means of loans of the Central Bank and deposits of the Ministry of Finance of the Russian Federation. It is to be noted that the liquidity shortage is aggravated by the segmentation of the banking system and its low capitalization. Generally, the situation may develop in accordance with the following three scenarios:
1. Prevalence of the existing trends. In such a case, the liquidity crisis is highly likely to occur in the banking sector as soon as February-March 2012. The crisis will be justified both by the short-term nature of deposits of the Ministry of Finance and problems related to refinancing of a large number of small and mid-sized banks. A relatively simple solution of the problem may consist in provision of another portion of state resources and modification of the system of refinancing (in order to ensure that an ever larger number of participants join it). Within the frameworks of that scenario with a simple solution of the problem, the situation will not radically change and the next large-scale aggravation of the liquidity crisis will take place early in autumn.
2. Expansion of external financing. The gap between the resources of the banking system and the volume of the extended loans can be covered by means of the external financing. A similar process was observed in the 2006-2008 period; it is to be noted that that process was accompanied not only by a drop in the volumes of refinancing to the zero level, but also by the growth in the gross (not net) capital outflow. In other words, as seen from the experience of the past decade growth in the inflow of external resources to the Russian banking sector encourages not only further growth in lending to the non-financial sector, but also growth in excessive liquidity and capital outflow which factor points to existence of both system difficulties and structural problems in the banking system. Realization of that scenario is far from being clear due to the fact that an unstable situation, primarily, in the banking sector of the developed economies is highly likely to remain.
3. A drop in the growth rates of lending to the non-financial sector. Such a scenario is of a crisis nature for a number of reasons. First of all, a drop in the growth rates of lending is possible not only due to toughening of requirements to the borrower, but also due to growth in interest rates. With loans becoming more expensive, economic activities will
decline, prices will go up and the number of debt service payments will increase. Then, the bad debts problem will get worse due to both more expensive refinancing of old debts and the "effect of the base". The latter means that indices of problem debts aggravate purely statistically when growth rates or absolute volumes of the extended loans fall.
In case of implementation of any scenario listed above, the banking system of Russia will face instability in 2012. Apart from the fact that bank lending will not be able to be a factor behind the economic growth, the very feasibility that it will meet the adequate demand in loans on the part of the non-financial sector appears highly doubtful. An important observation of the development of the banking system in 2011 consists in the fact that no proper conclusions have been drawn from the 2008-2009 crisis, and as soon as the first evidence of stabilization appeared structural problems got aggravated again. It is quite clear that restructuring of the banking sector is badly needed to ensure sustained development. However, such an operation is related to high costs and risks in a situation of unstable recovery growth.
3.10. Market for Municipal and Sub-Federal Borrowings
3.10.1. Dy namic of Market Development
By results of 2011, the consolidated regional budget and budgets of territorial state ex-trabudgetary funds had been executed with a deficit of Rb 14.2bn (0,03% of GDP). When compared with 2010, the amount of the deficit of the consolidated regional budget shrank in the shares of GDP equivalent nearly 7.5 times. Thus, the 2010 deficit of territorial budgets accounted for Rb. 99.3bn (0.22% of GDP).
In 2011, budgets of RF Subjects were executed with a deficit of Rb 20.4bn, budgets of urban okrugs - with a deficit of Rb 31.1bn, budgets of intracity municipal entities of the city of Moscow and St. Petersburg - with a surplus of Rb 0.8bn, budgets of urban and rural settlements - with a surplus of Rb 1.8bn, balances of territorial public extrabudgetary funds - with a surplus of Rb 20.9bn. In 2010, the RF Subjects' budgets were executed with a deficit of Rb 88.1bn, budgets of urban okrugs - with a deficit of Rb 15.1bn, budgets of intra-city municipal entities of the city of Moscow and St. Petersburg - with a deficit of Rb 0.1bn, budgets of municipal districts - with a deficit of Rb 1.2bn, budgets of urban and rural settlements -with a surplus of Rb 4.5bn.
Table 14
The Territorial Budget Surplus (Deficit) to Budget Expenditure Ratio (as %)
Year Consolidated Regional Budget* Regional budgets
2011 -0.2 -0.3
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 account of state extrabudgetary funds.
Source: calculations by IEP on the basis of the Federal Treasury's data. 166
Table 15
The Territorial Budget Surplus (Deficit) to Budget Expenditure Ratio
in 2007-2011 (as %)
year Budgets of intra-city municipal entities in the city of Moscow and St. Budgets of urban okrugs Budgets of municipal districts Budgets of urban and rural settlements
2011 6.15 -2.10 1.13 0.64
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
Source: calculations by IEP on the basis of the Federal Treasury's data.
As of 1 January 2012, as many as 55 RF Subjects had executed their consolidated budgets (including territorial extrabudgetary funds) with a deficit (in 2010, the respective figure was 63 regions). The aggregate amount of the deficit was at the level of Rb 189.2bn, or 4.4% of the revenue part of their budgets (b 2010 - Rb 202.5bn, or 5.2%).
The median level of the budget deficit accounted for 4.6% of revenues of a respective budget. Atop the list of regions with the highest value of the budget deficit to budget revenue ratio were Republic of Mordovia - 21.4%, Sakhalin oblast - 14.3%, Vologda oblast - 14.0%, Smolensk oblast - 12.6%, Republic of Khakassia - 11.5%, Saratov oblast - 10.1% (Table 18).
Meanwhile, 28 RF Subjects executed their consolidate budgets with a surplus (20 in 2010). The aggregate volume of the budget surplus in those regions accounted for Rb 175.0bn, or 4.7% of the value of the revenue part of their budgets (in 2010 - Rb 128.9bn, or 3.5% of the revenue part of the said budgets). The median value of the budget surplus accounted for 2.2% of the revenue part of the budget.
The highest value of the surplus to the expenditure level of the consolidated budget was reported in Nenetsky AO - 18.8%, Irkutsk oblast - 8.1%, Moscow oblast - 7.6%, Tyumen oblast - 7.2%. The bulk volume (84.3%) of the aggregate surplus of the consolidated regional budget was secured by 5 Subjects of the Federation: the city of Moscow - 47.1%, or Rb 82.5bn, Moscow oblast - 17.1%, or Rb 29.9bn, Tyumen oblast - 7.7%, or Rb 13.4bn, Khanty-Mansy AO - 6.8%, or 11.9bn, Irkutsk oblast. - 5.7%, or Rb 9.9bn.
3.10.2. Structure of the Accumulated Debt
According to the RF Ministry of Finance, the 2011 volume of the RF Subjects' accumulated debt was up Rb. 72.6bn on a year-on-year basis and made up Rb 1,172.2bn (2.1% of GDP), while the respective increase for municipal entities was Rb 45.7bn (Rb 215.5bn, or 0.4% of GDP).
Table 16
Net Borrowing by Regional and Local Budgets (as % of GDP)
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Borrowings by subfederal and local governments Including: -0,29 -0,04 0,47 0,37 0,26 0,09 0,21 0,17 0,29 0,74 0,51 0,21
Repayable loans out of budgets of other levels -0,03 0,04 0,12 -0,1 -0,02 -0,03 -0,04 -0,01 0,03 0,33 0,37 0,15
Subfederal (municipal) bonds -0,27 -0,07 0,16 0,31 0,29 0,09 0,14 0,08 0,17 0,24 0,07 -0,11
Other kinds of borrowings 0,01 -0,02 0,19 0,6 0,03 0,11 0,10 0,09 0,17 0,07 0,17
Source: calculations by IEP on the basis of the Federal Treasury's data.
Meanwhile, according to the Federal Treasury, the 2011 volume of net borrowings by regional consolidated budgets stood at Rb 113,170.1mn, or 0.21% of GDP (Table 16). The volume of accumulated external borrowings by regional consolidated budgets shrank by Rb 16,172.0mn, while the volume of net domestic borrowings accounted for Rb 129,342.1mn.
Structure ofborrowings
The 2011 aggregate volume of the consolidated budget's borrowings accounted for Rb 604,708.5mn (1.1% of GDP), of which external borrowings made up Rb 785.3mn. Like in 2009-10, it was the Republic of Bashkortostan which became a sole region-recipient of foreign loans.
The aggregate volume of regions and municipalities' domestic borrowings accounted for Rb 603, 923.2mn. The largest borrowers on the domestic market became: Nizhny Novgorod oblast - Rb 64.4bn, Moscow oblast - Rb 40.9bn, Omsk oblast - Rb 29.9bn, Republic of Tatarstan - Rb 26.1bn, Krasnodar krai - Rb 24.6bn, Saratov oblast - Rb 23.3bn. Their aggregate share in the overall volume of borrowings accounted for 34.6%. When compared with the 2010 figure, the volume of domestic borrowings in nominal terms was down by Rb 104.0bn.
Issuance of securities in the overall volume of consolidated regional budget accounted for 9.1%, loans out of higher-tier budgets (budget loans) - 21.3%, other borrowings (borrowings from commercial banks and international credit organizations) - 69,6%.
The most significant change in the structure of regional budgets' borrowings became continuation of the 2010 trend to a relative increase in borrowings from credit institutions against a shrinking share of securities issues from 15.7 to 9.1% (Table 17).
Table 17
The Structure of Domestic Borrowings by Subnational Budgets (as %)
2011 2010 2009
Regional consolidated budget Regional budgets Municipal budgets Regional consolidated budget Regional budgets Municipal budgets Regional consolidated budget Regional budgets Municipal budgets
Securities issuances 9.1 10.9 4.3 15.7 18.1 4.3 24.9 28.5 4.4
Budget loans 21.3 26.2 24.0 29.0 26.9 31.5 0.4
Other borrow- 'nss 69.6 62.8 95.7 60.3 53.0 95.7 48.2 40.0 95.3
Source: calculations by IEP on the basis of the Federal Treasury's data.
The greatest net borrowings to budget revenues ratio was exhibited by: the Republic of Mordovia - 23.1%, Vologda oblast - 13.1%, Smolensk oblast - 13.0% (Table 18).
The largest net borrowers became: the Republic of Tatarstan - Rb 21.9bn, Krasnodar krai -Rb 21.6bn.
To the greatest degree the accumulated debt was reduced by having the volume of repayment of earlier made borrowings be in excess of new ones: the city of Moscow - at Rb59.5bn, Moscow oblast - at Rb 38.8bn, Murmansk oblast - at Rb 3.1bn.
Table 18
Execution of Consolidated Budgets of RF Subjects in 2011
Budget revenues (Rb mn) Budget deficit (surplus) (Rb mn.) The deficit (surplus) to revenue ratio, % The attracted borrowed capital to revenue ratio, % The net borrowing to revenue, % Borrowing redemption expenditures to revenue ratio, % Net borrowings to deficit (surplus) ratio, %
1 2 3 4 5 6 7 8
Central federal okrug
Belgorod oblast 84 315.4 2 123.5 2.52 7.39 2.44 4.96 0.97
Bryansk oblast 41 150.2 -7.8 -0.02 12.24 1.79 10.45 -94.07
Vladimir oblast 50 771.3 -1 976.7 -3.89 2.05 1.70 0.35 -0.44
Voronezh oblast 82 543.1 1 996.4 2.42 10.05 6.91 3.15 2.85
Ivanovo oblast 34 260.6 1 504.6 4.39 18.47 7.79 10.68 1.77
Tver oblast 53 877.5 3 694.1 6.86 18.61 10.50 8.11 1.53
Kaluga oblast 47 974.4 2 119.2 4.42 13.30 6.80 6.50 1.54
Kostroma oblast 23 864.9 1 241.8 5.20 29.36 4.78 24.59 0.92
Kursk oblast 44 902.3 2 056.9 4.58 2.30 1.92 0.38 0.42
Lipetsk oblast 44 493.2 2 048.2 4.60 9.23 4.90 4.33 1.06
Moscow oblast 392 927.8 -29 846.8 -7.60 10.40 -9.89 20.29 1.30
Orel oblast 28 026.6 -505.1 -1.80 4.92 1.74 3.18 -0.96
Ryazan oblast 44 050.8 3 381.5 7.68 26.41 8.48 17.93 1.11
Smolensk oblast 36 432.3 4 600.6 12.63 50.06 13.00 37.06 1.03
Tambov oblast 40 637.5 -271.8 -0.67 9.77 4.31 5.46 -6.45
Tula oblast 53 856.5 -2 806.6 -5.21 12.51 -3.83 16.34 0.74
Yaroslavl oblast 55 641.3 3 197.169 066.41 5.75 20.39 1.61 18.78 0.28
City of Moscow 1 525 923.7 -82 488.0 -5.41 0.98 -3.90 4.88 0.72
Total 2 685 649.4 -89 938.9 -3.35 6.13 -2.37 8.50 0.71
North-West okrug
Republic of Karelia 38 546.6 90.0 0.23 15.28 -0.70 15.98 -3.01
Republic of Komi 61 801.4 1 112.3 1.80 4.41 4.10 0.31 2.28
Arkhangelsk oblast 68 072.6 5 388.8 7.92 20.01 7.03 12.99 0.89
Vologda oblast 53 292.2 7 460.3 14.00 21.49 13.14 8.35 0.94
Kaliningrad oblast 50 946.2 -240.0 -0.47 9.66 6.63 3.03 -14.08
Leningrad oblast 85 989.0 -2 217.1 -2.58 0.71 0.07 0.64 -0.03
Murmansk oblast 60 017.1 -927.7 -1.55 2.21 -5.13 7.33 3.32
Novgorod oblast 29 760.2 -73.3 -0.25 13.47 5.99 7.49 -24.33
Pskov oblast 29 423.4 267.8 0.91 9.58 9.40 0.18 10.33
St. Petersburg 422 000.8 2 850.5 0.68 0.46 0.45 0.01 0.67
NenetskyAO 14 613.6 -2 718.080 967.69 -18.60 0.21 -0.05 0.26 0.00
Subtotal 914 463.2 10 993.5 1.20 5.40 2.28 3.12 1.90
Southern federal okrug
Republic of Kalmykia 10 065.7 272.5 2.71 5.41 2.97 2.45 1.10
Krasnodar krai 227 158.7 9 078.9 4.00 10.81 9.49 1.32 2.38
Astrakhan oblast 35 394.1 1 646.9 4.65 47.63 7.14 40.49 1.53
Volgograd oblast 83 755.8 7 578.0 9.05 17.32 8.46 8.86 0.94
Rostov oblast 142 158.3 3 202.5 2.25 2.92 2.62 0.30 1.16
Republic of Adygeya (Adygeya) 14 145.6 410.4 2.90 5.90 3.92 1.98 1.35
Subtotal 512 678.1 22 189.2 4.33 11.99 6.97 5.01 1.61
Volga federal okrug
Republic of Bashkortostan 143 901.9 5 053.4 3.51 2.69 0.83 1.86 0.24
Republic Mary-El 23 173.8 1 182.5 5.10 13.79 5.90 7.90 1.16
Republic Of Mordovia 35 716.6 7 643.4 21.40 28.79 23.11 5.67 1.08
Republic of Tatarstan (Tatarstan) 200 245.0 14 205.4 7.09 13.04 10.95 2.10 1.54
Udmurt Republic 57 103.3 1 288.4 2.26 11.03 3.28 7.75 1.45
Chuvash Republic -Chuvashia 40 205.6 -265.9 -0.66 9.60 0.37 9.23 -0.55
Nizhny Novgorod oblast 132 127.8 5 976.8 4.52 48.77 9.47 39.31 2.09
Kirov oblast 51 580.8 1 456.9 2.82 15.56 5.73 9.82 2.03
Samara oblast 138 092.6 10 909.3 7.90 16.81 7.71 9.09 0.98
Orenburg oblast 81 619.2 652.6 0.80 1.65 0.73 0.91 0.92
Penza oblast 50 703.9 4 213.4 8.31 16.04 8.84 7.20 1.06
cont'd
1 2 3 4 5 6 7 8
Perm krai 114 314.3 -1 171.3 -1.02 0.06 -0.01 0.08 0.01
Saratov oblast 81 296.5 8 216.8 10.11 28.67 10.94 17.73 1.08
Ulyanovsk oblast 43 337.4 1 777.8 4.10 8.96 6.87 2.09 1.68
Subtotal 1 193 418. 61 139.5 5.12 15.59 6.52 9.07 1.27
Ural federal okrug
Kurgan oblast 34 795.0 815.4 2.34 1.72 0.56 1.16 0.24
Sverdlovsk oblast 195 319.8 4 036.1 2.07 4.65 3.80 0.85 1.84
Tyumen oblast 187 542.0 -13 437.3 -7.16 0.00 0.00 0.00 0.00
Chelyabinsk oblast 127 653.5 7 316.8 5.73 0.94 -0.16 1.10 -0.03
Khanty-Mansy AO 211 679.1 -11 873.9 -5.61 0.98 -1.36 2.34 0.24
Yamal-Nenetsky AO 140 487.5 8 934.8 6.36 0.00 0.00 0.00 0.00
Subotal 897 476.9 -4 208.1 -0.47 1.44 0.51 0.94 -1.08
Siberian federal okrug
Republic of Buryatiya 47 618.8 -261.4 -0.55 5.70 -2.27 7.97 4.13
Republic of Tyva 17 498.7 -31.6 -0.18 4.37 1.98 2.39 -10.97
Altay krai 87 575.1 -1 041.6 -1.19 0.83 0.27 0.56 -0.22
Krasnoyarsk krai 197 677.4 4 353.7 2.20 7.73 3.80 3.92 1.73
Irkutsk oblast 121 885.1 -9 910.3 -8.13 1.10 -2.42 3.52 0.30
Kemerovo oblast 136 362.1 2 908.7 2.13 2.93 1.61 1.32 0.75
Novosibirsk oblast 119 827.2 1 263.2 1.05 10.57 2.80 7.77 2.65
Omsk oblast 72 871.4 3 353.6 4.60 41.04 5.10 35.95 1.11
Tomsk oblast 55 488.4 -828.2 -1.49 10.69 0.72 9.97 -0.48
Republic of Altay 15 855.9 869.9 5.49 10.03 5.80 4.24 1.06
Republic of Khakas-sia 23 317.9 2 673.3 11.46 10.34 7.64 2.70 0.67
Trans-Baikal krai 51 204,9 2 506,9 4,90 8,40 2,16 6,24 0,44
Subtotal 947 183,1 5 856,3 0,62 8,62 1,85 6,77 2,99
Far-East federal okrug
Republic of Sakha (Yakutiya) 130 474.4 -4 681.4 -3.59 2.34 -0.37 2.71 0.10
Primorsky krai 109 222.7 -2 183.1 -2.00 2.58 0.66 1.91 -0.33
Khabarovsk krai 87 489.7 -1 070.9 -1.22 1.39 1.00 0.39 -0.82
Amur oblast 53 486.3 3 608.3 6.75 18.25 10.26 7.99 1.52
Kamchatka krai 56 318.2 -1 323.2 -2.35 1.84 -1.27 3.11 0.54
Magadan oblast 23 645.1 -836.4 -3.54 4.86 0.97 3.89 -0.27
Sakhalin oblast 57 804.2 8 270.9 14.31 9.83 4.57 5.26 0.32
Jewish AO 8 916.4 786.9 8.83 9.13 9.13 0.00 1.03
Chukotka AO 20 208.2 -1 060.5 -5.25 0.00 -0.14 0.14 0.03
Subtotal 547 565.2 1 510.7 0.28 4.66 1.74 2.92 6.32
North-Caucasian federal okrug
Republic of Dagestan 77 572.6 3 506.4 4.52 5.29 3.83 1.46 0.85
Kabardino-Balkar Republic 26 471.3 49.3 0.19 5.67 1.13 4.53 6.09
Republic North Ossetia-Alania 21 023.7 1 248.9 5.94 20.69 6.16 14.53 1.04
Republic of Ingushetia 18 873.6 -965.8 -5.12 0.15 0.15 0.00 -0.03
Stavropol krai 88 729.1 505.8 0.57 10.89 4.31 6.58 7.56
Karachaevo-Cherkes Republic 15 628.6 810.9 5.19 7.28 4.22 3.06 0.81
Chechen Republic 81 537.9 1 491.4 1.83 2.82 2.08 0.74 1.14
Subtotal 329 836.9 6 646.9 2.02 7.00 3.27 3.73 1.62
Russian Federation, total 8 028 271.7 14 188.9 0.18 7.53 1.41 6.12 7.98
Source: calculations by IEP on the basis of the Federal Treasury's data.
Domestic Bond Issues
In 2011, as many as 21 RF Subjects and 5 municipal entities registered prospectuses of bond issues (in 2Ol0 - 17 Subjects and 6 municipalities).
The following regions registered prospectuses of their bond issues with the RF MinFin: republics of Karelia, Komi, Sakha (Yakutiya), Bashkortostan, Buryatiya, Udmurtia, Chu-
vashiya, Krasnoyarsk, Krasnodar, Stavropol krais, St. Petersburg, Volgograd, Vologda, Ivanovo, Kaluga, Kostroma, Nizhny Novgorod, Ryazan, Samara, Sverdlovsk, Tver, Yaroslavl oblasts, Volgograd, Kazan, Krasnoyarsk, Novosibirsk, Krasnodar.
In 2011, the volume of placed bonds continued to decline and accounted for Rb 55.1bn vs. 111.1bn in 2010 and 158.1bn in 2009. The annual contraction in nominal terms accounted for Rb 55.6bn (53.3% in real terms). The volume of issuance of subfederal and municipal bonds over the year was down from 0.25 to 0.10% of GDP (Table 19).
Table 19
Volume of Issuance of Subfederal and Municipal Papers (as % of GDP)
year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Issuance 0.19 0.17 0.27 0.46 0.47 0.37 0.28 0.26 0.43 0.41 0.25 0.10
Redemption 0.46 0.23 0.10 0.15 0.19 0.28 0.14 0.18 0.26 0.16 0.18 0.21
Net financing -0.27 -0.07 0.16 0.31 0.29 0.09 0.14 0.08 0.17 0.24 0.07 -0.11
Source: calculations by IEP on the basis of the RF MinFin data.
The largest securities placements were reported by Samara oblast (Rb. 12.2bn, or 22.2% of the aggregate volume of territories' issuances), Krasnoyarsk krai (Rb 9.1bn, or 16.4%), Nizhny Novgorod oblast (Rb 8.0bn, or 14.5%).
So, the share of the top three largest issuers in the overall volume of issuances of placed regional and municipal bonds accounted for 53.1% (Table 20).
Table 20
Placement of Subfederal and Municipal Securities in 2011
Subject of the Federation Volume of issuance (Rb mn) The issuer's share in the aggregate volume of issuances (%) Issuance volume to domestic borrowings ratio (%)
Central federal okrug
Kaluga oblast 2 500.0 4.5 39.2
Kostroma oblast 2 044.3 3.7 29.2
Yaroslavl oblast 2 322.1 4.2 20.5
North-West federal okrug
Republic of Karelia 1 000.0 1.8 17.0
Komi Republic 1 154.8 2.1 42.4
Vologda oblast 2 510.0 4.6 21.9
Southern federal okrug
Krasnodar krai 1 100.0 2.0 4.5
Volgograd oblast 3 400.0 6.2 23.4
Volga federal okrug
Republic of Tatarstan (Tatarstan) 131.0 0.2 0.5
Udmurt Republic 2 000.0 3.6 31.8
Chuvash Republic - Chuvashiya 1 009.6 1.8 26.2
Nizhny Novgorod oblast 8 000.0 14.5 12.4
Samara oblast 12 200.0 22.2 52.6
Ural federal okrug
Sverdlovsk oblast 3 000.0 5.4 33.1
Siberian federal okrug
Krasnoyarsk krai 9 050.0 16.4 59.3
Tomsk oblast 1 125.3 2.0 19.0
Far-East federal okrug
Republic of Sakha (Yakutiya) 2 500,0 4.5 81.7
Russian Federation, total 55 050,7 100 9.1
Source: calculations by IEP on the basis of the Federal Treasury's data.
By today, a high level of secutirization has been exhibited mostly by the largest issuers: the Republic Sakha (Yakutiya) - 81.7%, Krasnoyarsk krai - 59.3%, Samara oblast - 52.6%.
The aggregate volume of redeemed regions and municipalities' papers proved to be at Rb. 58.2bn greater than the 2011 volume of their placement, while the volume of net borrowings on the securities market in 2010 accounted for Rb 29.7bn. (Table 21).
Table 21
Volumes of Net Borrowings on the Market for Subfederal and Municipal Papers
(as Rb Mn)
Consolidated regional budget Regional budgets Municipal budgets
2011
Net borrowings -58 202.6 -57 113.1 -1 089.5
Attraction of capital 55 050.7 53 366.2 1 684.5
Redemption of the body of the debt 113 253.3 110 479.3 2 774.1
2010
Net borrowings 29 774.6 28 611.9 1 162.6
Attraction of capital 111 106.3 105 854.3 5 251.9
Redemption of the body of the debt 81 331.7 77 242.4 -4 089.3
2009
Net borrowings 95 457.6 97 916.5 -2 458.9
Attraction of capital 158 114.0 153 992.6 4 121.4
Redemption of the body of the debt 62 656.4 56 076.1 6 580.4
2008
Net borrowings 68 851.3 72 984.9 -4 133.7
Attraction of capital 178 565.7 177 324.4 1 241.4
Redemption of the body of the debt 109 714.5 104 339.4 5 375.1
2007
Net borrowings 25 867.0 23 691.9 2 175.0
Attraction of capital 84 159.2 79 889.8 4 269.4
Redemption of the body of the debt 58 292.2 56 197.8 2 094.4
2006
Net borrowings 36 489.7 35 161.6 1 328.1
Attraction of capital 73 288.6 66 524.8 6 763.8
Redemption of the body of the debt 36 798.9 31 363.2 5 435.7
2005
Net borrowings 20 887.6 16 939.9 3 947.7
Attraction of capital 81 220. 5 75 016.8 6 203.7
Redemption of the body of the debt 60 332. 9 58 076.9 2 256.1
2004
Net borrowings 47 880. 3 44 470.1 3 410.2
Attraction of capital 79 436. 7 74 995.9 4 440.7
Redemption of the body of the debt 31 556. 4 30 525.8 1 030.5
2003
Net borrowings 41 908. 2 40 043.5 1 864.7
Attraction of capital 61 712. 6 59 012.9 2 699.7
Redemption of the body of the debt 19 804.4 18 969.4 835.0
2002
Net borrowings 17 696. 5 17 153.8 542.8
Attraction of capital 29 141. 8 28 169.2 972.6
Redemption of the body of the debt 11 445. 2 11 015.4 429.8
2001
Net borrowings 6 601. 4 6 667.6 -66.1
Attraction of capital 15 123. 8 14 226.9 896.8
Redemption of the body of the debt 8 522. 3 7 559.3 962.9
2000
Net borrowings -1 877. 3 -2 286.2 408.8
Attraction of capital 13 042. 2 10 090.2 2 952.0
Redemption of the body of the debt 14 919.5 12 376.4 2 543.1
Source: calculations by IEP on the basis of the Federal Treasury's data.
Most regions which were regularly issuing bonds kept on doing so in 2010 too. More specifically, Volgograd oblast has issued bonds since 1999, Krasnoyarsk krai - since 2003, Republic of Karelia - since 2004, and Nizhny Novgorod oblast - since 2004 (Table 22).
Table 22
Registration of Issue Prospectuses of Subfederal and Municipal Securities in 1999-2011
Issuer 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Subjects of the Federation
Volgograd oblast * * * * * * * * * * * * *
Krasnoyarsk krai * * * * * * * * *
Republic of Karelia * * * * * * * *
Nizhny Novgorod oblast * * * * * * * *
Tver oblast * * * * * * * * *
St. Petersburg * * * * * * * * * * * *
Tomsk oblast * * * * * * * * * * *
Republic of Sakha (Yakutiya) * * * * * * * * *
Yaroslavl oblast * * * * * * * *
Udmurt Republic * * * * *
Komi Republic * * * * * * * * * *
Sverdlovsk oblast * *
Republic of Chuvashiya * * * * * * * * * * * *
Samara oblast * * * * * * *
Kaluga oblast * * * * *
Stavropol krai * * *
Republic of Bashkortostan * * * * * * *
Kostroma oblast * * * * *
Ivanovo oblast * *
Republic of Buryatiya *
Vologda oblast *
The city of Moscow * * * * * * * * * * *
Krasnodar krai * * *
Murmansk oblast * * *
Republic of Khakassia *
Ryazan oblast *
Khanty-Mansy oblast * * *
Irkutsk oblast * * * * * * * * *
Penza oblast * * *
Ulyanovsk oblast * *
Belgorod oblast * * * * *
Kurgan oblast * *
Moscow oblast * * * * * * *
Lipetsk oblast * * * * *
Voronezh oblast * * * *
Novosibirsk oblast. * * * * *
Republic of Kalmykiya *
Tula oblast *
Khabarovsk krai * * * *
Kabardino-Balkariya Republic * *
Leningrad oblast * * * *
Yamal-Nenetsky АО * *
Bryansk oblast *
Republic of Mordovia *
Sakhalin oblast *
Kursk oblast *
cont'd
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Primorsky krai *
Municipalities
Volgograd * * * * * * * * * * *
Kazan * * * * * *
Novosibirsk * * * * * *
Krasnodar * *
Krasnoyarsk * * * * * * * *
Tomsk * * * * * *
Ufa * * * *
Electrostal (Moscow oblast) * *
Smolensk *
Lipetsk * * *
Magadan * * *
Bratsk *
Novorossiysk *
Ekaterinburg * * * * * * * *
Klin district of Moscow oblast * * *
Noginsk district of Moscow oblast * * *
Blagoveschensk * *
Cheboksary * * *
Balashikha (Moscow oblast) *
Odintsovo district of Moscow oblast * *
Astrakhan *
Bryansk *
Voronezh *
Orekhovo-Zuevo (Moscow oblast) *
Yaroslavl *
Yuzhno-Sakhalinsk * * *
Novocheboksarsk * * * *
Angarsk *
Vurnarsky district of Chuvash Republic *
Town of Shumerlya (Chuvash Republic) *
Barnaul *
Perm *
Nizhny Novgorod *
Kostroma * *
Arkhangelsk *
Dzerzhinsky *
Source: MinFin RF.
