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Section 13. Economics
Vlasenkova Alexandra Vitalyevna, Assistant of London Gates Education Group, Moscow E-mail: ally.vlasenkova@yandex.ru
THE DEVELOPMENT OF INDIVIDUAL INVESTMENT ON RUSSIAN STOCK MARKET
Abstract: This article is dedicated to a development ofprivate investment in Russia. Despite the significant changes undertaken by the government in order to stimulate attraction of individuals to the stock market, systemic barriers continue to restrain investing activity of households. The reasons for persistent ineffectiveness of structure of Russian families' savings are analyzed and possible ways to increase of individual's attraction to investment in securities are suggested in the paper.
Keywords: private investment, individuals, securities, savings, deposits, Russia, stock market
1. Introduction tween the maturity of the financial sector and the
Since the beginning of the century, the economic long-term growth of the respective economy. The
community has been discussing the significance of higher the maturity of the financial market is, the
financial markets and their impact on the economy. faster the country's economy grows on a long-term
The statistical studies by Ross Levine, Robert King horizon. In addition, developed and efficient finan-
[1], and the theoretical research by Asli Demirguc- cial markets are beneficial for the social sphere, lead-
Kunt [2] showed a high level of interrelation be- ing, among other things, to lower inequality.
45 40 35 30 25 20 15 10 5 0
34
29.4
22.5
26
18.7
20.7
2013
2014
2015
2016
2017
2018E
Investment in securities
Savings volume
Figure 1. Savings and Investments of Population in the Stock Market, tn
6
Thus, the financial sector can act as an engine and source of funds for the growth and development of the economy.
The need for long-term funds in Russia is estimated by Russian economists at 20-30% of GDP, or Rb15tn per year [3].
The required amount of money is accumulated by households: their deposits and bank accounts amounted to Rb34tn as of December 2018, and if we add the cash 'under the mattress', the sum rises to at least Rb40tn, or about 50% of a country's GDP. As reported at the national debt market conference (Cbonds-2018), only the reorientation of individuals from traditional deposits to the stock market can enlarge investment resources by at least two times.
The disadvantages of analyzed works either include high levels of abstraction (macroeconomics level) or indulgence into details and resolution of specific problems with subtle connection to the general problem.
2. The purpose of the work
The selected topic, i.e. individual investments, is important for the economy due to the tremendous volume of savings, accumulated by population - instead of being hoarded, this money can be redirected to facilitate economic development. The issue of re-
directing household savings to financial markets is acute, especially now.
The distinction of the study is the attempt to look upon the issues not just with the national level, but to compare them with those of the other countries.
3. Research methodology
The information on the Russian Federation government policies of individual investment support was gathered and analyzed to study problems which preclude the development of individual investment in Russia; the structure of Russian households' savings is analyzed in comparison with analogous in income and location savings in other countries; the possible investing process problems are discovered; the ways of investment improvement are suggested.
4. Results and discussion
a. Features of savings behavior in Russian households
Russian households are showing inefficient savings structure. The main reason for the low efficiency is low revenues as such. Since most of the money of the households is spent on current consumption, a very small amount is left for savings. The main motive of savings is the preservation of acquired wealth, the main asset of the family is property, and the traditional way of keeping money is a bank deposit or cash.
Figure 2. Structure of Money Income of the Population, in% of income
Household welfare determines the set of available i.e. bank deposits. We note that this is in line with the
investment tools [5]. Families in low-wealth countries, general trend for Eastern European countries, where
which include Russia with its EUR4,590 ofnet income 55% of savings were deposited in 2017. per person per year, prefer conservative instruments,
100 90 80 70 60 50 40 30 20 10 0
— 27 1 11
31 31 51 39
— 53 -^-■ 20 27
-- 25 53 55
13 1
North Oceania Western America Europe
Bank deposits ■ Securities
Japan
Eastern Europe
Insurance and pensions
Latin Asia ex America Japan
Other claims
Figure 3. Breakdown of Households' Savings
The common reason for such a conservative savings structure is low income of the families, when most of the money is spent on current consumption, and allocation of significant funds for investment purposes is not possible. Meanwhile, aware of their vulnerable financial condition, households set aside some funds, forming a safety cushion. Since this 'rainy day' money has to be accessed quickly, they are usually either kept on deposits (up to a year) or remain in cash at home and in bank cells. Such savings methods are short-term and provide a much smaller return or none at all in comparison with investments in the stock market. Families in high-wealth countries with incomes of more than EUR42,000 per person multiply their capital much faster by investing in securities, diversifing their investment portfolios with pension programs and various types of life insurance.
b. Systemic Barriers to Private Investment
In 2015-18, the Central Bank of Russia has first identified its priority goals in the field of financial market development, highlighting the following areas (goals are listed in order of importance) [7]:
• increasing the level and quality of life of the population;
• promoting economic growth;
• creating conditions for the functioning of financial markets.
Structure in terms of Asset Types, 2017,%
Meanwhile, one of the most significant barriers to participation of people in the investment process in the stock market is the focus of the Central Bank primarily on ensuring the stability of the banking segment and preventing systemic risk, which puts the protection of investors on the backburner. Thus, in the event of national currency devaluation, exporters become the main beneficiaries of the weaker ruble, while country's population will suffer from a decline in purchasing power due to the inflation shock following devaluation. Weaker bargaining power of a small private investor is often used by banking institutions, which put themselves first in line to seek bond repayments, while individuals get no more than 6% on default and restructured bonds.
Another limiting factor for the development of the securities market and non-financial institutions attracting funds from individuals is the existence of a deposit insurance system in Russia (since 2003) and individual entrepreneurs (since 2014). Mikael Berg-brant [4] demonstrated a relation between these factors, using more than hundred countries as an example. And indeed, when a private investor looks into how to increase his funds, the alternative for him would be a risk-free (within the insured amount of Rb1.4mn) investment in bank deposits (registered with the Deposit Insurance Agency).
The state, fully aware of the need to attract private investment to the securities market, in recent years has taken a number of important steps that have increased the appeal of securities for individuals.
c. Flattening tax inequalities between deposits and investments in securities for individuals
The measures for flattening tax inequalities between deposits and bonds - the closest financial instrument to deposits in terms of risk levels - were undertaken.
Hence, In 2017, the monetary authorities provided tax exemptions (personal income taxes for individuals) on corporate bond coupons. During the grace period from 2017 to 2020, coupons on corporate bonds placed after 2017 that do not exceed the key rate by more than 5 ppts are not taxed. Now the personal income tax on coupons is not paid for all types of ruble bonds (municipal and sub-federal, state and corporate), which creates equal tax environment for individuals both when placing their funds on deposits and when investing in bonds.
d. Launching new financial products that can be interesting for individuals
The government aimed to attract individuals' attaraction to investment before 2008-year crisis. (The so-called 'folk IPOs'). For the first time ever, the IPOs of Rosneft, VTB and Sberbank gave Russians an opportunity to take part in the placement of the largest Russian companies, become shareholders and participate in the profits of these companies.
Approximately 10 years later, Ministry of Finance was concerned with the establishing of conservative individuals' instruments. In 2017, the Ministry of Finance launched federal loan bonds for the population (OFZ-n), which is a transitional form from a deposit to securities. OFZ-n can be purchased at the offices of agent banks (Sberbank and VTB), which made them available to people not previously familiar with the securities market. One ofthe peculiarities ofthese bonds is that they do not trade on the secondary exchange market. They can only be redeemed after its holder comes to the agent bank. The Ministry of Fi-
nance positioned OFZ-n as an awareness project that helps individuals to take the first step towards real investments in the securities market.
Over 18 months since this instrument was launched, it was acquired by 34.5 thousand new investors for a total amount of Rb56bn - 56% were newcomers to the securities market.
In fact, the Ministry of Finance created a new type of instrument, called "folk", designed for general public. Following the Ministry of Finance, 'folk bonds' were also issued by Russian regions and banks.
e. Encourage long-term investment through tax benefits
In 2011, the government introduced a tax return on the income of individuals from long-term holding of stocks or equity units for a period of 5 years, from 2015, the period for the purposes of tax benefits was reduced to 3 years. In 2018, the exchange initiated the reduction of the tenure from 3 to 1 year.
From 2015, individuals have the opportunity to participate in the securities market by opening an Individual Investment Account (IIA). The account holder has the right to receive a personal income tax refund on the invested amount of no more than Rb 400.000 per year for three years or choose profit tax waiver after three years of investment. The former option essentially adds up to 13% to the annual yield of account holders. The first three-year period of use of this form of investment showed a strong interest in the instrument form individuals, although the main disadvantage of IIA as compared to the deposit remains no guarantee of return on investment. Soon this problem could be solved. The draft law on IIA insurance has already passed the first reading in the State Duma. In 2018, the maximum size of IIA was increased to Rb1mn, but tax benefits apply only to Rb 400.000. The possibility of opening several IIA is being discussed.
f. Ways to Boost Attractiveness of Investments
As we have mentioned above, the state is interested in attracting funds from the population in order to
provide the country with long-term resources. This task can be achieved through the following methods: • Boosting investments from household incomes, which may be possible if tax breaks are introduced or economic growth accelerates or sanctions are lifted;
Increase in the savings rate of households if they transition to a savings behavior model (leads to lower consumption and long-term economic growth);
Stimulating more efficient structure of household savings.
2013
2014 2015
■ Brokerage account
2016 2017
Aktive individuals
2018
Figure 4. Number of active individuals on the bonds market and number of Individual Investment Accounts (IIA), 000
We note a relatively low level of financial assets held by individuals in relation to GDP (as % of GDP). In this regard, the former method looks theoretically possible in the long term.
The second method is generally feasible, especially in the context of possible new sanctions, as well as higher retirement age. Meanwhile, the slowdown in the economy - the price of this scenario in the long run - is undesirable for the country.
The low level of income, which is the main reason for the small share of savings and ineffective structure of them, is the factor which is unlikely to be improved in medium term.
Thus, most desirable and very much possible option is the latter, i.e. improvement of household savings structure and the shift from traditional real estate and deposits to securities, collective investment, insurance and other more complex financial products.
Ways to Boost Attractiveness of Investments:
• Strengthening trust in banking system and financial institutions, including increasing issuers' transparency and improving the availability and quality of corporate reporting, market information. The sequence of financial crises and the "clearance" of banking system, which included revocations of licenses, do not improve population's confidence. Years are required to regain trust in banks: in this case the removal of "security guarantee" from deposits is unlikely. Meanwhile, even deposited money is more effective than non-performing assets.
• Introducing new financial products that may be interesting for individuals:
- Given traditional interest of individual Russian investors in deposits, foreign currencies, real estate and gold, new tools can
be introduced with these types of assets (currency bonds, including Eurobonds, local issues traded in two currencies) as underlying, gold bonds with protection capital (structural products based on precious metals), real estate mutual funds;
- Restrictions for unqualified market participants to buy structured products could be lifted as these instruments are often very convenient;
- Development of special-type securities ("green bonds", "structural products", folk banking and sub-federal bonds).
Increasing the availability of market instruments:
- Projects to create various public and private financial marketplaces should increase the geographical accessibility for regional investors, simplify participation in primary placements for individuals;
- Launching financial applications and online accounts that would allow individuals to open trust management accounts, buy and sell units, sign brokerage agreements and manage their accounts on their own to eliminate the need for a personal visit to the bank to buy securities, purchase a trading system - a smart phone app would eliminate even the need for a computer. At the end of 2018, four banks had applications for trading securities (VTB, Sber-bank, BCS, Tinkoff);
- Splitting Eurobond lots would lower the barrier to entry when purchasing these tools for unqualified investors. Expanding the list of Eurobonds with small lots in trading systems would allow individuals to access the usually over-the-counter Eurobond market.
Improving population's financial literacy
level and knowledge of financial products
and risks. In 2011, the Ministry of Finance
together with the World Bank launched the project to improve the financial literacy of Russian citizens. In 2017, the government adopted the National Strategy for Improving Financial Literacy for 2017-23. The population's interest increases due to the launched program and government's policy. Financially literate citizens reasonably deal with their expenditures and savings; however, the results of education are likely to be experienced in the long run. The fact of the government's will to educate the population is particularly valuable because it demonstrates the government's care about the citizens' wellbeing;
• Creation of the Financial Advisors institute in 2018. The institute was created in Russia only in year 2018. Compared with other countries, 8 out of 10 American households use the advice of professional consultants, in the Czech Republic one consultant works with 14 thousand residents, in Hungary -with 11 thousand, in Russia - with 75 thousand. Development of this profession should improve the quality of consultation, as well as increase the reach.
g. Challenges
Growing digitalization, on the one hand, opens up new opportunities, but, on the other, creates new challenges:
• it is necessary to strengthen the security systems for client personal data, their assets and bank assets;
• a massive inflow of unqualified investors can increase market volatility and lead to significant losses for retail investors during a crisis (for example, the crypto currency market in 2017-18);
• new pyramids and high-risk investment products are likely to appear, the potential risk of which is difficult to assess for inexperienced investors.
5. Conclusion
Development of the individual investment market is important for the state seeking to reclaim trillions of hoarded rubles as well as for banks that try to keep the retaining funds on deposits, and for individual investors themselves who are interested in obtaining a higher return on investment amid declining rates of traditional banking deposits.
The authorities make every effort to improve people's education, introduce a culture of investment and facilitate the initial entry into the securities market. Among real steps that boost the attractiveness of investments in the stock market compared to deposits we highlight the launch of the IIA mechanism (individual investment accounts), as well as the ex-
emption of coupon payments on corporate bonds from taxes, which aligns the tax burden on bonds in portfolios of individuals with the deposits. These actions attract the attention of individuals, however, mainly, of those who have previously traded on the securities market.
However, the main restraining factor of individuals' investment growth is their low-income level and ineffective savings structure. The trust towards Russian financial institutions needs to be raised; the population's interests should be taken into account when creating investment instruments; individuals should be worked with in order to increase their knowledge of financial culture.
References:
1. King R. G. and Levine R. Finance and Growth: Schumpeter Might Be Right // Quarterly Journal of Economics. 1993.- P. 717-738.
2. Demirgu^-Kunt Asli, and Ross Levine. Finance, Financial Sector Policies, and Long Run Growth // M. Spence Growth Commission Background Paper, - No 11. World Bank, Washington, DC.
3. URL:http://duma.gov.ru/media/files/Rx9q8OtxoYAibYrJ5VDmteeAu6Aeugyj.pdf
4. On Measures to Overcome Crisis Processes in the Russian Economy, published by the State Duma,-Moscow, 2015.
5. Mikael C. Bergbrant, Kaysia T. Campbell, Delroy M. Hunter, James E. Owers. Does deposit insurance retard the development of non-bank financial markets? // Journal of Banking & Finance. May 2016.-Vol. 66.- P. 102-125.
6. URL:https://www.allianz.com/content/dam/onemarketing/azcom/Allianz_com/migration/media/ economic_research/publications/specials/en/Allianz_Global_Wealth_Report_2018_e.pdf / Allianz Global Wealth Report 2018
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