Moscow Times
April 23, 2007
Markets Mentor Puts His Faith in Transparency
By Simon Shuster
Staff Writer
Try to discipline a restive group of teenagers, and you might get some idea of Oleg Vyugin's job. He is the head of the Federal Service for Financial Markets, whose goal it is to keep Russia's young and booming bourses on an even keel.
The exuberance of this decade, which has seen the RTS Index grow tenfold in value, has made things tough for Vyugin's service, as the price of such expansion is almost always volatility. This year, however, Vyugin said Russian companies would begin to see fair values, meaning that a more "mature" pace of expansion is at hand.
"We have clearly been seeing abnormal levels of growth," he said. "Although total capitalization will keep climbing as new companies go public, the growth of existing stocks will continue at a slower rate." At most, there is enough steam for 25 percent of yearly growth for the RTS, though it is more likely to stay at about 15 percent, he said.
But more moderate growth will not translate necessarily into a steadier market. If too many of the upcoming emissions flow onto foreign bourses, primarily the London Stock Exchange, the local exchanges will start to become illiquid, and relatively small trades will be able stir up a lot of volatility.
The main approach to solving this problem has so far been the 30/70 rule, which demands that 30 percent of all new equity gets floated at home, and limits the foreign-traded value of any firm to 35 percent. For companies going public, this has been a major hindrance.
"Companies go to London mainly because they aim to get the broadest investor base, the best selection of investors ... and ultimately to get a better capitalization," Vyugin said. "It is clear that this cannot come solely from local investors."
In hopes of a compromise, his service has been seeking new ways to keep local trading volumes strong. Vyugin's proposal is to create a central depository.
Currently, both the RTS and the MICEX work with their own depositories, and a broker must set up accounts with them to buy and sell common shares of Russian companies. Vyugin said most brokers simply did not want to take on the risk and trouble involved in buying common shares this way, so instead they buy depositary receipts, which represent Russian equity on foreign exchanges. But this takes liquidity out of Russia, Vyugin said.
"Once we have a central depository, the risks will be on the same level that exists around the world, and the only factors driving companies to list abroad will be psychological," he said.
A more natural break on the equity draining westward is expected to come however from "the people." Sberbank's recent share emission, touted as one of the "people's IPOs," attracted tens of thousands of retail investors, and a recent MICEX survey found that up to 7 percent of the population -- nearly 10 million people -- are ready to invest in stocks this year.
But while presenting a source of homegrown liquidity, this trend comes with a new set of problems for Vyugin. "In principle, we welcome the popularization of the stock market, but it has to be done through a reasonable and thought-out policy," he said. Sberbank's tactics, which included cartoon advertisements for the stock and promises of profit, "can by no means be broadly employed."
Bills now going through the State Duma, Vyugin hopes, will introduce the notion of a qualified investor and oblige stockbrokers to inform their clients of risk. "Though it will not be a fast process, we also intend to institute compensatory funds, which will at least insure small investors against nonmarket risks," Vyugin said.
Pushing through this raft of bills is now Vyugin's political priority. Once they are passed, crucial notions related to the securities markets will finally be on the books, closing loopholes that have held Russian markets below the Europe's standards.
Chief among them will be a law on transparency. As it stands, the law that governs information disclosure contains a loophole that allows firms to go public without revealing all their beneficiaries, Vyugin said.
Although the situation is improving, a Standard and Poor's study released in November found that 21 percent of private ownership is still obscured. Without complete lists of beneficiaries, it is much harder to control insider trading, a notion that is not yet defined in Russian law.
"There has been serious resistance to these laws," Vyugin said. "In particular, Gazprom asked us, 'What are these demands? We're so transparent as it is. We're a government company.' Now, after several years of considering it, they have disclosed their independent directors. So little by little, we're getting there."