Russia tries to revive interest in struggling stock market

By Melissa Part.

2013 seemed to end on a grim note for Russia’s economy with consumer confidence hitting a new low.

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The country’s economy has had a bumpy start to 2014 too. The recent release of high-profile political prisoners does not seem to have rallied investor interest in Russia’s stock market.

Russia recently released former oil tycoon Mikhail Khodorkovsky, 30 Greenpeace members locked up over charges of piracy replaced by accusations of hooliganism as well as two members of the Pussy Riot rock band who were also jailed for hooliganism.

The day after the release of Khodorkovsky, Russia’s Micex stock index climbed just 0.3 percentage points, however. When President Vladimir Putin first declared that Khodorkovsky was being pardoned, stocks rose only 1%.

Such a poor reaction is perhaps testament to the fact that investors still have massive concerns about Russia’s human rights record and the vulnerability of business people to the government and law if they fall out of favour.

Investors remain suspicious

Khodorkovsky, who presided over an economic empire worth around $15bn before he was imprisoned, was jailed for oil embezzlement, money laundering and tax evasion but denied the charges, claiming that he was being framed because he had been giving money to opposition parties.

His firm Yukos, which had a market value of almost $36bn in 2003, ended up being mostly sold off to the state at auction. Khodorkovsky has come to embody the fears and suspicions that many investors have about doing business in Russia.

Investor interest in Russia’s stock markets is currently at a low point.

Capital outflows since 2008 have now climbed to more than $400bn and economic growth, which was 1.2% in the third quarter of 2013, is at its lowest level in four years. Moreover, Russian equities have the lowest valuations out of Bloomberg’s 21 emerging markets. Shares trade at four and a half times the predicted earnings over 12 months. In comparison, for the MSCI Emerging Markets Index, the figure is a multiple of 10.5. Redemptions from Russia-dedicated equity funds had risen to $3.59bn for 2013 up to December 18.

Russia tries to wow investors with the Winter Olympics

Khodorkovsky’s pardon comes just two months in advance of the Winter Olympics in Sochi, Russia, which are taking place on February 7-23.

Moscow is spending $48bn on infrastructure developments to prepare for the games, which include stadiums, airports and roads. Such a high expenditure on preparing for a Winter Olympics is unprecedented, raising questions about whether Russia is attempting to send out a strong signal to the rest of the world and foreign investors that it is a modern and well-functioning country.

The Central Bank leads on reforms

Russia has also taken to other measures in a bid to get investors to take the country more seriously.

The Central Bank is at the forefront of a lot of reform plans, aware of the fact that not only is foreign investor confidence low but interest in the stock market among Russians is not reaching its full potential; Russians have invested 9% of their saved earnings into the country’s stock market, which is less than a quarter of the figure for the United States, and also contrasts with trends in Britain, where the value of funds under management increased 20% between October 2012 and October 2013 to £765bn.

This is despite the fact that tools like investment trusts which expose savings to the stock market could, as Martin Lane argues on www.money.co.uk, see one’s money grow at a rate that “outpaces any savings account”.

Reforms which the Central Bank is overseeing include the easing of the regulation of the ruble with a plan to stop any control of the market by 2015.

Furthermore, towards the end of 2013 Russia introduced a currency symbol for the ruble to compete with the US $ and the British £. The new symbol is supposed to “give an impression of the stability of the Russian currency”, according to the country’s Central Bank. The symbol features the Cyrillic letter P – which is pronounced like an R – with a horizontal dash cutting through the stem.

The development comes eight years after the Central Bank was given the green light to come up with a symbol; the global credit crunch caused delays as the ruble plummeted in value.

The Central Bank has also been involved in other reforms to generate more investor interest in Russia’s stock markets.

It is introducing a new corporate governance code, for example, which it believes will be a crucial tool for protecting minority shareholders. Most listed Russian companies have a single dominant shareholder – for example an oligarch.

A new rule is also being incorporated to prevent shareholders from making arbitrary changes to dividends; all changes will have to be economically justified according to the new code.

There is also a plan in the pipeline to make it easier for outside investors to use the Euroclear settlement system to trade Russian equities.

Since Euroclear made changes in February for the settlement of Russian sovereign bonds, foreign interest in the market is up by a quarter. Reforms which the central bank is now overseeing to make use of the Euroclear settlement system easier include software improvements and tax reform, changes which will take some months to implement successfully.

Stocks to get excited about

Moreover, many foreigners feel that investing in Russia’s stock markets is potentially lucrative despite general misgivings about the country’s business climate.

After all, Russia is still home to the biggest IT-literate workforce out of all of the emerging markets.

A number of listings on the stock market are attracting some excitement. They include mobile payments firm QIWI, which is expected to grow due to favourable trends like increased smartphone and Internet penetration.

Other listings for firms involved in online and mobile banking are a source of excitement. Among them are Bank St Petersburg and MTS, which are tapping into increased mobile penetration and Internet usage to generate interest in alternatives to using high street banks to carry out transactions.

Another listing stirring up interest is the online company Mail Group, which has enterprises in online gambling, social networking and online advertising.

Looking into 2014 then, investor interest in Russia is likely to remain modest and recent high-profile gestures like the release of political prisoners and high spending for a Winter Olympics is unlikely to do much to challenge misgivings.

Nonetheless, valuable reforms are taking place to lure investors, many of which are being led by the country’s Central Bank.

Moreover, there are a smattering of stocks for investors to get excited about, many of which are concentrated in the ICT sector.

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