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Table Market indicators for ruble-denominated corporate bonds (billions of dollars) 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total market value 1,6 2,5 3,3 4,8 8,9 17,0 33,2 49,2 67,0 80,Secondary market, 0,2 1,1 2,3 8,2 14,7 44,2 134,9 371,1 457,4 295,including repo transactions Placements 1,1 0,8 1,5 2,6 4,9 9,2 17,1 17,9 16,1 29,Investments in capital 0,0 0,0 0,1 0,1 0,1 0,3 0,1 0,2 0,2 0,assets As a percentage of total 0,00 0,00 1,67 2,32 1,63 1,86 0,18 0,49 0,26 0,market value As a percentage of place- 0,00 0,00 3,59 4,33 2,98 3,43 0,36 1,34 1,10 0,ment volume Source: proprietary calculations using data from MICEX, cBonds, the Bank of Russia, and the Statistics Committee.

The impact of equity IPOs on the economy Compared to corporate bond issues, equity IPOs and SPOs are a more effective instrument of raising funds for capital asset financing. This is due to the longer-term nature of IPO proceeds. Table 7 shows market indicators for the Russian equity market that point to the peak of IPO activity in 2006 and 2007, when companies were able to raise US$17.0 billion and US$33.0 billion respectively. In 2006, 18.6% of IPO and SPO proceeds were used by companies to finance capital assets, a ratio that declined to 11.1% in 2007. In some years, the proportion was much higher: thus in 2008, 89.7% of IPO proceeds were used for capital asset financing, next to 61.7% in 2005 and 51.2% in 2009. However, in these years the total amounts of IPO proceeds were insignificant, equal to US$1.9 billion, US$5.2 billion, and US$1.7 billion respectively. The bulk of resources raised in the stock market were used to buy out previous business owners, refinance debt, and service merger and acquisition transactions, including the purchase of large blocks of shares.

Thus it is premature to speak about a significant part equity placement and especially of corporate bond placement proceeds being used for promoting economic modernization and economic growth. Moreover, the amounts raised by companies through equity and corporate bond placement and subsequently used for capital asset acquisition is a tiny part of the overall funding for investments in capital assets, as shown in Fig. 49 detailing the funding sources for investments in capital assets.

ble Russian equity market indicators (billions of dollars) 2000 2001 2002 2003 2004 2005 2006 2007 2008 Market 40,7 74,6 105,5 176,3 230,0 549,0 1057,0 1503,0 397,0 642,capitalization Secondary market, 46,7 49,4 86,8 188,3 541,3 374,0 914,2 1687,1 1982,5 1155,including foreign stock exchanges RUSSIAN ECONOMY IN trends and outlooks 2000 2001 2002 2003 2004 2005 2006 2007 2008 Equity IPOs 0,5 0,2 1,3 0,6 3,0 5,2 17,0 33,0 1,9 1,Investments in 0,2 0,1 0,2 0,2 0,1 3,2 3,2 3,6 1,7 0,capital assets As a percentage of 0,4 0,1 0,2 0,1 0,1 0,6 0,3 0,2 0,4 0,market capitalization As a percentage of 36,1 26,9 12,6 24,6 4,0 61,7 18,6 11,1 89,7 51,IPO volume Merger and acqui- 5,0 12,4 17,9 32,3 27,0 60,4 61,9 125,9 110,4 38,1* sition transaction volume * Estimate.

Source: proprietary calculations using data from MICEX, the Bank of Russia, the Statistics Committee, www.mergers.ru Source: calculations using Statistics Committee data.

Fig. 49. The funding structure of investments in capital assets The principal sources of funding for capital assets financing by real sector companies are retained earnings, government funds, extra budgetary funds, and bank loans that together accounted for 68% of all funding sources for capital asset investments in 2009. Throughout the 2000s, the share of funds raised by equity and bond placements among the total capital asset funding sources ranged from 0.1% in 2001 to 3.4% in 2005. In 2007 and 2008, it stood at 0.and 0.8% respectively.

Section Monetary and Budgetary Spheres The prospects of private equity funds and venture capital funds The prospects of the Russian economy with regards to modernization are hindered by the weakness of the private equity fund and venture capital fund market segment. These funds working with Russian corporates can be divided into those created in offshore zones abroad (Svarog Capital Advisors, Russia Partners, Delta Private Equity Partners, Baring Vostok Capital, etc.), and closed-type unit investment trusts operating in accordance with the Federal Law On Investment Funds. As of mid-2009, Finance magazine estimated the net asset value of the first group of funds at approximately US$3 billion1, while the National Fund Managers League estimated the net asset value of the second group of funds at approximately RUR billion2.

The reasons for the week development of private equity funds in Russia are indicated by the interview results from the city of 72 global private equity fund investors conducted by KPMG from December 2008 to February 20093. In answering the question was a Russia appeared more attractive than other BRIC countries, 58% of respondents gave it a negative answer. Among the main reasons preventing these funds from operating in Russia in 2009-2010, investors claimed macroeconomic instability (89% of respondents); legal and regulatory restrictions (30% of respondents); unrealistic vendor price expectations (23% of respondents);

political risks (16% of respondents); and the shortage of qualified fund managers (16% of respondents). It can only be added that the market for private equity transactions is at present in the hands of monopolies controlled by large oligarch corporations, which hinders the entry of independent market players, including major global private equity funds, and artificially limits both competition in this area and the mobilization of cutting-edge global technologies.

As regards closed type unit investment trusts investing in private equity, that growth prospects are still doubtful. In accordance with the legislation on investment funds, any information on private equity unit investment trusts is intended only for qualified investors and thus was removed from the public domain at the end of 2009. In accordance with the requirements of the Russian Federal Financial markets service, stock exchanges must create specialized trading sections for qualified investors, were participants will have access to information about such funds. It is unclear in this situation how potential investors who do not have the status of qualified investors, such as foreign investors, will be able to learn about existing and new private equity unit investment trusts. Such funds have found themselves outside of the scope of review by analysts and academics. In our opinion, the artificial information barriers introduced by the Russian Federal Financial markets service regarding the activities of private equity unit investment trusts will only result in the decrease of potential investor interest in such funds, which will have a negative impact on the growth prospects for such funds in Russia.

The creation and development of private equity funds and venture capital funds in Russia is also hindered by the lack of a government innovation development policy. At present, according to the ministry for education and science, more than 80 technology parks are regis A. Golovin, Drrect investments comatose // Finance, No. 27-28 (310-311), July 27 August 16, 2009.

At present, in accordante with the requirements of the Russian Federal Financial Markets Service, closed type unit investment trusts that invests in private equity classified as funds for qualified investors that cannot be advertised publicly. For this reason, the public information sources and unit investment trusts, www.nlu.ru and www.investfunds.ru, have stopped publishing statistics for this category of unit investment trusts.

A. Golovin, Drrect investments comatose // Finance, No. 27-28 (310-311), July 27 August 16, 2009.

RUSSIAN ECONOMY IN trends and outlooks tered in Russia, along with a greater number of innovation and technology centers, more than 100 technology transfer centers, 10 national innovation and analytics centers, 86 scientific and technical information centers, more than 120 business incubators, 15 innovation consulting centers, as well as a number of other innovation infrastructure entities.1 This multitude of innovation entities is hardly justified. Further development of the innovation framework calls for the creation of centralised entities with regional representation that would undertake coordination functions with respect to the efforts of numerous local entities for the promotion of new technologies in the economy, as well as promote the dissemination of information about the capabilities of innovation organisations for enterprises in various sectors.

2.4.9. The impact on of the crisis on the domestic savings system The financial crisis was a serious test for the savings system for individual investors. As expected, the crisis resulted in a significant growth of the public propensity for savings (a share of income allocated to savings annually), as evidenced by the data shown in Fig. 50.

The public propensity for savings, including investments in financial assets and real estate, was estimated by the Statistics Committee to have grown from 6.0% of individual incomes in 2008 to 14.2% in 2009. The indicator of public savings in financial assets2 that we have calculated separately has grown from 4.3% to 8.3% over the same period.

Source: calculations based on Bank of Russia and Statistics Committee data.

Fig. 50. Public propensity for savings, 19972009 (%) The structure of public savings in financial assets is shown in Fig. 51. The 2008-2009 crisis has substantially changed the structure of public savings. At the start of the crisis, as a re Venture Capital Investing. Business Guide // Kommersant, December 15, 2009.

Including public savings in ruble denominated in foreign currency deposits, foreign currency and ruble cash, and securities less the increase in consumer lending.

Section Monetary and Budgetary Spheres sult of the stock market slump and the ruble devaluation, the public decreased its cash savings and even decreased savings in ruble-denominated bank deposits, while savings in foreign currency cash and foreign currency deposits have substantially grown. In 2009, the public restructured their savings. As the devaluation stopped and the ruble continued to strengthen, savings in ruble-denominated bank deposits substantially increased, and the propensity for savings in foreign currency deposits and foreign currency cash decreased. For the first time during the 2000s, the savings indicators were positively influenced by the significant reduction of public indebtedness for consumer loans. The propensity for savings in securities did not experienced a significant change even during the crisis, remaining at a minimum level of 0.3 0.5% of individual incomes.

Source: calculations based on Bank of Russia and Statistics Committee data.

Fig. 51. Public propensity for savings in 1997For public savings to become a real catalyst of domestic market growth, it is necessary not only for millions of people to enter the market, but also for most of them to have real confidence in the potential of long-term savings strategies of 10, 20, 30 and more years. So far fewer believe its such strategies, despite the fact that unlike speculative transactions, they can bring the greatest return to inexperienced investors. Fig. 52 shows data on the minimum, maximum, and average portfolio yields for RTS index portfolios of different maturities from September 1995 through December 2009. For comparison purposes, the respective curves for the period from September 1995 through July 2008, i.e. up to the point preceding the latest financial crisis, are shown as dotted lines.

RUSSIAN ECONOMY IN trends and outlooks Source: calculations based on RTS data.

Fig. 52. Annual portfolio yields (% p.a.) for RTS index portfolios of various maturities from September 1995 through December The riskiest portfolio among the above is the one-year RTS index portfolio. In the 15-year observation period, the maximum yield for these portfolio amounted to 363% per annum, while the minimum yield amounted to a 91% drop in portfolio value. On average, investments in one-year portfolios yielded 44% over the investment period. As seen from the Fig., as portfolio maturity increases, the average annual yields stabilise, and the gap between the highest and lowest portfolio yields narrows. For investments in a seven-year portfolio for investors in the RTS index, minimum yields become positive at 1% per annum. Thus, only investments in the RTS index over seven years or more allow investors to avoid the diminution in the market value of their portfolio. For this reason, the minimum prudent term of investment in a diversified equity portfolio in the Russian market must amount to seven years or more. Moreover, as seen in Fig. 52, the yield curves for similar portfolios over the period preceding the 20082009 crisis practically coincide with the yield curves that extend into the crisis period, meaning that the current crisis had no impact on the minimum investment maturity for equity investments in the Russian market or on the long-term portfolio yield indicators.

Unfortunately, these advantages of long term lending in the Russian market are not sufficiently used at present. The bulk of investors focus on relatively short-term strategies. When signing agreements with financial intermediaries for brokerage services and trust management services in the securities market, the minimum acceptable investment terms for individual investors in high risk instruments are disregarded.

Fig. 53 shows available data on the number of individual investor accounts at brokerages and the number of registered accounts of unit investment trust shareholders. Unfortunately, at present NLU (the National League of Managers) does not disclose the number of unit investment trusts shareholders in a timely manner. However, assuming that this number in 2009 did Section Monetary and Budgetary Spheres not experience a significant decrease compared to 2008, it may be estimated that the number of individual investors entering into securities transactions directly or through collective investment vehicles reached 1,000,000 in 2009.

Source: calculations based on MICEX, NAUFOR; and NLU data.

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