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Fig. 1. Intensity and Duration of Long-Lasting Global Financial Crises as of February 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--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 Downfall, % Section Financial Markets and Financial Institutions 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.

USA 2007 (DJIA) months; 90.7% Russia (RTS) 44 months; 64.1% 20 Months USA 1987 USA 2000 Mexico 1994 Russia (RTS) - Indonesia 1997 Brazil 1997 Russia (RTS) 2008 USA (DJIA) 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%) Source: RBC and WFE data.

Fig. 3. Yield Rates of Stock Indices Worldwide in 20102011, % Downfall, % RUSSIAN ECONOMY IN trends and outlooks 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--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%) Capitalization (left axis) Trading volume at the Russian stock exchange (left axis) 1800 Risk (standard quadratic deviation) 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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.

Trifonov . MICEX is not up to nickeling-and-diming. Vedomosti, 8 February 2011.

100,86,78,75,% 60,$ bn 47,41,42,42,41,41,35,26,27,Section Financial Markets and Financial Institutions 100,1,2,6 0,3,3,5 3,7 4,4,4 4,8 4,6,2 0,7,4 6,8 1,1,9 1,1 0,0,2,8 1,2,90,0 17,2 NYCEX and NASDAQ (CTCM) 22,19,17,23,34,5 23,29,80,0 29,4,4,0,0,46,4 7,7 0,German exchanges 34,0,0,0,41,0,43,5 0,0,9 0,0,0,0,0,70,0 43,1 0,6,3,30,1 London exchange 0,1,60,0 0,0,0,0,4 70,8,6 1,3,50,RTS-Standard 4,42,0 7,2,11,40,0 26,6 0,2,77,73,70,6 70,3 69,9 St. Petersburg Exchange 30,0 59,8 59,1,49,44,11,6 42,5 RTS stock (T+0) market 20,38,36,1,19,10,0 20,15,4 RTS-Standard 0,03,MICEX 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 yearon-year basis. The Russian stock exchanges 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 RTSs 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 companys 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 "Polymetal", 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, The way correlation between the main market and the merged MICEX-RTSs 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--vis the main market of MICEX-RTS.

Improving the securities issuance procedure (the NAUFOR report). December 13, 2011. The document is posted on the NAUFOR website:http://naufor.ru/tree.aspn=9411&hk= .RUSSIAN ECONOMY IN trends and outlooks more stringent requirements to listing introduced by the merged stock exchange vis--vis the earlier JSC RTSs 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.

2 2 1 y = 20,02x - 159,R2 = 0,1 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 Brent, $/bbl Source: by IFS IMF and MICEX-RTS data.

Fig. 6. Dependence of RTS index on Brent Prices from September through December According to the international financial organizations and the RF Ministry of Economic Developments 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-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 Developments 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 todays $ 111 to about $ 100.

RTS index, points Section Financial Markets and Financial Institutions Russia 1997-1998 Russia 2008-36 months 100,83,43 months 41,31,1 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 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 2000s. 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;

RUSSIAN ECONOMY IN trends and outlooks - between May 2011 and December 2011, the RTS index is down drastically, while the oil prices slide fairly insignificantly.

April 3000 1,0,July 0,2000 0,0,0,1000 -0,-0,-0,March 0 -0,RTS index (09.1995=100%)- left axis Brent price (09.1995=100%) - left axis Annual correlation (right axis) 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 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.

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