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At the present stage, the problem on the REPO market consists in the fact that for individual types of securities, for example, corporate bonds they became a dominating type of transactions. Corporate bonds became an instrument which specializes in provision of sureties in inter-bank lending deals. It has a positive effect as it ensures an influx of short-term liquidity to the market of corporate borrowings and a partial transformation of such liquidity into more long-term investment resources. At the same time, corporate bonds are much less convenient instruments for such a type of operations as compared, for instance, to OFZ. As regards output volumes, liquidity, affordability and reliability, OFZ have either already surpassed or will surpass in the next two years most issues of corporate bonds. It appears that as the strategy of development of the term market is carried out by the Ministry of Finance of the Russian Federation OFZ will become more liquid and popular with many investors. Gradually, they will oust corporate bonds from the inter-bank lending segment. If by that time corporate bonds have failed to find more long-term resources of funding the corporate debts market may collapse.

3.5.7. Lack of the Financial Market Development Strategy The industry of provision of investment and financial services as well as readjustment of that industry to a long-term private investor requires considerable investments. To do that, financial institutions and investors should be well aware of the prospect of development of the industry in the next few years. So, a strategy of development of the financial market is to be agreed upon both by market participants and state authorities. The existing Strategy of Development fails to perform guideline functions as forecasted indices of the financial market stated in it refer to the distant year 2020. The indices were prepared without breakdown by the year and those indicators which were approved before the crisis have not been revised with taking into account the actual data in the 20082011 period. Not surprisingly, on the basis of the results of the strategic audit of development of the Russian financial market the Accounts Chamber of the Russian Federation stated that with current growth rates of indices which characterize the dynamics of development of the financial market goals can be achieved as regards only two out of twenty target indices of development of the financial market set by the Strategy 1.

Within the frameworks of the course in the economy of non-banking financial brokerage, in the 20092010 period NRU HSE carried out evaluation of the capacity of the Russian fi On January 10, 2012, the Accounts Chamber carried out a strategic audit of development of the financial market of Russia. The Information Department of the Accounts Chamber of the Russian Federation. Published on the Internet site of the Accounts Chamber of the Russian Federation at the following address www.ach.gov.ru RUSSIAN ECONOMY IN trends and outlooks nancial market in the 20102020 period.1 On the basis of different sources and expert surveys, the value of assets which different categories of individual and institutional investors keep in brokerage accounts and transfer into trust management, including unit investment funds was estimated. Also, an evaluation of the market of investment services both in offering of different securities and carrying out of merger-takeover deals was made. Then, the amount of intermediaries income from rendering of non-banking financial services was calculated on a yearly basis and it eventually permitted on the basis of the DCF-model to determine potential capitalization of the business of investment banks, brokers and trustees. The above calculations were carried out in accordance with the following three scenarios: an optimistic one which is close to KDR-2020 (the Concept for the Long-Term Social and Economic Development of the Russian Federation in the Period until 2020) of the year 2008; a base one which is aimed at the current growth path of the GDP and market capitalization and a moderate one which virtually allows for stagnation in economic growth and financial parameters.

On the basis of the results of the research, it was revealed that the entire business of Russian investment banks, brokers and trustees was evaluated at $22.7bn, $20.5bn and $11.8bn according to the optimistic scenario, base scenario and moderate scenario, respectively. In 2011, the above calculations were not updated completely, however, matching of the initial data with the actual outputs in the 20102011 period shows that the financial services market is developing according to the trend which is worse than the most moderate scenario.

An illustration of both a drop in demand in financial services and growth in a lack of confidence by the middle class to the domestic financial market in 2011 became a large-scale shutdown of once popular financial publishing houses which were aimed at an average investor. On June 27, 2011, the last issue of the Finans weekly came out. In April 2011, the Zhurnal D magazine aimed at persons with work experience on the stock market ceased to exist.

Those developments became a continuation of a shutdown of the Smart Money magazine in May 2009 and the Russian Newsweek magazine in October 2010.

With lack of strategy, the entire financial business is doomed to degradation. Without clear and justified goals there are no investments, while without investments into development the financial business turns into industry which is dangerous to the consumer of services where growth in income is achieved not through attraction of new participants and investment assets to the market, but by means of intensifying the pressure of commissions on the existing customers. The present trend of strengthening of the role of state regulation and supervision should be combined with raising of responsibility of representatives of the state for different financial services industries. One of the state authorities should be responsible for the policy of development of financial organizations, including indicative planning of key indices of the industry. In May 2009, Decree of the President of the Russian Federation on the Principles of Strategic Planning in the Russian Federation was signed; at present special legislation on indicative planning is being developed. The ideas of the above documents are topical to the financial market. A center for coordination of the work on development of modern strategies of development of the industry and its participants can become self-regulating entities represented by the National League of Management Companies (NLMC), the Russian National See more detailed results published in the NAUFOR Bulletin (Bulletin of the Russian National Association of Securities Market Participants), No.3. March 2010.

Section Financial Markets and Financial Institutions Association of Securities Market Participants (RNASMP) and the National Securities Market Association (NSMA)1.

3.6. Problems of Attraction of Conservative Institutional Investors The Russian stock market remains unattractive to the most capitalized conservative investors, primarily, western pension funds. To understand the reasons, it would be expedient to turn to the experience of the California Public Employees Retirement System (Calpers), the US largest pension fund whose reserves amount to about $200bn. For many years until 2007, Calpers used methods of preparing the emergency markets rating as regards opportunities of investing its assets in such markets. The above methods were public and were based on research of authoritative organizations, including the Freedom House, the World Economic Forum, the Oxford Analytica, the Heritage Foundation, the Wall Street Journal and other research centers. On the basis of Calperss research, the most important factors which prevent active investment by western pension funds and other conservative investors in the Russian stock market are shown in Fig. 42.

Practice of Political stability 31% settlements/transaction costs 8% Capital market transparency 15% Market regulation/legal system/protection of investors rights 11% Compliance with standards of regulation of labor relations Information transparency 15% 20% Source: www.calpers.ca.gov Fig. 42. The factors which prevented Russia from receiving the maximum investment ratings in accordance with methods of the CalPERs Pension Fund (USA) in In 2007, Calpers changed the methods of making decisions as regards investment in emerging markets; portfolio managers were granted the right to select at their own discretion companies from emerging markets for making investments with taking into account risks incidental to different countries and stock markets. In the 20082010 period, Calpers invested in equities of a number of Russian companies (Table 8). Analyzing investments by Calpers in ADR of Russian companies in the above period, it has been found that investments in ADR of According to Academician V.M. Polterovitch practically all the countries which managed in the past six decades to become developed states used indicative planning based on a close cooperation between the government and business associations (Strategy of Modernization of the Russian Economy/ executive editor V.M. Polterovitch. SPb.: Aleteya, 2010, p.57).

RUSSIAN ECONOMY IN trends and outlooks Gasprom and Lukoil were reduced as a reaction to sanctions against foreign companies operating in Iran.

Table Investments by Calpers in equities of Russian companies, million $ 2008* 2009* 2010* Gasprom 144.7 46.0 55.Lukoil 189.1 93.5 80.Mechel 9.1 1.0 1.GMK Norilsky Nikel 4.6 1.4 14.Novatek 20.6 10.Novorossiisky Torgovy Port 10.3 8.4 7.Rosneft 11.4 31.4 15.Polus Zoloto 5.5 2.Rostelekom 3.4 1.Sberbank of Russia 5.5 30.8 9.Severstal 7.0 4.7 7.AFK Sistema 9.7 3.8 62.Surgutneftegaz 4.5 20.5 18.Wimm-Bill-Dann 20.2 2.Magnit 7.3 15. 6.1 2.VTB 31.6 6.9 14.LSR 2.9 4.Other open-end joint-stock companies () 12.Equities of Russian companies total 427.4 314.4 337.Equities on the domestic and foreign markets 122 281.2 80 728.6 91 776.The share of equities of Russian companies in Calperss portfolio 0.35 0.39 0.The share of Russian companies in the global capitalization 1.21 1.85 1.*the fiscal year ending in June; the detailed data on the composition and structure of Calperss portfolio at its Internet site is published with nearly a year delay, probably, in order to limit strategies of following to that pension funds portfolio.

Source: on the basis of the report on Calperss investments for a number of years.

The value of Calperss investments in equities of Russian companies is a symbolic one. In 2008, it was estimated at $427m or 0.35% of the cost of the equities portfolio of the state pension fund, in 2009, at $314m or 0.39% of the cost of the equities portfolio and in 2010, at $337m or 0.37% of the cost of the portfolio. For comparison, the share of equities of Russian companies in the global capitalization amounted to 1.21%, 1.85% and 1.91% in 2008, and 2010, respectively.

As regards the main criteria which restrained Calpers from investing into Russian equities when they officially declared the methods of selection of emerging markets for investments, no positive changes have taken place so far. In Fig. 43, the data of the Global Competitiveness Index of the World Economic Forum for a number of years is presented. The above data shows those spheres where Russia received low rating grades in terms of Calperss former methods.

Section Financial Markets and Financial Institutions Position in the GCI WEF: independence of justice Position in the GCI WEF: protection of the rights of minority shareholders Position in the GCI WEF: efficiency Position in the GCI WEF: depth of the domestic equity market of the standard of audit and reporting Position in the GCI WEF: regulation of exchanges Position in the GCI WEF: reliability of banks Source: The Global Competitiveness Index of the World Economic Forum for a number of years.

Fig. 43. Position of BRIC states in the global competitiveness index as regards a number of criteria which are important for decision-making by conservative portfolio investors As regards the most problematic issues such as independence of justice, protection of minority shareholders, efficiency of standards of audit and reporting, depth of the equity market, efficiency of regulation of exchanges and reliability of banks, Russia lags significantly behind other BRIC states. It is to be noted that in 2011 Russias position changed for the worse as regards two of the above six indices, remained unchanged as regards one index and somewhat improved as regards the remaining three indices.

3.7. The Role of the Stock Market in Modernization of the Economy and Promotion of Innovations The crisis has revealed deep-rooted problems and inconsistencies of the Russian economy, as well as its unpreparedness to challenges of globalization. Russia has adopted a policy of RUSSIAN ECONOMY IN trends and outlooks economic modernization. The financial market should play an important role in implementation of that policy. However, it remains to be seen if it is prepared for such large-scale objectives 3.7.1. Contribution of the Market of Corporate Bonds in Real Capital Growth An important financial achievement of the 2000s was development of the market of rubledenominated bonds (Fig. 44). Capitalization of the market of ruble-denominated bonds rose from Rb 0.6 trillion in 2000 to Rb 7.4 trillion in 2011 or 12.3 times over. Of all rubledenominated bonds, the market of corporate bonds was growing at a higher rate. Their aggregate capitalization rose from Rb 46bn in 2000 to Rb 3.4 trillion in 2010 or nearly 75 times over.

8 OFZ, GSO and other Regional bonds Corporate bonds GKO 3 3 6 2 1 4 1 2 3 103 2 74 7,1 2 1 22 65 1 2 6 1 4 624 477 515 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: on the basis of the data of the Ministry of Finance of the Russian Federation and Cbonds.ru.

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