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Fig. 44. Volumes of outstanding ruble-denominated bonds Such parameters of the market of ruble-denominated corporate bonds in the 2000-2011 period as were recalculated in US dollar terms are shown in Table 9. Despite the rapid growth in volumes of offering of corporate bonds from $1.1bn in 2000 to $31.5bn in 2011, the volume of such funds spent on capital assets growth remains low. With the total volume of offering of bonds in the amount of $28.2bn in 2010, only $0.03bn out of the above amount or 0.1% of the volume of the placed bonds was spent on purchase of capital assets. Altogether, in the 2000s the share of volumes of corporate bonds issues spent on capital assets varied from 0.00% to 6.7%. The data for January-September 2011 reflects positive changes. Only in the first nine months of 2011, for replenishment of capital assets $1.6bn was spent out of the total volume of the corporate bonds offering ($31.5bn), that is, ten times more than in all the previous years altogether.

billion Rb Section Financial Markets and Financial Institutions Table The parameters of the market of ruble-denominated corporate bonds (billion $) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Capitalization 1.6 2.5 3.3 4.8 8.9 17 33.2 49.2 67 79.7 98.8 117,Secondary 0.2 1.1 2.3 8.2 14.7 44.2 134.9 371.1 457.4 293 756.8 1237,market, including REPO Placement 1.1 0.8 1.5 2.6 4.9 9.2 17.1 17.9 16.1 29.0 28.2 31,In capital assets 0 0 0.1 0.1 0.1 0.3 0.1 0.2 0.2 0.1 0.03 1,6* the same as % 3.0 2.1 1.1 1.8 0.3 0.4 0.3 0.1 0.of the capitalization the same as % 6.7 3.8 2.0 3.3 0.6 1.1 1.2 0.3 0.of the volume of placement * for January-September 2011.

Source: calculated on the basis of the data of MICEX-RTS, cBonds, the Bank of Russia and Rosstat.

3.7.2. The Impact of IPO of Equities on the Economy The more effective instrument of raising funds for financing of capital assets as compared to issuing of corporate bonds is a public offering of equities in the form of IPO and SPO. It is justified by the fact that funds raised by means of IPO are more long-term ones. In Table 10, parameters of the market of equities of Russian companies are shown. As seen from the Table, the most active IPOs of equities were carried out in 2006 and 2007 when companies managed to raise $17.0bn and $33.0bn, respectively. In 2006, 18.8% of receipts from IPOSPO was spent by companies on purchase of capital assets, while in 2007 that index decreased to 10.9%. In individual years, for example, in 2008 and 2009 110.5% and 117.6% of the volume of IPOs was spent on capital assets, respectively. It can be explained by the fact that a portion of investments in capital assets was received by companies by means of a private offering and not IPO-SPO. In 2010, Russian companies, including RUSAL and Mail.ru which are both off-shore-registered companies raised $6.3bn by means of IPO-SPO; generally as a result of issuing of equities $2.6bn or 46.0% of the volume of IPO-SPO was invested in capital assets. In 2011, only in the nine months $1.6bn out of the total value of IPO ($11.3bn) was spent on capital assets. A considerable portion of funds raised on the stock market was spent on buying out of business from former owners, refinancing of debts and serving of merger-takeover deals, including purchasing of large equity stakes. At present, the volumes of IPO and investments in real capital through issuing of shares are much lower than those of merger-takeover deals. From 2000 till 2001, the total volume of IPO-SPO of Russian companies amounted to $72.0bn, while the volume of merger-takeover deals, to $644.3bn, that is 8.9 times more.

However, it is too early to say that a large portion of receipts from offering of equities and, especially, corporate bonds contributes to modernization of the economy and promotion of economic growth1. The volume of funds which companies raise by means of offering of equi In Russia, for some reason the q-Tobin rule does not work well. Under the above rule, if there is a high coefficient characterizing the ratio of market capitalization to replacement cost of the business it will be profitable for businessmen to make investments in real capital. (F. Mishkin The Economic Theory of Money, Banking and Financial Markets, 7th edition: Translated from English. .: I.D. Williams, 2006, p. 738). Interestingly, RUSSIAN ECONOMY IN trends and outlooks ties and corporate bonds and then spend on purchase of fixed-capital assets accounts for a small portion in sources of financing of capital assets. The data in Fig. 45 on the sources of financing of investments in fixed-capital assets points to that effect.

Table Parameters of the market of equities of Russian companies (billion $) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Capitali- 40.7 74.6 105.5 176.3 230.0 548.6 1057.2 1503.0 397.0 861.4 938.3 1130** zation Secondary 46.7 49.4 86.8 188.3 541.3 374.0 914.2 1687.1 1982.5 1155.7 1430.5 2221.market.

including foreign exchanges IPO of 0.5 0.2 1.3 0.6 3.0 5.2 17.0 33.0 1.9 1.7 6.3 11.equities In capital 0.2 0.1 0.2 0.2 0.1 3.2 3.2 3.6 2.1 2 2.9 1.6*** assets the same 0.5 0.1 0.2 0.1 0.0 0.6 0.3 0.2 0.5 0.2 0.as % of capitalization The same 40.0 50.0 15.4 33.3 3.3 61.5 18.8 10.9 110.5* 117.6* 46.as % of the volume of IPO The vol- 5.0 12.4 17.9 32.3 27.0 60.4 61.9 125.9 110.4 56.1 55.7 79.ume of mergertakeover deals * - the value is more than 100% because a portion of investments in capital assets might have been carried out through private offering;

**- evaluation;

***- for January-September 2011.

Source: calculated on the basis of the data of MICEX-RTS, the Bank of Russia, Rosstat and www.mergers.ru Throughout the 2000s, the share of funds raised through issuing of bonds and equities in the sources of financing of capital assets varied in the range of from 0.1% in 2001 to 3.4% in 2005. In 2010, the above index amounted to 1.4%, while on the basis of the outputs of the nine months of 2011, to 2.0%.

according to the IMF Report on Global Financial Stability Russia differs from other developing countries by a lower value of the P/BV ratio which fact does not contribute to investments in real capital. It seems that the problem of Russia is of a dual nature: first, prices on equities are overrated and, second, the cost of non-efficient assets is tremendously high.

Section Financial Markets and Financial Institutions 100% 7,11,15,20,0,4 18,2 20,19,19,4 18,20,17,0,7 22,22,0,5 23,0,1 3,2,3 1,0,5 0,4 0,0,80% 1,1,4 2,29,25,26,23,0 18,22,3 20,5 20,9 22,20,7 21,3 16,22,2 19,60% 4,5,4,7,3 5,4,8 5,6,8 6,4,2 7,2 6,5 7,1 6,5,4,7,2,9 7,9 8,6,4 8,5,9,10,4 8,11,10,40% 25,24,36,40,25,9 26,2 24,27,4 27,22,21,20,26,20,20% 23,4 24,20,3 19,19,1 19,2 19,4 18,17,8 17,15,9 16,14,13,0% profit at disposal of enterprises depreciation and other own funds loans from banks funds borrowed from other organizations budgetary and extra-budgetary funds Issuing of equities and bonds Other Source: calculations on the basis of the data of Rosstat.

Fig. 45. The structure of sources of investment in fixed-capital assets 3.8. The Impact of the Crisis on the System of Domestic Savings To maintain high rates of growth and modernization of the economy of Russia, high rates of domestic savings and accumulation are required. However, if the rate of savings in Russia is relatively high and only below those of some states of the Asian region the rate of accumulation, that is, investments in capital assets and inventories is much lower than in many developing and developed countries. In Fig. 46, the data on the rate of savings and the rate of accumulation in Russia in the 1995-2010 period is presented.

36,32,31,30,30,3 30,30,28,28,30 27,27,28,25,25,21,25,4 20,24,23,19,22,22,21,20,9 21,20,20,20,18,7 18,15,14,Gross accumulation, % of the GDP Gross savings, % of the GDP Source: calculations on the basis of the data of Rosstat.

Fig. 46. The rates of savings and accumulation in Russia in the 1995-2010 period, % of the GDP 9 month RUSSIAN ECONOMY IN trends and outlooks The difference between rate of savings and the rate of accumulation amounts from year to year to 510 percentage points. The main factor that a portion of domestic savings in this country fails to turn into real capital can be explained by the fact that a large portion of the savings surplus is left in the gold and foreign exchange reserve which is deposited abroad.

Such a situation is a necessity because at the current level of development of financial instruments and investment climate the financial system is unable to make the above reserves work efficiently in Russia. The system itself needs modernization, new knowledge and expertise.

That problem should be attached key importance in development of the new long-term strategy of development of Russia till 2020.

Another reserve of growth in accumulation implies raising of the rate of savings by households. According to the official data of Rosstat, Russian households save 1415% of their income. In leader-states as regards economic growth and modernization (China, India, Singapore and Hong Kong), the rate of savings by households to the amount of the disposable income is much higher. The social and demographic situation in those countries is, certainly, different from that in Russia, however it is to be admitted that any large-scale modernization is to rely on internal financing. In addition to the above, in the current situation a high rate of consumption in Russia actually means motivation at the expense of the domestic demand of foreign manufacturers.

To raise the rate of savings of households and attract long-term resources, as well as in a case of reserves of the state, conservative institutional investors are required. A relatively low level of development of such investors in Russia (Table 11) is a principal problem to the Russian financial market.

Table The composite data on the level of development of institutional investors in Russia Number of coun- Share as % of the GDP Average index in the 20012010 period as regards mutual Position of tries in samples Average in funds and in the 20012009 period as regards pension funds Russia in samof ICI1 and the 2001 and insurers ples OECD 2010 period Assets of open investment funds* 46 45 0.3 0.Reserves of private pension funds** 47 44 1.0 1.Assets of insurance organizations*** 33 32 1.0 1.* Russia open-end and interval unit investment funds;

** Russia reserves of non-government pension funds;

*** Russia insurance reserves.

Source: calculated on the basis of the data of the Investment Company Institute, stat.org OECD and IFS IMF base.

As compared to countries where there is a domestic stock market, Russia is the only country which is a global outsider as regards the level of development of all the three forms of institutional investors. Among 46 countries in respect of which the data on the assets of openend investment funds is collected, Russia is rated 45th; as regards the standard of the relative level of development of private pension funds, 44th among 47 countries and as regards the assets of insurance organizations, 32nd out of 33 countries. In 2010, the share of assets of openend unit investment funds and interval unit investment funds to the GDP of Russia amounted to 0.3%, reserves of non-government pension funds, to 1.4% and assets of insurance organizations, to about 1.1%. The above data points to the fact that in Russia the mechanism of mobi Investment Company Institute.

Section Financial Markets and Financial Institutions lization of savings through institutional investors does not virtually work. Unlike all other countries, in Russia the main ways of savings are real-estate and bank deposits.

In Fig. 47, the data on the number of accounts of individual investors with brokers and the number of personal accounts in registers of owners of investment shares of unit investment funds is presented. Unfortunately, at present the National League of Management Companies (NLMC) does not promptly reveal the number of market sharers of unit investment funds.

However, if is assumed that in the 2009-2011 period the number of sharers of unit investment funds did not decrease as compared to 2008 then it may be concluded that in 2011 the number of individual investors which carry out operations with securities directly or by means of collective investments amounts to about a million investors. It is to be noted that the specifics of the 20102011 period was a trend of a slowdown of the growth in the number of brokers clients registered in the MICEX trading system. If in 2009 the growth in registered clients within a year amounted to 112,200 persons, in 2010 it was equal to the mere 42,800 persons, while in 2011, to 66,500 persons. The number of active clients with brokers fell from 114,persons in 2009 to 93,200 persons in 2011. The above data may point to the fact that the existing scheme of attraction of clients to the Russian stock market has started to exhaust itself.

The number of people who are attracted by manipulation on stock exchange is a limited one in any country. The new scheme of growth requires involvement of long-term investors, but it cannot be done without establishment of an efficient system of pension savings and restructuring of the pattern of provision of services by financial institutions.

800 Sharers of unit investment funds The 2007-2008 evaluation 700 2009-2010 Not available 600 500 400 300 200 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 sharers of unit investment funds, number of persons brokers clients, number of persons brokers active clients, number of persons Source: calculations on the basis of the data of the MICEX-RTS, RNASMP and NLMC.

Fig. 47. Number of retail and wholesale customers with management companies and brokers Thus, the financial market has exhausted to a great extent the former scheme of growth and it needs to be changed. A particular attention is to be attached to a long-term investor, representative of the middle class. To solve that problem, it is important to work out a new strategy of development of the financial market.

780 714 671 559 480 417 342 198 133 114 113 82 95 93 74 64 63 29 29 11 6 6 RUSSIAN ECONOMY IN trends and outlooks 3.9. Development of the Banking Sector in Russia in 3.9.1. The Post-Crisis False Start The financial sphere of Russia was the first sector of the national economy which was affected by the global economic crisis of 2008. Financial markets were hit first and then the banking sector experienced the liquidity problem to be followed by a full-scale economic crisis in Russia.

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