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Lastly, one should not help but underestimate the impact of the enacted against the market participants and SROs will decision on raising requirements to capital adequacy ratio on deterioration of the business climate both in the economy on the whole and the financial market in particular. The decision in question appears just a link in the string of states numerous direct interferences with business. As a consequence, the business climate in the country has lately worsened and the capital flight has been on the upswing. In 2010, the media tattled of a possible sale of Troika Dialogue, one of the largest private investment banks, to a state-owned one. Meanwhile, Mr. R. Vardanyan, Troikas founder, publicly voiced his desire to quit the company as early as in 2013. Given his reputation both in Russia and overseas and caution he, as an investment banker, exercises in his assessments and statements, his explanation of the current processes in the business and financial spheres appears fairly provocative. For example, he cites that, there is no understanding of how decisions are made both in business U.S. Securities and Exchange Commission. Study on Investment Advisers and Broker-Dealers. January 2011, p.6-8. Posted at: www.sec.gov Chuvilyaev P. Dmitry Ananyev: bolshinstvo systemnykh problem v finansovom zakonodatelstve ostayutsya nereshennymi. Kommersant Dengi, 24, 21.06.-27.06. 2010, p. 16.

Section 3.

Financial Markets and Financial Institutes and in the government; the civil servants attitude to business worsened; the crisis demonstrated there is no capitalism but some kind of pseudocapitalism; for any business the planning horizon is limited by one year or three years at best; you should be prepared for different things, for example, receiving a request to sell business and be prepared for having your license revoked or for everyone been instructed not to work with you any longer1.

% of registered clients % of active clients 2006 2007 2008 2009 2010 Source: calculated by MICEX data Fig. 16. The Share of Top 7 Brokerages in Clients Assets, as % That private financial structures have grown increasingly concerned about the states interference in their business was evidenced by acquisition in 2001 by Zoulian Trustees Limited (Cyprus) of 99.5% of voting shares in JSC Investment Holding Finam. The acquisition was approved by the RF Federal Anti-Monopoly Service. A Finam representative commented that, so far we have not faced a hostile takeover, but anything can happen in Russia.2 The statistics of the banking sector also illustrate growing doubts over the domestic markets prospects. In 2009-2011, shareholders of ten foreign banks3, such as International Personal Finance, Santander, Rabobank, Barclays, Swedbank, HSBC, KBC Group, Morgan Stanley, to name a few, announced scaling back on their presence on the Russian market. Meanwhile, numerous investment companies and banks in Russia declared they would hence focus on wealthy individuals as an alternative to financial retail services. Thanks in large measure to a direct involvement of FSFM, the Bank of Russia and the RF Ministry of Finance in negotiations between professional participants in the stock market in February 2011, the two largest Askar-zade. N, Safronov B. Krizis pokazal, chto kapitalizma u nas net. Vedomosti, 30 September 2010.

Zhelobanov D., Gubeidullina G. Finam ukhodit v ofshor. Vedomosti, 1 July 2010.

DementyevaK., Khvostik E. Inorodnoye telo. Kommersant, 9 March 2011.

jul jul jul jul oct oct oct oct jan feb apr jun sep jan feb apr jun sep jan feb apr jun sep jan feb apr jun sep jan dec aug nov dec aug nov dec aug nov dec aug nov dec mar mar mar mar may may may may RUSSIAN ECONOMY IN trends and outlooks domestic exchanges, MICEX and RTS, decided to merge. The decision on the merger and the Bank of Russias retirement from the MICEXs capital prior the end of 2011 was made on December 2010 at a meeting on establishment of an international financial center. Consequently, on 1 February 2011, the top five RTSs shareholders that is, Troika Dialogue, Aton, Alfa-Bank, Renaissance Broker and Da Vinci Management Company - signed an agreement on their intention to sell their stakes in the exchange. The deal suggests that MICEX acquires a control bloc in RTS with a subsequent merger of the two exchanges. RTS was appraised to cost USD 1.15 bln. Its 35% stake will be bought for cash, while the rest will be swapped for shares in JSC MICEX at the ratio of 1:351. It is symbolical that all that was made public on the premises of the Bank of Russia. At the height of the consolidation of the Russian exchanges, in late 2010, there popped up information of their possible merger with Deutsche Borse. Media sources suggested that the information evidenced that in the frame of the work on establishment of an international financial center the matter was discussed by individuals close to government structures behind the RTS and MICEX top management and shareholders back2.

Creation of a consolidated exchange on the basis of MICEX and RTS, can, other conditions being equal, ensure a positive effect in the form of concentration of liquidity, greater efficiency in transactioning in different segments of the financial market, cuts in direct and indirect transaction costs for participants in trading and investors, and solidification of Russias standing on international capital markets. However, there persist some risks, too. Monopoly can affect an exchanges innovational activity, result in higher tariffs for infrastructural organizations products and services, push participants in the Russian markets to more vigorous entering overseas markets. Meanwhile, the major risk a consolidated exchange structure would face could lie in a government structures greater influence on its operations. Formally, the Bank of Russia should withdraw from the exchange within 2011. However, government structures have plethora of informal leverages to influence the exchange and the settlement infrastructure through votes of subordinated to them state-owned banks, control over appointment of heads of infrastructural organizations, and adoption of regulatory documents. That is why a major challenge the consolidated exchange will see in the short run will lie in shaping such a corporate governance system which should establish a legitimate balance of interests between private corporations and public structures in regard to the new exchanges operations. That said, as government structures have lately intensified their interference in business, such a balance will be hard to strike in the years to come.

As to legislation, the year of 2010 saw enactment of several federal acts which may have a positive effect on advancement of the national financial market. Specifically, Federal Act of 27 July 2010 224-FZ On countering the improper use of insider information and market manipulation and on introducing amendments to individual legislative acts of Russian Federation reads that the national financial, forex and commodity markets have now become subject to control over the use of insider information and market manipulation. The Act established the definition of insider information, identified the circle of individuals who qualify for insiders, formulated signs of insider trading and activities that fall under market manipulation, and determined measures on their restraint. Criminal and administrative responsibility for the Smorodskaya P. RTS storgovali s MMVB. Gosudarstvo sklonilo birzhi k obyedineniyu. Kommersant, 2 February 2011.

Maltsev O. Ministerstvo birzhevoy torgovli. Istoriya s Deutsche Borse. Finans, 47-48, 20.12.2010-16.01.211, p. 56.

Section 3.

Financial Markets and Financial Institutes improper use of insider information and market manipulation was introduced in the form of amendments to the Criminal Code of RF and the Code of RF of Administrative Violations. In compliance with by-laws to the Federal Act, FSFM suggests to obligate stock exchanges to daily produce calculations, on the basis of special formulas and with the use of their databases, on exchanging transactions and to report suspicious deals to the regulator.

The other novelty became Federal Act of 27 July 2010 208-FZ On consolidated financial reporting. The Act reads that credit, insurance and other organizations, whose papers float at stock exchanges and with other organizers of trading on the securities market, are bound to publish their annual consolidated financial report according to IFRS. This means that from 2010 on, all issuers, with their outstandings, rather than the previous 20-25 ones, should publish their reports according to IRFS. Since 2015 the requirement will become binding for all corporate issuers whose bonds were permitted of trading. Let us hope this positive practice will expand shortly to embrace all the professional participants on the security market and companies that manage pooled investments. It is also imperative to urge issuers to compile and disclose the IRFS-based reports quarterly, for that would allow a comprehensive fundamental evaluation as a pillar to investment decision making on the domestic market.

Lastly, last year saw adoption of a number of amendments to the Tax Code of RF, which concerned operations on the stock market and the market for pooled investment. The novelties comprise, in particular, personal income tax benefits for private individuals and corporate profit tax benefits for legal entities that invest in start-ups and venture projects. The said categories of taxpayers are now exempt from the respective taxes on incomes generated by sales (redemption) of participation shares and stock in Russian organizations which are not traded on organized securities markets, provided the shares sold belonged to the taxpayer for more than five years, while over-the-counter stock belonged to their owner for long. According to some other amendments introduced to Art. 378 of the Tax Code, assets transferred to the mutual investment fund are now subject to the property tax collected from the managing company. Also, amendments were introduced to Art. 388, which now reads that land lots assigned to the MIF are subject to the land tax payable by the managing company out of the assets that form the fund.

So, the year of 2010 witnessed the state bolster its reign as the regulator of financial markets and institutions. However, in addition to its traditional market control and oversight functions, government structures started engaging more vigorously in governing infrastructural organizations, dictating conditions of doing business, participating in the largest banks and investment companies property structure. It is yet premature to judge to the full extent efficiency of these moves; however, it can be ascertained now that the financial market, as well as other sectors of the economy, has faced increasingly unfavorable conditions of doing business and the private sector has increasingly clearly sensed risks and increased costs of doing business in Russia.

The mounting administrative pressure makes one contemplate mechanisms which might secure a reasonable balance between the governments interests and the business structures ones. Such a mechanism might take the form of obligating public structures to pursue a development policy that would suggest employment of indicative forecasts of quantitative indicators of the sectors advancement, simplification of the effective law to bolster innovational activities by businesses, the government structures contribution to implementation of strategic projects aimed at creation a more favorable business climate. These and other problems are highlighted in a greater detail in the concluding part of the present Section.

RUSSIAN ECONOMY IN trends and outlooks 3.3. Financial Institutions: Seeking for a New Growth Concept 3.3.1. Residual Forms of Support to the Financial Sector During the recession period of 20082009 the federal government was acting as a good administrator which manually managed to maintain the financial system facing bad loans and low liquidity. One may say that the state learned from the lesson of the previous recession, when it failed to save large banks and was held liable for being a source of the problems faced by private institutions ten years ago. The state had to spend USD 212 bln from the international reserves to support banks to balance their foreign exchange assets and liabilities through long-term loans to state-owned banks. To strengthen the resource base of the banks, the state took a risk, from the economic point of view, by ensuring repayment of bank deports in the amount of RUB 700 K. When the recession was in full swing, the state granted a total of RUB 2,5 t loans to the banks.

In 2010, most of these measures were discontinued unlike at many developed economics which had to actively pursue a quantitative relaxation monetary policy. Only a few of the measures continued, namely the guarantee to repay RUB 700 K of bank deposits. Some of the state-owned entities began to repay a part of their outstanding working capital loans. In December 2009, VEB reported repayment of RUB 175 bln, a loan which the bank obtained as part of the antirecession stock market support. Sberbank of Russia repaid about RUB 200 bln, or 40% of the total antirecession support, to the Ministry of Finance in H1 2010. The bank is likely to continue repaying in the course of privatization deals scheduled for a period between 2011 and 2013. Rosselkhozbank will repay its public loans through IPO. Rosselkhozbank obtained a public contribution of RUB 30 bln to replenish its charter capital during the recession period. In September 2009, the Government of the Russian Federation purchased from VTB an additional issue of RUB 180 bln as part of the antirecession support, at a par value of 4,8 kopeks per share. During IPO which was held on February 17, 2010, the state sold 27.9% of the issue at par value of RUB 9,1468 per share thus gaining RUB 95,7 bln, including a profit of RUB 45,5 bln1 on this block of shares. It is obvious that the antirecession debt owed by VTB will be paid in full after the subsequent sale of a 10% interest in VTB during a new SPO.

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