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Fig. 29. Structure of deals with regional bonds in the MICEX Stock Exchange, % Fig. 30 shows analysis of a share of different groups of traders (private financial companies, state-owned companies, and the Bank of Russia) in stock-exchange deals with corporate bonds in the MICEX in all modes, including market negotiated deals and REPO deals. Beginning with March 2009, a share of state-owned companies increased visibly in the volume of corporate bonds trading; the Bank of Russia as a large supplier of liquidity trough REPO and other deals joined in April. Between April 2009 and January 2010, the Bank of Russia accounted for 0.7% to 14.3% of trading volume s with corporate bonds in the MICEX. From January 2011 MICEX ceased to include the Bank of Russia into monthly its reporting on trading volumes, which might mean that the Bank of Russia discontinued operations with securities in the MICEX Stock Exchange. On May 2010, a composite share of state-owned companies in volumes of deals with corporate bonds reached the pre-recession level.

Fig. 31 shows a share of state-owned companies and the Bank of Russia in trading volumes with regional securities. Though no the market saw no serious changes in a share of state-owned companies and the Bank of Russia in the period between August 2008 and January 2010, we can see that the share accounted for nearly 3540% of the total volume of deals with regional securities, which was very important for supporting this segment in the bond market.

Section 3.

Financial Markets and Financial Institutes State-owned companies, excl. the Central Bank of Russia Bank of Russia Other traders 2005 2006 2007 2008 2009 2010 Source: based on the data published by the MICEX Stock Exchange.

Fig. 30. A share of private and public brokers in trading volumes of deals with corporate bonds in the MICEX Stock Exchange, % Source: based on the data published by the MICEX Stock Exchange.

Fig. 31. A share of private and public brokers in trading volumes of deals with regional bonds in the MICEX Stock Exchange, % Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Jun Jun Jun Jun Jun Oct Oct Oct Oct Oct Oct Sep Feb Sep Feb Sep Feb Sep Feb Sep Feb Sep Feb Apr Apr Apr Apr Apr Dec Dec Dec Dec Dec Dec Mar Mar Mar Mar Mar Aug Nov Aug Nov Aug Nov Aug Nov Aug Nov Aug Nov May May May May May RUSSIAN ECONOMY IN trends and outlooks Fig. 32 shows data on the number of dials and the value of a single deal with corporate bonds in stock-exchange (order-driven) trading mode in the MICEX Stock Exchange. As opposed to the market segment of stock trading (Fig. 15), a downward trend in the number of market deals with corporate bonds was observed as the average volume of deals increased in 2009 early in 2011, which means that this market segment, unlike stock trading, provides at least less developed algorithmic trading and trading robots. On the other hand, growth in short-term liquidity allows volume of deals to be increased. Inflow of foreign portfolio investors who become more interested in the ruble bond market, as it offers a higher yield against global market interest rates amidst an acceptable macroeconomic stability in Russia, also may become a growth factor in volumes of deals in this market segment.

Fig. 33 shows analysis of REPO deals with corporate bonds in the MICEX Stock Exchange. Unlike the market trading mode in the REPO segment, deals grew rapidly in 2009 early in 2011with a decrease in the average deal size beginning with mid-2009. This means that the REPO market became a more popular source of short-term funding as the economy recovered. The number of participants in this mode grew constantly.

Source: based on the data published by the MICEX Stock Exchange.

Fig. 32. Market deals with corporate bonds in the MICEX Stock Exchange Section 3.

Financial Markets and Financial Institutes Source: based on the data published by the MICEX Stock Exchange.

Fig. 33. REPO deals with corporate bonds in the MICEX Stock Exchange Fig. 34 shows analysis of placement volumes of not only corporate obligations, but also regional ruble bonds, as well as federal securities. Until 2010, placement volumes of corporate obligations exceeded visibly volumes of issues of federal securities. For example, a total of RUB 457 bln of corporate obligations and federal loan bonds (FZ) and RUB 271 bln of state saving bonds (GSO) were placed in the 2007 pre-recession year. The situation began to change beginning with 2009, when the gap between corporate bonds and federal bonds began to narrow. of A total of RUB 917 bln of corporate obligations, RUB 519 bln of FZs and GSOs were placed at the same year. It was for the first time over the recent years when in 2010 the volume of issue of federal bonds RUB 861 bln exceeded the volume of placement of corporate obligations RUB 855 bln. In general, this is a positive phenomenon for the Russian stock market. The existence of a liquid government securities market is important not only for financing a moderate federal budget deficit. Making federal securities a main tool to service the interbank loan market could make the latter more stable as well as strengthen the position of corporate obligations as a tool of long- and medium-term fundraising.

With regard to issues of regional obligations, Fig. 34 shows that they fall behind the corporate and federal bond market. Nevertheless, their role may become more important in the future, because the state will have to engage more actively regional authorities in modernization of the economy, which would inevitably make the regions more economically and financially independent thereby strengthening their activity in the bond market.

RUSSIAN ECONOMY IN trends and outlooks 2 1 1 1 1 1 0 200 11 - - 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 GKO-OFZ-GSO Regional bonds Corporate bonds Source : based on the data published by RTS OJSC and IMF.

Fig. 34. Volume of placements of ruble bonds Amendments to the pension legislation, a part of the funded pension accruals can be invested in non-government bonds were an effective measure of support to the ruble corporate bond and regional bond markets in 2009. The Federal Law No. 182-FZ On Amendments to the Federal Law On Non-Government Pension Funds and Federal Law On Investments to Finance Funded Work Pension in the Russian Federation became effective on 18 July 18, 2009. Under this federal law, Vneshekonombank (VEB), being in the capacity of public asset manager, is entitled to invest pension accruals in an extended investment portfolio which also includes Russian corporate bonds, state-insured ruble and foreign exchange deposits with credit institutions, mortgage securities, bonds of international financial institutions. At the 2009 year-end, a total of RUB 12,9 bln of pension accruals were invested in corporate bonds, including 7,8 bln RUB from the VEB managed portfolio. At the end of 9 months in 2010, these investments increased up to 57,8 bln RUB and 45,9 bln RUB, respectively.

The largest state-owned companies became the offer-drivers in the ruble corporate bond market due to amendments to the legislation on securities, which made it easier to issue stockexchange bonds by using simplified listing procedure for securities in stock exchanges instead of the Federal Financial Markets Service Russia. To strengthen stability of the corporate bond market, the maturity on stock-exchange bonds was extended from one year to three years. Not only open joint-stock companies, but also other economic agents, including state-owned corporations, were allowed to issue stock-exchange bonds.

Table 4 shows data on placements of corporate bonds by specific issuer in 2009 and 2010.

Because of numerous defaults the bond market was closed for third-echelon issuers. The largest public and private companies became primary issuers of corporate obligations in the post-recession period. For many of them the domestic bond market became a tentative replacement for external borrowings which were hard to obtain because of credibility crisis in this market segment.

RUB bln Section 3.

Financial Markets and Financial Institutes Table The largest issuers of ruble corporate obligations in 2009 Issuers Issuers RUB bln % RUB bln % 1 2 3 4 5 6 1 RZHD 145 15.8 FGC UES 50 5.2 Transheft 135 14.7 Rosselkhozbank 35 4.3 Vneshekonombank 60 6.6 Rosnanotech 33 3.4 Lukiol 50 5.5 EurazHolding 30 3.5 Atomenergoprom 50 5.5 AIZHK 29 3.6 Bashneft 50 5.5 Vneshekonombank 27 3.7 AFK Systema 39 4.3 Alrosa 26 3.8 MTS 30 3.3 MTS 25 2.9 AIZHK 28 3.1 Mechel 25 2.10 VTB ( VTB 24) 23 2.5 Wimm-Bill-Dann 24 2.11 SIBMETINVEST 20 2.2 VTB ( VTB 24) 20 2.12 Gazpromneft 18 2 Gazpromneft 20 2.13 VTB-Leasing Finance 15 1.6 VympelCom-Invest 20 2.14 Mechel 15 1.6 RZHD 15 1.15 MMK 15 1.6 Severstal 15 1.16 Gazprom 15 1.6 Globex Bank 15 1.17 NLMK 15 1.6 Norisk Nickel 15 1.18 Severstal 15 1.6 Unicredit 15 1.19 NIA VTB 001 14 1.6 EBRD 14 1.20 Bank Petrocommerce 11 1.2 MMK 13 1.21 10 1.1 Bank St. Petersburg 13 1.22 Rosbank 10 1.1 Aeroflot 12 1.23 Rosselkhozbank 10 1.1 Transcredibank 12 1.24 VympelCom-Invest 10 1.1 Atomenergoprom 10 1. Other issuers 113 12.3 Other issuers 342 40. Total 917 100 855 Source: based on the data posted on www.cBonds.ru, www.rusbonds.ru and published by the MICEX Stock Exchange.

In 2009, 24 largest issuers accounted for 87.7% of the value of corporate bond issues whereas only 60% in 2010, which means that a wider range of issuers offer bonds in the market. In 2007, however, of a RUB 476,7 bln of placements of corporate bonds, the 24 issuers accounted for mere 42.1% whereas other issuers for 57.9% of the value of issue. In other words, the primary market of corporate bonds was not recovered yet to reach the prerecession levels in terms of accessibility of corporate bonds for a wide range of companies.

RUSSIAN ECONOMY IN trends and outlooks 3.5. Key Risks in Financial Market The key risks of financial market crisis as per results of 2008-2009 are based on the following factors: the strong dependence of the economy in general and the stock market in particular on oil prices; outstripping growth of external borrowings by banks and non-financial sector; risks of foreign capital outflow; RUR devaluation; the growth of trading volumes in the futures market at the background of an insufficient level with transactions, increase of the risks in the REPO market ; small capacity of financial security services market, preventing the capitalization of financial intermediaries.

3.5.1. Dependence of the stock market on oil prices As shown in the comments to Fig. 7 and 8, the Russian stock market depends on oil prices.

Inflow or outflow of the short-term portfolio investments from abroad only occasionally suspends the interdependence between the dynamics of changes in the stock indices and prices.

However, the flow of foreign investments ultimately depends on the dynamics of oil prices in the world. Dependence of the stock market on oil prices is illustrated in Fig. 35, which reflected the coefficient between the absolute monthly value of the RTS index and the price of Brent crude oil for the entire period of existence of the stock index for December 2010. Coefficient of determination (R2) between these parameters is 0.87, what indicates a very close relationship between them.

The current level of dependence of the Russian stock market on oil prices is one of the main sources of investors risk. According to the scenario conditions of 2030, an average price of Urals crude oil in 2020 will reach 101 dollars per barrel, and in 2030 - only USD per barrel (See Fig. 36). Basing on the regression equation, demonstrating the relationship of the RTS index and the annual oil price, we can estimate the average value of RTS index for the future 10 years. The average annual value of the RTS index in this case will reach points, which is only slightly above the average level recorded in 2007. It means that the domestic stock market is expected to stagnate for 10 years, which however, does not preclude its high volatility, if modernization and diversification of the Russian economy does not take place.

2 2 y = 21,67x - 212,1 R2 = 0,1 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 Brent Oil, USD per barrel Source: estimates on the FS IMF and RTS stock exchange data.

Fig. 35. Dependence of the RTS index on Brent crude oil price from September 1995 to December RTS index, points Section 3.

Financial Markets and Financial Institutes 2 500 2 73 651546 1681 1550 1 Forecast 1 2529 803 24 1720 81142393 181 0 -Average annual RTS index (left axis) RTS index at the end of the year (left axis) Average annul Brent oil price, WB estimates for 2010-2020 right axis) Source: estimates on the basis of MED forecast for the Concept of long-term development - 2030 and RTS stock market data.

Fig. 36. Forecast of the RTS index up to 2020 based on the World Bank estimates for oil prices In the previous survey, basing on the links formula of the RTS index and oil prices, we were estimating an average annual value of the index at 1,503 points, but in fact it is equal to 1 510. That is, this relationship is working and can help to predict the average annual values of stock indices very accurately. At the same time, we would like to recall once again, that oil prices predicting is an extremely difficult task, which is still unresolved.

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