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3.5.2. Risks of foreign capital outflow During the last two or three years, various foreign capital flows were moving in opposite directions in the Russian market. As shown in the comments to Fig. 8, according to the EMPR, from April 2009 to February 2011 overseas investments have been steadily growing mainly in speculative funds, investing in Russia. As a result, the Russian stock market is quickly recovering after the crisis. There is a risk that the inflows of foreign funds investing in Russia is unlikely to continue all the time, especially in view of the fact that in February the oil prices have already grown close to their limit. Any shock in the global financial markets associated with the insolvency of one or two countries in Europe, natural disasters, the collapse of a major financial institution or a slowdown in global economic recovery that inevitably will deploy the flow of funds investing in Russia. This was the case in May 2006, when at the very first signs of the crisis in the market of unsecured bonds, foreign capital flows to Russia turned the other way for virtually 22,5 years. A similar scenario with a change of direction of speculative capital in Russia is very likely in the second half of 2011, Points USD per bl 2011e 2013e 2015e 2017e 2019e RUSSIAN ECONOMY IN trends and outlooks which can provoke a long-term correction in price correction in the stock market of the Russian companies1.

Another flow of foreign capital is recorded by the bank in Russia. They are portfolio, foreign direct and other investments in different segments of the financial market. In 2008-and in the first two months of 2011 there is a predominating tendency of foreign capital export, including FDI (foreign direct investments). The tendency is decaying, which gives us a hope that in 2011 we will experience a net inflow of capital or a zero balance in capital inflows. In 2008, capital outflow from Russia amounted to USD 133.9 billion, in 2009 - USD 56.9 billion in 2010, according to the Bank of Russia estimates USD 22.7 billion. In this case, for two consecutive years, there was recorded a negative balance of FDI amounting to 7.7 billion dollars in 2009 and 7.4 billion dollars in 2010.

According to the estimates for January-February 2011, the Bank of Russia also notes the outflow of capital level of USD 13 billion2. Fixed by the Bank of Russia level of foreign capital outflow in 2009-2010 and early 2011 did not prevent the steady growth of the stock market and the ruble-denominated bonds. However, the risk of continuing outflow of portfolio investments and FDI from Russia is that it will hinder the growth and modernizing of the economy, increasing its dependence on the prices of exported raw materials. In this case, the risks of depending on the stock market of oil prices and short-term capital will only increase.

3.5.3. Ruble devaluation risk in the medium term Since February 2009, ruble strengthened from RUR 35.72 to RUR 28.94 for USD 1. However, in the medium term, there is a risk of its devaluation. Fig. 37 shows that since mid-there began a rapid growth of M2 monetary base as compared with an increase in international reserves in the economy. As a result, the official exchange rate became more and more deviate from the estimates, which can be determined by dividing the M2 by the value of international reserves. The long-term history of financial market demonstrates that the more rapid growth of the ruble money supply as compared with the international reserves in Russia often serves as a sign of the national currency devaluation. Foreign investment funds are always sensitive to the risks of currency devaluation. Expectations of devaluation in addition to adverse events for investors in global financial markets may cause long-term outflow of foreign investors from funds that invest in Russia. This may entail a new stock market collapse.

The probability of a positive trend in the dynamics of the Russian stock market may be confirmed by March 2011 weekly review of the futures market SmartFORTS made by investment company ITinvest, where a rare for a stock index futures on the RTS phenomenon of Backwardation was noted, when the values of stock indices in calculating the price of futures contracts are lower than the data values of stock indices in the spot market (A.

Berezin. Concentration of liquidity. Weekly Review of futures market SmartFORTS of March 9, 2010.

Published on the Internet site of the investment company ITinvest).

A. Shapovalov A. Oil does not cover the risks, Kommersant, March 9, 2011.

Section 3.

Financial Markets and Financial Institutes 41,28,Notional exchange rate Nominal exchange rate as the end of period 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: estimated based on the Bank of Russia and Ministry of Finance data.

Fig. 37. Relationship between the nominal and notional (estimated) RUR exchange rates against USD 3.5.4. Risk of excessive foreign borrowings accumulation by banks and real sector companies The foreign indebtedness of the private sector is practically equal to the total foreign exchange reserves of the Russian Federation (see Fig. 38) and remains one of the significant risks for the national financial system. Herewith, the amount of external debts of Russian business, with the exception of 2008-2009., was roughly equal to the value of assets of Russian participants in the rating of dollar billionaires in the world of magazine Forbes.

RUSSIAN ECONOMY IN trends and outlooks 448 427 172,29 30 32 35 8 Private sector external debt Gold and foreign currency reserves, including Stabilization Fund The value of assets of Russian participants in the rating of dollar billionaires in the world of magazine Forbes Source: balance of payments data for a number of years.

Fig. 38. Growth in private sector debt, public excessive financial reserves and assets of the Russian participants in the rating of dollar billionaires in the world of magazine Forbes 291,281,294,255,160,124,76,20,166,163,21,200 144,22,23,10,55,1 127,7,7 33,7 101,32,5 50,9,11,3 24,14,138,133,116,98,97,103,96,71,34,44,37,29,31,CB estimates Government management authorities Banks Non-financial agen Source: balance of payments data Fig. 39. Foreign debt of the Russian Federation, 1998-20010, billions of dollars bln dollars estimate) 2010 (CBR estimate) 2010 (CBR Section 3.

Financial Markets and Financial Institutes 3.5.5. Operational market and algorithmic trading risks Fig.15 and comments thereto show that in response to the growing number of transactions in the exchange market, as a result of trading robots and application of algorithmic trading, government institutions and infrastructure agencies are taking measures aimed at limiting the growth of small transactions. This is justified, because such activity increases the operational risks of the bidders as a result of disruption of trade and settlement systems.

14 000 3 000 Futures trading volume 12 000 2 500 Options trading volume 10 000 Number of futures transactions 2 000 8 000 Number of options transactions 1 500 6 000 1 000 4 000 500 2 000 - Source: OAORTS trading system.

Fig. 40. Trading volumes and number of transactions at the RTS futures market from September 1, 2001 to December 31, In addition to the operational risk, an advanced growth of trade volume, as compared with customers' assets, means compulsion of often not prepared for this client to excessive operating activity. Unfortunately, commercial systems currently do not disclose the value of clients assets, reserved before the trading session. Brokers are not accountable for the value of the assets of their clients as well. Meanwhile, occasionally published in the media volumes of customer transactions and the values of client assets are sometimes astonishing. For example, here is a short message from Interfact on BCS plans. In 2009, the aggregate brokerage company turnover amounted to RUR 9.2 trillion, and client assets of the company were worth RUR 46.8 billion. In 2014 it is planned that that data will achieve RUR 30 trillion and about RUR94 billion1. This means that the rate of portfolio turnover of an average customer of this company will grow from 197 times per year in 2009 to 320 times per year in 2014. Similar figures of portfolio turnover allow customers to calculate the publication in the media investment bank "Discovery": in 2008, the average client portfolio was turned over about 250 times BCS plans. Vedomosty, June 22, 2010.

Trading volume, RUR mln Jun-Jun-Jun-Jun-Jun-Jun-Jun-Jun-Jun-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Mar-Mar-Mar-Mar-Mar-Mar-Mar-Mar-Mar-Number of transactions RUSSIAN ECONOMY IN trends and outlooks a year in 2008 and 126 times a year in 2009. For comparison, the largest actively-managed unit investment trust funds shares portfolio turnover in 2009 is 12 times per year.

RTS futures market raises concerns of a similar nature. The number of trades and trading volumes in it are growing rapidly, customers' assets are growing more slowly. As shown in Fig.40, the Russian futures market, concentrated mainly in the RTS stock exchange, having survived the fall of cost volumes, started to recover quickly. In 2009, the increase in the volume of futures contracts amounted to 45.4%, in 2010 - to 104.9%; options trading volume decreased by 7.1%, in 2009 and in 2010 increased by 168.0%. The number of transactions in the futures market has grown by 162.2% in 2009 and by 56.5% in 2010; in options, the corresponding figures were 18.3% and 136.1% Herewith, there was reduction in security of futures and options contracts, as evidenced by data in Fig. 41. Here are the details on the amount of open positions in futures and options markets, as well as the security of transactions on each market segment, which is calculated by dividing the average monthly volume of open positions in the trading volume by the respective futures contracts. Recovery of trading volume in futures and options markets since March 2009 was accompanied by a decline in security futures transactions with 10% of trading volumes in December 2008 to 5% in December 2010 in the options market over the same period from 146% to 74%.

Open positions in futures transactions Open positions in options transactions 300 000 Futures market coverage, % Options market coverage, % 250 200 150 100 50 - Source: OAO RTS trading system.

Fig. 41. Open positions and transaction coverage in the RTS forward market from February 1, 2002, to January 31, In 2010, we have expressed concerns about the rise of operational risks of trading systems in relation to the faster growth of the operating activity of the participants, which are fully justified. The first failure in the RTS occurred on March 9, 2010. From June 8 to 22, 2010, there happened 4 operational failures in the trading and clearing system of the RTS1. Major operational failure in the RTS also occurred on October 18, 2010. According to A. Shcheglov, Zhelobanov D., G. Gubeydullina FORTS with butter. Vedomosti, June 22, 2010.

Open positions, mn Rb Open positions, number of transactions, % Feb-Feb-Feb-Feb-Feb-Feb-Feb-Feb-Feb-Aug-Nov-Aug-Nov-Aug-Nov-Aug-Nov-Aug-Nov-Aug-Nov-Aug-Nov-Aug-Nov-Aug-Nov-May-May-May-May-May-May-May-May-May-Section 3.

Financial Markets and Financial Institutes CEO of Zerich Capital Management, such problems arise because "the system of exchange market works on the core, which is overburden for many years". According to his words, the exchange market is fascinated by the development and does not stop in order to improve the reliability and quality1.According to Vedomosti to V.D. Milovidov, the Head of the Russian Federal Financial Markets Service, the massive influx of players and robots to the futures market has led to manifold increase in speed and load on the RTS market and trading system:

the exchange market does not manage to pay attention to its development "2. Due to technical failures in the RTS, the Head of the Russian Federal Financial Markets Service was forced in October 2010 to send a letter asking to suspend the annual "Best Private Investor3 to the exchange market.

3.5.6. Risk in repo transactions The rapid development of the financial crisis in the stock market since August 2008, was marked by crisis, in repo market, during which several major market participants have failed to fulfill their obligation to repay the debts. Systemic payments crisis was avoided only thanks to the intervention of the Bank of Russia, which helped to resolve the problem of mutual nonpayments. The cause of this crisis was that the conclusion of repo transactions on MICEX was not accompanied by creation of a mechanism of guarantees execution of the second part of the repo transactions, i.e., the return of funds by debtors. Financial community have been made in general the right conclusions, MICEX has established a system of guarantees on the obligations under repo agreements and transferred to settlements through a single counterparty.

However, improving the system of payments and guarantees under repurchase agreements does not remove from the agenda the question of the risks of over-development of this market segment. Outpacing growth of repo transactions has an economic explanation. This is an important tool for refinancing the banking system by the Bank of Russia and the banks that have excessive liquidity. Often, however, banks quite aggressively use this mechanism for refinancing, building up investments in bonds by a pyramid scheme, continuing repurchase transactions. In 2010, the second place in the largest circulation of securities in the MICEX took the Bank Centrocredit with a turnover of RUR 7.7 trillion, which was only a few steps back of the Sberbank of Russia, the sales of which amounted to RUR 8.9 trillion. That bank in accounted for nearly one-third of all deals with regional bonds. According to experts, these records were achieved by banks through the use of repo transactions. It is impossible to verify, what kind of papers is involved by bank through repo. In March 2010, the rating agency "Expert RA" has warned about the danger of a "pyramid repo agreements in the banking sector: by the beginning of the year 17 Russian banks (including Centrocredit) the share of assets with encumbrance exceeded 20%4.

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