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Thus, investments in long-term bonds are often funded with short-term loans. An increasingly narrow segment of the market trades in bonds does not allow to assess their real market value. For this reason, very conventional ways of assessing the value of bonds are used for repo transactions. This increases the systemic risks of investing in ruble-denominated bonds, Verzhbitsky A. Innovative failure. RTS can not keep up with its technologies. RBC daily, October 19, 2010.

Askar-Zade. N., G. Gubeydullina RTS lagged behind the market. Vedomosti, June 25, 2010.

Federal Financial Markets Service suspended contest Rs. Kommersant, October 21, 2010.

RBC daily, March 23,2010.

RUSSIAN ECONOMY IN trends and outlooks which in case of sudden insolvency of one or a group of large emitters could lead to a systemic crisis of defaults, which will not be in force to handle even the clearing. Perhaps, along with the repo market, the Bank of Russia should think about developing other ways to refinance the banking system.

3.5.7. Low capacity of the internal market for financial services To make the Russian financial intermediaries competitive so that they could provide financial services in compliance with the world standards, it is necessary that their market capitalization, i.e., their value of business, sought to meet the performance of similar foreign agencies. Attempts to solve this problem by increasing the administrative requirements to the own means of professional market participants are unlikely to be successful. The main problem here is the low capacity of the financial services market. Centralization of 70% savings at the level of sovereign wealth funds, inefficient system of pension savings, the lack of incentives for people to save and other factors not yet allow us to hope for a prompt solution to this problem.

In 20092010. HSE research university work has carried out the work on assessment the capacity of the Russian financial market in 2010-2020. Based on a variety of sources and expert surveys, there was assessed value of the assets, which are, by the estimates of different categories of individual and institutional investors, held at brokerage accounts, transferred to trust management, including mutual funds. There were also estimates of the market of investment services of offerings of various securities in the implementation of mergers and acquisitions. After that, the amount of income from the provision of intermediary non-bank financial services was made by years, which ultimately allowed for the DCF-model to identify potential business capitalization of investment banks, brokers and trust managers (see Table 5). These assessments were performed under three scenarios: optimistic, close to the Concept of long-term development of Russia-2020; the basic one, targeted at the current trend of GDP growth and market capitalization; moderate one, envisaging a virtual stagnation in the growth of economic and financial parameters.

Table Capitalization forecasts for the Russian businesses involved in investment services on the basis of cash flow capitalization in 2010-Scenarios USD, mln optimistic basic moderate Capitalization of the retail business 8 190 4 930 3 including:

Brokerage services 4,530 2,992 1,Individual trustees 1,877 998 Trustees of collective investment 1,661 857 Insurance brokerage 122 84 Capitalization of institutional business 19,457 15,601 8,including Underwriting arid Consulting 9,530 8,090 4,Trust and Brokerage 9,928 7,511 4,TOTAL CAPITALIZATION 27,647 20,531 11,For reference:

NPF capitalization 1,687 968 Source: estimates made by HSE research university experts.

Thus, the whole business of Russian investment banks, brokers and trust managers is valued at USD 27.6 billion under an optimistic scenario, at USD 20.5 billion under the basic sceSection 3.

Financial Markets and Financial Institutes nario and at USD 11.8 billion under a moderate scenario. Summary data on the quantitative parameters of the Russian financial market in 2010 suggest that its development is carried out on a trajectory close to the moderate scenario. This is the source of the increased risks for investors, emitters and the economy in general. The solution to this problem requires the government and businesses to achieve breakthroughs in the field of strategic management, innovation, incorporation of Russian financial institutions in the global chain of international financial markets, decision-making that will provide a real impact on the capacity of the domestic financial market.

Therefore, gradual recovery of the stock market, record levels of liquidity and the volume of domestic bond offerings in 2009-2010 do not remove the issue of the risks inherent in the Russian financial market. It remains vulnerable to external shocks and domestic risk factors.

3.6. Problem of attracting conservative institutional investors The Russian stock market remains unattractive to the most highly capitalized conservative investors, especially to foreign pension funds. To understand the reasons for this, one may refer to the experience of the largest U.S. pension fund, California Public Employees' Retirement System (CalPERS), the value of which reserves is approximately USD 200. Before 2007 for many years, CalPERS applied the methodology for ranking emerging markets in terms of the possibility of investing in the assets of the fund. This technique was public and was based on the studies of reputable organizations, including Freedom House, World Economic Forum, Oxford Analytica, the Heritage Foundation, as well as Wall Street Journal and many other research centers.

The technique involved the assessment of CalPERS investment opportunities in emerging markets is based on two groups of factors - country risks and the risks inherent to a particular financial market.

Country risks were estimated by CalPERS under the following criteria:

political stability - a state of civil liberties, the independence of the judicial system and political risk;

information openness, including an assessment of press freedom, the level of disclosure of information on monetary policy and budget, quality of stock exchange listings and the effectiveness of international financial reporting standards (IFRS);

compliance with labor laws with international standards of labor relations - the ratification of ILO Convention, compliance with labor laws with ILO standards, the effectiveness of law enforcement.

In other words, the assessment of country risks involves the investment climate and institutions as the fundamentals of the financial markets. The second group of criteria involves the assessment of quantitative and qualitative parameters of developing capital markets, including the following indicators:

liquidity and volatility of the stock market, including an assessment of market capitalization and its growth rates, coefficient characterizing the ratio of monthly turnover of exchange trade to market capitalization, number of companies included in the listing, the volatility of the stock market and the coefficients of the risk/returns on investment;

evaluation of banking supervision effectiveness and enforcement in the stock market, the level of the rights of creditors and shareholders protection;

RUSSIAN ECONOMY IN trends and outlooks assessment of the degree of openness to foreign investments, regulations liberality of banks and financial institutions, restrictions in the purchase of securities;

assessment of the stock market settlement mechanisms effectiveness and the level of transactions cost, primarily in terms of tax liabilities, in the securities market and in regard to payments to the owners thereof.

The maximum score for this or that market, is three. If the country obtains 2.0 or more points, it was entered in the list of markets admissible for CalPERS assets. Otherwise, the market of a country was classified as prohibited to invest the assets of that pension fund. In 2007, according to CalPERS approach, the Russian stock market was rated at 1.91, i.e., less than two points, which made it impossible to invest in reserves of the pension fund. Fig. provides an analysis of key factors that have prevented the Russian market to reach the maximum assessment in three points by the method of CalPERS.

Assessment Political stability, 31% practice/transaction costs, 8% Capital market openness, 15% Market Information transparency regulation/legislation/pro 15% tection of investors Compliance with labor rights, 11% legislation standards, 20% Source: www.calpers.ca.gov.

Fig. 42. Factors that interfere with the investment in the Russian pension fund maximum assessment by CalPERS (USA) techniques in Country risk factors, including political stability, information transparency and compliance of labor legislation with international standards, accounted for 66% shortage Russia estimation points. Political stability in the country received a score of 1 out of three possible ones.

The main reason for such a low rating are associated with a low estimates of civil liberties, judicial independence and security of property rights, as well as the stability of the political system in Russia. The level of transparency in Russia is estimated at 2.0 points. In this regard, the main claims to Russia were imposed in terms of media freedom and the efficiency of application of IFRS (or US GAAP).

In contrast to the conservative evaluation of the effectiveness of institutional factors, quantitative and qualitative characteristics of the Russian stock market look quite respectable.

However, Russia did not reach 34% of the required up to two points in this factor as well.

Here the following problems occurred. The quality of market regulation in banking activity and stock markets in Russia is estimated at an average level of 2.0 points. Obtaining a higher score in this area prevent a lack of effective banking supervision and law-enforcement in the Section 3.

Financial Markets and Financial Institutes stock market, as well as shortcomings in the protection of creditors rights. According to the criterion of openness of capital markets, a low score of 1.7 points was obtained due to the restrictions in entering the market for banks and insurance companies.

In 2007, CalPERS has changed the methodology for making decisions about investing in emerging markets. Portfolio Managers were granted the right to choose companies from emerging markets for investment on their own, with regard to the risks inherent to the different countries and stock markets. In 2008 and 2009, CalPERS implemented a series of investments in the shares of the Russian companies (Table 6).

Table CalPERS investments in the Russian companies, USD mln 2008* 2009* Gazprom 144.7 46.Lukoil 189.1 93.Mechel 9.1 1.GMC Norilsk Nickel" 4.6 1.Novatek 20.Novorossiysk Commercial Port 10.3 8.Rosneft 11.4 31.Police Gold 5.Rostelecom 3.Sberbank of Russia 5.5 30.Severstal 7.0 4.AFC System 9.7 3.Surgutneftegas 4.5 20.Wimm-Bill-Dann 20.Magnet 7.C 6.VTB 31.6 6.LSR 2.Shares of Russian companies, total 427.4 314.Shares in foreign and domestic markets 122 281.2 80 728.The proportion of shares of Russian companies in CalPERS portfolio 0.35 0.The proportion of shares of Russian companies in the world capitalization 1.21 1.*fiscal year, ending in June.

Source: CalPERS investment reporting for a number of years.

The values of CalPERS investments in the shares of Russian companies are symbolic. As of June 2008, they were estimated at USD 427 million, or 0.35% of the value of a portfolio of shares, in June 2009 - USD 314 million, or 0.39% of the value shares portfolio. For comparison, the share of Russian companies in the world capitalization amounted to 1.21% in and to 1.85% in 2009.

However, there are no positive changes in the main criteria, which prevented CalPERS from investing in the Russian equities at the time when they officially declared the selection criteria of emerging markets for investment. Fig. 43 shows the global competitive ratings for several years, highlighting the areas where Russia received the lowest evaluation in terms of the old method of CalPERS.

RUSSIAN ECONOMY IN trends and outlooks Place in the GCI WEF: protection of minority investors rights Place in the GCI WEF: independence of the judiciary system 140 78 62 62 37 2007- 2008- 2009- 2010- 2009- 2010- 2009- 2010- 2009- 2010- 2007- 2008- 2009- 2010- 2009- 2010- 2009- 2010- 2009- 20102008 2009 2010 2011 2010 2011 2010 2011 2010 2011 2008 2009 2010 2011 2010 2011 2010 2011 2010 Russia China India Brasil Russia China India Brasil Place in the GCI WEF: compliance with auditing and reporting standards Place in the GCI WEF: depth of the local stock market 140 116 64 60 20 2007- 2008- 2009- 2010- 2009- 2010- 2009- 2010- 2009- 2010- 2007- 2008- 2009- 2010- 2009- 2010- 2009- 2010- 2009- 20102008 2009 2010 2011 2010 2011 2010 2011 2010 2011 2008 2009 2010 2011 2010 2011 2010 2011 2010 Russia China India Brasil Russia China India Brasil Place in the GCI WEF: banks safety Place in the GCI WEF: regulation of stock exchanges 118 25 40 20 20 2007- 2008- 2009- 2010- 2009- 2010- 2009- 2010- 2009- 20102008 2009 2010 2011 2010 2011 2010 2011 2010 2007- 2008- 2009- 2010- 2009- 2010- 2009- 2010- 2009- 2010Russia China India Brasil 2008 2009 2010 2011 2010 2011 2010 2011 2010 Russia China India Brasil Source: Global competitiveness of the World Economic Forum rating over the years Fig. 43. Places of the BRIC countries in the global competitiveness ratings under a number of criteria, essential for decision-making by conservative portfolio investors In terms of the most problematic issues, i.e., the independence of judiciary system, the level of protection of minority investors rights, the compliance with audit and reporting standards, the depth of the stock market, effective regulation of stock exchanges and banks safety, Russia is far behind other BRIC markets. Herewith, the majority of these criteria are steadily deteriorating over the past four years, including the rating of evaluation of the Russian market as of October 2010.

Section 3.

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