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Institutional and Macroeconomic Challenges the part of a certain group of issuers. An analysis had been made by the example of ex changes, which play the leading role among the infrastructure organizations, a group of companies of the Moscow Interbank Currency Exchange (MICEX), Russian Trading Sys tem (RTS), and foreign organizers of trade with the stock of Russian joint stock compa nies in the form of depositary receipts these are London Stock Exchange (LSE), German stock exchanges, and the New York Stock Exchange.

Note that, in itself, the presence of competition of trade organizers services on both international capital market and domestic stock market is an important instrument contrib uting to raising the quality of those services and reducing the operational costs of market participants.

4.4.1. Russian issuers stock market The stock market of Russian issuers encompasses the two main segments: circula tion of stocks issued directly by Russian companies, and the market of depositary receipts for the above stock issued by depositaries abroad. To analyze internal mechanisms of the stock market development of Russian issuers, we may single out three phases of its evolu tion, during which considerable changes took place concerning the competitors standing on the market (Fig. 9)96.

100, Equilibrium period The MICEX boom period 90, SPE' s capture ock Exchange London St 80,of the new niche 70,38,6 37,45,0,46,60,9,49,6 15,3 1, "-" St. Petersburg Exchange 4,5,50,64,3,53,75,21,48,40,45,46,30,4 2, Russian Trading System 30,28,1,20,21,10, MICEX 5,0,1998 1999 2000 2001 2002 2003 Source: Stock exchange data.

Fig.9. The proportional weights of exchanges in the volumes of trading with the stocks of Russian JSC The first period spans 19982001. This period is characterized by growth of the share of MICEX (Moscow Interbank Currency Exchange) as organizer of trade with the Here and in what follows the volume of exchange trading is calculated by totaling the stock turnovers on Russian ex changes and depositary receipts turnovers on foreign exchanges (in USD million).

RUSSIAN ECONOMY in trends and outlooks stock of Russian JSC=s from 5,4% in 1998 to 52,0% in 2001. Such growth occurred against cutting of RTS market share from 30,4% in 1998 to 9,3% in 2001, and also the share of London Stock Exchange from 64,2% in 1998 to 37,3% in 2001.

The second period refers to 20022003. It may be characterized as a period of temporary balance of forces of the competitors. In those years, the share of MICEX, as or ganizer of trade with the stock of Russian issuers, decreased, but negligibly from 52,to 45,8%, while the share of LSE (London Stock Exchange) increased from 37,3% in to 46,9% in 2003. At the same time, RTS competitiveness at the stock market noticeably weakened, the exchange share in the market decreased from 9,3% in 2002 to 3,2% in 2003.

The third period of evolution of the stock market of Russian JSC began in late and was characterized by qualitative changes in the balance of forces on the market of services of organizers of trade with the stock of Russian issuers. In 2004, the share of LSE on the stock market of Russian JSC=s reached 75,4%, the share of MICEX decreased to 21,4%. The RTS share, as organizer of trade, reached the critical level 1,2% of the volume of exchange trade.

Reasons for such profound alterations in the balance of forces on the stock market of Russian issuers can be found in new priorities of issuers and investors in the capital markets, which caused changes in the balance of supply and demand for the stock of Rus sian JSC=s.

The priority rates of volumes of exchange trade with the stock of Russian companies on MICEX during the first period is explained by emergence of an interest of new owners of the Russian largest companies, which received control over them during the privatiza tion, in establishing a liquid stock exchange market of those companies, as an instrument of building up their capitalization to the market level, appearance on the Russian stock market of a number of domestic speculative investors, after the crisis of 1998, and intro ducing modern technologies of the exchange trade and settlements on MICEX.

Based on the data of Russian economic barometer, since the mid 1990s, 3 stable trends could be observed in the structure of privatized companies property: passing of a title from workers to managers, from insider (of the same management) to outsiders (fi nancial groups and non resident), and from the state to private persons. In 19952003, the share of insiders decreased from 54,8 to 46,6%, and outsiders increased from 35,to 44,0%97.

The privatization gave rise to active development of extra exchange trading with stocks, within the frame of which buying the stock of privatized companies had been car ried out in regions from their employees and from the citizens, who received stock in ex change for vouchers from the financial intermediaries acting in interests of the outsiders and companies management. The development of extra exchange market gave an im pulse to growth of volumes of stock exchange trade, where each exchange occupies its own niche. On MICEX, brokers bought small blocks of stock and sold them, after consoli dation, via RTS (in currency) to non residents, including the off shore companies estab lished by the Russian participants of the market.

In 1999, an inter depositary interaction (bridge) had been organized between the settlement depositaries of MICEX and RTS, which allowed to noticeably facilitate the counter flows of shares between the Russian and foreign markets. High and low tides From the report of R. Kapelyushnikov The Impact of Property Concentration on the Economic Activity of Industrial Enter prises at the international conference Socio Economic Transformation in CIS Countries: Achievements and Problems, organized by IET on September 13 14, 2004.

Section 4.

Institutional and Macroeconomic Challenges of shares on the Russian market occurred in accordance with clearly defined regularities.

Rise in prices of shares, including the depositary receipts of Russian issuers on global markets, caused additional demand for the stock of Russian issuers. To satisfy the de mand, Russian brokers bought blue chips on MICEX, and using a bridge, withdrew packages from MICEX settlement depositary to RTS settlement depositary. Then, the shares were sold in RTS or the extra exchange market, and moved abroad. On the other hand, in falling of prices on global markets, the shares of Russian issuers returned, in the same way, to the MICEX settlement depositary and were sold on exchange in small pack ages.

Changes in the behavior of big business, which followed the privatization, also con tributed to the development of domestic capital market. During the 2000, as far as the economic efficiency had grown, an interest of the largest privatized companies increased in formation of long term development strategy and entering the strategic alliance with transnational corporations98. For Russian business, the condition of forming such alliances on competitive terms was bringing the market capitalization of the companies in its pos session to a level equal to intrinsic value of shares. Oligarchs wished to operate on Russian exchanges. Access to circulation on MICEX and RTS of the companies' blocks of stock, amounted to several percent of the total volume of issuance, made possible to get a quick growth of companies capitalization. In the following, selling at the market price of big packages to outsider investors would bring holders of controlling stakes a real compensa tion for the privatization risks and possibility of transformation of ficticious stock capi tal to its more real liquid forms. It is to be noted that the usage of similar strategies should not be regarded as negative phenomenon. This is a regular and typical (for transition economies) process of stage by stage building an efficient private business.

As an illustration of strategies of accelerated building up the capitalization, data are given in Fig. 10 on the proportion of capitalization and the share of blue chips, circulating on exchanges, in the total volume of their issuance, as of 2003.

The rate of effective capitalization of most liquid shares, excluding the shares of the RAO UES Russia was, in 2003, in inverse ratio to proportion of free circulating shares (re served here for trading in the settlement depositary of MICEX). Most capitalized are issu ers (primarily oil companies), who had insignificant participation of free circulating blocks of shares on the exchange: such were, for example, YUKOS 0,7% of shares, Surgut neftegas 1,2%, LUKOIL 2,2% and mining and metallurgical integrated works Norilsk Nickel 1,4% of shares.

At present such alliances began to be formed, while at the end of the 1990s the early 2000s such plans were only con ceived. As an example of an alliance between Russian and foreign business may be mentioned Severstal Group, which general director, A. Mordashov, told in an interview to Vedomosti of an intention to to establish, on Severstal basis a global mining and metallurgical company with Russian control (Vedomosti. October 21, 2004). Another example is acquisition of a big block of stocks of the JSC LUKOIL by ConocoPhillips. An illustration of Russias big business intention to stand equal in such alliances is the statement of LUKOILs vice president and the compamys board member L. Fedun that LUKOILs managers should never sell their shares, not to loose control over the company (Vedomosti. October 25, 2004).

RUSSIAN ECONOMY in trends and outlooks Dependence curve built by least-squares method :

Y = 91,9*X-0,0 100 000 200 000 300 000 400 000 500 000 600 000 700 000 800 000 900 000 1 000 RAO UES Russia OAO LUKOIL OAO Mosenergo Aeroflot GMK Norilsk Nickel OAO Surgutneftegas OAO YUKOS Dalenergo OAO AvtoVAZ OAO Rostelecom Fig. 10. Stock capitalization and their proportion in free circulation (according to MICEX data for JanuarySeptember 2003) Fig. 11 shows the data of growth of Russian companies capitalization and the vol umes of trade on Russian exchanges.

, 250 0,Capitalization 0, Volume of stick trade at Russian exchanges 0,Volatility (means square of the yields bias of the RTS index) (. . ) 0,0,0,0,124,0,92,0,44,50 41 0,28,0,22,0,0,0,10,5,0 0,19 98 199 9 20 00 20 01 20 02 20 03 20 Source: Calculated according to the data of MICEX, RTS, and St. Petersburg stock exchanges.

Fig. 11. Capitalization, liquidity and volatility of the Russian stock market The proportion of stock deposited with the clearing depository to the total stock issuance, as % .


coefficient USD bln.

Section 4.

Institutional and Macroeconomic Challenges Enhancing the capitalization of Russian companies and increase in the volumes of trade on the stock exchange market occurred simultaneously. And still the capitalization grew in a faster pace than the volumes of trade, which met the needs of the largest issuers interested in increasing the cost of their business. In 19982004, the capitalization of Rus sian companies increased from USD 17 bn to USD 230 bn or 13,5 times. The volume of trade with shares on Russian exchanges (MICEX, RTS, St. Petersburg stock exchange) increased from USD 10 bn in 1998 to USD 101.2 bn 2004, i.e. 10 times. To a large extent, lessening of risks, changed by index of standard deviation of relative price changes of as sets contributed to growth of the Russian stock market, especially in the early 2000s.

Striving of big business to increase the capitalization meant arising on Russian ex changes, primarily on MICEX, an additional demand for blue chips on the part of privat ized companies and their related financial intermediaries. Such transactions led to raising the share of MICEX on the stock market of Russian companies.

The third factor of growth of demand on the domestic stock market in 1998was emergence on the market of domestic small investors, inclined to short term and speculative equity in conditions of increased risks. The above became possible because of quick growth of earning power of the Russian issuers equity investment, happened in 2000 after two years of negative effective yield of shares as a result of crisis of 1998.

Though, in 1998, proceeding from its annual average the value the RTS index resulted in negative yield amounting to 54,0% annualized, and in 1999 to 46,2% annualized, in 2000, the earning power of investment in this index made up +99,9%.

An important growth factor, in 19982001, of the share of MICEX in the market, as compared to RTS and LSE, became implementing of new technologies of exchange trade and settlements. A project had been implemented on the exchange increasing the number of those involved in exchange trade by means of using the Internet technologies. Using Internet, small investors, being the clients of brokers, got a chance to participate in the exchange trade on a real time basis, to receive information about the course of trading and on their own to make requests for purchase and sale of papers, which, via interface with broker, were promptly entered in the trading system. According to MICEX, 70% of the exchange transactions are performed via Internet. At present, the Internet trading systems have been developed on RTS and MICEX in equal proportion, but the structure, which suc ceeded to occupy the niche earlier found itself in a more valued position.

MICEX became a leader on development of the electronic document management between participants of the stock exchange market. After the crisis, considerable demand arose (on the part of investors) on the stock market, concerned with granted by MICEX guarantees of settlements on delivery against payment (DAP) terms with preliminary de positing securities and funds reservation by the participants of trade. All this helped MICEX occupy a new niche on the stock market, where investors dominate with ruble demand for shares, interested in settlements on DAP deals.

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