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Second groups of factors stipulate evaluation of numerical and qualitative pa rameters of emerging capital markets, including the following indicators:

Liquidity and volatility of capital markets, including assessment of market capi talization and its growth rates, the ratio between monthly trading turnover and market capitalization, growth of the number of listed companies, stock market volatility and risk/profitability factor;

RUSSIAN ECONOMY IN trends and outlooks Efficiency of bank supervision and law enforcement at capital markets, the level of investors and creditors rights protection;

Assessment of the extent the national economy is open to foreign investment, the extent to which bank and financial institutions regulations are liberal, as sessment of limitations for buying securities at secondary capital markets;

Evaluation of how efficient the calculating mechanisms at stock exchange are, of the level of transaction costs (mainly taxes) at securities market and when paying dividends to securities holder.

CalPERS's assessment of Russian capital market is extremely interesting both for certain domestic investors, which in general are still pretty cautious with regards to domestic investment. The fact that pension funds of retired government officials from the US are now coming into this market is a very serious event capa ble of convincing even the most conservative Russian investors in certain advan tages of the domestic market.

Table 15 represents the final CalPERS evaluation of early 2006 compared with three emerging economies from BRIC Group Brazil, India and China.

Table BRIC Countries (Brazil, Russia, India and China) Rating with regards to Admissibility of CalPERS Investment in Investment banned Investment allowed Weight of Maximum factor, % score Russia China India Brazil 1. Country Risk Factors:

1.1. Political stability 16.7 1.0 1.3 1.7 1.7 3.1.2. Openness of information 16.7 2.0 1.3 2.7 2.7 3.1.3. Labor relations standards 16.7 1.7 1.0 1.0 1.7 3.compliance 2. Market factors:

2.1. Liquidity and volatility 12.5 3.0 3.0 3.0 2.7 3.2.2. Market regulatory framework / law enforcement / protection of 12.5 2.0 1.7 2.3 2.3 3.investors rights 2.3. Openness of capital market 12.5 1.3 1.3 1.0 1.7 3.2.4. Efficient calculations / transac 12.5 2.3 2.0 2.3 3.0 3.tional costs TOTAL 100.0 1.9 1.6 2.0 2.3 3.Source: www.CalPERS.ca.gov.

In 2006 Russia and China (out of 4 BRIC countries) scored less than 2.0 and were included in the group of countries banned for CalPERS investment. The key problems of Russian market are predetermined by low political stability, poor qual ity of labor regulations and insufficient openness of capital markets. Table 16 pre sents more details about the value (weigh)of various factors which impeded Russia from getting the maximal 3 scores as per CalPERS methodology during the period of 20032006 and based on preliminary 2007 rating outcomes. With this we need Section Institutional Problems to emphasize that neither of emerging economies scored 3.0 in 2006; the countries that scored the highest were Hungary 2.7, Poland, Chile and Czech Republic 2.6 each.

Table Share (Impact) of Various Factors in Deviation of the Final Russian Score from the Maximum Score (3.0) for the period of 2003 2003 2004 2005 (estimate) 1. Country Risk Factors:

1.1. Political stability 20.5 28.6 27.6 29.2 30.1.2. Openness of information 20.5 0.0 13.8 14.6 15.1.3. Labor relations standards 20.5 28.6 27.6 19.0 19.compliance Total Section 1 61.6 57.2 69.0 62.8 65.2. Market factors:

2.1. Liquidity and volatility 7.7 10.7 0.0 0.0 0.2.2. Market regulatory framework / law enforcement / protection of 7.7 10.7 10.3 10.9 11.investors rights 2.3. Openness of capital market 15.4 21.4 20.7 18.6 14.2.4. Efficient calculations / 7.7 0.0 0.0 7.7 8.transactional costs Total Section 2 38.4 42.8 31.0 37.2 34.TOTAL 100.0 100.0 100.0 100.0 100.Source: www.CalPERS.ca.gov.

Country risk factors in 2006 accounted for 65% of points underscored by the Russian Federation. The average country risk assessment for Russia makes 1.6 out of 3. This is predetermined by low political stability, insufficient openness of capital markets and poor quality of labor regulations.

Political stability In evaluation the status of civil liberties and rights score 1 means the highest level of freedom and score 7 complete lack of freedom. Russia scored 5. The level of judicial system independence and legal protection in Russia scored 1 out of the maximum 3, which is to a great extent below the level of China. Our country per formed quite unsatisfactory in such areas as judicial system autonomy, legal pro tection for property rights, and favoritism towards government authorities when making judicial decisions, poor outcomes of opposing the organized crime.

Openness of information In the area of information availability and accessibility Russia scored 2, which is enough to overcome the barrier and join the club of markets permitted for in vestment. Measures on disclosing monetary policy, budget system and companies exchange listing information received sufficiently high evaluation. At the same time the key gaps identified for Russia were insufficient freedoms for media and insuffi RUSSIAN ECONOMY IN trends and outlooks cient rate on introducing IFRS (IAS or US GAAP). To be fair we need to emphasize that Russias score is still better than those of India and Brazil about at the same level as for China.

Labor regulations The quality of labor regulatory framework in Russia was evaluated to score 1.out of the maximum 3. This is below the passing score, but above China or India, about the same level as Brazil.

Contrary to the conservative evaluation of institutional factors, quantitative and qualitative parameters of Russian capital markets look pretty presentable. The average rank for risks associated with Russian capital markets made 2.14 in 2006 above the passing score of 2.

Market liquidity and volatility Russia scored the highest possible (3.0) with regards to market liquidity based on such indicators as capitalization, trading volumes, market capacity and volatility.

Market regulatory framework, protection of shareholders and creditors rights For the quality of regulatory framework for banking and capital markets Russia scored at an average level of 2.0. Insufficient efficiency of bank supervision and law enforcement at capital market, as well as gaps in assuring the creditors rights pre vent Russia from getting a higher score.

Accessibility of capital market Russian scored rather low (1.3) due to limitations for banks and insurance companies with regards to entering the market.

Efficient calculations / Transaction costs Russian capital market scored pretty high at the level of 2.3 (it scored 3.0 in 2005) in the field of efficiency of calculations and level of transaction costs. The ef ficiency of calculation methodologies applied at capital markets scored as high as 3.0 even in the environment that there is no Central Securities Depository and Guaranteed Settlement System without advanced deposit of assets. However, the evaluation of transaction costs level reflecting the level of taxation imposed on revenues and securities transactions was pretty negative (1.0 score out of 3 maxi mum). 24% profit tax when selling securities was reported as a particularly strong deficiency (today it is especially hitting the non residents buying shares of Russian companies, who are trying to avoid this by way of investing into Russian economy through off shore zones) Another deficiency identified was higher taxation of divi dends compared to other emerging economies.

Summarizing this review of various factors effecting the feasibility of CalPERS investment at Russian capital markets, one may notice that the key complaints re late first of all to institutional factors and investment climate in the context of coun try risks, as well as to the level of capital markets development with regards to taxa tion of investors revenues, efficiency of bank supervision and law enforcement.

Practically there is almost no potential room for further improving Russias rating at the expense of increasing quantitative parameters of capital markets and improving Section Institutional Problems its infrastructure because Russia has already scored nearly maximum in these ar eas. So the activities of the regulators should be focused on the areas, in which Russia is behind other competing countries.

The outcome of applying CalPERS methodology to Russia are interesting also because of the fact, that both Russia and China scored almost 2 in early 2006, i. e., they are pretty close to the threshold level, starting from which both economies nay be qualified for CalPERS investment107. Now everything depends on the final evaluation expected about March or April of 2007. `So far CalPERS web site dis plays the draft final evaluation, according to which Russias score will remains on the level of the previous year (1.9), and China will improve the score from 1.6 up to 1.7. But in both cases it wont exceed the passing score of 2.0. In such conditions CalPERS Investment Committee will have to face the uneasy Dilemma of Clod Frollo already in spring of 2007.

The objective of this analysis is to try to provide an independent evaluation of changes at Russian capital market irrespective of CalPERS opinion and evaluation, but through a system parameters and criteria described above.

In 2006 the balance of various factors reflecting the status of civil freedoms, the extent of justice and courts independence and the level of political risks was unlikely to change for the better. The Report developed by an International NGO Freedom Status of Freedom in the World108 in 2006 states that the situation with civil freedoms in Russia has not changed compared to 2005. According to their cri teria Russia scored 5, which means it was qualified as constrained country. Ac cording to Freedom House commentary, such a low score for Russia is based on the outcomes of these NGO experts assessing the processes of electing State Duma members in 2003 and the President of the RF in 2004, of reinforcing gov ernment control over media and of developing the government/opposition inter face inside the country. According to Freedom House, 45 countries were qualified Among BRIC countries China scored 6 (constrained country), Brazil scored 2 and India 3, which means recognizing them as unconstrained.

CalPERS's methodology of evaluating the level of judicial system autonomy and of legal protection of citizens/entrepreneurs from the point of view of their im pact on competitiveness of the markets is based on global competitiveness indices (GCI) of the Global Economic Forum (GEF)109. In 2006 Russia sank from the 53 th position it had been awarded in 2005 down to the 62 d position. Our country found itself behind China (54), India (43), but ahead of Bolivia (66). According to GEF, pri CalPERS Report of December 18, 2006, states that the Funds management has made a decision to allow investment in buying stocks of companies from China and other emerging economies.

Reuters Statement of December 18, 2006, extends this CalPERS decision over Chinese and Russian companies. However, no new list of markets classified as acceptable for investment has so far ap peared at CalPERS website. Draft final report on capital market research outcomes by Wilshire Con sulting of January 2007 (used for defining the list of acceptable markets) so far has stated both Rus sia and China having below 2 rating (2 is the criteria for including these markets into the list of ones allowed for investment).

See: www. freedomhouse. org.

See: www. weforum. org.

RUSSIAN ECONOMY IN trends and outlooks vate businesses in Russia have serious concerns about independency of judicial system and delivery of true justice. Legal aid is not fast in Russia, not is it transpar ent or inexpensive. Protection of property rights in Russia is very weak and contin ues to go worth compared to global competitive economies. Russias rating in this area has visibly dropped over the recent 2 years: in the group of 125 countries Russia moved from position 88 (in 2004) down to position 114 (in 2006) having been ranked as one of the worst countries. GEF Chief Economist and Global Com petition Studies Director Augusto Lopes Claros stated that special attention needs to be given to reforms aimed at improving government institutions of Russia which are not in compliance with current standards, improving judicial and legal climate, protection of property rights, anti corruption and anti crime efforts110.

Corruption problems in Russia redoubled in 2006, which may be confirmed by reports of such organizations as INDEM Foundation, Global Economic Forum, World Bank, as well as Transparency International index.

The year of 2006 was the year when major state owned corporations were at tacking property rights private investors both Russian and domestic in various areas. According to estimates of analysts from Alpha Bank, during the last year the share of governments interest in Russian companies increased from 29.6 up to 35.1%111. Gazprom abandoned its initial plans to engage foreign investors to devel oping Shtockman field; a group of foreign investors comprising Shell, Mitsubishi and Mitsui was forced to remise the controlling interest in Sakhalin 2 project to Gazprom under the threat of terminating the project because of environmental regulations incompliance. Gazprom acquired companies involved into developing one of the biggest gas fields (Yuzhno Tabeyskoye) from businessman Yu.

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