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During the first 9 months of 2006 the demand of non-residents for shares in Russian companies increased, in the form of the balance of foreign direct investments (FDI), by $ 11.1 billion, and in the form of portfolio investments by $ 11.5 billion. The specificity of placing investments in the category of FDI is such that there, in fact, belongs the mainstream of investments being made by hedge funds and direct investment funds. For this reason, the FDI in shares of Russian differ little from portfolio investments.

In 2006 the share of non-residents in the total value of purchase and sale transactions in shares on the MICEX became 25.4 %, having exceeded even the share of transactions effectuated by physical persons (22.%). The noticeable enhancement of the role of non-residents on the MICEX coincides with the period after the lifting of the restrictions on transactions with shares owned by non-residents, formerly established by legislation on foreign currency control and foreign currency regulation. It should be noted that in actual practice the role of non-residents in the transactions with shares of Russian companies in the territory of Russia is even more prominent. In fact, many big brokers and banks purchase shares on the MICEX in their own name for purposes of their subsequent resale by non-residents through offshore companies. Such resale of shares is formalized as ex-pit transactions, which constitute approximately 20 30 % of the turnover of shares on the MICEX. The sale of shares by non-residents is also carried out as ex-pit transactions. Considering this factor, the share of non-residents on the share market is approximately 50 %, in accordance with our estimations.

The problem faced by the Russian stock market in connection with the participation in this market of foreign portfolio investors is that so far it has not become a target for investing on the part of the worlds biggest investment and pension funds oriented to foreign retail investors. The funds whose specialty is Russia are usually characterized by a low degree of capitalization and mostly have the status of hedge funds or funds oriented to qualified investors (for example, the Hermitage and the funds managed by J P Morgan Fleming). According to the data published by the Rosstat, offshore zones in 2006 (Luxemburg, Cyprus, the Virgin Islands and the Cayman Islands) accounted for 40 % of the accumulated foreign investments in Russia. According to the information published at EmerginPortfolio.com, the total value of the investments made by portfolio investment funds in Russia as of the beginning of 2006 amounted to approximately $ billion.

The principal investors in the shares issued by Russian joint-stock companies are foreign investment funds specializing in investments in shares of companies located in the developing European countries, as well as the global funds of developing markets. In this connection, in the sphere of investments in Russia the dominant role is played by the investment funds registered in Luxemburg, which account for approximately 47 % of the assets owned by portfolio investors in Russia, followed by those from the USA (23 %), Ireland (8 %), Austria (7 %) and the Cayman Islands (2 %). Nearly 60 % of the assets is constituted by the funds established in offshore zones (Luxemburg, Ireland, the Cayman Islands and Guernsey).

These foreign investment funds invest in developing markets on a package base, making it their goal to diversify their investments between different countries irrespective of their macroeconomic situations. The significance of the factor of developing markets attractiveness is generally higher than that of the specificities of individual developing markets, and the country-based approach usually prevails over the industrybased one12.

The prevalence of the country-based strategy of forming their portfolios among the foreign investors operating in Russia has a negative impact on the qualitative structure of the market for the shares in Russian companies, because it creates the phenomenon of synchronous changes of their prices, independently of the indices characterizing the activity of companies proper. This can be seen by the near-1 Beta coefficients of the majority of blue chips, which characterize the degree of deviation of the return on investments in some or Brooks R., Del Negro M. The Rise in Co movement across National Stock Markets: Market Integration or IT Bubble.

Federal Reserve Bank of Atlanta. Working Paper 2002-17a, September, 2002.

other securities from the return of the stock indices. The Beta coefficients of most of the issues of shares are approximated to 1, which is indicative of a high correlation between the fluctuations of their prices and the return of the MICEX index. The average Beta coefficient for all issues of shares was 0.92 in 2005 and 0.in 2006, thus demonstrating the dominant role of the synchronicity of the movement of the prices of blue chips on Russias stock market.The synchronicity of the movement of shares does not only represent an impediment for institutional investors and the population in terms of opportunities for taking advantages of the diversification of portfolios on the domestic market, but also is indicative of the existence of certain efficiency problems associated with the management of the biggest corporations. The portfolio theory usually assesses the efficiency of managers by applying Alpha coefficient, which demonstrates the deviation of a portfolios actual return from its potential return in conditions of a given return on a basic portfolio (i. e., index) and Beta coefficient of a given portfolio.

During the first 11 months of 2006, the investments of banks in shares increased by 65.6 billion roubles, or by $ 2.4 billion, which is very modest figure by comparison with those characterizing the growth of capitalization and liquidity on the stock market. At the same time, the gap between the level of the development of the stock market and the banking systems potential was becoming greater.

In 2006, the share of capitalization in GDP increased to 92.7 %, as compared to 61.5 % in the preceding year. In the same year, Russia became one of the worlds leaders in the attraction of FDI. Against this background, the share of domestic credit in GDP, which in 2005 went down from 25.9 % to 20.6 % of GDP, in 2006 remained nearly at the same level as in the preceding year. The gap between the indices of capitalization and those of domestic credit is indicative of the existence of serious disproportions between the level of development of the banking system and the growth of Russian companies.

The shortage of domestic credit resources urged banks and nonfinancial companies to actively attract borrowings on the external market. In 2006 the external debt of nonfinancial companies and commercial banks amounted to $ 135.4 billion and $ 78.5 billion, respectively. In one year, the debt of nonfinancial companies increased by 8.4 %, that of banks by 56.7 %, that is, the growth of banks external debt was far ahead of that of the external borrowings of nonfinancial organizations. In 2007 this trend, in all probability, will persist - in 2007 only Rosneft has decided that it is going to attract credits in the sum in excess of $ billion (within the framework of accumulating resources for purchasing the assets of Yukos).

The borrowing activity of banks was much higher than that of nonfinancial companies. The year 2006 saw significant prevalence of the share of foreign liabilities of banks over the share of the corresponding assets, which was the consequence of the strategy of banks aimed at an accelerated formation of their liabilities denominated in foreign currencies and their reinvestment in rouble-denominated assets. The risks of such a policy for banks are that, in an event of a noticeable fall of the roubles exchange rate, a fall in the return on rouble-denominated assets, or a growing cost of foreign currency denominated borrowings, banks may be faced with the problem of liquidity. A lack of balance between the foreign currency denominated assets and liabilities of banks was one of the main causes of the collapse of the biggest Russian banks in August 1998 in the situation of the roubles rapid depreciation. In 2006 there existed a similar lack of balance between the assets and liabilities of banks, which was much greater than on the eve of the 1998 crisis. In it constituted 5.0 % of the value of assets (or liabilities) banks, while in 2006 it became as high as 7.7 %.

This is indicative of growing liquidity risks faced by banks and the vulnerability of their financial status in an event of any significant changes in the external factors of the foreign currency and credit markets.

One traditional problem is represented by the low level of the populations savings invested in securities. The populations share in the stock exchange transctions on the MICEX, in the 2006 prices, amounted to approximately 20 %. The population is one of the main driving forces of the trade via the Internet, and the citizens are active in using the opportunities of marginal crediting for increasing yields and the volume of transactions on the stock market. According to the MICEX, the number of physical persons operating on the market at the end of 2006 was 250,000, or by 2.5 times higher than their number at the years beginning.

However, the statistical data concerning the populations investments in securities within the first months of 2006 have demonstrated that the populations contribution to the growth of the Russian stock market in 2006 was rather moderate. The share of the populations incomes invested in securities in amounted to 0.6 %, which is by 3 times less than the level of 1998 the pre-crisis year. According to the For the sake of fairness, it should be added that some analysts, for example A. Vernikov from Aton Line, have noted that in 2006 there appeared a trend of a gradual deterioration in the synchronicity of the circulation of shares, due to the appearance of new generators of market growth companied dealing in energy carriers and banks (see comments in Quote.ru of 29 January 2007).

data published by the Rosstat, the growth of the populations net investments in securities in 2006 was as high as 87.3 billion roubles, or $ 3.2 billion, which is nearly by one-third higher than that registered last year. The populations savings in securities in 2006 are higher than the growth of the assets of banks invested in shares, but against the annual growth of capitalization in the amount of $ 426 billion and the growth in liquidity on the stock-exchange share market in the amount of $ 397 billion they appear to be rather modest. As for the total value of securities held by the population in 2006, it achieved the level of $ billion.

It should also be noted that, according to the preliminary data of the year 2006, two negative trends have emerged: the populations inclination in 2006 to invest their savings in financial assets - from 11.7 % of their incomes in 2005 to 8.0 % in 2006, and a dramatic growth of the populations debt against bank credits, which in 2006 became as high as 5.3 % of the populations incomes - nearly equal to the sum of the populations rouble-denominated bank deposits.

The rapid growth of the stock market and the attraction of resources through the placement of corporate bonds and IPO should, in an ideal situation, be conducive to growth of investments and economic boom.

However, for this connection to become operative, the investments attracted by companies on the stock market must be real investments, that is, be aimed at creating new capacities, fixed assets and production stocks.

Nevertheless, despite the very active growth in IPO and placements of corporate bonds, the activity on the stock market has not resulted, so far, in real capital growth.

As already mentioned earlier, in 2006 the companies from Russia attracted approximately $ 17 billion within the framework of IPO, and another $ 17 billion through placing rouble-denominated bonds. At the same time, accotding to the Rosstat, of the $ 17 billion received from the placement of shares only $ 2.billion, or 14.7 % the total funds attracted in this way, was invested in fixed assets. Even more paradoxical is the statistics on the use of the $ 17 billion yielded by the placement of corporate bonds. Only $ 60 billion out of the aforesaid sum, or 0.4 %, was spent on the growth of fixed assets. Some allowances may be made for errors in the official statistical data, but on the whole this can hardly make any difference in terms of the main conclusion that the resources generated by issuing shares and bonds are not invested in fixed assets and thus have no impact on economic growth.

In all probability, the main bulk of these resources is spent on the refinancing of debt and the acquisition of assets from their effective owners. On the contemporary Russian stock market we can now see the same processes as were characteristic of the US market in the late 1980s, known was the financing of LBO (leverage-buy-out) transactions through the issue of junk bonds and IPOs. The transactions mainly represented large-scale borrowings on the stock market by applying the lever of crediting for purposes of buying-up companies and their assets. The main risk associated with such transactions is the low performance of the companies being thus purchased, which may prove insufficient for the settling of debts incurred for purposes of such a purchase. In USA the junk bonds market ended in 1989 in a spectacular collapse of the corporate borrowers.

A. Abramov, A. Radygin On the provision with pharmaceuticals of certain categories of citizens with the right to state social support The program of additional provision of pharmaceuticals (hereinafter the APP program) to certain categories of citizens was launched in 2005 due to the adoption of Law of the Russian Federation No 122 - FZ.

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