Data source: calculations performed on thebasis of data provided by the RF Audit Chamber
To resolve the problem of enhancing theeffectiveness of utilization of funds provided by multilateral financialinstitutions, it is necessary to develop and introduce a viable set of stimulifor the timely repayment of loans by the subnational authorities, i.e. theimprovement of stability of the tax base of the subnational authorities, theresolution of the problem of non-funded mandates, as well as the amendment ofapplicable legislation so as to include therein detailed provisions on theprocedures for the recovery of overdue debts from the regional and municipalauthorities.
1.4.3. The Russian stockmarket
The Russian stock market posted fairlydecent results in 2001, especially if account is taken of adverse external factors, such as an economicslump in the USA, Japan and the EU, financial crises in Turkey and Argentina aswell as declining pricesin the natural resources market. Continued growth of the Russian economy,timely external debt payments and upgrading of the RF ratings related thereto, improvedrelations with the USAand international financial institutions, further steps in reforming theRussian legislation in keeping with the demands of the market economy have,doubtless, attracted foreign investors to the Russian market. However, one cannot but point out someadverse factors as well. Redistribution of powers and corporate scandals significantly impacted on thequotations of some issuers’ shares and the investment climate as a whole.
The Russian market was one of the mostprofitable ones in the world in 2001. Thus, according to the results of thefirst quarter, the RTS index was third on the list of the world’s fastest-growing stockindicators published by the Merrill Lynch investment bank, topped only by theShanghai B (China) and Taiwan Weighted Index (Taiwan). In the second quarter theRussian stock market climbed to the second rank topped by the Turkish one this time. As a result of theyear the Russian stock indicator became almost twice as “heavy” (by 81.49percent). For the sake of comparison, Table 1 shows the movements of stock indices in thedeveloped and developing countries.
Within a year the RTS index changed by129.03 points with the trading volume totaling about $4.5 bln. Let us point out that the turnoversomewhat declined compared with the last year (by about $5.5 bln), which wasdetermined by the impactof the external factors, specifically, the September 11 events and theunfavorable trends in rawmaterials markets. Several periods can be identified in describing themovements of the RTSindex during the year. In January of last year the stock index grew by 21.4percent and the tradingvolume – by 40.4percent. This wasfollowed by a three-month lateral trend within the 160-180-point band atmoderate trading volumes. Growth became manifest in late April-early May,continuing into the second part of June. On June 22 the index reached 227.62points with a record-high trading volume –over $50 million- registered onthat day. The period of fast growth ended in stagnation. As a result of Julythe index dropped by 6 percent with the trading volume almost halved in August. Growthemerging later was followed a steep drop after the terrorist attacks on the USA. Withinone day, on September 12, the index fell by 5.4 percent with the minimal valueof 174.2 points (-15.5 percent compared with September 11) observed on October 3. By the year-endthe index climbed to the pre-crisis level: on December 29 the stock indicatorreached 206.05 points – the maximal value since May 14, 1998.
As a result of the year, almost allRussian blue chips demonstrated positive movements. The highest-yield sharesturned out to be those of Sberbank (+206.93 percent), YUKOS (+192.13 percent),and Sibneft (+173.6 percent). The quotations for RAO UES (+93.15 percent),Mosenergo (+70.83 percent), Surgutneftegaz (+51.5 percent), Tatneft (+45.1percent) and LUKOIL (+31.93 percent) were less volatile. At the bottom of thelist are the shares of Rostelecom (+4.55 percent) and GMK Norilsk Nickel (+2.27percent since July 9,2001). It should be noted that the highest yield instruments in 2001 were theshares of the “second echelon” enterprises. The absolute leaders yield-wise were the shares of theVolzhsk Automobile Plant which had become ten times as expensive (the ordinary shares went up by 1086percent, while the preferred ones – by 966.67 percent). The Tulenergo shares (+330.23percent) and preferred shares of Lenenergo (+325 percent) became almost three times as expensive.
In thetotal RTS turnover the share of the RAO UES stood at 32.86 percent (40.0percent in 2000), LUKOIL –16.65 percent (17.4 percent), YUKOS – 13.2 percent (1.2 percent),Surgutneftegaz – 9.02percent (8.9 percent) and RAO Norilsk Nickel – 5.18 percent (4.6 percent). Thus,the total share of the five most liquid stocks amounted to 76.91 percent (77.2percent in 2000) in the aggregate RTS turnover.
The maximal number of deals – over 20,000 – were transacted in the RAO UESshares. The runner-up was the RAO Gazprom with over 17.5 thousand transactionsdone through the RTS terminals at the Saint Petersburg Stock Exchange.
According to the data of the NationalAssociation of capital market participants (NAUFOR), the top five major Russiancompanies by capitalization as of the end of December were the following: OAOSurgutneftegaz ($12,585.5 mln.), OAO Gazprom ($12,349.67 mln.); OAO YUKOS oilcompany ($11,585.67 mln.), OAO LUKOIL ($10,319.9 mln.) and RAO UES ($6,664.89mln.)
To explain the above-noted trends in sharequotations, let us review the situation in the Russian stock market in 2001 inthe context of the changing risk levels. Insofar, the impact of the followingfactor groups seems especially important:
The domestic political situation;
new instruments of the Russian capital market;
relations with international financial institutions;
the situation in the international financial markets;
trends in oil prices in the world markets.
We will cover the first five factor groupsin this section, while the last (but not the least) - trends in oil prices inthe world markets - will be analyzed in detail in section 2.1 of thisreview.
The domestic politicalsituation
Strengthening political stability in thecountry, the Government’s consistent economic policy, adoption of key legal acts by thelegislature, doubtless, played a positive role in a successful development ofthe Russian economy as a whole and the capital markets, in particular.
These components led to an enhancedattractiveness of the Russian economy both for Russian and foreign investors.However, it should be noted that a power struggle between the old and the newelites, accompanied by flagrant scandals was a destabilizing factor which didnot contribute to increased capital investments in domestic companies.Placement of “single team players” to key positions contributed to a speedydecision making on important issues, on the one hand, but on the other hand,this gave rise to questions about the efficiency of the officials appointed tovarious posts on the basis of their affinity to a political grouping, but notaccording to their professional achievements.
Unfortunately, the role of theadministrative factor in corporate dispute settlement continues to be high,testifying to the imperfect nature of the RF judiciary system. The level ofinstitutional protection of investor rights, including those of foreigners, isalso rather low in Russia. The confrontation between the procuracy and the“Most” group in the spring of last year as well as the legal proceedingsagainst the TV6 television company in autumn, triggering off broadrepercussions both at home and abroad, scared off investors from the Russianmarket. All these negative developments prevented growing investor optimismwith respect to the prospects of the Russian economy and rehabilitation of theRussain investment climate.
The early spring witnessed severalimportant developments in the Russian domestic and foreign policy areas.Specifically, there was some cooling off in relations between Russia and theUSA. In mid-March the State Duma reviewed the issue of no-confidence vote inthe Government. Despite the fact that the vote was not approved, the criticismleveled at the government went mostly unanswered. Such an uncertain situationdid not contribute to growing quotations in the capital markets, so a lateraldrifting of the prices was observed during most of the spring.
As has already been mentioned, a number ofimportant legislative acts were adopted in 2001, among them the Land Code, theLabor Code, the Law “On Investment Funds”, etc. As a result, obstacles to acivilized turnover of non-agricultural lands were removed, a legal frameworkfor collective investments in Russia was created and the principles of managingjoint stock and unit investment funds as well as those of supervising theiractivities were identified. Adoption of these important laws creates potentialconditions for inflows of fresh funds to the Russian market.
To put a barrier to illegal capital flowsin Russia (according to the FATE requirements has blacklisted Russia), theCommittee for Financial Monitoring has been set up under the RF Ministry ofFinance. Financial intelligence will monitor all transactions above 600, 000rubles. The activities of the new agency are expected to enhance transparencyof capital transactions in Russia, improve the investment climate with freshfunds of the Russian and foreign investors coming to the domestic capitalmarkets.
New instruments of theRussian capital market
Due to a conflict between the Moscow StockExchange - the main trading site for the Gazprom shares – and the Gazprombank, the coreturnover of the transactions in the OAO Gazprom shares was moved to the SaintPetersburg Stock Exchange. The share trading is effected at the dedicatedtrading session with the RTS Stock exchange terminals used. The turnover ofGazprom share trading through the RTS terminals exceeded $210 million sinceJuly 6 (434 million securities).
It is necessary to mention thedevelopment of the Russian derivatives market and the emergence of new assetsthereon. September 19 witnessed the opening of the RTS futures market (FORTS)in the framework of an agreement on creating a single market for trading infutures and options contracts by the RTS and the Saint Petersburg StockExchange. Transactions in 4 futures contracts for the quotations of RAO UES, Gazprom, LUKOILand Surgutneftegaz shares are currently done at the FORTS, as well as optionsfor futures contracts for the shares of the first two above-mentioned issuers.In the first of hour of the system’s existence, the trading volumeexceeded 15 mln rubles (147 transactions and 5,206 contracts).
As a result of 2001, about 53 thousandtransactions were done in the futures market for the value exceeding 7.8 blnrubles (2 million contracts). The aggregate volume of open positions as of theend of the last trading day of 2001 exceeded half a billion rubles.
The turnover in futures contracts amountedto 7.7 bln rubles (50.3 thousand transactions, 2 million contracts). Arecord-high turnover in futures at a trading session – 281.7 mln rubles - was recorded onNovember 26, while December 29 broke the record in the open position volume– 510 mln rubles.
2.8 mln transactions totaling 71.3 mlnrubles (24.5 thousand contracts) were concluded for options at the FORTS in2001.
On November 12, the RTS launchedcomputations of RUIX, the Russian investment index and RUIXOIL, the oil stockindex (Chart 3). Computations of the former index include quotations of theseven most liquid ordinary shares: RAO UES, OAO Mosenergo, OAO Rostelecom,LUKOIL oil company, OAO Surgutneftegaz, OAO Tatneft and YUKOS oil company.Computations of the oil index include the shares of the four latter issuers.Futures trading for these indices commenced on December 3 by two contractsimmediately with the execution on December 17, 2001 and March 15, 2002.
Afterthe end of the December 17 trading session came the date of the execution ofthe obligations under all contracts falling due in December 2001. The firstexecution of contracts in the history of the FORTS futures market wassuccessful. Apart from the contracts to be executed in March, futures with thenew execution date –June 2002 – arecurrently in circulation.
Made in January, the RussianGovernment’sdeclaration of intent to defer payments of the Paris Club debt in the firstquarter of 2001 elicited a rather harsh reaction from the creditors. Apossibility of restructuring payments of the Russian debt to the Paris Clubbecame one of the widely discussed issues in the very beginning of the year.The total volume of Russia’s debt to the Paris Club amounts to about $40 bln. Ensuingstatements by the German and Japanese officials about Russia’s membership in G-8 as well as theUS harder stance on the issue of crediting the Russian Federation made the RFGovernment somewhat ease its position. The harsh stance of the creditors,confirmed at the meeting of G-7 ministers of Finance in Palermo, prevented theRussian Government from securing restructuring and debt write off in 2001. Atthe same time, the “not to pay” alternative, so widely discussed in the Russianpolitical circles, could have led to the country’s investment isolation as well asto a domestic political crisis. At that moment the investors were not takingthis scenario seriously, which may be borne out by the growing prices for theRussian assets in January (see above). February saw the introduction ofamendments into the Law “On the 2001 Federal Budget” which allowed toreallocate part of additional revenue for external debt payments. TheGovernment started payments of the Paris Club debt before the amendments to thebudget were approved by the Federation Council. According to the paymentschedule, Russia’spayments to the Paris Club of creditors in 2001 totaled $3.73 bln, with $2 blnpayable to the IMF.
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