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Thus, during the first period of the development of the stock exchange market MICEX success had been achieved due to more prompt response to arising an additional demand for the stock of Russian JSC=s on the part of the companiesТ management, the financial groups interested in growth of their companiesТ capitalization, and small domestic inves tors inclined to short term speculative transactions99.

According to the head of FSFM O. Vyugin in 2005, Уon the structure of investors the market Е has not considerably changed for the last five yearsФ; Уaccording to different estimates, about half of the market participants - are foreign inves tors, next are Russian investors, who earn money by short term operationsФ, Уthe proportion of conservative institutional investors is not too large - 10%Ф (see: Vyugin O. Uncertainty hampers to take decisions // Vedomosti. 2005. January 31).

RUSSIAN ECONOMY in trends and outlooks However, by its nature, the new sources of demand for the stocks of Russian com panies were short term. The purchase of stock by management could not be everlasting, the volumes of such transactions decreased with concentration in the hand of those per sons controlling stakes. Financial groups and other holders, interested in original increas ing the capitalization, sooner or later will sell their packages to strategic investors. Mean while, the joint stock companies that became transnational corporations will inevitably go to global capital markets to maintain their competitive ability. As a rule, the resources of domestic speculative investors are limited, and on their own cannot maintain the high de mand for the stock of Russian companies.

At the second stage of stock market development - from the beginning of 2002 to October 2003 - a period of temporary balance became on the domestic stock market. It was characterized by absence of noticeable coming to the stock market of new categories of domestic investors, primarily physical persons and collective investors. The number of exchange trade participants practically did not increase over that period, basically, on the stock market they were represented by domestic investors inclined to short term specula tive strategies.

The RTS exchange continues to compete with MICEX for organized stock market with settlements on DAP terms, but, up until now there are no clear results of such competition.

At the same time, RTS could find more effective solutions on the futures market and the stock market of the JSC Gazprom, succeeded to be the first in occupying new market niches. The lesson to be learned from the experience most efficient strategies on the market are those directed to forming new market niches, rather than fighting for already occupied market segments.

At that time, the stock market of Russian companies and that of depositary receipts for those shares developed in parallel, complementing each other. It should be said that the Russian stock market fulfilled the functions of a liquidity and price formation center, while the external market allowed the foreign portfolio investors, who are not ready to bear УrubleФ risks and legal risks of the country of issuers registration to invest, by means of de positary receipts, in shares. The arbitrage beetween the domestic and external stock mar kets raised attractiveness of both market segments in the eyes of financial intermediaries and investors.

The third stage of stock market development started from October 2003. Granting to Russia by MoodyТs agency of the investment rating led to forming a new niche on the stock market of Russian companies, concerned with additional demand for the stock of Russian issuers on the part of non residents. This opened possibilities for investing in the stock of Russian companies large volume of means by conservative foreign investors, who are allowed, in accordance with the law, to form portfolios using only papers with the in vestment rating. But the investors were not ready to acquire shares with settlements in ru bles, as ruble is not a recognized investment currency.

At this stage the Russian stock market needed taking the agreed decisions by market participants and regulatory bodies, which made possible to form the competitive strategy of Russian exchanges regarding additional demand for the stock of Russian JSC=s on the part of foreign conservative investors. Many years heretofore, the problems of forming an international financial center based on Moscow exchanges raised by the experts of the stock market and scientific community representatives100. The idea of establishing such a See, for example: Mirkin Ya.M. The Securities Market of Russia: the impact of fundamental factors, forecast and devel opment policy. M.: Alpina Publisher, 2002.

Section 4.

Institutional and Macroeconomic Challenges center suggested formation in Russia of a securities exchange market with settlements in foreign currency between its participants.

Unfortunately, the Russian stock exchange market could not make an adequate de cision. Instead, a new federal law had been adopted in Russia on currency control and cur rency regulation, which retained for all non residents, without restriction, a possibility to acquire the stock of Russian JSC=s in rubles and repatriation of profits from their sale, and also restrictions for residents in purchasing securities with settlements in foreign currency.

The Russian infrastructure, that by the amount of risks and operational costs was substan tially behind its competitors was not ready to serve the conservative foreign investors.

As a result, the new niche, concerned with additional demand for the stock of Rus sian issuers in currency, had been developed by London Stock Exchange. Fig. 12 shows, how changed changed, since October 2003, the balance of forces between the competi tive stock markets of Russian JSC=s.

Объемы вторичных биржевых торгов акциями российских АО (млн.долл.) Арест Ходорковского, 21октября 2003 г.

October 8, 2003Khodorkovsky's detentionFITCH rating 60 Рейтинг FITCH October 17, 17 ноября Рейтинг MOODY'S 50 8 октября 2003 г.

MOODY's rating 40 30 20 10 III III I II IV VI VII VIII IX X XI XII I II IV V VI VII VIII IX X XI XII V янв. фев. мар. апр. май июн. июл. авг. сент. окт. ноя. дек. янв. фев. мар. апр. май июн. июл. авг. сент. окт. ноя. дек.

2003 ММВБ РТС, классич рынок ФБ "Санкт-Петербург" Лондонская фондовая биржа MICEX RTS, the clеский St. Petersburg Exchange London Stock Exchange assical market Немецкие биржи Нью-Йоркская фондовая биржа Фондовая биржа РТС German exchangesNYSE RTS Stock Exchange NYSE Source: According to the stock exchange data.

Fig. 12. Volumes of secondary exchange trade with the stock of Russian JSC=s (USD million) The data of Fig. 12 contradict the prevailing opinion that under the influence of risks caused by Yukos case and the political and economical uncertainties in Russia, the Rus sian stock market moved to London. According to the volume of exchange trade with shares, the MICEX market retained positive dynamics. According to MICEX, in 2004, the volume of trade with ishares on MICEX increased by 35% in comparison with previous year. At the same time, the volume of trade with receipts for the stock of Russian compa nies in London over the same period increased 4,7 times, which is explained by emer gence on the market of new investors non residents, as a result of improvement of the in vestment climate in Russia.

RUSSIAN ECONOMY in trends and outlooks The conflict around YUKOS oil company caused fears of non residents in protectabil ity of their property rights to the stock of Russian companies, but this factor did not cause capital outflow from the MICEX market to London, as proportion of non residents, trading with the stock of Russian JSC=s on MICEX is negligible. The YUKOS case rather told on volatility of volumes of trade with depositary receipts on LSE, which, as is seen in Fig. 12, were changing significantly from month to month.

The more detailed proportional weights of exchanges on the stоck market of Russian companies and depositary receipts on them are shown in Fig. 13.

100 NYSE German exchanges London Stock Exchange St. Petersburg Exchange RTS, the>

2003 MICEX RTS, the>

Fig. 13. The proportional weights of exchanges in the volumes of secondary trading with the stock of Russian JSC=s (%) In 2004, the share of MICEX in thevolumes of trade with the stock of Russian JSC=s varied from 14 to 26%, the share of LSE - from 58 to 80%. In December 2004, by volume of trade, the New York stock exchange, where depositary receipts were circulated for the stock of only 6 Russian JSC=s, came close to MiCEX; the share of NYSE in the volumes of trade with financial instruments for the stock of Russian issuers reached 12% of the mar ket, while MICEX share for the same month was 18,2%. On NYSE the main participants of transactions with ADR are institutional portfolio investors, NYSE advancement, in compari son with MICEX, is explained by their greater interest in receipts for the stock of Russian companies.

The successful marketing policy of the London stock exchange, which offered the market participants a new electronic system, to conclude transactions on anonymous ba sis, played the important part in forming a liquid market of depositary receipts for the stock Section 4.

Institutional and Macroeconomic Challenges of Russian companies. However, influence of this factor should not be overestimated, as it cannot explain the following: of all the developing economies there were just the stock of Russian issuers that caused rapid increase of the volumes of trade with depositary receipts on LSE, the volumes of trade with which reach now about 70% of volumes of all transac tions with depositary receipts for the shares of issuers from the developing countries on that exchange.

Depositary receipts for the shares of Russian companies proved to be the more practical financial instrument than shares themselves, which issuance and circulation is regulated by legislation of the Russian Federation. Acquisition of depositary receipts re duces the risks of private investors determined by possession of basic shares of Russian companies in conditions, where the Russian law and enforcement cannot ensure reliable protection of property rights. In the scheme of depositary receipts violator of rights of stockholders will have to do not with an isolated small investor, who often simply does not know Russian legislation, but with one of one of the largest world custodians, which repre sent the collective interests of owners of depositary receipts. The rights of owners of de positary receipts are protected not by Russian but the American legislation, which, among other things, provides for criminal responsibility of the officials of Russian joint stock com panies before the USA for the crimes committed against owners of depositary receipts. In addition, participants of the market of depositary receipts make transactions with them ac cording to the legislation and exchange rules of a foreign state, not to be subjected to re strictions laid in accord with the Russian legislation on exchange control and currency regulation for participants of the domestic securities market.

The problems of deterioration of competitive positions of the Russian exchanges on the stock market are clearly realized by the regulatory body - FSFM (Federal Service on Financial Markets). According to the head of this department, reorganization of infrastruc ture of the stock market, in particular, establishing a central depositary institution will con tribute to overcoming those negative trends on the market, which will help raise the eco nomic efficiency of operations and reduce the investorsТ operational risks101. FSFM promises to simplify IPO shares procedures on the Russian exchanges, including substan tial reduction of the period of time between the state registration of stock issues and con ducting auctions for their placement102.

However, such measures will hardly be able to radically change those trends. Going of Russian largest companies to global markets is an objective process, and changing the procedures of share issuance in the Russian legislation is not of vital importance here.

Global exchanges are more suitable for non residents, as allow to make deals with the se curities of issuers from different countries, not assuming the risks of settlements in na tional currencies. It is known by experience that it is by far more difficult to win competitors in the niche that had already been occupied. Progressive advance of the domestic stock exchange market and its infrastructure is possible only if it will be supported by the long term investment resources of domestic investors - investment and pension funds, insur ance organizations, households and non financial companies. For this, it is required to solve problems of Russian portfolio investors entering into international capital markets and establishing efficient systems for distribution of their products within Russia. In this area, no significant regulating activities have been observed as yet.

Therefore, since October 2003, a qualitative decrease in the share of local ex changes happened as organizer of trade with Russian Уblue chipsФ, which raise a question Vyugin O. Uncertainty hampers to take decisions // Vedomosti. 2005. January 31.

Kozitsyn S. Priglasheniye regulyatora FSFR khochet oblegchit provedeniye IPO v Rossii // Vedomosti. 2005. January 28.

RUSSIAN ECONOMY in trends and outlooks about moving the centers of price formation of the stock of Russian issuers to global capi tal markets. The main problem of Russian exchanges on the stock market is absence of sufficient number of domestic investors oriented to long range investments. In conditions where main investors on the market of Russian Уblue chipsФ are non residents, it is difficult for Russian exchanges to hold positions in competition with global markets. Movement for attraction of no residents to the domestic stock exchange market is complicated by the fact that this niche has already been occupied by global exchanges. In order to convince non residents to go from the global markets of the stock of Russian issuers, weighty ar guments are needed, which are so far absent.

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