Bloomberg News

Micex 40% Volume Slump to London Spurs Call for Investment Shift

April 17, 2012

Ruben Aganbegyan, president of Russia's Micex-RTS stock exchange. Photographer: Peter Foley/Bloomberg

Ruben Aganbegyan, president of Russia's Micex-RTS stock exchange. Photographer: Peter Foley/Bloomberg

Russia needs a “paradigm” shift in local investment trends to bolster its main stock exchange as volumes sink 40 percent below the level of trading in Russian shares in London, the head of the Micex-RTS Exchange said.

“The biggest lag for the Russian market is the absence of local long-term money, and that is something that we need to fix for sure,” Ruben Aganbegyan, president of the Moscow-based Micex-RTS, said in an interview yesterday at Bloomberg’s headquarters in New York. There needs to be a “change of paradigm” when it comes to the nation’s pension system, which is mandated to focus on annual returns and doesn’t generally invest locally, he said.

The 30-day average value traded in shares of 10 of Russia’s biggest companies in London was $1.2 billion on April 16, compared with $760 million on the Micex-RTS, data compiled by Bloomberg show. London volumes exceeded Moscow’s by 74 percent on March 19, the most since November 2008, and the only initial public offering by a Russia-based company this year was undertaken in the British capital.

Aganbegyan, formerly head of investment bank Renaissance Capital’s Russia unit, is trying to implement reforms needed to boost investment and liquidity on his trading platforms. The Micex-RTS was formed out of a merger between Moscow’s ruble- denominated Micex and the derivatives-focused RTS in December.

The exchange plans to debut a central securities depositary in July, and replace immediate settlement of trades with a protocol in line with developed markets by November, allowing traders either two or three days to finalize transactions, Aganbegyan said yesterday. While these reforms will help make conservative investors more comfortable trading on the Micex-RTS “I don’t think any of this is enough on a stand-alone basis to boost trading,” he said.

‘Less Than 1%’

“A portion of Russia’s pension system should be invested into the equity market,” he said. “Less than 1 percent of state pension assets are currently invested in the equity market in Russia today, compared with about 60 percent in the U.S. and about 40 percent in the U.K.”

Prime Minister Vladimir Putin, who will take up a third term as president on May 7, told the Duma -- Russia’s lower house of parliament -- on April 11 that the government has to widen the range of securities that the nation’s pension funds can invest in, the Prime-TASS news agency reported. “The talk is about so-called long pension money,” he said, according to the report.

Only IPO

The government restricted the assets pension funds contributed to by employers and managed by state development bank Vnesheconombank can invest in in a Jan. 27 resolution, government newspaper Rossiyskaya Gazeta reported in February. The funds can only buy ruble-denominated state securities, after previously being allowed to invest in state assets denominated in other currencies, Rossiyskaya Gazeta said, citing the resolution.

Oil and gas producer RusPetro Plc (RPO) raised $250 million in London on Jan. 20, the only Russia-based company to do an IPO this year. Of the five initial share offerings undertaken in 2011, three were done in London, one in Moscow and one on both exchanges. There were 13 Russian IPOs in 2007, the most since at least 1999, data compiled by Bloomberg show.

OAO Transneft, operator of Russia’s oil pipelines, and shipping company OAO Sovcomflot are among companies which may seek to list outside of Russia this year, according to Azat Nougumanov, a Moscow-based vice president for new business development at Bank of New York Mellon Corp.

‘Bounce Back Home’

Iron ore explorer OAO Metalloinvest, petrochemical producer ZAO Sibur Holding, and diamond miner OAO Alrosa may also list depositary receipts abroad in 2012, Nougumanov said in an April 9 interview. OAO Promsvyazbank is considering a $1 billion IPO later this year in London and Moscow, President Artem Konstandian, said last month.

The Micex-RTS has dissuaded “a couple” of issuers from placing shares offshore, Aganbegyan said, declining to provide more details.

“We’re in quite a unique situation because we didn’t reform our market over the last 10 years,” he said yesterday. “Trading equity for such a huge market as Russia outside of this economy is actually an exception, it’s not a rule, that’s why the market will naturally bounce back home if that home can offer a good way of trading for investors.”

Nordgold NV, the Russian gold miner spun off from steelmaker OAO Severstal in 2012, may consider redomiciling for a primary listing in London and inclusion in the benchmark FTSE-100 index, Chief Executive Officer Nikolai Zelenski said in March.

Volumes Migration

Polyus Gold International Ltd. may apply again to redomicile in London after Russia’s largest gold company withdrew its application last month to a government foreign investment commission, Alexey Chernushkin, Polyus’ director for capital markets and investor relations, said in an interview on March 20.

Polymetal International Plc, a silver and gold miner, and Evraz Plc (EVR), a steelmaker, were the first Russian companies to join the FTSE-100 in December after moving their main listings to London.

It will “take time” for trading volumes to migrate from London to Moscow, Arjun Jayaraman, who manages $400 million in emerging-market equities at Causeway Capital Management LLC in Los Angeles, said by e-mail yesterday.

“Buying shares on the Micex-RTS will be much more attractive with the improved settlement and central depositary,” he said. “We stopped trading due to the settlement problems a number of years ago. We will most certainly come back to the Micex-RTS once volumes pick up, because there are many stocks that don’t have general depositary receipts.”

30% Boost

The exchange could boost volumes by 30 percent in the 12 months after the central depositary and settlement time reforms are implemented, according to Luis Saenz, chief executive officer of the U.S. unit of Moscow-based brokerage Otkritie Financial Corp.

A central depositary is an independent body that makes sure money is paid or debited and securities ownership is transferred after a trade occurs. The Micex-RTS is in talks with bourses in Ukraine and Kazakhstan to link their markets with Moscow’s depositary as a way of broadening investors’ access to assets in the former Soviet Union, Aganbegyan said.

The Micex-RTS owns 51 percent of Ukraine’s PFTS Stock Exchange (PFTS) and around 50 percent of the Ukrainian Stock Exchange, he said.

The 30-stock Micex Index trades shares of Russian companies including state-run OAO Gazprom, the world’s biggest natural gas producer, Russia’s biggest lender OAO Sberbank (SBRCY:US) and OAO Lukoil (LKOD), the nation’s largest independent oil producer. All three companies have depositary receipts listed in London and New York.

The Micex-RTS will seek more than $1 billion in its own IPO next year “when a market window is there,” Aganbegyan said in yesterday’s interview. The exchange is allowed to issue a minimum of $300 million of shares, he said.

To contact the reporters on this story: Halia Pavliva in New York at hpavliva@bloomberg.net; Ksenia Galouchko in New York at kgalouchko1@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net


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