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The Bretton Woods Committee

Symposium Strengthening Capital Markets in Emerging Market Countries

The Russian Capital Market


Dr. Vladimir Kvint

Washington, DC January 25, 2008


1

Emerging Market Definition


Lack of clear definition- pervasiveness of misleading statistics and studies Even in the IMF and the Economist Intelligence Unit, the list of countries considered to be Emerging Markets is not consistent
Statistics not comparable, conclusions not accurate

Ignores the fundamentally different needs of Emerging Market, Developing and Underdeveloped countries
2 January 25, 2008 Dr. Vladimir Kvint, 2008

Emerging Market Definition


a society transitioning from a dictatorship to a free market oriented economy, with increasing economic freedom, gradual integration within the Global Marketplace, an expanding middle class, improving standards of living, social stability and tolerance, as well as an increase in cooperation with multilateral institutions.
3 January 25, 2008 Dr. Vladimir Kvint, 2008

Role of Emerging Markets in the Global Marketplace (January 1, 2008)


81 countries Territory: 46.45% Population: 68.32% Gross World Product: 49.67% Foreign Direct Investment inflow: 40%

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Impact of Russias National Ideas on the Capital Market


Power of the Territory Prevention of disintegration Russia as the Third Rome Ruler worship The Superior is always right Conspiracy Obsession Extensive not Intensive Economy
5 January 25, 2008 Dr. Vladimir Kvint, 2008

The Political Environment of the Russian Capital Market


From Communist Dictatorship to Yeltsins Anarchy to Putins Vertical of Power (1989-2006) Western Misconceptions about Russias pseudo-advocates of the free market (1989-2001) Liberalization of prices before Demonopolization (1992-93) Pseudo-privatization and the creation of the economic roots of corruption (1992-1995) The Crash of Russias romantic image of capitalism and Americanism (1992-1995) Regional Decentralization of Russia- Governors as Godfathers (1995-2002) Corruption and Nepotism as a philosophy and image of Russian Business
6 January 25, 2008 Dr. Vladimir Kvint, 2008

Historical Developments of the Capital Market


1990 Birth of Russian stock market: the USSR government issues two decrees:
Regarding Share Holding Companies Regarding Valuable Papers

First shares issued and actually sold: shares of Russian commodity exchanges, accounting for 80 per cent of all shares until November 1991.
7 January 25, 2008 Dr. Vladimir Kvint, 2008

Historical Development
1992 Creation of The Moscow Interbank Currency Exchange, the Moscow Central Currency Exchange, the Russian Commodity Exchange, St. Petersburg Stock Exchange and the SouthUral Stock Exchange 1993 Beginning of the sale of shares of privatizing companies Beginning of the state bond market- GKO
8 January 25, 2008 Dr. Vladimir Kvint, 2008

Historical Development
1994 October, Black Tuesday- the dollar exchange rate collapses, cutting the purchasing power of the Russian Ruble in half.
first currency speculation in the Russian market

MIBOR (sellers rate of deposit) and MIBID (buyers rate) are adopted by the 9 biggest banks.
9 January 25, 2008 Dr. Vladimir Kvint, 2008

Russian Stock Market, 1994

GKO

20% 32% 5% 12% 29%

Privatizing companies Bank shares Vouchers Other securities and bonds

10 January 25, 2008 Dr. Vladimir Kvint, 2008

Historical Development
1996 Establishment of the stock, currency, derivative, and interbank credit markets.
The biggest of these was the currency market. Daily interbank credits reached the value of 300 billion rubles. Due to the high risk of this market, securitization takes off
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Historical Development
1998 Destabilization of the Russian stock market , following the Asian crisis. August 17- following payment crisis, Russian government declares Ruble default and a moratorium on private and state obligations to foreign creditors

12 January 25, 2008 Dr. Vladimir Kvint, 2008

10 years later
January 21, 2008 Futures for Brent oil fall below $88 Shares of Oil companies fall between 5.27% (Rosneft) and 8.7% (Surgutneftegas) Capitalization of Vneshtorg Bank decline by 6.33% and Sberbank by 7.65% Telecom sector declines by an average of 7.5% Caused by uncertainty of US market and complicated by closing of NYSE (US National Holiday)
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Russian Stock Market, 01.01.2007


3% 4% 5% 15% GKO Corporate Bonds Company Shares Municpal and State Bonds Eurobonds and others

73%

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Capitalization Growth Rates, 2007


160 140 India 120 100 80 60 Russia 40 Germany 20 US 0
*including Hong Kong January 25, 2008 15 Dr. Vladimir Kvint, 2008

China*

BRIC Brazil

World EU

Capitalization of the Global Marketplace, January 2008


2.9
United States

12.78% 38.5% 22.17%

Global Emerging Market (without Russia) European Union (without EMCs)* Japan and Canada

23.6%

Russia

16 January 25, 2008 Dr. Vladimir Kvint, 2008

Capitalization in Russia
2007 For the first time since 2000, Russia experienced a sluggish growth of capitalization and high volatility. 300 new companies went public bringing an additional $121 billion. Only in December, 15 companies went public with a total market value of $924 billion.

17 January 25, 2008 Dr. Vladimir Kvint, 2008

Capitalization
2008
Total capitalization of the Russian market: $1.463 trillion. Since 2003, market capitalization increased by a factor of ten. Contrary to popular opinion, the market capitalization of the oil and gas sector is a little lower (by $6 billion) than capitalization of all other publicly traded companies. The 100 biggest publicly traded companies of Russia account for 92.12% of the total market capitalization

18 January 25, 2008 Dr. Vladimir Kvint, 2008

Quantitative Evaluation of the Russian Capital Market, 2008


Out of 85,489 emitters in Russia, only 482 (0.56 per cent) have a presence in organized markets 95 % of market transactions are related to only 3% of available company shares Total face value of corporate shares on the market is 1,128.15 billion rubles
increased by 30% in 2007

The percentage of transactions on stock markets relative to total transactions has surpassed 75%
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Unique Characteristics of the Russian Stock Market


An emitter can have a presence at several different exchanges simultaneously Extremely high rate of growth 2005: 150% 2006: 200% 2007: 10% (six months)

High concentration of capitalization in terms of emitters and industries


Gazprom: 25.5% of the market. The ten major companies, (Norilsk Nickel, Lukoil, MTS Telecom, and Sberbank, among others): more than 70% Three industries- Energy, Financial and Metallurgy: 90% Increasing role of the financial sector (3.5 times, 2007)

Declining role of depository receipts of Russian companies on foreign stock exchanges (since 2004)
January 25, 2008

20

Dr. Vladimir Kvint, 2008

Russian Capital Market Trends 2008


Increasing debt of individuals and companies will have a substantial influence on the financial and banking sectors
every Russian owes the banking sector of about $1,000 Delinquent debt per person is 1,500 rubles (roughly $60) Lower credit discipline will negatively influence the credit debt market

Rapid development of banking sector despite decreasing number of banks


Assets, capital and private bank accounts have increased by 30-40% annually (7 times faster than GDP)

21 January 25, 2008 Dr. Vladimir Kvint, 2008

Status quo of Russian Banking Sector, 2008


1,243 registered banks
Total registered capital of 731.74 billion rubles

1,092 banks licensed to conduct banking transactions 199 banks licensed to operate with precious metals 906 banks licensed to operate with foreign currency 202 banks with foreign capital
63 banks (with 169 branches) that consist of 100 per cent foreign capital 23 banks with more than 50 per cent foreign capital

909 banks with governmentally insured accounts Since 2003, 1,419 bank licenses were revoked More than 90 per cent of all transactions (60 per cent of in terms of value) are conducted via internet trading 22
January 25, 2008 Dr. Vladimir Kvint, 2008

Selected Financial Indicators of Russia as % of GDP


70 60 50 40 30 20 10 0 2000 M2 2001 Bank Assets 2002 2003 2004 2005 2006 2007

Domestic Credit

Deposits

Household Deposits
23

January 25, 2008

Dr. Vladimir Kvint, 2008

Number of Banks in Russia

2500 2000 1500 1000 500 0 2000 2001 2002 2003 2004 2005 2006 2007
24 Prepared by Dr. Kvint for BWC, on the base of statistics from the Central Bank of Russia, January 24, 2008

M2 Growth Rate (%) in BRIC


60 50 40 30 20 10 0 2001 2002 2003 Brazil
January 25, 2008

2004 Russia

2005 India

2006 China

2007

25 Dr. Vladimir Kvint, 2008

Annual Trading Volume, Total Turnover of the MICEX (blns US $)


2500

2000

1500

1000

500

0 1992 1993 1994 1995 1996

Prepared by Dr. Kvint for BWC, on the base of statistics from the Central Bank of Russia, January 24, 2008

1997

1998

1999

2000

2001

2002

2003

2004

2005

26

2006

Annual Trading Volume, Derivative Market of the MICEX (blns denominated rubles) 1000 900 800 700 600 500 400 300 200 100 0 1996 1997 1998 1999 2000 2001

Prepared by Dr. Kvint for BWC, on the base of statistics from the Central Bank of Russia, January 24, 2008

2002

2003

2004

2005

27

2006

International Reserves of Russia (Blns US $)


500 450 400 350 300 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007
28 Prepared by Dr. Kvint for BWC, on the base of statistics from the Central Bank of Russia, January 24, 2008

Gold Reserves of Russia (Mlns US $)


14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2000 2001 2002 2003 2004 2005 2006 2007
29 Prepared by Dr. Kvint for BWC, on the base of statistics from the Central Bank of Russia, January 24, 2008

Priorities for Russian Capital Markets Improvement


Establishment of Law of Protection of Minority Shareholders Rights Enforcement of legal rights of minority shareholders Improved access of medium and small companies to capital market Continuation of the increasing role of the public sector in the Russian capital market Prevention of federal and regional governments from breaching of contracts Increasing level of convertibility of the Ruble World Trade Organization membership and improvement of capital controls
30 January 25, 2008 Dr. Vladimir Kvint, 2008

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