Russian exchanges in battle for liquidity

Financial News

Jason Corcoran in Moscow

26 Nov 2007

Alliances and technology investment should attract IPOs

Russia’s stock exchanges are battling against international competitors and mounting pressure to consolidate as they launch initiatives to attract domestic liquidity.

The London Stock Exchange remains the preferred destination for Russian companies looking to tap the capital markets, handling more than 70% of foreign listings by Russian companies. But rivals, including Frankfurt exchange operator Deutsche Börse, which opened a Moscow office this year, are attempting to challenge the LSE stranglehold.

Roman Kirindassov, who heads the German exchange’s campaign to lure Russian issuers, said: “For Russian companies, we offer a real alternative for tapping western capital with the most cost-effective and time-saving listing procedure.

“Russian banks and brokers can obtain direct membership to our electronic trading platform Xetra and Eurex, the world’s largest derivative exchange.”

Cat Oil, an Austrian provider of services to oil and natural gas producers, last year became the first company with Russian operations to sell shares on Deutsche Börse. It was joined in February this year by two Russian groups, Zaab Energy and IBS Group.

Nordic and Baltic stock exchange group OMX, which is subject to complicated takeover negotiations involving US exchange Nasdaq and Borse Dubai, has expressed an interest in buying a stake in a Russian bourse.

In April, OMX entered into a partnership with the St Petersburg Exchange – whose profits halved in 2005 after losing its monopoly to trade Gazprom stock – and RX, a group of UK venture capitalists, to create a new international trading platform.

The International Exchange St Petersburg will offer small and mid-sized Russian growth companies access to international capital without listing on a foreign exchange.

Although London has emerged as the home for Russian IPOs, domestic exchange Micex believes it is making inroads. Micex claims to account for more than 70% of transactions in Russian securities by volume, compared to 50% two years ago.

Alexander Potemkin, president of Micex, said: “We can say with certainty that foreign investors are prepared to bear the risks of the Russian infrastructure. Non-residents played an important role in the development of the Russian internal stock market as they gradually changed over from trading in global depositary receipts and American depositary receipts to trading in local stocks.”

Companies and their bankers cite the lack of a high-quality long-term domestic investor base as their reason for listing aboard.

Local exchanges, however, argue that conditions are improving with the growth of a domestic asset management industry and pension reform.

State-owned Sberbank bucked the trend in the summer with its $19bn (€12.9bn) share offering, which was placed entirely on Russian bourses.

To compete with London’s Alternative Investment Market, both the rouble-denominated Micex and its dollar-denominated rival, RTS, have launched secondary markets.

In June, Micex launched its innovation and growth companies sector, which has been described as Russia’s answer to Nasdaq, catering for telecommunications, software, biotech and hi-tech companies.

Micex, which focuses on individual investors and small to medium-sized brokerages that work directly with foreign investors, expects 10 new issuers to enter the opened sector.

RTS launched futures and options contracts in a number of Russian blue chips including Mobile TeleSystems, gold producer Polyus Gold, natural gas producer Novatek and oil pipeline monopoly Transneft.

Although companies usually list their shares on both exchanges, trade volumes on Micex surpasses those on RTS. However, RTS has a sizeable over-the-counter market for small-cap stocks and remains Russia’s only derivatives exchange.

Both domestic exchanges are looking to Asia and the Commonwealth of Independent States for growth. RTS acquired an equity stake in the Ukrainian stock market, Inneks, while Micex has signed a co-operation agreement with the Hong Kong stock exchange, which could pave the way for dual listings.

Potemkin said the deal with Hong Kong would bring more Asian investors to the Russian stock market.

He said: “This year, the share of foreign investors’ transactions in the volume of stocks trading on the Micex has exceeded 25%. The interest of Asian investors keeps growing.”

Despite the innovative efforts of the exchanges, however, the Russian regulator continues to call for the two main bourses to merge. The Federal Service for Financial Markets cites improved clearing, better market efficiency and the need to create a central depository as main benefits of a union.

Vadim Yegorov, head of public affairs at Micex, confirmed a merger could be on the cards in the next year or two. He said: “We are discussing it now but a lot depends on the regulatory bodies, pooling our infrastructure and shareholders’ interests.”

The Russian central bank owns 28% of Micex’s parent company, while RTS is privately owned by local brokerage houses including UFG, Troika, Aton, Renaissance and Alfa.

Roman Goryunov, chairman of RTS, said the exchange had not ruled out a merger but he believed the global trend towards consolidation did not necessarily apply to Russia.

He said: “RTS and Micex have their own segments of the market, their own clients and instruments. That is why current competition helps to develop the technology and market instruments and the development of the Russian financial market.”

Elena Krasnitskaya, a market analyst at Troika Dialog, believes policymakers are determined to expand the domestic markets for Russian companies, citing as one example a law permitting domestic custodians to issue Russian depositary receipts on foreign securities.

The regulator also published a bill in August that will eventually provide a legal framework for trading in foreign securities.

Krasnitskaya said: “The latest move, if successful, would boost the position of domestic exchanges in their competition with foreign peers for the stocks of CIS countries.

“It is becoming important to attract these listings as in the past 18 months alone, six Kazakh and Ukrainian companies have conducted offerings on the London Stock Exchange’s Alternative Investment Market.”

Calls for greater integration of the 18 CIS stock exchanges and three depositories grew louder at August’s general meeting of the International Association of Exchanges of the CIS countries.

Micex’s Potemkin said the most pressing task is to integrate the markets by allowing mutual admission of issuers, participants and investors.

He said: “One important measure aimed at securing this integration must be the creation of an IT committee and the compatibility of trading, broker, information and analytical systems, as well as the different telecommunication products of the CIS countries.”

In June, Russian Finance Minister Alexei Kudrin admitted his government was targeting the leading companies of the CIS in an attempt to persuade them to launch IPOs in Moscow. Russia already boasts by far the biggest and most liquid stock market in the region.

However, it is increasingly having to compete with the Warsaw stock market, which has attracted several Ukrainian IPOs and is equally well developed.

Warsaw has signed an agreement with one Lithuanian and two Ukrainian brokerage firms to encourage foreign listings. The Polish bourse could yet emerge as the main threat to the Russian exchanges’ hopes of becoming the leading trading centres in the region.

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