1. RUSSIAN STOCK MARKET Sergeeva Irina Ph.D., Professor

2. Topics Covered Stock Market Characteristics MICEX RTS IPO

3. 3 Russian Stock Market Characteristics The Russian financial market of 1999 - 2007 is one of the most dynamic markets in the world. According to estimates, over 30% of investors in domestic market are non-residents.

4. 4 Russian Stock Market Characteristics The modern infrastructure of the Russian financial market was created in the 1990s. There was formed an eclectic market model, combining advantages of universal banking and benefits of specialization of securities companies. The system of financial market regulation is formed in analogy with developed markets models. In 1994 was created an independent securities commission; in 2004 appeared the mega regulator (Federal Financial Markets Service) (www.fcsm.ru).www.fcsm.ru

5. 5 Russian Stock Market Characteristics The key factor forming the Russian model of capital market is an over concentrated ownership. The majority of companies have 2 - 4 stakeholders who control 70 - 80% of the equity capital and are not interested in its dilution. 10 largest issuers’ securities account for about 98% of all transactions in the orderly share market. In countries with a well-developed stock market this indicator does not exceed 20-30%. Russia’s ownership structure is comparable to German and Japanese “stakeholder” economies and to the majority of other emerging markets.

6. 6 Russian Stock Market Characteristics Controlling shareholders do not have enough interest in the growth of capitalization based on transparency of business and diversification of ownership. The government as a shareholder is dominating in a number of industries.

7. 7 Russian Stock Market Characteristics One of the problems of the Russian market is the narrow range of liquid securities. The Russian market has quite small free float (the volume of securities in free circulation). For eight largest Russian corporations free float does not exceed 12%, while for the market as a whole it stays within 25-30%. Compare: in developed markets this figure reaches 80-90%.

8. 8 Russian Stock Market Characteristics Individual investors are very conservative High political risks Russian stock market depends on the price of oil, gas and raw materials exports and on the external investors with speculative strategies

9. 9 Russian Stock Market Characteristics Structure of investors’ demand drives the capital market to debt model. The commercial banks generate over 95% of financial assets in Russia. Institutional investors are unable to create significant demand for shares. Households prefer either hard currency in cash holdings or simple debt products as means of savings.

10. 10 Russian Stock Market Characteristics The economic reasons of debt model of the Russian capital market are: - massive losses of households in the 1990s; - ultrahigh volatility of the Russian stock market as one of the 6-8 most risky emerging markets in the world; - low level of dividends in Russia; - wide-spread practice of under declaration of profits as a tax and dividend base; - insignificance of shares as assets of minority shareholders.

11. 11 Russian Bond Market Characteristics Corporate bonds have become the main investment instrument of the Russian stock market. The accelerated development of the bonds market is only natural, as this form of borrowing enables to borrow money for longer periods, in larger volumes and at lower interest rates than in the case of bank loans. The corporate bonds market began to develop in Russia in the late 1999.

12. 12 Russian Bond Market Characteristics The growth of the total volume of borrowings with the use of corporate bonds is accompanied by the extension of investment horizons. The proportion of bonds with the time of redemption of 3 or more years amounts to about 90%. Still, only 2% of enterprises use the corporate debt market to finance their capital investments. In developed countries, the volume of the corporate debt market amounts to 30 to 95% of the GDP. In Russia, the nominal volume of corporate bonds in circulation amounts to only about 5 billion dollars or slightly over 1% of the GDP.

13. 13 Russian Bond Market Characteristics Russia’s ruble bond market has been fully open to international investors for less than a year. Most limits on foreign participation were removed on July 1, 2006, while full convertibility of the ruble was achieved only at the start of 2007.

14. 14 Russian Bond Market Characteristics Ruble Bond Market: Statistical Snapshot (end of 2006) Market size, face value US$70 billion Number of issues 560 Number of issuers 320 Average daily turnover, corporate bond segment US$400 million Proportion of government/municipal/corporate debt ( percent) 50/8/42 Average credit rating B category Participation of foreign investors 30 percent

15. 15 Russian Bond Market Characteristics One of the problems of Russian corporate bonds market is the absence of reliable rating system. Most bond issues do not have international credit ratings. Another problem is tax on the issue of bonds, which should be further decreased or, if possible, abolished. The whole procedure of the issue of corporate bonds should be simplified.

16. 16 Russian Stock Market Architecture The market share of the two major Russian stock exchanges (Moscow Interbank Currency Exchange (MICEX) Stock Exchange (www.micex.com) and Russian Trading System (RTS) Stock Exchange) (www.rts.ru) constitutes more than 98% of the domestic volume of tradingwww.micex.comwww.rts.ru Both exchanges are nationwide electronic markets

17. 17 Russian Stock Market Architecture In 2006 more than $4 billion of Russian stocks traded on local exchanges, over $3.9 billion went through the MICEX Stock Exchange and some $70 million through the Russian Trading System. The equities OTC market in Russia commands another $1-1.2 billion daily turnover. In addition RTS trades 250-300 million dollars of equity derivatives (notional volume of contracts). Each exchange is associated with an independent depository, which handles clearing for the exchange – the National Depository Center for MICEX, and the Depository Clearing Company for the RTS.

18. 18 MICEX Group ● MICEX was established in 1992 as a currency exchange in the form of a closed joint-stock company ● Shareholders: Central Bank of the Russian Federation Association of Russian Banks Sberbank RF Vneshtorgbank Rosbank International Moscow Bank Bank of Moscow 9 other leading commercial banks of Russia ● In 2004 on the base of the MICEX stock market the MICEX StockExchange was formed

19. 19 MICEX Group ● The MICEX Group offers trade and settlement services on the 5 markets: ۰ currency market (since 1992) ۰ federal bonds market (since 1993) ۰ market of derivative financial instruments (since 1996) ۰ equities market (since 1997) ۰ market of corporate and regional bonds (since 1999) ● Operates under the licenses of: ۰ Central Bank of Russian Federation (currency market) ۰ Federal Service for the Financial Markets (securities market) ۰ Ministry of the Antimonopoly Policy (derivative market)

20. 20 MICEX: the currency market ● Trading is held in five currencies: the US dollar, the Euro, the Ukrainian hrivna, the Kazakhstan tenge, the Byelorussian ruble ● Settlements on the currency market are effected «today» and «tomorrow» ● As a result of trading on the MICEX the Russian Central Bank fixes the official exchange rate of the US dollar ●The volume of transactions in January– August 2007 has reached 872.4 bln USD, which is 1.4 times more than in January–August 2006

21. 21 MICEX: the federal bonds market ● The MICEX organizes the primary placement and the secondary circulation of federal bonds, Bank of Russia bonds (OBRs) ●The volume of transactions in January– August 2007 has reached 224.3 bln USD, which is 3.3 times more than in January– August 2006

22. 22 MICEX SE: the stock market ● The MICEX Stock Exchange — the leading stock exchange in Russia ● The MICEX Stock Exchange is based on a continuous auction model and internet trading facilities ●In 2006 the MICEX’s share in the Russian stock market turnover has reached 90%

23. 23 MICEX SE: the stock market MICEX is ruble-denominated and guarantees settlement through a 100 percent prepayment rule, which requires traders to deposit all cash and securities before trading begins. This rule makes for effective risk management and safer use of anonymous trading, by far the most popular trading mode on the exchange.

24. 24 MICEX SE: the stock market In August 2007 total number of issuers on the MICEX SE has reached 637 companies including Issuers of equities – 197 companies Issuers of bonds – 482 companies

25. 25 MICEX SE: the equities market ● 298 equities of 197 issuers are traded on MICEX SE ● 72 equities of 56 issuers are listed on MICEX SE, including such companies as Gazprom, RAO UES, LUKoil, Rostelecom ● The volume of transactions with equities in January–August 2007 has reached 713.5 bln USD, which is 2.2 times more than in January–August 2006

26. 26 MICEX SE: the equities market capitalization ● Equities market capitalization has grown 6.5 times during 2003–2006 ● The most capitalized companies are: ۰Gazprom—244.4 bln USD ۰Sberbank—84.0 bln USD ۰Rosneft—78.6 bln USD

27. 27 MICEX SE: the market of corporate and regional bonds ● The market of corporate and regional bonds is the most fast-growing market ● 680 bonds of 481 issuers are traded on MICEX SE. The total nominal value of corporate and regional bonds in circulation — 55.3 bln USD ● The volume of transactions with corporate and regional bonds in January– August 2007 has reached 304.3 bln USD, which is 2.9 times more than in January–August 2006

28. 28 MICEX SE: the market value of the corporate bonds market ● The market value of the corporate bonds market has grown 7.1 times during 2003– 2006 ● The biggest issuers in terms of the nominal value of bonds issues: ۰ VTB —1.36 bln USD ۰ RZhD—1.29 bln USD ۰ Gazprom—1.17 bln USD

29. 29 MICEX SE: the market value of the regional bonds market ● The market value of the regional bonds market has grown 3.7 times during 2003– 2006 ● The biggest issuers in terms of the nominal value of bonds issues: ۰Moscow city — 6.59 bln USD ۰Moscow region — 1.82 bln USD ۰Samara region — 0.45 bln USD

30. 30 MICEX SE: the Internet-based trading ● The development of the Internet-based trading has allowed: ۰ to cover the all-Russia territory ۰ to connect about 400 thousands minor private investors ● The number of trades’ participants, using Internet in brokerage systems has grown to 404 since 2000 ● Above 60% of daily turnover at the MICEX stock market is made with the use of Internet technologies

31. 31 MICEX: leader among exchanges of the CIS and CEE ● The capitalization of the Russian stock market is 101.5% of Russia’s GDP or 1059.8 bln USD (as of September 1, 2007) ● The volume of trading in the Russian stock market is over 60% of the stock market of the countries of the CIS, Central and Eastern Europe

32. 32 RTS Stock Exchange The Russian Trading System (RTS) Stock Exchange – the open joint-stock company – one of the largest electronic trading floors in Russia At the beginning (1995) the RTS Stock Exchange was offering only the organized over- the-counter (OTC) stock trading with foreign currency settlement. Later the RTS Stock Exchange has received the stock exchange license to organize trading in securities.

33. 33 RTS Stock Exchange The Russian Trading System (RTS) Stock Exchange is based on dealer market approach and quote-driven system The RTS Index, the official Exchange indicator, has become the benchmark in Russian securities’ industry

34. 34 RTS Classic Market Russian stocks and bonds listed on the ”RTS Stock Exchange” are traded on the RTS Classic Market. The RTS Classic Market is the only regulated market in Russia that offers settlement in foreign currency. The prices of the Classic Market are quoted in US dollars and serve as the key benchmark for foreign investors.

35. 35 Classic Market Instruments over 200 listed companies are presented; more than 300 stocks and bonds are traded including: – the “Blue chips” – the “Second-tier” stocks “Blue chips” are traded in the Order-driven mode. ”Blue chips” are highly liquid shares. High market capitalization of companies is one of the factors that make these securities attractive. “Second-tier” stocks are traded in the Quote-driven mode, the most suitable one for securities with lower liquidity. “Second-tier” stocks represent a wide range of securities normally issued by middle capitalization companies.

36. 36 RTS Index RTS Index has been the benchmark of the Russian securities market since 1995. The RTS Index is calculated online during trading session on the RTS Classic Market after every change in the price of the Index constituents. The Index constituent list has a fixed number of shares. It consists of 50 stocks issued by leading Russian companies, including “blue chips”. The RTS Group has been calculating the second-tier stock index – RTS-2 Index – since 2005 to provide investors with a clear indicator of this dynamically developing stock market segment. RTS-2 Index covers only “second-tier” stocks. The number of index constituents is not fixed. Now the list comprises 60 shares.

37. 37 RTS Board RTS Board is the OTC-market for professional investors. RTS Board is the only trading floor in Russia for stocks and bonds of small capitalization issuers and securities not listed on stock exchanges. RTS participants use the Classic Market trading system to quote prices and execute transactions on the RTS Board. Trading is available in the Quote-driven mode. Quotations are renewed in the real-time. The RTS Board uses the settlement infrastructure of the RTS Classic Market including DVP settlement in US dollars. At the moment 1534 securities of 1160 companies are included into RTS Board.

38. 38 Futures and Options on RTS (FORTS) Derivatives market of RTS (FORTS) is a leading trading ground for futures and options in Russia. Trading on FORTS started in September 2001. At present FORTS has the widest in Russian range of instruments. These are 58 contracts (39 futures and 19 options) on shares of Russian companies, bonds, short interest rates, currency, RTS Index, oil, gas and gold.

39. 39 FORTS Derivatives RTS Index Futures provide market participants with a wide range of opportunities to take advantage of broad market moves and to hedge stock portfolio risks. Single Stock Futures can be used to achieve different stock portfolio management goals. High price sensitivity of futures compared to the underlying assets – Russian “blue chips” – provides an opportunity to fully hedge investment portfolios. Interest Rate Futures allow investors to hedge fixed-income market risks and to take advantage of bond financial leverage trading and of short-selling abilities. Currency Futures and Options are an important instrument for exporters and importers, currency traders, stock portfolio managers, and private investors. Options on Single Stock Futures provide investors with a wide range of opportunities to hedge risks on spot and futures markets and allow them to execute transactions with high return, low transaction costs and limited risks.

40. 40 Initial Public Offering IPO (Initial Public Offering) is the primary public placement of shares: a company issues its shares for the first time and a wide circle of investors buys them.

41. 41 IPO technologies Classical IPO’s are organized by investment banks. They conduct road-shows, collect orders from investors and, in coordination with the issuer, set the price of the placement. Recently, some companies, e.g., Google, have rejected standard IPO procedures in favor of open auctions in order to raise the price of placement to the maximum and reduce the commission paid to intermediaries. The auction-based form of IPO seems to be the most attractive for Russia. The electronic trading system of the MICEX is successfully used for holding auctions of different types when placing government, corporate and regional bonds.

42. 42 Initial Public Offering Around $40 billion has been raised in 20 IPOs, including some of the biggest share offerings in the world during the past three years, such as oil company Rosneft’s $10.6 billion IPO in 2006 and Sberbank’s $8.8 billion rights offering in 2007. VTB (formerly Vneshtorgbank) expects its IPO to rake in $4.6 billion.

43. 43 Companies planning their IPO’s represent the following industries IndustryNumber of issuers Coal mining1 Machine building1 Metallurgy6 Chemical industry1 Light industry1 Timber1 Food processing9 Jewelry2 Construction1 Agriculture1 Telecoms3 Finances4 Trade5 Other5 Total41

44. 44 Main participants of Russian Stock Market Troika Dialog www.troika.ru Morgan Stanley www.morganstanley.com TRUST Investment Bank www.trust.ru Renaissance Capital www.rencap.com Cbonds www.cbonds.info