December, 2. 6. 2013 Macroeconomic funcions of he Russian sock marke Adam Marszk Faculy of Managemen and Economics Gdańsk Universiy of Technology Gdańsk, Poland amarszk@zie.pg.gda.pl Absrac The purpose of his aricle is o presen he srucure of he sock marke in he Russian Federaion and he significance of his par of naional financial sysem for he whole economy, paricularly he degree of main macroeconomic funcions fulfillmen. Firs par of he ex includes an overview of he main heoreical conceps linked wih he sock marke roles as well as a brief descripion of resuls of seleced sudies on he linkages beween sock marke developmen and economic growh. The mos imporan evens in he hisory of he Russian sock exchanges since he beginning of he economic and poliical ransformaion in he early 1990s are described in he nex par of he paper. Oher presened opics are he insiuional srucure of he sock marke (including differences beween he wo main exchanges, heir inegraion process and esablishmen of he Moscow Exchange) and he equiy marke supervision sysem (along wih main weaknesses in his field). Main par of he ex includes a presenaion of he resuls of analysis performed in order o gain insigh ino changes in he mos crucial sock marke funcions (mobilizaion of savings, allocaion of resources and valuaion of asses), conduced on he basis of seleced sock marke developmen indicaors such as marke capializaion, value of raded socks (in boh absolue and relaive erms), urnover raio and marke concenraion as well as he conclusions concerning marke characerisics oulined in he preceding pars. The research covers 10 years: 20032012. Key words Sock marke; Russia; financial sysem; sock exchange I. INTRODUCTION The sock (equiy) marke is one of he sources of capial for enerprises operaing in a given economy. However, he significance of his par of he financial sysem is differen in each counry, in some sock markes do no exis or heir mechanisms do no funcion properly, whereas in ohers heir sizes in relaion o he whole economies are paricularly large. In he firs par of he ex, key macroeconomic funcions of he sock marke relaed o he funcioning of he whole economy and he process of economic growh will be presened. Afer discussing heoreical issues, in he nex par of he ex, here will be described he hisory, srucure and he insiuional environmen of he seleced sock marke, i.e. in Russia. Russia, despie many economic problems, is included in he group of rising world economy gians BRIC (Brazil, Russia, India and China), hence he assessmen of sources of growh of he Russian economy and he role played by he sock marke seems o be an imporan issue, also from he poin of view of he fuure of global economic relaions. Such analysis will be carried ou in he following paragraphs of he ex and he presenaion of is resuls will include he changes in he degree of fulfillmen of he sock marke funcions in he Russian economy (analysis will be conduced mainly based on seleced secor developmen indicaors). II. STOCK MARKETS AND THE REAL SECTOR Funcions of he sock marke mos frequenly menioned in he lieraure include mobilizaion and allocaion of savings, valuaion of capial and conrol of he public companies [1]. In addiion, secondary funcions of his par of he financial secor are relaed o he managemen of invesmen porfolios, economic policy and level of he sociey s economic knowledge [2]. Mobilizaion funcion of he sock marke occurs hrough simulaing savings in he economy. Through his marke invesors gain access o a variey of securiies issued by lised companies, which leads o growing propensiy o save (as a resul of he emergence of forms of invesing alernaive o bank deposis) and consequenly an increase in he capial resources available for companies o finance invesmens. Transfer of funds from households o companies may ake place in wo ways: eiher direcly (he acquisiion of shares hrough accouns in brokerage houses) or indirecly (when shares are purchased by insiuional invesors, i.e. financial inermediaries, such as muual funds, insurance companies or pension funds). Nex of he sock marke roles, allocaion funcion, is undersood as enabling and inensifying he flow of mobilized funds o he mos effecive projecs. I is linked wih he presence of compeing eniies rying o fund various kinds of invesmen projecs. On he basis of knowledge possessed by paricipans and general capial marke expecaions invesors acquire shares wih he mos desired risk/reurn profile. Sock marke, in some economies he main par of he whole financial sysem (or comparable wih he banking secor), has cerain advanages in he fulfillmen of he allocaion funcion. The firs and also he mos imporan of hem is paricipaion of many acors in securiies rading, wih access o a wide range of informaion and a high degree of ransacions freedom, which makes operaing condiions close o a perfec compeiion. Sock marke should herefore provide an objecive evaluaion of he araciveness of available securiies, and hus sock prices of companies whose prospecs are regarded by he invesing public as relaively beer should be higher in comparison wih oher lised companies. This The 2nd year of hp://www.arsaconf.com 143
December, 2. 6. 2013 mechanism (on a primary marke) allows higher raed issuers o gaher larger funds and, as a resul, in he economywide scale capial is used by he mos effecive eniies [3]. Anoher advanage is a higher probabiliy of obaining invesmen projecs financing (e.g. in highech indusries) due o limiaions in receiving bank loans relaed o regulaions concerning he value, concenraion and credollaerals or inernal policies [1]. Moreover, sock marke gives an opporuniy o gain access o poenial capial providers, who o a larger exen han banks assess he fuure siuaion of he company, no only is abiliy o provide adequae collaeral, which may be a serious barrier for young, innovaive companies, whose main asse is human capial [3]. The hird of he primary funcions of he sock marke, valuaion of capial, is fulfilled mainly by he secondary marke. Sock rading conduced on he exchanges (as well as on he OTC markes) shapes he prices of securiies balancing supply and demand. Due o he presence of a significan number of professional invesors, on highly developed markes obained share prices are objecive and updaed on a regular basis, so ha he whole economic sysem has an access o a reliable source of informaion on he curren cos of capial. Conrol (monioring) funcion should be considered in many aspecs, wih wo main ones being an abiliy o exercise conrol in he dispersed ownership srucure and he fulfillmen of lised companies informaion disclosure duies. In order o provide he invesors (shareholders) wih he abiliy o exercise an adequae level of conrol over he lised companies, sock marke supervision auhoriies mus funcion properly, commercial law mus be appropriaely designed and enforced and public companies should adap and comply wih a leas he basic corporae governance principles [4]. The second aspec of he conrol funcion is he disclosure by he company s managemen of all mos imporan informaion concerning he managed eniies, which can be used by invesors o make decisions abou conducing seleced share ransacions and oher social groups can gain access o daa on he operaions of companies (e.g. lawsuis indicaing possible illegal pracices). Conrol funcion is ofen analyzed as a par of he allocaion and valuaion funcions; hence i will be omied in he nex pars of he ex. Sock marke developmen may be defined as a process of increasingly higher fulfillmen of is primary and secondary macroeconomic roles. The relaionships beween his process and he level and dynamics of economic growh have been over he pas several years subjec of research conduced by many auhors. The resuls of mos of hem can be used as a basis o sae he prevalence of a posiive impac, alhough is direcion and srengh remains a debaable issue. Resuls of sample sudies are following: srong posiive correlaion beween he sock marke developmen and economic growh [5], posiive correlaion beween he sock marke liquidiy and he rae of produciviy growh and accumulaion of capial [6], sock marke developmen marke hrough liberalizaion improves allocaion of resources and increases invesmen rae [7]. So far, here is no such research concerning Russia, issues such as macroeconomic imporance of he sock marke were included in some sudies as secondary opics, wih no conclusive resuls; some auhors sugges possible negaive impac of he sock marke expansion on he level of GDP in Russia [8]. III. CHARACTERISTICS OF THE RUSSIAN STOCK MARKET Sock rading in Russia was for he firs ime menioned in documens a he end of he 18h cenury and he oldes sock marke (in S. Peersburg) was founded in 1703, bu rading in shares did no begin unil he 1830s [9]. Before he oubreak of World War I, Russian sock marke was rapidly developing, paricularly in erms of size, which was relaed o he high indusrial secor producion dynamics. In 1914, here were 295 lised Russian companies (for comparison in New York heir number was 521). Afer he war began, he sock exchange was closed; i was laer relaunched for wo monhs before he February revoluion, bu aferwards was closed by communis auhoriies. Russian sock marke in is curren form began o form in he early 1990s, during poliical and economic ransformaion, which included, among ohers, privaizaion of enerprises hrough he esablishmen of join sock companies. During he firs few years rapidly increasing shares urnover occurred wih almos absen marke regulaion or supervision, here were also no insiuionalized rading plaforms. The urning poin in he recen hisory of he Russian marke were wo evens creaion of he sock exchange supervisory auhoriy (Capial Marke Commission) in 1994 and Russian Trading Sysem (RTS), i.e. he firs sock exchange afer several years wihou such insiuion, in 1995 [10]. In 1997, Moscow Inerbank Currency Exchange (MICEX) offered marke paricipans a plaform for sock rading and shorly afer (since 1999) i became he bigges exchange in erms of share rading value [11]. Over he nex few years compeiion beween he sock exchanges RTS and MICEX inensified; i was also, o some exen, a period of heir profiling, e.g. admission o lising of differen ypes of companies. However, he whole Russian sock marke remained underdeveloped, which was caused mainly by he widespread issuance of deposiory receips on foreign markes by Russian companies [12]. This siuaion began o change a he end of he firs decade of he 21s cenury, when he process of inegraion of he Russian sock exchanges acceleraed. The firs sage was he inclusion of some smaller exchanges o he RTS sock exchange, and he second one, much more imporan, was he merger of wo main compeiors, MICEX and RTS and, a he end of 2011, he esablishmen of he Moscow Exchange MICEXRTS. Even hough boh insiuions already have a common share rading plaform, he merging process has no ye been compleed, e.g. separae marke indices are sill published. Before he creaion of he Moscow Exchange, rading sysems on he RTS and MICEX exchanges differed quie significanly on RTS prices were expressed in US dollars, whereas on MICEX in Russian rubles, he minimum ransacion amoun was 5 housand USD on he firs of he menioned exchanges, wih no such resricion on he oher [13]. Currenly, mos rades ake place on a par of he Moscow Exchange based on MICEX soluions, bu here is sill a funcioning marke segmen based on he former RTS. In he early years of he Russian sock marke afer he collapse of he Sovie Union here was no insiuion The 2nd year of hp://www.arsaconf.com 144
December, 2. 6. 2013 responsible for he supervision of his and oher pars of he capial marke, which has led o numerous scandals, including pyramid schemes [10]. From 1994 o 2011, sock marke was conrolled by he Capial Marke Commission. However, unil he oubreak of he Russian crisis in 1998, reforms had been carried ou o a relaively limied exen (some of hem included specifying he requiremens ha mus be me by he sock companies, concerning mosly financial saemens and he ones relaed o sock ransacion sides), which was caused mainly by inadequae adoped regulaions enforcemen and limied possibiliies for imposiion of penalies. Main reason for such siuaion was he weakness of he Russian judicial sysem as a whole. Sock marke supervision was reformed on a broader scale a he beginning of Puin s firs presidenial erm, when he scope of he righs of minoriy shareholders was increased and a se of legal acs on individual elemens of he capial marke and is surroundings was adoped. Acions menioned above were in par a response o he concerns of foreign invesors, wihdrawing from he Russian marke afer he crisis of 1998, when i was perceived as paricularly risky; despie he Yukos and TNKBP scandals he posiion of minoriy shareholders has become a lile sronger. In 2011, capial and currency markes as well as insurance secor supervisory auhoriies were combined ino one insiuion Federal Financial Markes Service [14]. Russian sock marke supervision is neverheless sill ineffecive and does no provide sufficien rading securiy, as evidenced by some negaive feaures of he marke, including a low percenage of companies ha comply wih he corporae governance principles (paricularly wih regard o minoriy shareholders reamen), a high share of OTC ransacions ha are no conrolled by he auhoriies (including ones conduced offshore, e.g. in ax havens), nonransparen and oudaed financial reporing sandards (based on he provisions of he Sovie Union), corrupion and excessive lengh of proceedings in he supervisory insiuions and cours [10]. IV. THE DEGREE OF RUSSIAN STOCK MARKET S ECONOMIC FUNCTIONS FULFILLMENT In his par of he ex here will be presened he resuls of he analysis of various aspecs of he Russian sock marke developmen in he conex of is place in he economy, i.e. primarily in funcional approach. The analysis will cover 2003 2012 ime period (for some indicaors o 2011); he choice of he beginning of he research period is a consequence of a differen siuaion on global financial markes a he beginning of he 21s cenury during he high volailiy of sock markes linked wih he docom bubble and is burs. A characerisic feaure of he Russian sock marke, which mus be aken ino accoun in furher analysis, is a low percenage of lised company s socks in free exchange circulaion, i.e. he securiies which can be purchased/sold hrough he sock exchange (low free floa). Using he available hisorical daa, he assumed level for he pas several years amouned o ca. 25% and was one of he lowes in he world (similar o he mos underdeveloped markes). Basic indicaors, which can be used o assess he degree of fulfillmen of he mobilizaion funcion, are marke Figure 1. Sock marke capializaion in Russia over he 20032012 period. (source: [15], [16]). capializaion (marke value of all lised companies; for Russia i is necessary o include he correcion using indicaors based on he free floa level) and he issued shares value, i.e. value of sock offerings (indicaor relaed direcly o he mechanism for convering savings ino invesmens). Marke capializaion, a marke size indicaor, can be expressed in absolue (mos commonly used ype is he value in curren US dollars) or relaive (relaive o he size of he economy, usually in relaion o GDP) erms. Second opion is more reliable as he values obained are wihou disorions resuling from he inflaion processes or exchange raes changes (urnover indicaors laer in he ex will be presened in an analogical way). In Russia, up o 2007, capializaion in boh erms increased consanly in relaion o GDP he change amouned o more han 100% (figure 1). In 2007, he marke value of lised companies amouned o ca. 1.5 rillion USD or 116% of GDP (highes level in he hisory). However, using adjused capializaion figures (wih free floa only), i should be noed ha, despie he increase, he size of he marke remained very low free floa capializaion level averaged o less han 20%, which indicaes a low degree of mobilizaion funcion fulfillmen as far as secondary equiy marke is considered. In 2008, here has been a clear decline in all indicaors, which was relaed o he global financial crisis and he accompanying decline in commodiies prices (a significan percenage of he larges lised companies operaes in commodiies secor), as well as he increase in he poliical risk level in he wake of Russian aack on Georgia relaive capializaion decreased o 24% of GDP (adjused o 6%). In 2009 and 2010, sock prices resurged, which led o increase in he marke capializaion, bu in 2011 and 2012 (due o e.g. he deb crisis in he euro zone), relaive marke capializaion dropped o he lowes level in he analyzed ime period (close o he one recorded in 2002). In order o deermine he degree of fulfillmen of he capial mobilizaion funcion of he primary sock marke, where securiies issued by lised eniies are purchased by invesors, here will be used daa on value of such ransacions (including The 2nd year of hp://www.arsaconf.com 145
December, 2. 6. 2013 some esimaed figures due o lack of official daa for he mos of he seleced ime period). Over he years 20032012, Russian companies used his source of funding on a small scale, as evidenced by, among ohers, he fac ha in 2005 for he firs ime he value of sock issuance (sum of iniial public offerings, ha is linked wih he firs lising of securiies, and secondary offerings of already lised companies) exceeded 1 billion USD (0,45% of GDP). The highes value was recorded in 2007, when marke valuaions of lised companies reached heir maximum and inflow of foreign capial inensified. Even hen i was, hough, small compared o he size of he economy, as i amouned o only 1.32% of GDP (for comparison, in India, anoher counry from he BRIC group, is level was hen 3,64% and in China 3,19%).The fac ha should be evaluaed posiively is ha, despie he economic urmoil, value of sock offerings in 2010 and 2011 was relaively high [17]. I should also be noed ha par of menioned issues was carried ou a he same ime on he domesic and foreign markes; hence he presened indicaors can be considered oversaed. Sock issuance values may indicae a limied role of his corporae financing mehod among all capial sources and hus a low level of mobilizaion funcion fulfillmen wih regard o he primary marke. Such conclusion is also confirmed by he saisics on he poenial conribuion of funds raised hrough issuance of shares o he privae secor s gross fixed capial oulays, which amouned over he analyzed period o on average ca. 3% (average share of bank loans was more han 35%). Moreover, Russian capial sock was also nearly unaffeced by he inflow of equiy porfolio capial (in he form of purchasing Russian socks by foreigners), wih negaive oal balance [15]. Changes in liquidiy, indicaing changes in he abiliy o perform he allocaion funcion (increasing liquidiy for marke paricipans means higher probabiliy of being able o carry ou he planned ransacion and ransfer he funds beween differen eniies) can be assessed using urnover indicaors, especially he value of purchases and sales on he Russian sock exchanges in absolue and relaive erms. Turnover relaed o GDP increased mos significanly beween 2005 and 2007, when i rose from 22% o 58%, ha is o 754 billion USD (figure 2) i was a period of favorable condiions on global financial markes (addiional facor were acions underaken by he Russian financial supervision auhoriies aimed a reducing he supply of securiies of lised companies on markes abroad in order o simulae he developmen of he domesic marke). Afer a sharp decline in 2008, in subsequen years (unil 2011) he relaive urnover remained sable in he range of abou 50 60% of GDP, much higher han a he beginning of he period considered, which could indicae a higher degree of capial allocaion funcion fulfillmen (in 2012, he urnover once again decreased considerably, parly due o he ouflow of foreign capial). However, he resuls of he evaluaion of he indicaors of he nex, relaed funcion, i.e. capial valuaion, lead o differen conclusions. The mos imporan indicaor used o deermine he degree of fulfillmen of he valuaion funcion of he sock marke is a urnover raio (sock urnover value divided by average annual marke capializaion, for Russia i was calculaed on he basis of he adjused capializaion daa, i.e. free floa only) and marke concenraion (share of he 10 larges lised companies in he oal capializaion and/or urnover). Figure 3 Turnover raio in Russia over he 20032012 period. (source: [15], [16]). Figureb 2 Sock marke urnover in Russia over he 20032012 period. (source: [15], [16]). The Increase in he value of he urnover raio o a level of abou 2,0 in 2007 (figure 3) should be assessed posiively from he perspecive of he Russian sock marke s capaciy o provide he correc valuaion of he cos of capial in he economy. I is assumed, however, ha value of he urnover raio exceeding 2,0 indicaes increasing number of speculaive ransacions on he marke, unrelaed o fundamenal facors, i.e. acual siuaion of issuers and he whole economy [18]. In 2008, urnover raio increased significanly and exceeded he level of 5,66 (one of he highes in he world), denoing he occurrence of serious disurbances in he valuaion mechanisms (ransacion volume was oo high in relaion o he value of he shares available in a free exchange rade). Main cause of his siuaion was he wihdrawal of a subsanial par of longerm sock invesors (especially domesic insiuional invesors) and srenghening posiion of foreign invesors buying Russian securiies as a subsiue for invesmen in commodiies. This was due o he fac ha majoriy of he lised companies on The 2nd year of hp://www.arsaconf.com 146
December, 2. 6. 2013 boh exchanges operae in commodiies secors (in he MICEX sock exchange index only companies exracing and selling crude oil and naural gas accouned for more han 50% of he capializaion) and he srucural characerisics of he Russian economy, heavily dependen on expors of commodiies. If he urnover on he OTC markes is aken ino accoun in calculaions, which according o esimaes is as high as ca. 70% of he value of he sock exchanges ransacions [10], urnover raio becomes even higher in 2008 and 2011 i amouned o beween 9.5 and 10 (his mean ha each uni of adjused capializaion was sold/purchased abou 10 imes a year). Saisics on he Russian sock marke s concenraion are published only since 2008, however, even using daa from half of he seleced period, a very high degree of concenraion should be noiced, one of he highes in he world (in paricular among counries wih a large economic poenial). In he years 20082012, concenraion raio, calculaed as he arihmeic mean of he share of he 10 larges companies in he marke capializaion and urnover, was equal o ca. 80% [17]. Main groups of lised companies, apar from he energy commodiies exracion ones menioned above, include banks and companies exracing meal ores. The concenraion of urnover was paricularly srong, as he op 10 companies had in 2012 he share of over 95% in conduced ransacions, wih only hree of hem, Sberbank, Gazprom and Lukoil, accouning for more han 65%. This means ha, despie he increasing urnover, he real abiliy o conclude he ransacions and obain credible informaion abou valuaions of lised shares referred o only a small group of companies, while rading he res of hem was hindered or even impossible On he basis of he daa relaing o exremely high values of he urnover raio from 2008, indicaing he inensificaion of speculaive ransacions and he daa on marke concenraion, i should be concluded ha he Russian sock marke no only ceased from ha momen o perform properly is valuaion funcion, bu also became a source of misleading economic informaion (unrelaed o he acual siuaion of companies and/or he whole economy); i also mean a decreased abiliy o fulfill is oher major and secondary macroeconomic asks. Sock marke urmoil could also become one of he facors reducing he rae of economic growh by is desabilizing impac on he real secor of he economy rapid flucuaions in asse valuaions caused difficulies in making invesmen decisions by firms (e.g. problems wih esimaing he value of loan collaerals) and households. V. CONCLUSIONS Over he pas several years, Russia has managed o build he basic mechanisms of he public sock marke. Is major insiuions were, iniially separae, laer inegraed, RTS and MICEX sock exchanges. Reforms in he field of sock marke supervision, carried ou by Russian auhoriies, gradually increased is scope, bu he effeciveness of supervisory insiuions remains low, despie he inroduced law changes. I is evidenced by frauds ha are sill presen on a large scale and limied rus on he par of foreign invesors, paricularly noiceable during he urmoil in global financial markes, when such invesors wihdraw heir funds, leading o massive capial ouflows. Russian sock marke due o e.g. menioned insiuional problems, over he years 20032012 has no fulfilled is basic macroeconomic asks. Adjused capializaion raios and sock issuance daa, in spie of he apparen growh in relaion o he firs years of he considered period, prove he small size of he marke in relaion o he oal economy ransformaion of savings ino invesmens hrough his par of he financial sysem occurred on a very limied scale (especially in relaion o he role of he banking secor). Despie he decrease in he relaive urnover value in 2012, i would seem ha in he analyzed decade considered as a whole, Russian sock marke o a relaively high degree fulfilled allocaion ask, i.e. was raher liquid. However, afer aking ino consideraion he exremely high level of urnover concenraion (more han 95% of ransacions in shares of he negligible percenage of companies) and serious disrupions in he fulfillmen of he hird of he main funcions, i.e. valuaion, i should be noed ha he increase in he liquidiy of he sock marke played almos no role on economywide scale. Furhermore, due o he significan share of speculaive ransacions, which was a major limiing facor in he marke developmen, is impac in some areas could have been negaive. Russian eniies concerned had difficulies wih obaining reliable informaion on he valuaion of asses (anoher problemaic issue were oudaed regulaions on financial saemens), and because of he weaknesses of he sock marke supervision, conrol funcion was no fulfilled. On he basis of he analysis conduced, he posiive role of he Russian sock marke in he economy of ha counry should be assessed as minor, and in some periods even negaive in he conex of he process of economic growh. 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