The Financial Markets

As a result of falling of the prices for oil in January - April, 1998 there was a considerable decrease in positive trading balance of Russia - almost on 90 % - about $7.5 billion to $0.82 billion In May - August reduction of positive trading balance was a little slowed down also general decrease in January - August in comparison with the similar period of 1997 has constituted 73.3 %.

And such decrease should affect a condition of financial markets of Russia. In January, 1998 the conclusion of means of non-residents has begun with the Russian financial market. As a result RTS consolidated index has decreased about 411.61 points on January, 5th to 265.93 points on January, 29th, and the average effective yield of state credit obligations for the same period from 29.51 % annual to 46.66 %. Demand for the American currency for the Moscow Inter-bank Stock Exchange, especially on an inter-bank market has considerably grown. Then vigorous actions of the Government and Central bank, once again maximized and conducted currency interventions on the Moscow Inter-bank Stock Exchange and the inter-bank exchange market, the excessive demand for currency was possible to extinguish a base rate. Besides, some steadying influence on the Russian markets was rendered also by some growth of the world prices for the oil, connected with a political conflict between the USA and Iraq.

As a result in February - March on financial market of Russia the rise in prices was observed. However at the same time it became obvious that in case of decrease in positive balance of the foreign trade balance sheet and sharp growth of profitableness of state credit obligations-federal loan bonds Russia is unable solve at once two tasks - to serve an internal debt and to keep a rouble exchange rate to dollar in earlier established corridor.

After stabilization of profitableness of state credit obligations-federal loan bonds in March - April, in May, under the influence of the data about sharp decrease in positive balance of trading balance, sharp growth of profitableness of state credit obligations and falling of the prices for the Russian shares begins. Recession in industrial production of Russia after 15-month's growth is simultaneously observed.

Attempts to avoid devaluation or a default under state credit obligations-federal loan bonds by increase in taxation and the conclusion of arrangements with IMF and the international financial organizations about allocation of the credits, Kirienkos undertaken by the Government together with the Central Bank, couldn't change a situation considerably. Allocated with Japan, IMF and other organizations of credits it has appeared insufficiently for situation deduction on financial markets under the Government and Central Bank control. The arrangement from IMF demanded from Russia of refusal of placing of new state credit obligations that has considerably increased a budgeted deficit. Refusal of a currency issue for the purpose of a covering of this deficit has led to additional social intensity in connection with delays of payroll payments and pensions.

At the same time the Central Bank, trying to keep a dollar exchange rate in frameworks before the declared corridor, from August, 1 till August, 14th has been forced to sell about $9 billion gold and exchange currency reserves. As a result of August, 17th the Government has made unprecedented the decision on simultaneous devaluation of rouble and internal debt re-structuring under state credit obligations-federal loan bonds and declared the 90-day moratorium on payment by residents of the Russian Federation of debts under obligations to non-residents of the Russian Federation, including under forward contracts on currency purchase.

As a result of followed then resignations of the Government of S. Kirienko, and also because of failure to carry out by E. Primakov's Government of obligations on parameters of the money issue, taken by the previous Government, the IMF has transferred consideration of a question on allocation of the second tranche of the credit for the next year, before accepting of the budget of Russia for 1999.

As a result of all these events in 1998 there was a decrease in all macroeconomic indicators. So, industrial output volume has fallen in January-November on 5 % in comparison with the same period of 1997, volume of goods of agricultural industry - on 9 % (including owing to adverse weather conditions), a foreign trade turnover - on 13.7 %, inflation has constituted in January - November, 1998 of 65.3 % (10.0 % for the similar period of 1997). Because of devaluation of rouble and export falling (on 5.7 %) the external debt of Russia has grown to 77 % of gross national product and 203 % of annual export. If to it to add political instability of 1998, it is possible to draw a conclusion on loss of all investment advantages by Russia, available year before.

Now we will consider a situation on financial market of the Russian Federation after events on August, 17th, 1998. After declared the Government unilateral re-structuring of a debt under state credit obligations-federal loan bonds had been closed on August, 17th the largest and most liquid financial market of Russia. Essential influence on a situation was rendered by Government abortive attempt to keep dollar exchange rate in relation to rouble around 9.5 roubles for dollar - it has led to modification of rules of trade in dollar on the Moscow Inter-bank Stock Exchange and rules of calculation of an official rate of the Central Bank. As a result of it the exchange market has been broken into three segments with various rates:

- A special session in system SELT on the Moscow Inter-bank Stock Exchange for importers and exporters;

- The usual auctions in system SELT on the Moscow Inter-bank Stock Exchange;

- Purchase and sale of cash currency.

And total volumes of the auctions on all three segments of the exchange market considerably yield to volumes of the inter-bank auctions in the exchange market till August, 17th, 1998.

RTS consolidated index has decreased from value of an annual maximum - 411.6 points on January, 5th to 115 points on August, 14th and 59.94 points on December, 25th. Thus the annual minimum of an index has constituted 38.53 points (on October, 5th) that is a historical minimum of an index from the moment of the beginning of its calculation on September, 1st, 1995. Volumes of the auctions - about $1.84 billion in March (an annual maximum) to $60.34 million in November were considerably reduced. Thus the annual minimum of the auctions has been reached in September - $27.68 million

But at the same time on financial market of Russia a number of the positive moments was observed also. On December, 17th the Government declared the re-structuring of state credit obligations-federal loan bonds agreed all concerned parties. And though in the offered scheme there was an ambiguity with possibility of an investment of 20 % of the means re-structured in profitless privatization securities of federal loan bond-PD, in the share of the Russian enterprises, the fact of occurrence of the given governmental order allows to hope for revival of the market of internal debt obligations of Russia in 1999.

On December, 19th successful auction on sale 2.5 %-s' shares blocks of "Gazprom" of German company "Rurgaz" that speaks about preserving of interest of strategic western investors to leading enterprises of an oil and gas complex of Russia has been conducted.

In stock market the dollar prices for the most liquid shares have grown more than on 100 % in comparison with the minimum values in the beginning of October (and the prices for "Gazprom" shares even more than on 300 %). Average volumes of the auctions in dollar expression have increased more than three times in comparison with the end of September - the beginning of November.

It is necessary to note also increase of interest to the Russian stock market from small Russian investors and, first of all, physical persons. The reasons of such interest of a steel:

- The low dollar price of shares;

- Falling of trust of citizens to deposits in banks and to state debt obligations.

Despite proceeding speculative pressure upon rouble, the Central bank of Russia managed to avoid an excessive demand for dollar and thus even to increase gold and exchange stocks of Russia in comparison with August, 17th, 1998 a little.

2.3 The market of corporate securities

Principal view of the corporate securities addressing in the Russian market, common stocks of such emitters, as the joint-stock company, the state in the course of privatization state and municipal enterprises are.

The share market of the privatized enterprises in Russia has started to be formed in the course of mass privatization. The basic feature of the first stage (1993-1995) developments of a secondary market of shares - integration of proprietors, process of intensive buying up of shares blocks by institutional investors at individual. In 1996-1997 there was a formation of a speculative secondary market, the circle of the industries most attractive to investors and emitters was formed.

In world practice (in the developed markets) the ratio between primary and secondary the markets fluctuates within 5-15 % of volume of a secondary market.

«Characteristic feature of the Russian share market till 1995 was unconditional prevalence of a primary market». Such ratio was determined first of all by proceeding privatization sales, including shares blocks remaining with the state (primary sales during privatization).

Nevertheless the share of a secondary market of shares constantly increases in trade total amount.

Forming of a secondary market of shares of the privatized enterprises has begun practically simultaneously with the advent of the first privatized joint-stock companies.

Off-exchange transactions in different volumes are made constantly with shares of almost each emitter. «The motive of the control still remains dominating for the overwhelming majority of transactions». The major motive for foreign investors there is a relative cheapness of the majority of assets of the Russian enterprises. At last, «the essential component of growth of trade volumes still has purely speculative factor which value also is great».

Important indicator is the ratio between exchange and off-exchange the security markets. In world practice the stock exchange market is first of all the share market and derivative securities. As to off-exchange turnover it covers is usual primary placing, the secondary bonded markets, circulation of other debt instruments and the share of the companies which do not conform to requirements of exchange listing.

The off-exchange market of corporate papers in Russia is absolutely dominating. The ratio of shares of the exchange and off-exchange markets in total amount of transactions with corporate securities constitutes over 90 % for benefit of the off-exchange market. Last has some levels of the organization and includes:

       Organized with telecommunication trading systems;

       Unorganized telephone, based on trust of participants;

       Unorganized Street, or retail, calculated on the small investor who is not operating with standard packets of securities.

The choice of an off-exchange way of market development has been caused by decline of exchange activity to the middle of 90th At the heart of this choice following reasons lay:

- Low liquidity of the market and backwardness deposit-registration services limit possibilities of speculative operations at a stock exchange;

- Buying up of shares blocks under orders of large investors - both owing to the previous reason, and for reasons of confidentiality (the prices and the sizes of a packet) - is performed out of stock exchanges;

- Distribution of many shares as a result of mass check privatization, difficulty access of shareholders to operations on the stock exchange.

As one of the basic lines of the Russian security market it is possible to note forming of the regional centers of share activity. First of all it is Moscow, St.-Petersburg, Yekaterinburg, Novosibirsk and Primorski Territory. On these regional centers it is necessary today over 35 percent of all investment institutes available in the country.

For today the Russian stock market yet does not constitute a single whole. It is insufficiently structured and harmonized, in this connection it is possible to carry the regional isolation which is an essential barrier to dynamical and safe movement of securities and cash assets to number of its distinctive features. Owing to it the securities emitted in this or that region are forced to address in the limited limits, acquiring thereby artificial determination "regional", or make uneasy "migration" in a direction of the centers of share activity.

On volume of concluded transactions with corporate securities in the all-Russian scale the leading place is necessary on the Moscow region.

By some estimation, in Moscow consists more than 80 % of all transactions in the off-exchange market of corporate securities.

As a whole it is possible to allocate the most typical lines which the Russian market has acquired by this time:

1.       It is the market of the large institutional investors operating with considerable means and large shares blocks. It that fact, in particular, speaks that the Russian market today it is exclusive the market of professionals.

2.       For the Russian market absolute prevalence of the off-exchange form of the conclusion of transactions between its participants is characteristic. It and market transactions (within the limits of RTS and in "the telephone" market), and direct transactions with considerable packets under the mutual arrangement of the parties which are not reflected in trading and information systems.

3.       The Basic share of a market turnover is necessary on buying up by strategic investors of controlling blocks of shares of the privatized enterprises. At the same time for 2001-2002 there is characteristic a growth of interest of portfolio investors to the Russian shares.

4.       Stabilization of the market. If earlier on the market shares blocks destabilizing the market were thrown out, bought by small brokers at workers of the enterprises now brokers have saved up rather solid capital and have possibility to wait favorable terms of sale (purchasing), to regulate flows of shares and price fluctuations. Simultaneously the considerable part of shares belongs to institutional investors who - unlike small - take shares for long time, are not afraid of local recessions in the market and carry out more weighed and quiet to the policy.

5.       The legibility of investors has increased. If earlier investors bought up «all successively» now investment process has concentrated on the most liquid shares. At the same time there is an obvious tendency to distribution of interests of professional participants of the market on the share of the companies «second echelon».