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Russian economy, financial market, investment instruments, risks

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Title: Russian economy, financial market, investment instruments, risks


1
Russian economy, financial market, investment
instruments, risks
2
Strong Export Positions
3
Public finance structure of budget expenses
4
Public finances structure of budget expenses
  • Expenses of the federal budget in 2007 are
    provided for in the amount of 17,5 of GDP (over
    USD 20bn)

of budget expenses of GDP
Inter-budget transfers 33,3 5,8
National defense 15,0 2,6
Issues of national significance 12,2 2,1
Law enforcement activities 12,2 2,1
National economy 9,5 1,7
Education 5,1 0,9
Social policy 3,9 0,7
Health care and sport 3,8 0,7
Culture and mass media 1,2 0,2
5
Tax reform two vectors of different direction
  • Imposition of severance tax and increase of
    export duties on oil and oil products
  • Introduction of flat rate schedule of income tax
    on individuals on the level of 13
  • Reduction of corporate income tax from 35 to 24
  • Reduction of VAT rate from 20 to 18
  • Cancellation of sales tax
  • Reduction of UST rate
  • Differentiation of severance tax rate depending
    on fields

6
Russian stock market History
  • In 2007, Russian market will be 12 years old.
  • 1992-1997 privatization auctions and first
    allocation of securities in the market. Formation
    of the basis of the stock market.
  • Origin of GCO market 1993 end of the same
    1998.
  • In September 1995, the first exchange Russian
    Trade System (RTS) - began computation of the
    index
  • In 1993, the Federal Commission on Securities
    Markets (FCSM) was established, having among its
    main functions regulation of activities in the
    stock market
  • Placement of the first bond debt in the domestic
    market - 1999 Gazprom bonds
  • The first technical default on bonds 2002,
    Sibur company (underwriter - Reiffeisenbank)
  • The first IPO in the Russian market RBC
    (Rosbiznesconsulting), a media sector company

7
Russian stock market Structure in terms of
composition of participants
  • Regulators
  • Associations and SRO
  • Stock Exchanges
  • Depositories and registrars
  • Professional participants of the Securities
    Market
  • Issuers
  • Investors

8
Russian stock market Regulators
Federal Financial Market Service
Central Bank of Russia
Ministry of Finance
Stock market
9
Russian stock market Associations and
Self-Regulating Organizations
Professional participants in the market
SRO
FFMS
  • National Association of Securities Market
    Participants NAUFOR (300 brokers)
  • National Association of Funds NFA (300 banks)
  • Professional Association of Registrars, Transfer
    Agents, and Depositories PARTAD (80)
  • National League of Managers NLU (70)

10
Russian stock market Exchanges
  • MICEX Moscow Interbank Currency Exchange
    (foreign currency market, bond market, share
    market, clearing, indices)
  • RTS Russian Trading System (forward market,
    market of shares of second and following issues,
    clearing, indices)

11
Russian stock market MICEX
Maximum value of MICEX index is 1758 points
Average amount of trading per month, USD bn Number of traded securities
Foreign currency 5,4 -
shares 4,0 325
bonds 1,4 544 430 corporate 105 municipal 9 - Eurobonds
12
Russian stock market RTS
Maximum value of RTS index is 1984 points
Average amount of trading per month, USD bn Number of securities traded
Forward market 8,4 -
shares 2,8 392
bonds 0,025 161
13
Russian stock market structure in terms of
amount of trading
Growth of the stock market amounted to 85 in
2005 and to 67 in 2006.
14
Second-Tier Stock Market
15
Russian stock market Structure in terms of place
of trading
16
Russian stock market IPO projects of Stock
Exchanges
  • IRC - MICEX
  • RTS-Start - RTS

Stock Exchange
Listing broker
  • Companies of medium-size and small
    capitalization - Possibility of public and
    private placement - Possibility of legalization
    of business

17
Russian stock market Depositories and
registrars
  II quarter 2004 II quarter 2005 II quarter 2006
Special depositories 26 24 26
Mutual funds 295 329 438
Share investment funds 5 5 5
Non-government pension funds 227 256 248
Number of operations performed 63486 68984 117530
- Law On the Central Depository. -
Bringing of depositories to compliance with new
requirements (capital, certified equipment,
programs of insurance of current activities and
risks) - Bringing of registrars to compliance
(Effects of raidership)
18
Russian stock market Professional participants
in the market
Licensing of professional activities in the stock
market is performed by the Federal Financial
Markets Service (FFMS, former FCSM)
  • Investment companies financial companies having
    any of the four, or all of the four licenses
    (broker, dealer, trustee, or depository license)
  • Credit institutions banks having, along with
    banking license, one or more licenses of
    professional participant. Moscow Interbank
    Currency Exchange (currency market, bond market,
    share market, clearing, indices).
  • Asset Management companies operate within the
    framework of individual or joint management
    strategies, having one or two available licenses
    for trust management or joint investment
    management

19
Russian stock market Professional participants
in the market
20
Russian stock market Professional participants
in the market
  • The latest achievements in the sphere of
    regulation of professional participants in the
    stock market
  • Development of the project of prudential
    supervision in the stock market
  • Regulation of ethical standards in the stock
    market
  • Development of the mechanism of introduction of
    GIPS standards for adequate assessment of
    profitability of trust management

21
Russian stock market Issuers
Largest industries in terms of capitalization
Industry Major issuers Percentage of capitalization Average free-float
Oil and gas Gazprom, Rosneft, Lukoil, TNC-?? Over 60 0,33
Ferrous metallurgy HLMC, EurasHolding 7 0,24
Mobile Communica-tions MTS, Vympelcom 4,5 0,35
  • The highest free-float is recorded with Sberbank
    of Russia 0,92,
  • The lowest one is recorded with ??? Irkutskenergo
    0,08

22
Russian stock market Issuers
General public IPO
Capitalization gained (USD bn) Ultimate free-float Number of subscribers
??? Rosneft 10.6 0,12 115 000
??? Sberbank 8.8 0,92 46 000
??? VTB - 0,25 150 000
23
Russian stock market Issuers
Trends in the IPO market
  • More than 40 companies plan their IPOs for
    2007-2008. Among the novices are insurance
    companies, coal companies, retail chains,
    construction companies, air carriers. Dilution of
    the share of oil and gas sector in capitalization
    of the Russias market.
  • Entry of companies with medium-size or small
    capitalization to the IPO market private
    placements. Simplified version of private
    placement.
  • Increase in the number of free-floating shares
    after additional issues.
  • Emergence in the organized market of large amount
    of over-the-counter addressed transactions.
  • Large interest to share market on the part from
    private investors.

24
Russian stock market Issuers
Step-by-step strategy of entry to stock market
IPO in London
Less than 5 years
IPO in Russia
Bonded debt
Loan against bills of exchange
25
Russian stock market Investors
  • Western funds 60 of investment is Russian
    money invested via foreign funds
  • Russian investors
  • Institutional companies of financial and
    non-financial sectors
  • Qualified investors
  • Individuals

26
Russian stock market Investors
Investment instruments
Object of investment Profitability Profitability less inflation rate
Business 40-70 30-60
Real estate 30-50 20-40
Stock market 15-25 5-15
Forex 12-15 2-5
Bank deposits 9-11 (-1) 1
Pillow 0 (-10)
27
Participants in financial market Banking sector
Number
Russian banks 1080
Banks with foreign participation 60
NCO 45
28
Russian Banks The Biggest Deals With Foreigners
Date Seller Buyer Amount of deal, USD Million of equity purchas- ed Price to book value ratio
Dec. 2004 Delta Bank GE Consumer Finance 100 100 4,5
Apr. 2005 KMB Bank Banca Intesa 90 75 3,9
Aug. 2005 Deltacredit Societe Generale 110 100 3,2
Jan. 2006 Monchebank DnBNOR 21 97 2,2
Feb. 2006 Impexbank Raiffeisen International 550 100 2,9
Jun, Sep. 2006 Rosbank Societe Generale 634 20 4,5
Jul. 2006 Investsberbank OTP Bank 477 96 3,9
Nov. 2006 Orgresbank Nordea 318 75 4,0
29
Participants in financial market Banking sector
Concentration in banking sector
Percentage
Moscow banks 58
Assets of 10 largest banks 53
Capital of 10 largest banks 46
Clients of 10 largest banks 56
Credits of 10 largest banks 56
30
Participants in financial market Banking sector
Growth of assets in banking sector
31
Participants in financial market Banking sector
Growth of credits to general public with respect
to GDP and assets
32
Participants in financial market Banking sector
Evaluation of Russian banks (P/BV)
- In 2006, the average value of multiplier (P/BV)
in the sector was 3,3 3,5. - Maximum multiplier
in Russia was recorded in acquisition of UFG
(United Financial Group) by Deutsche Bank - 10
(P/BV)
33
Participants in financial market Banking sector
Shares of banks in Russian stock market
Free-float ?cap, m P/E 2006 P/BV 2006
Sberbank of Russia 0,92 39 482 13,8 3,6
Uralsib 3 594 11,0 2,0
Bank of Moscow 0,20 2 614 18,7 2,6
Rosbank 0,08 3 096 0,1 3,4
Promstroybank 0,48 1 403 8,8 2,5
Vozrozhdenie 500 13,2 3,4
Prospective issuer banks Rosbank, Gazprombank,
Uralsib, KIT-Finance Bank
34
Participants in financial market Insurance sector
Indices
Insurance companies 918
Insurance premiums collected in 2006 USD 23.5bn
Insurance indemnity payments in 2006 USD 13.5bn
35
Participants in financial market Investment
companies
Indices
Investment companies over 900
Capitalization (2006) USD 1.7bn
Assets (2006) USD 9.5bn
Profit (2006) USD 0.4bn
36
Participants in financial market Asset management
companies
Indices
Asset management companies over 200
Trust management USD 10.2bn
Funds of NPF USD 15.3bn
Mutual and investment funds USD 14.6bn
37
Types of rating agencies in Russia
  • International rating agencies
  • National Rating Agencies
  • Trade rating agencies
  • Agencies at media holdings
  • Information and marketing rating agencies
  • Rating agencies at associations, unions, and
    partnerships

38
National Rating Agency
  • Conducts activities related to rating and ranking
    of participants in financial market on the basis
    of financial and economic indices from 2000.
  • Assesses reliability and solvency of participants
    in financial market
  • Provides information support to decision-making
    in management and business, outsourcing with
    respect to risk management systems in terms of
    assessment of contracting party risk, and
    monitoring with application of scoring models.
  • Advances initiatives aimed at improvement of
    Russias investment climate and transparency of
    participants in financial markets

39
Participants in financial market in the
Agencys ratings
40
  • Pattern of default probability

Probability of default depending on the term Probability of default depending on the term Probability of default depending on the term Probability of default depending on the term Probability of default depending on the term
  Up to 180 days Up to 1 year Up to 2 years Up to 3 years
AAA 0,0 0,0 0,0 0,0
AA 0,0 0,0 0,0 3,0
AA 0,0 0,0 1,5 5,5
AA- 0,0 0,0 4,0 8,0
A 0,0 1,0 8,0 12,0
A 0,0 3,0 10,0 15,0
A- 0,0 6,0 13,0 18,0
BBB 0,0 7,0 15,0 20,0
BBB 0,0 10,0 18,0 23,0
BBB- 1,5 14,0 22,0 28,0
BB 7,0 20,0 30,0 35,0
BB 11,0 26,0 36,0 41,0
BB- 15,0 30,0 40,0 45,0
B 22,0 37,0 47,0 54,0
B 26,0 41,0 51,0 58,0
B- 30,0 45,0 55,0 62,0
CC 38,0 53,0 63,0 71,5
CC 44,0 59,0 69,0 77,5
CC- 49,0 63,0 73,0 81,5
C 56,0 70,0 79,0 84,0
C 62,0 78,0 87,0 92,0
C- 69,0 86,0 93,8 98,8
D 100,0 100,0 100,0 100,0
No risk
Low risk
Moderate risk
Increased risk
High risk
Maximum risk
41
Distribution with respect to rating scale
42
Target audience of ratings
  • Our ratings are recognized by market participants
    and applied as criteria in risk management
    systems they use
  • Banks, investment companies, asset management
    companies, insurance companies, clearing floors,
    exchanges, industrial enterprises, and investors
    apply our ratings in their activities
  • Rating report presented by our Agency may be used
    as independent public assessment by the Agency in
    activities of a company or a bank
  • Ratings are used as criteria in holding of
    tenders by DIA and MHCA, by major private and
    public companies, and in accreditations carried
    out by regulators - FFMS, Ministry of Finance,
    and Central Bank of RF.

43
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