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The Russian Capital Market on the Threshold of a New Era
24 May 2018
16:45—18:00
KEY CONCLUSIONS
Russian capital market enjoys recovery

Russian banking customers have over 25 trillion roubles in their deposit accounts. We are confident that in the next 3–5 years about 15-20% of this money will go towards investment products — .

If we talk specifically about what is happening now, the retail demand is getting back on track; last year issuance and trading went up about 60% year over year; and year-to-date issuance and trading exceeds last year’s number by over a half. Over the four months of this year, individuals have reached a 3.5 times higher turnover at the corporate bond market than last year. Year-to-date we’ve demonstrated a stock market growth of 33% — Alexander Afanasiev, Chairman of the Executive Board, Moscow Exchange.

As for Russian demand in general, it has grown significantly. If we talk about debt instruments or Eurobonds, 10 years ago the share of Russian investors was about 10–15%. Now Russians buy a third or even more issues. Same applies to stock. Latest transactions have shown Russian investors’ demand to be somewhere around 30–35% of their books value, whereas its historical level was 10% 10 years ago — .

Russian capital market attracts foreign investors

I would call on all of you: if you do not have an investment account in Russia, find someone who will help do this, open an account. You need to call brokers and say that this is, perhaps, one of the most attractive markets in the world, including the bond market. Call your broker, and it's possible that you will get rich really soon — Jim Rogers, Chairman, Beeland Interests Inc..

Transformations make Russian capital market more attractive

An important factor affecting what is happening on the Russian market is development of Moscow Stock Exchange. Moscow Stock Exchange virtually became the main placement platform for Russian companies and made significant steps towards investors and issuers. The vast majority of placements at Moscow Stock Exchange is conducted in accordance with international rules, with an international disclosure standard, with the same issuance prospectus as if the placement happened in London or at other international exchange — .

What happened now? Our intermediaries, market participants have become more professional. The supervision has changed, the legislation has changed, and individual investment accounts have appeared. We have real incentives now. There is taxation for coupon bonds, which is quite comparable with deposits, etc. — Alexander Afanasiev, Chairman of the Executive Board, Moscow Exchange.

For 10 years, the infrastructure of the market has seriously improved. There’s one pool of liquidity, good infrastructure at the stock exchange, convertible currency, deposit and clearing system — .

Russian capital market expects new players

Earlier, under high oil prices there were businesses that were just growing on their own. Now nothing happens by itself, and one must be a good entrepreneur to develop their business. <...> Obuv Rossii did an IPO at Moscow Stock Exchange last year, which is a perfect example. Anton Titov is the person, who created this business with his own hands in Novosibirsk, and now it’s federal level brand. <...> I can see that although not all of them go through an IPO, these businesses exist, and their number and the number of entrepreneurs are growing. When it is possible, I think the next pipeline IPO will be a pipeline of higher quality, more interesting and talented businesses that will slightly improve the reputation of the market and give bigger opportunities to investors — .

We had three ‘unicorns’: Yandex, Tinkoff and Avito. These are examples that inspire thousands of entrepreneurs, who start businesses. Every year we see a large number of very ambitious and innovative next generation companies. We're talking about a new era. And this area will be among the most interesting and sustainable in these difficult political conditions, under sanctions. I think within the next 3–5 years there will be very interesting IPOs, despite this pressure — .

ISSUES
Russian assets significantly undervalued

Over the last 10 years, market capitalization volume of all Russian companies that have been or have become public has doubled, from USD 300 to just over 600 billion. But in fact, it is a rather sad result, because over the last ten years a lot of companies became public, and other markets would show a much greater result. <...> The impact of international sanctions on the capital market cannot go unnoticed. But this is not the only reason for the market to be significantly undervalued — .

To some extent I treat this decade as a decade of missed opportunities. First of all, the institutional trust of the investment community to Russian issuers suffered over this time. Secondly, local pool of institutional investors was never created, while this is a very important thing for developing any market. Russian issuers still remain utterly dependent on the demand for Russian assets from the international global investment community — .

The circle of foreign investors has narrowed, especially over the last few years. Basically, now the only funds that are looking at Russia are the ones investing in emerging markets. This is the result of the sanctions driven risk, as well as the result of investors generally becoming more selective. Right now, an IPO is significantly more difficult than it was in 2006–2007 or 2011–2012. As a result, valuation of Russian companies dropped — .

Russian private equity market underdeveloped

The private equity market is not fully developed in Russia yet. The share of private equity is approximately 50–60 times smaller than in developed markets, such as the United Kingdom or the United States — .

Low presence of consumer sector companies on capital market

We still see a large number of companies that represent the oil and gas sector and the mining industry on the stock exchange in Russia. Companies with the highest growth rates are the companies that focus on their consumers. These are telecommunications companies, as well as those engaged in infrastructure and consumer market. And business environment as a whole would benefit from more companies that are not involved in oil and gas or metals. Had they been available to investors, more capital would flow into to the market, including fixed and foreign capital — .

SOLUTIONS
Conditions for private investment market development: government support, new technologies and business environment

I see a synergy of factors here, not just one. First of all, it is a low inflation environment. There will be an inflow of long-term money, as well as instigated demand for investment products. Secondly, it is a rapid change in the digital sector and its introduction into the financial sector of the economy. This means huge opportunities for companies and private investors to obtain simple and clear access to the investment market. Thirdly, it is the measures that the government is now taking to create the private investor class in Russia — .

New technologies allow investors and individuals to use stock market services in a different way. That means they don’t have to enter collective investment funds in a traditional way, but, let's say, they can do it directly or use robo-advisors and become an almost semi-professional investor — .

Ensure SMEs’ access to capital markets

What do small and medium-sized enterprises need? First and foremost, they need access to capital. And as they grow and as their business develops, they need to move on to the next stage, to the next level of capital they need. I am not talking about the capital, which they access through the banking market, but about the long-term capital. Opportunities for infrastructure companies are to build this kind of ladder. It is crucial for companies and start-ups in the first, second, third and fourth round to be able to communicate with private investors, with funds, etc. — .

Developing domestic investment demand

70% of the market belongs to foreigners. The only way to reduce the Russian discount and to increase capitalization is to develop domestic demand and, accordingly, reduce dependence on foreign money — .

The material was prepared by the Russian news agency TASS