Ovanes Oganisian of Renaissance Capital -

On July 1, following the St Petersburg Economic Forum, Russian President Dmitry Medvedev announced seven measures - closely reflecting proposals he put forward in late March, in Magnitogorsk - to address Russia's investment climate. The measures, which were published on the presidential website, include the following:

1. Further privatisation: Medvedev has ordered a reduction of government stakes in non-strategic and non-infrastructure Russian companies, with overall state ownership falling below a controlling interest.

2. Medvedev has ordered that bureaucrats take responsibility for their mistakes in the same way CEOs and accountants are held legally responsible in private companies.

3. Medvedev wants measures implemented allowing for the immediate termination of employment for bureaucrats accused of corruption.

4. Medvedev wants better selection criteria for the appointment of judges, and wants mechanisms implemented for disciplinary procedures to be taken against them should the need arise.

5. Medvedev wants to widen the city of Moscow's borders into the Moscow Region, and to move some government offices outside the current Moscow borders.

6. Medvedev's orders to the government include the removal of barriers and limits on global depositary receipt (GDR) issuance and fungibility. He wants to create legislative measures to improve Russia's financial services infrastructure, to increase foreign investment in the country. This will include the adoption of laws on central custody and allowing international custodians to open accounts with Russian institutions. He stated that the government should also create laws to stimulate disclosure and raise overall standards and practices to an international level.

7. Other orders to the government include issuing long-term work visas to expatriates working for large international businesses.

Taking stock

The most interesting of the above points, in our view, is #6, as it has implications for the stock prices of locally listed companies with GDRs, but no fungibility between these GDRs and local listings. It seems local stocks with non-fungible programmes are reacting very positively to the above proposals. Sistema's local shares added 6% following Medvedev's announcement, and LSR's local shares gained 5.2%. Magnit was up 4.9% and MTS local shares gained 4%. These local stocks have historically traded at large discounts to their respective GDRs. For example, LSR's local/GDR discount was 27% on January 1, but it shrank to only 6% after the speech; while Sistema's discount went from 29% to 5%, and MTS's dropped from 18% to 9%. We have been awaiting this move, and believe it is very positive because, when implemented, it could ease GDR issuance by strategic companies; support the further privatisation of companies like Sberbank and Rosneft; and possibly help loosen the state's grip on strategic companies.

The discounts of local stocks to GDRs, which are still in place, are likely to disappear by September 1, the deadline for when the new GDR issuance rules are to be shaped.

The current rules for GDR issuance, introduced in autumn 2009, are strict. For stocks on the A-list (the most liquid), the maximum proportion of GDRs allowed is 25% of total shares. For stocks on the B-list, the maximum proportion is 15%, and for stocks on the (illiquid) V-and I-lists, no more than 5% is permitted. In addition, for strategic oil and gas companies that undertake exploration and production in strategically important fields, the limit is 5%, although up to 25% is allowed with specific government consent. A maximum of 50% of shares in each new placement can be offered outside Russia.

Medvedev stated that the deadline for the new rules is September 1, however we think this is likely the deadline for a new law to be developed, rather than implemented (with the new rules being enforced much later). If full fungibility is permitted, we would expect it to remove any price arbitrage between local stocks and GDRs. The new rules are unlikely to be compulsory for issuers, but as we believe that anybody can launch unsponsored programmes we would expect price arbitrage to disappear, in any case.