Russian stocks' secret membership of Euroclear

By bne IntelliNews November 19, 2014

Ben Aris in Moscow -


Russian stocks are now clearable by the two biggest international settlement systems, Euroclear Bank and Clearstream Banking. At the press of a button earlier this year it became possible to buy shares in Russia's blue-chip companies listed in Moscow from the comfort of a chair on a London trading desk. It is a huge change in the way that Russia's capital market operates – not that you’d know it from the low-key way the landmark innovation was introduced.

Clearstream announced July 27 that from the following week it would give foreign investors direct access to the Russian equity market. Though just two weeks prior to that, Euroclear said it was delaying its plans to offer the service.

Then on September 18, Alexey Zabotkin, an equity analyst with VTB Capital, informed his clients in an email that he had seen a document published on Euroclear’s website detailing how access to Russian equities was now available. "We believe this indicates that the depositary bank is to start settling Russian equities. However, there has been no official confirmation from Euroclear that this is the case."

As the news spread and bankers began to ask questions, Bloomberg picked up the story and reported that Euroclear confirmed it had started trading accounts for some Russian stocks. "We are waiting for a comment from Euroclear, which has not confirmed this yet, but apparently settlement started on Monday [September 15]," Zabotkin wrote somewhat bemusedly.

First step

Euroclear, based in Brussels, is the largest provider of securities settlement services. It began settling Russian domestic government bonds in early 2013, and Russian corporate bonds in January this year. The change was part of the government's plan to transform Moscow into a financial hub and hook up Russia's capital markets to the global financial system.

Being able to buy and sell bonds and stocks through Euroclear makes an enormous difference – it negates the need to open an expensive brokerage account in Moscow (and so will speed the death of the already dying local investment banks), and it allows traders to react much faster to price-moving news.

The effect on the bond market was immediate. International bond traders held about 4% of outstanding Russian state bonds in 2012, the so-called OFZs. But following the link-up to the Euroclear system, their share has soared to 25% of the total outstanding cheap but high-yielding OFZ's, according to the Central Bank of Russia (CBR).

The plan was always to add equities to the international system, but the government wanted to study the bond market reaction first, afraid that being able to buy and sell Russian stocks directly in London would accelerate capital flight. Equities were supposed to be included in the first half of 2015.

It seems that the cash-strapped Russian government accelerated its plans. The slowing economy and the stalled privatisation plan, launched in 2008 by then president Dmitry Medvedev, cajoled the government into making the switch almost a year early.

But of course this is not a good year to be buying Russian stocks, while many in the West don’t want to be seen climbing into bed with the Russian government with the Ukrainian crisis still raging. And the Kremlin is currently embroiled in a very public spat with the leading US credit card companies VISA and MasterCard, after passing a law earlier this year that effectively expels the two unless they can find a local partner. Given all that, the last thing Euroclear and Clearstream wanted to do was to draw attention to their new Russian business.

Clearstream has been quietly handling Russian equities since July. There was no press conference, grand announcements or party at the Moscow Exchange. Instead, the market found out following a few terse statements made to Russian daily Kommersant. The Moscow Exchange confirmed that Clearstream made the first settlements for Russian local shares on July 7.

Euroclear remains more cautious and has said nothing publicly so far. It turns out that while accounts have been set up, full trading will not start until some more amendments to Russian legislation come into force on January 1, 2015, according to press reports. The new laws allow depositories to vote shares they hold on trust at shareholder meetings on behalf of their beneficial owners.

Still, the entry of the globe’s two leading clearance and settlement firms is a landmark event, even if it is not certain how much of a difference it will make in the short term. If equities follow the bonds' lead, then clearly the volume of Russian stock trading will increase. But by how much remains anyone's guess. Foreign portfolio investors have always played a much bigger role in Russia's stock market than in its bond market, traditionally holding about half of all the tradable shares. Moscow Exchange said it has already seen a bump in volumes in July, but didn’t say by how much. "The demand for such settlements from old and new customers of Clearstream exceeded expectations," the exchange said at the time.

Even if the volumes don’t quadruple, one tangible change will be to close the spread between the locally listed shares and the depository receipts, or international proxy shares, listed in places like London.

An emerging market calling card, the best emerging market companies have used the DRs, as they are known, to allow them to tap international markets using these proxies based on their underlying locally traded shares. Differences in the markets' mentalities and size of the respective free floats affect the prices, which are usually a bit different – up to 20% in some of the better names.

Giving international investors direct access to the local underlying shares should squeeze that spread over the DR. The system is up and running, but clearly it is not firing on all cylinders yet as the spreads remain wide: the spread on the mobile operator MTS pair (which trades in both Moscow, and London as a DR) was 16% at the end of September before the recent selloff, and for the supermarket Magnit pair it was 14%.

"The immediate impact of Euroclearability on the market might well be muted, as other events have taken centre stage and are unlikely to fade away," says VTB's Zabotkin. "That said, the improvement of accessibility to Russian equities is positive."


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