INTERVIEW: Making Russia’s stock market predictable

INTERVIEW: Making Russia’s stock market predictable
Moscow's RTS index was almost flat in 2017 but Russian companies starting tapping the market again for capital.
By Ben Aris in Moscow March 8, 2018

bnePeople MOEX CFO Max LapinRussia can be a schizophrenic place to work. On the one hand the news is full of geopolitics, tension with the West and sanctions. But on the other hand, the economy has finally emerged from the Great Recession that started in 2008 and Russian entrepreneurs are getting on with their lives, building up businesses, making things that people want and improving what they already have.

The boom years of the fast emerging market catch-up phase are clearly over, but while Russia’s macroeconomic indicators increasingly look like those of a developed market, there are still many commercial lacunae and plenty of opportunities for the intrepid. This all makes Russia an exciting place to invest if you can get it right – especially for portfolio investors, says Max Lapin, the CFO of Moscow Exchange (MOEX) in an exclusive interview with bne IntelliNews.

“To some, Russia is as Churchill described it:  a riddle, wrapped in a mystery, inside an enigma,” Lapin told bne in the exchange’s offices, a stone’s throw from the Kremlin.

Maybe Lapin should have finished the quote: “… but perhaps there is a key. That key is Russian national interest.” Despite the ongoing showdown with the West, last year saw international investors increase their share of Russian domestic treasury bonds to an all-time high of 31% of the total outstanding, or some $20bn worth.

The equity market has also come alive again. The dollar-denominated RTS index rose 52% in 2016 and while the index was almost flat in 2017 Russian companies starting tapping the market again for capital.

“The stock market performance in 2017 was not as strong as the previous year where the index returned over 50%, but the number of IPOs and SPOs doubled. I expect that 2018 will stay at least in line with 2017 in terms of primary issuance,” says Lapin.

The Russian market has reached a new plateau and Lapin believes the future performance of the market will be fuelled by high-growth sectors such as Russian technology – the most vibrant part of the Russian economy these days.

The exchange has moved to capture more of this sector by launching a new platform to help smaller more dynamic companies gain access to capital by streamlining the listing requirements.

“We are the go-to place for capital raising – whether you’re a blue chip or a smaller, rapidly growing firm; whether you’re looking to sell equity or raise debt,” said Lapin.

Russian equities have always traded at a discount to  emerging market peers, but thanks to the current geopolitical tension, there is a discount on the discount; Russian stocks are worth half of what they should be compared to the other emerging markets, says Lapin.

Bonds are back

Bonds are also doing well as yield-hungry investors search the world for decent returns. The Russian treasury bonds, or OFZs, have been especially popular with international investors. Russia has a winning combination of low and falling inflation and interest rates, a recovering economy and pots of cash in reserve making a default almost impossible.

There have been fears that as part of the new US sanctions regime on Russia these bonds would be put out of bounds for US investors, but the January 29 deadline came and went without any change. More financial sanctions could still be imposed, but the United States Secretary of the Treasury Steven Mnuchin said on February 11 that the bonds will not be targeted. Many western investment banks have since marked their recommendations on these bonds back up to Buy. 

“We’re big believers in the Russian fixed income market. Russia has a strong debt culture. One of the trends we’re seeing is corporate bond issuance replacing bank borrowing. And thanks to the market infrastructure reforms, there is an expanded pool of buyers both on the domestic and the international side,” says Lapin. 

Part of the reason for the rise in foreign investment in Russian fixed income instruments is that it has become so much easier to do. The Russian capital market was totally transformed in 2012 when the two main exchanges – the RTS and its sister exchange, the ruble denominated Moscow Interbank Currency Exchange (MICEX) – were merged, a central depository was finally set up after a decade of debate and the capital market was plugged into international settlement and clearing systems Clearstream and Euroclear. Now a trader can buy and sell Russian stocks and bonds with the proverbial click of a button from the comfort of their trading desk in London or New York.

The result of the exchange merger was MOEX, which has followed through by investing heavily in IT and continuously developing new products and platforms.

“MOEX is unique globally in terms of the breadth of the asset classes that trade on the exchange. We’re the platform of choice not just for Russian stocks and derivatives. But for bonds. And for currency trading. Combined with the central counterparty and the depositary, we have a very powerful offering,” says Lapin.

At the recent Gaidar Economic Forum in Moscow in January all three of CBR governor Elvira Nabiullina, Russian Finance Minister Anton Siluanov and Minister of Economy Maxim Oreshkin sang from the same song sheet: the goal of Russia’s economic managers was not to ensure stability but to bring predictability to the markets.

A good example of this change is FX trading which is one of MOEX’s biggest business lines along with the stocks and bonds. The ruble remains volatile as it is still tied to the battered price of oil and as the current account surplus shrinks the value of the national currency has also become more sensitive to ebb and flow of flight capital because of the reduced size of the current account surplus.

MOEX has dealt with the problem by investing into its derivative trading platform and products so clients can hedge against excessive swings. More recently the exchange has offered big companies the possibility of taking on currency trading themselves to better manage their FX risk. 

“In Russia, currencies are largely traded on-exchange,” says Lapin. “And last year we introduced a new program whereby not just banks and brokers, but large corporates as well can trade directly on our FX Market.”

Retail rush 

But may be the most exciting and significant change has been the rush of retail investors to open individual accounts and are starting to play the market.

The Russian authorities have been trying to harness the massive domestic savings ever since former president Boris Yeltsin singed off on the legal basis for Russian mutual funds, the so-called PIFs, in 1997. Russians have hundreds of millions of dollars stashed in the large glass pickling jars under their beds (called “banka” in Russia), which is out of circulation. However, the authorities timing for its various drives have been ill stared. Yeltsin’s PIFs appeared a year before the financial system went into meltdown on August 17, 1998. Another attempt with the “people’s IPO” of state bank VTB in 2007 also went badly wrong after the market crashed within a year leaving the stock’s price underwater ever since.

For most Russians looking for a way to protect their nest egg against the ravages of high inflation the default option has been to deposit their cash (preferably in dollars) in a bank account. Equity and mutual fund investments maintain a single digit share of overall retail investments. 

But that is changing now. With inflation now down to 2.2% as of the start of February and the central bank monetary policy rate falling fast – the Central Bank of Russia (CBR) cut rates again in February to 7.5% -- retail investors have started to actively look for alternative investments that pay a bit more. Moreover, the government has been encouraging this switch with new “investment accounts” that come with significant tax breaks.

“In 2017 we opened 230,000 individual accounts, bringing the total to 350,000,” says Lapin “There is still a long way to go to unleash the full potential of Russian savings, but the appearance of long-term retail investors is a big step in the right direction.”