Today the MOEX ranks among the world's top 20 exchanges by trading volume and total market cap of shares traded, and among the top 10 derivatives exchanges
This post first appeared on Russia Insider
The author is Chairman, Disciplinary Committee, National Association of Corporate Directors, Russia
To preface this Russia story, a quick stroll down memory lane: As a young man just starting out and still studying I fell into a summer job as a runner for a firm trading Platinum and Palladium on the NYMEX. The exchange was then operating on Manhattan’s Hudson Street in the Butter, Cheese and Egg Exchange building. Wooden octagonal trading pits, cloth covered telephone wires, open outcry between pit, traders, brokers and so on. This was the home of the exchange since 1885 and this was during the weeks preceding its merged move with COMEX to the new combined 4 World Trade Center trading floor at the base of the twin towers.
Heady times, trade confirmations by Teletype gave way to Faxes! A large body and lung capacity ensured I was able to operate effectively jostling in the trading pits. Meanwhile the pace of changes in trading were speeding and expanding geometrically. The era of the PC in equity and commodity trading, together with online capabilities changed the face of this business almost monthly. In this trading neighborhood, all the players on the NYSE, NASDAQ, AMEX, COMEX, NYMEX were about 10 minutes walking distance from each other, and over smoky post trading drinks a great deal of information, rumors, lies, and dreams were cross-pollinating. Then, no one was aware of the term ‘insider trading’… it was business as it has always been executed, work to learn more than the other person, schmooze, either you win or you lose, deal with it. This was the time just before the stormy waves of regulations.
Time passed and for work reasons in 1991 I moved lock, stock & barrel to Moscow. Moscow was a new, forceful, chaotic, nervous, tragic and exhilarating place in a very turbulent time. In many ways it reminded me of the old trading pits on the exchange, the difference was the rules were as changeable as the traded prices, and so I felt moderately comfortable drawing on experiences gained in the 1970’s and early 1980’s.
Then in 1992 in an effort to create some order out of an economic free for all, and allow broader participation, an exchange was proposed. The first visible step was the Moscow Interbank Currency Exchange or MICEX that opened in 1992 becoming the leading Russian stock exchange. It was for that time and place cutting edge, despite its shabby location on Myasnitskaya Street (named after the meat markets once located there). I recall being down on the floor of this exchange which reminds me of today’s call centers, lots of small booths, people with headsets and mikes quietly talking, inter booth visiting, PC’s humming, and dial-up internet connections squeaking. In the following three years, the exchanges managed to streamline and consolidate to a degree that took decades in the States.
The Russian Trading System (RTS) was the other stock market established a bit later (1995) in Moscow, consolidating various regional trading floors into one exchange. The RTS system was first based on NASDAQ's trading and settlement software then developed and implemented its own system, which went on line in 1998. In 2011, MICEX merged with RTS creating today’s Moscow Exchange or MOEX. The exchange completed its Initial Public Offering in February 2013, raising about $500 million. It has been just over twenty years from absolute ground zero for these Russian exchanges.
Since 2010, market capitalization of listed domestic companies in Russia has fluctuated between US$951 billion and US$385 billion, 90% of which trades on MOEX. Today the MOEX ranks among the world's top 20 exchanges by trading volume and total market cap of shares traded, and among the top 10 derivatives exchanges. Its participants enjoy state of the art, hi tech infrastructure to trade stocks, bonds, currency, fund shares, ETFs, commodities, and derivatives, including OTC.
Transparency, ethics and good corporate governance has been an aspect of business I have endeavored to support in Russia. Involved at the board level with Russia’s Independent Directors Association, as well as the National Association of Corporate Directors of Russia. Both our groups since inception have been requested by MOEX to advise on the creation and fine tuning of workable efficient standards of governance and transparency. These requests were not part of any burdensome regulatory afterthought ‘post factum’, but as a common sense part of inculcating best ongoing business processes. The value of the guidelines and standards maintained by MOEX among its listed firms is a huge advance from what was prevalent even ten years ago and I consider them to be world class. The results have been positive, steady, impressive and integrated along with checks and balances that have become integral to the participants and the exchange.
While the press reports mostly about Gazprom, Rosneft and four or five other majors, over 700 firms trade on the equity and bond markets of the Moscow Exchange. To understand the future of Russia in the context of Eurasian growth and development, it is worth researching the secondary and tertiary listings. Liquidity is of course a function of volume, and as in all markets, the secondaries usually do lack the depth of instant fair market liquidity. The benefit and risk balance favors the long-term player, this is perhaps where the Russia opportunity shines at this point in development time.
History provides lessons which can give perspective and insight on how we see the world around us today. As an example, and having to do with attitudes and trading on exchanges. In 1989, the Soviet government asked me to speak with my friends stateside at the New York Mercantile Exchange. Their wish was for NYMEX to conduct a series of presentations and trainings in Moscow that summer on the use of futures, hedging and options for primary producers of oil and precious metals. By mutual agreement, this was kept confidential, as the subjects covered were at the time illegal in the USSR. Promoting or teaching such practices in the USSR were criminal offences subject to imprisonment. The reason for the request is that there was a very uneasy feeling inside the Soviet Union that the old ways were no longer working, so perhaps it was time to look closely at what alternatives there are.
That was the Soviet legacy just three years before the first exchange opened in the country soon to be called Russia. Until 1990 to own a percentage of a business outright was not possible, exchanging a ruble for a dollar got you years in jail, and investing in anything was a federal crime called “speculation”, and calling a person “speculator” had the effect of a four-letter word. It is important to see and understand the incredible developments in Russia today and appreciate through what crucible of perception and change did this alchemy work to create the foundations of today’s market based Russian economy.
What really stimulated the formation of the first exchange was that the government felt that simply selling state-owned assets, as opposed to the voucher program, would have likely resulted in the further concentration of a tight circle of ownership. Ownership among those who had the education or exposure to take advantage of the program, namely party related insider cliques and remnants of the “Red Management”. This the government tried to avoid by using the voucher program. As it turned out, despite best intentions, insiders did end up buying control over most of the assets. From 1992 to 1994, the state transferred ownership of more than 15,000 firms through the voucher program. Although the program did not achieve all it envisioned, an enormous mass of assets did enter the new private sector quickly and formed some relative basis for market competition and the trading of shares. Roughly 98% of the population participated in this program.
The vouchers, each corresponding to a share in the national wealth with a face value of 10,000 rubles, were equally distributed among the population. They could be exchanged for shares in enterprises being privatized. Because most people did not understand the program, or what market economics were, what investing in assets was, or were very poor, they quickly sold their vouchers for cash. Such sales were mostly well below the face amount (kopeks on the ruble). Most vouchers, hence shares, were bought this way by management of the newly privatized enterprises.
Today, the broad mass of Russians are still not entirely comfortable with the idea of owning stocks as opposed to simple interest bearing products offered by retail banks. This is changing, especially among the under 35’s who are using the internet to trade shares or through approved brokerages. Still the percentage of free-floating shares owned by private Russian investors is estimated to be below 10%. This is certainly still ‘early days’.
Today, I have learned from OPKO Russia Market Partners that a growing number of non-Russian companies (Latin American, Indian, Asian and MENA) have been in-country looking to invest in establishing separate 100% stand-alone Russian companies. Their desire is to diversify, and have such operations delinked from the Euro or US Dollar, trading in Rubles, or Ruble/Yuan. Additionally, given the unipolar restrictions of trade and business currently in vogue, some businesses are looking to establish what I guess can be called “foster twins” in freer trade environments. The view is towards investing in Russian securities and paper as local companies. In addition, setting up manufacturing, processing, or R&D facilities within Russia’s regions.
There is also interest in the possibilities of using such market presence to possibly IPO via the MOEX. The advantages are several, fundamental, regulatory and from various tax perspectives. The attractors despite geopolitical risk are ready market access, solid positive rates as well as the relative stability of a responsive, well managed central bank, and of course increasingly steady Russian/Eurasian development.
The value of the MOEX is not just as an exchange, but also as an information resource for doing business in Russia and Eurasia that is invaluable. The depth of publicly available information through the exchange is impressive, and the reporting standards for transparency quite high. While many analysts do their research covering the top traded companies, the vast underbelly of the market remains relatively untouched and unexamined.
The fundamental trends and signals these companies show are the paths to areas of opportunity not readily or widely publicized by media. The areas cover commercialized high technologies, genetics, medicines from stem cells, gas to liquid technologies, agriculture, aquaculture, transport, infrastructure and much more. In the fullness of time, this too will change, and those hundreds of secondary listed firms throughout the many regions of Russia will emerge, but no doubt will be valued far higher than today.
For those who would be interested in learning about the Russian markets from the source, and judge for yourself the actual state of affairs and standards of professionalism, I suggest attending the free annual Exchange Forum hosted by MOEX this coming November 15th in Manhattan. Their link can tell you more http://moex.com/en/. I believe that by seeing what is in place, the opportunities represented, and the actual record of accomplishment can be of benefit to define fact from noise, and thereby illuminate very real opportunity.
This post first appeared on Russia Insider
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