Download - Accessing Russia 2012
Chairman’s welcome
Stuart Adams FPL EMEA Regional Manager
THE RUSSIAN INVESTMENT STORY
Speakers:
Rachel Ziemba, Director of Central and Eastern Europe, Middle East and Africa (CEEMEA)
and global macroeconomics, Roubini Global Economics (Chair)
Kevin Dougherty, Founder, KDGF Asset Management
Johan Elmquist, Portfolio Manager/Founder, Tundra Fonder AB
Tom Mundy, Chief Strategist, Otkritie Capital
Presentation MICEX-RTS Ekaterina Anthony
Global Business Director
MICEX-RTS UPDATE
INVESTOR PRESENTATION
May 2012 London
6
Leading Russian capital marketplace 1
6
Russia - unique investment opportunity
Top 3 Economy by
GDP growth rate
among top 10
Largest Economies (4,3% in 2011) High Growth
Economy and
Strong Domestic
Market
Strong Internal
Demand Macroeconomic
Strength
9-th Largest Economy in
the World
2011 GDP US$1,8 tn.
The lowest
Government Debt to
GDP among Top 10
Largest Economies at
only 7% in 2011
Pension Funds
Savings size of
US$90 bln. by 2013
(US$47 bln. US in
2011)
Sochi Olympics in
2014 and World Cup
in 2018
Privatization
program of
US$32 bln. In
2012-2014
Increase in GDP per
capita from US$ 2K
in 2001 to US$ 13K
in 2011
Decreasing
Inflation (8,8% in 2010,
6,1% in 2011)
4 7
Russia has critical mass to have a developed and independent Financial Market
Source: Ministry of Economic Development of the Russian Federation, FCSM,
Federal State Statistics Service Thomson Reuters
159
93
39
MICEX-RTS WSE Wiener Borse Hellenic Exchange
2457
1394 1225
877 852
Shanghai SE BM&FBOVESPA Bombay SE MICEX-RTS Johannesburg SE
8
Leading growth markets platform
MICEX is the largest stock exchange in
CEE/CIS region by capitalization of traded
companies
significantly ahead of all other players
accumulating ~70% of liquidity in CEE and
CIS region
MICEX-RTS is on par with the biggest
exchanges of the rest of BRICS countries by
capitalization of traded companies
in the past 6 years equity market
capitalization has been growing at a CAGR
of 33%
MICEX-RTS trading turnover in 2011 totaled
US$1tn in equities and fixed income turnover*
Scalable platform covering all asset classes
Source: World Federation of Exchanges (Jan 2012)
* REPO transactions not included
BRICS exchanges by equity market capitalization (Jan 2012, US$bn)
Key CEE exchanges’ market capitalization (Jan 2012, US$bn)
877
Comments
8 Source: World Federation of Exchanges (Jan 2012)
* MICEX-RTS Data, REPO transactions not included
Vertically integrated exchange in rapidly
growing economy (real GDP growth 4,2% in 2011) 2
Leading platform for multi-asset trading of
Russian instruments: stocks, bonds, repos, FX
and derivatives
Operates its own clearing, settlement, and
depository infrastructure creating efficiencies
for pre to post trading services
MICEX-RTS is Top 5 by Fixed Income and Top
10 by Cash equities trading turnover in Europe3
Tailwinds by Russian economy
Strength Share in trading of Russian instruments (2011) 1
OTC Other
Equities 49,1% 29,1% 21%
FX (RUB/USD) 21,3% 78,7% n/a
REPO
Market 100% n/a n/a
Derivatives 93,4% n/a 6,6%
Fixed
Income (corporate
bonds)
89,2% 10,8% n/a
9 Note: (1) MICEX-RTS research
(2) The Economy Ministry of Russia
(3) WFE
Note: (1) NPI stands for New Product Introduction
(2) CCP stands for Central Counter Party
Cash Equities FX Repo Fixed Income Derivatives
Trading Volume
in 2011 $670bn $2,944 $3,869bn $380bn $1,938bn
Listing/NPI1 IPOs
Trading T+3
Clearing Introduce CCP2 Introduce CCP2 Introduce CCP2
Settlement
Central Depository
Law has come into
force
Data
dissemination &
Information
solutions
• Launch pre-trade pricing, data and risk analytics solution
• Enhance online data availability and distribution capabilities
Technology
services
• Co-location
• Points of Presence
• Access Protocol
10
Areas of expertise Key areas for development
MICEX-RTS: Opportunity to cover more asset classes and develop
more added-value pre-to-post-trade services
10
Note: (1) MICEX -RTS data
(2) NPI stands for New Product Introduction
(3) CCP stands for Central Counter Party
1
11
Clear strategy: already on track 2
11
Strong ambitions for further development
Current value1 and strategic ambition (US$mn)
Strategic goals
MICEX-RTS strategic ambition is to be in Top 5
of the world’s exchanges by market capitalization
Our near-term focus:
Become the platform of choice for international
traders and investors buying Russian and CIS
securities
Become the platform of choice for Russian and
CIS companies for IPO/SPO, bonds and
derivatives instruments
Drive and support infrastructure and legislative
improvements to attract further trading
volumes from foreign and domestic institutional
investors
Win market share in equities via increased
volumes vs. OTC and other venues
Increase derivatives product offering and
trading opportunities to foster related trading
volumes 4.044
4.346
4.491
4.600
5.728
6.058
7.263
8.919
12.496
13.583
18.279
19.002
4
6
8
3
10
2
1
5
7
9
12
11
12
Note: (1) Ranking by market capitalization. Market data (Bloomberg) of 07/02/2012 for all
players other than MICEX-RTS
(2) MICEX and RTS valuation as of deal parameters
2
13
Key growth drivers
3
13
14
Key Growth Drivers
Bring infrastructure
and business
practices in line
with the best
international
standards
Attract foreign
investors
Develop
IPO/SPO
market
Key Growth
Drivers
Further develop
Russian investor
base
14
What has been done and what is planned
Bringing business practices in
line with international standards
Создание российской
инвестиционной базы
Development of the IPO/SPO
market
Task Done in 2011
• Adoption of the Law on the Central
Depository (CD)
• Launch of trading involving the Central
Counterparty
• Cancellation of the capital gain tax for
nonresidents
• Privatization in Russia
• Optimization of the issuance procedure
• Modernization of listing (e.g. new
quotation lists)
• Bringing the standards of information
disclosure and corporate governance in
line with international standards
• Changes in the requirements for
preservation of non-state pension
funds’ assets as a result of revaluation
(abolition of the requirement of the
annual breakeven result)
• Changes in regulations on information
disclosure: disclosure in English (with
subsequent translation into Russian),
financial reporting under IFRS
Attraction of foreign investors
Expected in 2012
• Ensuring compliance of the NSD with
requirements for CD
• Implementation of T+3 and DVP
settlements
• Bringing the clearing infrastructure in line
with international standards
• Liberalization of the criteria of investment of
the means of the Pension Fund of the
Russian Federation, non-state pension
funds and insurance companies
• Expanding the possibilities of investing the
means of sovereign funds
• Measures to motivate individual investors
• Creation of new types of instruments
(ETF, structured products)
• Modernization of technologies of access
to trading (DMA, co-location)
• Motivational tariff policy (e.g. volume
discounts)
• Creation of an English-speaking
Customer Support Center
• Regulation of cross trades
Creation of the Russian
investor base
15
NSD – the CSD of the Russian Federation
Comments Modernization
New CSD law and NSD status
• Only one depository can have the status of the CSD
• NSD meets all legal requirements for the CSD
• In fact NSD is the only to contender to get the status of
the CSD
• NSD is expected to get the status of the CSD in July-
August 2012
All additional AGC requirements are answered
• Special CSD regulation
• Finality of CSD settlement
• Special status of CSD nominee accounts
• Obligatory reconciliation between the CSD and
registrars
• CSD records prevail registrars’ records
Now
NSD as CSD
16
Main market Main market
T+n Project Overview
Liquid shares
«Т0»
Market Sector
Standard
Liquid shares
«T+3»
17
•«T0», «T+3» (SPOT) •«FORTS» (Derivatives) •FX (next step)
Single cash position
•Collateral: RUB, USD or securities
•Collateral assets usable for delivery Partial collateral
•Arbitrage strategies
•Currency hedge
Implementation of complex strategies
•Major international investors Increased liquidity
Liquid stocks and RDRs - TOP 35
Foreign securities
Liquid stocks and RDRs - TOP 50 Foreign securities
Government bonds
Liquid stocks and RDRs - TOP 50 Government bonds and corporate bonds - TOP 15 Foreign securities
35
60*
75*
First stage
Second stage
Third stage
*
* - number of issuers
12.1
51.9
64 27
27
25
25
21 21
4.5
16.5
21
4
4
Total ПФР+НПФ Банки Частные инвесторы Суверенные фонды Страховые компании ПИФ
2011 2013 Insurance
Companies
Sovereign
Funds
Pension
Funds
Key Growth Factors*
US $72,6 bn
US $ 161,7 bn
Потенциал роста внутренней инвесторской базы
Growth of Insurance
Companies’ reserves
Liberalization of the
criteria of investment
of the means of
insurance companies
Expanding the
possibilities of
investing the means
of sovereign funds
Growing domestic institutional investor base and developing legislative
environment are reliable sources of Russian financial market development
18
Growth of Pension
Funds assets
Liberalization of the
criteria of investment
of the Pension
Funds’ assets
18
Domestic investors’ demand has huge growth potential
*All numbers are projections and are based on MICEX-RTS team’s calculations ; the numbers represent the funds invested by domestic investors in free-float of Russian companies
Pension
funds Banks Private investors Sovereign Funds Insurance Companies Mutual funds
Source: OECD and National League of Managers for Russia
73%
As % of GDP
64% 81% 82% 5% 4% 2% 16%
2
2 1
1
3
Pension system development will drive investment
Pension funds assets structure (2010) - Significant
opportunity
Currently Russian pension funds savings are
concentrated in low-yield bonds that represent
84.4% of their total investment portfolio due to
regulatory limitations
Less then 0.7% of local pension funds
savings are currently invested in equities
MICEX-RTS is actively involved in development
of new legislation which will stimulate
institutional investment into the equity market
We expect significant growth in total volume of
available savings of the pension funds
The major investment inflow should be driven by
pension funds after liberalization of pension
savings allocation regulation
Insurance market development and
recapitalization will also bring additional
investment
Pension funds assets (US$bn, 2010) - Significant
opportunity
19
Note: (1) 2009 numbers for UK
(2) Source for Japan: Tower Watson
(3) Other includes: loans, land and buildings, unallocated insurance contracts, private
investment funds and other investments
Comments
Russia’s privatization plan likely to attract foreign investors and
increase number of IPOs/SPOs
2012 2013 2014+
60
76
91
100
100
56
66
79
Sberbank
VTB
Alrosa
Sovkomflot
Rus.Helicopters
Rostelecom
Ilyushin Finance
FSK
FNL
FNL
MM
TRSP
MNF
TLC
MNF
PWR SPO
IPO
SPO
IPO
IPO
IPO
SPO
SPO
52
100
100
100
PWR
FNL
MNF
TRSP
58
Inter RAO
Rosnano
OSK
Sheremetyevo
RusHydro PWR
IPO
IPO
IPO
SPO
SPO 50 PWR Gazprom Energo IPO
IPO
IPO
IPO
TRSP
Russian Agri Bank
70
100
100
RosAgroLeasing
Russian Railways
FNL
FNL
Russia plans to launch a privatization program in 2012-2014+
The size of the program is over $32 billion*
It has been officially announced that privatization will take place in Russia
with further listing at MICEX-RTS.
Gov.
Share Company Industry Deal type
Gov.
Share Company Industry Deal type
Gov.
Share Company Industry Deal type
75 O&G Rosneft SPO SPO TRSP 51 Aeroflot
IPO Uralvagonzavod 100 MNF
IPO Zarubegneft 100 O&G
IPO OAK 83 MNF
O&G Transneft IPO 100
20
Source: Dealogic, Offerings.ru, Ministry of Economic Development of the Russian Federation, Russian Privatization Plan
* http://www.economy.gov.ru/minec/about/structure/depreal/doc20101123_01
- Depository receipts of Russian issuers - IPO/SPO of Russian companies - Eurobonds of Russian issuers
- Shares of Russian issuers - IPO/SPO of Russian companies
- IPO/SPO of Kazakh companies - Depository receipts of Russian issuers - IPO/SPO of Russian & CIS companies - Eurobonds of Russian issuers
- IPO/SPO of CIS & CEE companies
- IPO/SPO of Belarusian companies
- IPO/SPO of Ukrainian companies
MICEX-RTS seeks to be the primary center for price discovery, trading,
clearing and settlement for Russian and CIS financial instruments
Returning Liquidity back to Russia
21
Header 1 Header 2 Header 3
Text Text Text
Text Text Text
Text Text Text
MICEX-RTS technology and infrastructure services
• Connectivity solutions through domestic and global Network Service Providers and
international points of presence
• FIX and FIXFAST as well as proprietary APIs for execution and market data delivery
• Accessibility through Independent Software Vendors and trading networks:
Bloomberg, Reuters, Fidessa, Sungard, CQG and others
• Comprehensive exchange colocation with variable footprint sizing options
• Certification and testing environment services for new client/vendor technologies
• Dedicated client relationship team for a smooth on-boarding process
Connectivity solutions
• 300+ electronic broker systems certified to access the Exchange
• The Exchange is accessible by more than 15 telecommunication providers including
BT Radianz, SFTI and Orange, and more are coming
• Three data centers in Moscow
• Client connectivity protocols: Proprietary API, FIX trading interface, UDP multicast
FIX FAST
22
Thank you for your time and support!
23
Ekaterina Anthony
Global Business Director
MICEX-RTS
+ 44 781 494 0974 (UK)
+41 786 82 09 74 (Swiss)
23
Disclaimer
• This presentation has been prepared and issued by Open Joint Stock Company "MICEX-RTS" (the “Company”). Unless otherwise stated, the
Company is the source for all data contained in this document. Such data is provided as at the date of this document and is subject to change without
notice.
• This document does not constitute or form part of, and should not be construed as, an offer or invitation for the sale or subscription of, or a solicitation
of any offer to buy or subscribe for, any securities, nor shall it or any part of it or the fact of its distribution form the basis of, or be relied on in
connection with, any offer, contract, commitment or investment decision relating thereto, nor does it constitute a recommendation regarding the
securities of the Company.
• The information in this document has not been independently verified. No representation or warranty, express or implied, is made as to, and no
reliance should be placed on, the fairness, accuracy or completeness of the information or opinions contained herein. None of the Company, or any of
its subsidiaries or affiliates or any of such person's directors, officers or employees, advisers or other representatives, accepts any liability whatsoever
(whether in negligence or otherwise) arising, directly or indirectly, from the use of this document or otherwise arising in connection therewith.
• This presentation includes forward-looking statements. All statements other than statements of historical fact included in this presentation, including,
without limitation, those regarding our financial position, business strategy, management plans and objectives for future operations are forward-looking
statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results,
performance, achievements or industry results to be materially different from those expressed or implied by these forward-looking statements. These
forward-looking statements are based on numerous assumptions regarding our present and future business strategies and the environment in which
we expect to operate in the future. Important factors that could cause our actual results, performance, achievements or industry results to differ
materially from those in the forward-looking statements include, among other factors:
– perception of market services offered by the Company and its subsidiaries;
– volatility (a) of the Russian economy and the securities market and (b) sectors with a high level of competition that the Company and its subsidiaries operate;
– changes in (a) domestic and international legislation and tax regulation and (b) state policies related to financial markets and securities markets;
– competition increase from new players on the Russian market;
– the ability to keep pace with rapid changes in science and technology environment, including the ability to use advanced features that are popular with the Company's and its
subsidiaries' customers;
– the ability to maintain continuity of the process of introduction of new competitive products and services, while keeping the competitiveness;
– the ability to attract new customers on the domestic market and in foreign jurisdictions;
– the ability to increase the offer of products in foreign jurisdictions.
• Forward-looking statements speak only as of the date of this presentation and we expressly disclaim any obligation or undertaking to release any
update of, or revisions to, any forward-looking statements in this presentation as a result of any change in our expectations or any change in events,
conditions or circumstances on which these forward-looking statements are based.
24
Presentation NSD-DCC Karen Papoyan
Head of NSD-DCC Integration Communications
Office, Director of Risk Management & International
Relations, DCC
UPDATE – CSD IN RUSSIA
Building CSD in Russia
Karen Papoyan NSD-DCC Integration Communications Office
23 May 2012
• Market consolidates: MICEX and RTS merged to create a single integrated
exchange holding. Impact: trading defragmentation, increasing liquidity
• CSD law passed on Jan 1, 2012, implementation in progress
• NSD expected to become the CSD in Q3 2012
• Liberalization of Government bonds’ market (OFZ) in 2012
• Foreign nominee concept recognized, coming into force July 1, 2012
• Plans to launch T+3 for equities in November 2012
• Migration of DCC services to NSD to be completed by the end of 2012
• Liberalization of DR placement limits for non-strategic Russian stocks – expected
in 2013.
27
Russian Market – What’s New?
Integration Process
1
2
3
NSD to become the single settlement depository/bank of MICEX-RTS in 2012
May 2012
Parallel settlement depository for former RTS markets
July 2012
Single settlement depository for all MICEX-RTS trades
July 2012
Single settlement bank for all MICEX-RTS trades
End of 2012
Transfer of essential OTC services of DCC
28
Russian Market Consolidates
29
Came into force on 1 January 2012 except certain provisions:
• 1 Jul 2012 – provisions on foreign nominee account opening
• 1 Jan 2013 – no CSD nominee accounts with custodians for listed companies
Establishes:
• CSD legal status and operational requirements
• Procedure for granting the CSD status
• Government control and oversight of CSD activity
New account types:
• Foreign Nominee • Foreign Trustee • DR programs
at Custodians
at CSD • Foreign CSDs • Foreign ICSDs
Benefits:
•Lower costs: Fixed settlement fees (no more high bps registrar fees)
•Shorter settlement cycles: defragmented post-trade environment
•Simplified settlement: ‘spaghetti’ system with multiple settlement options eliminated
•17f-7 eligibility => green light for US funds
•Lower risks: One place of settlement – CSD
•CSD has exclusive rights to open nominee accounts at registrars
•Finality of settlement: issue solved
•Foreign Nominee: investors participate directly in corporate actions
•EDI mandatory for registrars: no more paper flows
CSD Law – Highlights
Global Custodian
Registrar
Local Custodian
CSD, ICSD ADR Issuer Trust
Owner
Limited foreign accounts, multiple settlement options
30
Before CSD Law
Investor
Owner Owner
Global Custodian
Registrar
Local Custodian
CSD, ICSD ADR Issuer Trust
DR program
Foreign Nominee accounts, centralized settlement structure
31
Investor
Foreign nominee Foreign Trustee
After CSD Law
CSD
Timeframe for obtaining CSD status
NSD submits application to FSFM to obtain the CSD status
FSFM reviews NSD documentation and activity to ensure compliance with CSD status requirements
Expected timeframe for obtaining the CSD status Opening of CSD’s nominal holder accounts at registers of securities shareholders
Q2 2012
Within 4 months of submitting documents
Q3 2012
Within one year of granting the CSD status to NSD
32
DISCLAIMER
This presentation has been prepared and issued by NSD (the “Company”). Unless otherwise stated, the Company is the source for all data contained in this document. Such data is provided as at the date of this document and is subject to change without notice.
This document does not constitute or form part of, and should not be construed as, an offer or invitation for the sale or subscription of, or a solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it or the fact of its distribution form the basis of, or be relied on in connection with, any offer, contract, commitment or investment decision relating thereto, nor does it constitute a recommendation regarding the securities of the Company.
The information in this document has not been independently verified. No representation or warranty, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy or completeness of the information or opinions contained herein. None of the Company, or any of its subsidiaries or affiliates or any of such person's directors, officers or employees, advisers or other representatives, accepts any liability whatsoever (whether in negligence or otherwise) arising, directly or indirectly, from the use of this document or otherwise arising in connection therewith.
This presentation includes forward-looking statements. All statements other than statements of historical fact included in this presentation, including, without limitation, those regarding our financial position, business strategy, management plans and objectives for future operations are forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, achievements or industry results to be materially different from those expressed or implied by these forward-looking statements. These forward-looking statements are based on numerous assumptions regarding our present and future business strategies and the environment in which we expect to operate in the future. Important factors that could cause our actual results, performance, achievements or industry results to differ materially from those in the forward-looking statements include, among other factors:
• perception of market services offered by the Company and its subsidiaries;
• volatility (a) of the Russian economy and the securities market and (b) sectors with a high level of competition that the Company and its subsidiaries operate;
• changes in (a) domestic and international legislation and tax regulation and (b) state policies related to financial markets and securities markets;
• competition increase from new players on the Russian market;
• the ability to keep pace with rapid changes in science and technology environment, including the ability to use advanced features that are popular with the Company's and its subsidiaries' customers;
• the ability to maintain continuity of the process of introduction of new competitive products and services, while keeping the competitiveness;
• the ability to attract new customers on the domestic market and in foreign jurisdictions;
• the ability to increase the offer of products in foreign jurisdictions.
Forward-looking statements speak only as of the date of this presentation and we expressly disclaim any obligation or undertaking to release any update of, or revisions to, any forward-looking statements in this presentation as a result of any change in our expectations or any change in events, conditions or circumstances on which these forward-looking statements are based.
© 2012 NSD 34
Presentation Otkritie Capital Tom Mundy
Chief Strategist
THE APPEAL OF RUSSIA
Accessing Russia 2012
Tom Mundy
Chief Strategist, Otkritie Capital, Moscow
May 23 , London
April 2012 37
1 Equity market valuations are compelling - LT sov debt yields contracting whilst earnings yields are rising. Russia
now 55% cheaper then EM, MXRU agg; div’ yield = LT sov debt yield.
2 Sovereign risk is manageable- Russia has ‘credibility’ problem, but not a ‘credit’ problem, FX reserves at $524bn,
debt repayment schedule manageable, GDP growth around 4%, inflation at record low, assuming oil stays at current
levels the budget should balance this year.
3 Political risk is subsiding - State is engaging society. New government, central role of the Kremlin dismantled, recent
protests a ‘wake up call’ for the Kremlin. Power has switched back to the President.
4 Transparency, efficiency and accountability among state run companies is improving - Raising dividend payout
ratios among state run companies, denying tariff increases for Gazprom, targeting cross holdings in state companies
5 Gov’ appears serious about tackling corruption – Creation of federal financial crimes task force, enshrining rights
for whistleblowers, joining OECD Anti-bribery Convention, clamping down on offshore companies, some improvement
in TI index.
6 Financial market infrastructure is moving to western standards – Creation of CSD, move to T+n settlement, all
listed companies to publish IFRS accounts by from July 2013, DR caps for non-strategic companies to be lifted from
25%, Strategic Sectors Lawbeing eased for Russian companies listing abroad.
7 Russia is integrating with global markets - WTO accession to be ratified this July, held up due to disputes with
Georgia and Russian protectionism, av’ tariff to fall from 10% to 7.8%, Russia benefits from access to WTO dispute
resolution mechanism, cements Russia’s commitment to a knowledge based economy.
8 Gov’ is committed to a balanced budget - Gov proposals to increase tax revenue by 2% of GDP in order to support
plans for increased spending in defense, public health and other government priorities, expect increases in MET, sin
taxes, excessive consumption tax, promote efficiency in budget allocation, move to program planning budget system.
9 Of course there remain plenty of risks - ST risk = Market remains high beta play on oil price, imports volatility form
EU, highly reliant on international flows, still no natural domestic buyer. LT risk = Reforms are painful, Putin will need
to spend political capital. Resolve may weaken, market tired of ‘reform rhetoric.’
8 reasons to BUY Russia and 1 reason to SELL
April 2012 38
Russia 30 yield
Otkritie Capital, Bloomberg
RTS fwd earnings yield
Otkritie Capital, Bloomberg
Russia discount vs EM
Otkritie Capital, Bloomberg
Russia 30 yield vs MXRU yield
Otkritie Capital, Bloomberg
1) Equity market valuations are compelling
Russia’s risk free rate has contracted
since the start of the year from 4.6%
to 4.3% - largely thank to the oil price
averaging $101/bbl since the start of
the year – 9% higher than the
average price over the last quarter of
2011.
However, it is the dynamics of the oil
price are more relevant to investors in
the near team. The oil price has fallen
from March, pushing up Russia’s
earnings yield to 22% and the implied
ERP to almost 18% vs 15% at the
start of January.
Russia is now trading at 55%
discount to EM with a dividend yield
now equal to the yield on the
country’s LT gov’ debt. The
argument for equities is compelling.
0
2
4
6
8
10
12
14
Jan-04 Jul-05 Jan-07 Jul-08 Jan-10 Jul-11
0
5
10
15
20
25
30
35
40
45
Jan-06 Jul-07 Jan-09 Jul-10 Jan-12
-100%
-90%
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
Jan-07 Jul-08 Jan-10 Jul-11
Russia PE Discount to EM Historic discount0%
1%
2%
3%
4%
5%
6%
Mar-10 Sep-10 Mar-11 Sep-11 Mar-12
MXRU div yield Russia 30 yield
April 2012 39
Structure of Russian reserves
CBR
Structure of Russian foreign debt,
$mn
CBR
Foreign Debt Repayments - All
repayments, $bn
CBR
Debt Repayments– Private sector
(non-financials/banks), $bn
CBR
2) Sovereign risk is manageable
Russia looks comfortable enough at a
sovereign level with reserves back up
to $524bn ($373bn in CBR Reserves,
$62bn in Reserve Fund, $89bn in
National Welfare Fund).
Foreign debt repayments are more
manageable now than in 2008 with
some $27bn in repayments in 3Q12
and $41bn in 4Q12. Russia’s debt
repayments in 3Q08 were $60bn
and $80bn for 3Q08 and 4Q08
respectively.
Russia’s stronger sovereign position
is reflected in declining sovereign
debt yields as the oil price has helped
rebuild FX reserves and corporates
have extended maturities. However,
the market trades the direction of the
oil price and volatility has driven
equity risk premiums higher.
0
100
200
300
400
500
600
700
1-F
eb-0
8
1-M
ay-0
8
1-A
ug
-08
1-N
ov-0
8
1-F
eb-0
9
1-M
ay-0
9
1-A
ug
-09
1-N
ov-0
9
1-F
eb-1
0
1-M
ay-1
0
1-A
ug
-10
1-N
ov-1
0
1-F
eb-1
1
1-M
ay-1
1
1-A
ug
-11
1-N
ov-1
1
1-F
eb-1
2
1-M
ay-1
2
CBR reserves Reserve Fund National Prosperity Fund
0
10
20
30
40
50
60
70
80
90
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
0
10
20
30
40
50
60
70
80
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
0
100
200
300
400
500
600
1-Oct-06 1-Oct-07 1-Oct-08 1-Oct-09 1-Oct-10 1-Oct-11
Government CBR
State-owned banks State-owned companies
Private banks Private companies
April 2012 40
Important government changes have been seen in May but Status Quo preserved
• Government was confirmed on May 21. Lots of new faces, but Putin retains control.
- Shuvalov remains the only First Deputy PM, the second in charge in the new government setup.
- Kozak, Rogozin, Surkov and Khloponin all retained the same Deputy PM posts and areas of responsibility.
- Power bloc in the Cabinet is firmly in the hands of Putin’s men: Serdyukov remains Defense Minister and
Kolokoltsev (Moscow police chief – close to Putin and Moscow Mayor Sobyanin) becomes Home Affairs Minister.
- Economic bloc is also made from Putin’s guard: Siluanov remains Finance Minister while Belousov (guy
close to Gref/Kudrin group) becomes new Economy Minister.
- Sergei Lavrov remains Foreign Affairs Minister.
• Presidential Administration confirmed May 22. Few new faces in positions of influence.
- Nabuillina joins as Advisor to Putin. Ivanov remains head of Presidential Administration
- Sechin not named in team – moves to head up Rosneft. Kudrin remains outside state structures.
Power vertical is being dismantled (to an extent)
• Threshold for parties entering Duma lowered to 5% from 7% / Direct election of regional governors (though
governors can still be dismissed by the President)/ Relaxation of rules to register parties (however coalitions still
forbidden).
3) Political risk is subsiding
April 2012 41
Payout Ratio and Dividend Yield
Otkritie Capital
FCF Yield
Otkritie Capital
Government is addressing the issue of low dividends amongst state-owned companies by enforcing a 25% payout ratio.
Though this appears to contradict government’s aim to limit its influence in company management we believe the move is
driven by a focus on efficiency. Recent proposals to increase MET and deny Gazprom tariff increases support this view.
The government is also looking at the issue of cross-holdings among state owned companies, particularly those that are
focused on infrastructure.
4) Improving transparency, efficiency and
accountability among state run companies
16%
9%
3%
23%
10%
8%
5%
2%
3%
2% 1
% 1%
0%
5%
10%
15%
20%
25%
Gazprom Rosneft Transneft Rostelecom Federal GridCompany
RusHydro
Payout Ratio (12E) Dividend Yield (12E)
16%
3%
-3%
6%
-11%
-10%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Gazprom Rosneft Transneft Rostelecom Federal GridCompany
RusHydro
FCF yield (12E)
April 2012 42
• Russia has historically lacked checks and balances. For example FSB and Office of the Prosecutor General have
internal bodies set up to monitor corruption. The creation of a federal financial crimes taskforce under First Deputy
PM Zubkov is encouraging.
• Protection for whistleblowers is weak. Russian state employees prefer to go the ECHR to report abuses. However
the Constitutional Court has recently upheld the rights of whistleblowers in the civil service and from 2013 slander
and libel will be defined by article 52 of the civil code, precluding a custodial sentence. This important step followed
the successful defence by Oleg Orlov of a libel suit brought against him by Ramzan Kadyrov
• Russia’s accession to the OECD Anti-bribery convention will hopefully bring more external supervision (Russia
joined the Council of Europe Group of States Against Corruption in 2007)
• Zubkov has proposed a draft legislation to make it harder for companies to create offshore structures, is
investigating the sources of capital flight and is pushing for firms to reveal beneficial owners
• TI Corruption Perception Index reported a moderate improvement last year from 154th to 143rd place. However,
Russia is still placed lower than Cameroon, Sierra Leone and Iran. Last year Russians paid $5.3bn in bribes to
teachers, policeman in “everyday situations” – double the level of 2001
5) The government appears serious about tackling
corruption
April 2012 43
• Creation of CSD should allow greater participation by foreign investors in the local market, reduce operational risk
and reduce transaction costs.
• T+n settlement will reduce operational hassles. Extending settlement will bring Russia in line with international
counterparts
• All listed companies will need to publish audited financial statements by May 2013. FSFR favours disclosure of
beneficial owners to receive voting rights and dividends.
• FSFR is planning to remove the cap on DRs for non-strategic companies (currently at 25%). Disclosure of beneficial
owners of DRs will avoid mandatory buyback requirements.
• FAS is trying to clarify laws on foreign listings. Up to 25% of a strategic company would no longer need government
approval. Suggestions even that limit could be raised to 50%. This is separate to the law which puts a 25% cap on
DRs strategic companies, but has encouraging implications
6) Financial market infrastructure is moving to
western standards
April 2012 44
• WTO Discussion will pick up ahead of ratification in July. Held up by dispute with Georgia, Kazakhstan and Belarus
Customs Union and arguments revolving around protection for specific sectors. For example, auto sector
protectionism. From Jan 2011 local component requirement for foreign automakers was raised to 60% + $500mn
minimum investment + production at 300,000 vehicles in order to get preferential 5% tariff.
• Existing members will not be able to impose unilateral restrictions on Russian exports. Russian chemical and meals
exporters are currently subject to over 100 anti-dumping quotas and tariffs. Measures can be challenged through
WTO Dispute Resolution Mechanism
• On average the legally binding tariff level for importing goods into Russia will be 7.8% vs 2011 level of 10% across
all products
• Tariff limit for agriculture products will be 10.8%, down from the previous 13.2%. Manufactured goods tariff limit will
drop to 7.3%, down from 9.5%. Dairy products will fall from 19.8% to 14.9%. Alcohol from 20% to 12.5%.
Automobiles from 15.5% to 12%. Medicines from 15% to 5%. IT products will go from 5.4% to zero. 49% limit on
foreign equity in telecom firms will be eliminated. Russia will allow 100% foreign ownership of retail and wholesale
businesses—and foreign universities will be allowed to set up branches. Foreigners will be allowed to take ownership
in Russian banks subject to an overall limit of 50% of all the capital in the Russian banking system (up from the
current 15%). The subsidized agricultural sector looks unlikely to suffer too much. Total trade distorting subsidies will
be reduced from $9bn to $4bn
• Cements Russia’s move to a knowledge based economy, based on innovation and competitive manufacturing.
7) Russia is integrating with global markets
April 2012 45
• Ministry of Finance is developing proposals to increase tax revenue by 2% of GDP in order to support plans for
increased spending in defense, public health and other government priorities – the so called “tax maneuver”
• The Cabinet has approved the main directions of tax policy for 2013-2015 though we expect more taxation reforms
to follow once the new Cabinet is in place.
• The Cabinet plans to increase the mineral extraction tax (MET) for gas producers and excise taxes for alcohol and
tobacco. The government will also consider increasing MET rates for producers of other natural resources, but this
issue will have to be discussed further.
• There is no clarity regarding future tax increases on property and 'excessive consumption.' Deputy Finance Minister
Sergei Shatalov said after the meeting that a new property tax could be introduced in 2014 and not in 2013 as
originally planned. The payroll tax rate will remain at its current level of 30% for the first RUB512,000 of salaries,
while any amount above this level will be taxed at a higher rate of 10% instead of the current 2%.
• Government is looking to move from budget allocation through government departments for federal programmes to
the so-called “programme planning budget system” which focuses on specific state programmes and is tied to
achievement indicators
8) The government is committed to a balanced budget
April 2012 46
Greece
• June election is a vote on EU membership. Coalition between ND, PASOK and Democratic Left most likely scenario
which could save Greece in short term. However, coalition will still need to agree to further austerity and Germany will
have to be lenient. Greece also has to fund EUR1-6bn a month in bond redemptions and coupons a month over the
next six months.
Spain
• 10 year yields approaching 6.5%. Spain still needs a bailout of its banking system of EUR125bn. PLL and ESM
should be flexible enough to meet this. However it would be insufficient to cover Italy. Run on Spanish and Italian
banks may have already started.
France
• Elections to National Assembly on 10-17 June. Should the Socialist not win a clear majority they will have to rely on
leftist parties and install a leftist PM. Best case would be to win a strong enough mandate to install a centrist PM.
Germany
• CDU loss in North Rhone Westphalia and coalition in Schleswig-Holstein could foreshadow grand coalition between
CDU and SPD in September 2013 elections.
9) Of course there remain plenty of risks
April 2012 47
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ELECTRONIC EXECUTION IN RUSSIAN
EQUITIES
Chaired by:
Stuart Adams, FPL EMEA Regional Director
Speakers:
Tatyana Frolova, Head of Electronic Trading Department, Aton
Chris French, Business Development Manager, London Stock Exchange's Equities &
Derivatives Peter Rowe, Director International Sales, Electronic Trading, Renaissance Capital
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Speakers:
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Sergey Shelyagin, Head of Technology Products and Services, MICEX-RTS