Access to the Russian equities market from overseas is relatively straightforward, but doing business is not. The Russian market has seen substantial overseas investment over the past decade, mainly accessed via the depository receipt (DR) market. But now local brokers are beginning to offer direct access, circumventing the complexities of a market infrastructure built for security rather than ease.
Economically, Russia has long held appeal for investors. A resource-rich country, it was seen as a land of opportunity by many following the fall of communism. The new equity market that was created was immature and had few rules, which added to the other risks of being an early mover, such as state intervention in commercial businesses, ownership of mammoth enterprises by individual oligarchs and extreme volatility in asset values.
Nevertheless, the opportunity has become reality. In 2009, Russia was the world's largest producer of oil, the largest exporter of natural gas and the eighth largest economy by GDP.
Russia's reliance on exports – particularly oil – saw it take a big tumble following the 2008 financial crisis. But it has recovered and its low public debt and leverage, combined with substantial fiscal reserves, mean it still holds attractions for investors. Russian GDP is generally predicted to grow between 3% to 3.5% year-on-year for 2010.
Investment through depository receipts via the stock exchanges of London, New York and elsewhere offers an easy and recognised route into the Russian market. The trading systems and infrastructure are familiar and trades are denominated in dollars. The downside is that not all stocks have DR programmed and that trading in DRs can ”max out' leading to artificial increases in price.
Trading directly offers the full range of stocks but there are challenges. Technology is not the issue here. Using FIX any buy-side firm should be able to connect to a broker. The challenge is caused by the market structure.
Stock exchange MICEX, which has the majority of Russian equity liquidity, currently operates a T+0 policy, meaning that securities and cash need to be deposited with the exchange's depository chamber before trades can take place. This makes rapid electronic trading difficult without connecting directly to Russian brokers operating under the Russian regulatory system; shorting becomes virtually impossible.
Operational complexity around settlement and market infrastructure means that development of low-latency offerings has been limited, with some bulge-bracket brokers preferring more easily navigated markets.
However change is afoot. Local firms have begun to establish new DMA methods to access the market.
The potential such innovation creates is enormous. Research firm TABB Group estimates that the amount of electronic trading will rise to $264 million per day in 2010 and $845 million – or 20% of daily value traded – in 2012, from $37 million in 2008.
Competition between dollar-denominated exchange RTS and ruble-denominated MICEX is heavily weighted in favour of the latter at the moment, but as post-MiFID Europe has proven, liquidity can move. This too could prove a driver for increased connectivity.
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