Page 46 - IFR Opportunities in Russian capital markets

CHAPTER EQUITIES – MARKET COMPOSITION AND 03 PERFORMANCE
Background
Russia's stock market was created in the early 1990s as a function of privatisation; if you have private joint stock companies where the owners have shares in these companies then you need a market on which to buy and sell these shares.
Like everything else in Russia's economy, privatisation broke every enterprise and market into its constituent pieces and much of the history of Russia's equity market has been about the process of putting all these pieces back together again into corporations.
The Russia Trading System (RTS) was itself set up in 1995 to consolidate the separate regional exchanges used to list newly privatised local companies into a united trading floor that covered the whole country.
It quickly became the default trading system (technically, it was not an exchange but a venue for organised over-the-counter, or OTC, trading of shares) and the RTS index remains the default reference index although its rival exchange, the Moscow Interbank Currency Exchange, or MICEX, has long since overtaken the RTS in terms of the volume of organised trading.
RTS development
The exchange has provided investors with an exciting time. Huge profits have been earned from investments in Russian equities, but investors have needed a strong stomach as the Russian market has been through at least two crashes and remains highly volatile.
The development of the Russian stock market can be roughly divided into three eras.
Inception to October 1997
Trading opened on 1 September 1995, with the RTS index set arbitrarily at 100. In the early days volumes were thin so that an investment of US$1m was enough to send the index soaring.
It took about a year for investors to build up any interest in the index. Most were waiting to see what happened in crucial elections in which the already ill Boris Yeltsin was competing with the resurgent Communist Party for job of President. It was in this period that the emerging oligarchs, who grabbed most of Russia's industrial jewels in the notorious loans-for-shares deal at the end of 1995, clubbed together to rescue Yeltsin's flagging popularity and ensure his return to office in early 1996.
Yeltsin’s re-election, or rather the overwhelming defeat of the Communists was the starting signal for the RTS, which began to rise quickly. With the prospect of a return to socialism behind them, investors concentrated on Russia's enormous potential and began to invest.
The first test came on 11 October 1994, a day that became known as Black Tuesday, after the value of the ruble on interbank exchange markets plunged by 27%, which sent the stock market reeling.
It took investors nearly another year to regain their confidence, but by the start of 1997 optimism returned with the rise of the so-called young reformers, who promised to push liberalisation and privatisation of the economy. In general, the macroeconomic picture was improving and both oligarchs and foreign companies selling their wares on the expanding Russian market – thanks to an overvalued ruble – were making fortunes. The performance of the index in its initial years is shown in Figure 3.1.
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