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bne March 2018 Companies & Markets I 23
emptive rights if the company issues new shares or makes tender offers, or the right to receive securities in the event of a reorganisation, amongst other things.
The underlying problem here is that the holders of DRs are
not formally recognised as the final beneficial owners of the share in many markets. In effect the custodian that holds the shares safely on behalf of the investor are also technically the beneficial owner of the shares – at least as far as the law is concerned. This confusion over ultimate ownership means a shareholder could be cut off from bringing a case in the Russian courts if the company abuses their shareholder’s rights.
More recently a new problem has surfaced. DRs expose the investor to the risk their depository bank may be put under sanctions – and VTB Bank has been sanctioned and is one of the biggest custodians in Russia. That has raised the question of if a bank registered in the EU or US is legally allowed to ask VTB, as the custodian, to vote their shares at an AGM
as technically international banks are not allowed to do “business” with sanctioned banks.
Add to this a confusion over converting DRs to local share owner- ship: does the local share ownership constitute the creation of new shares or the transfer of ownership of existing shares? The US regulator counts the conversion as the creation of new shares, which is banned by sanctions, but the EU says they are existing shares which is not, VTB told bne Intellinews in an interview.
Revolution in the market
In the past all this didn't matter much as the whole point of buy- ing emerging markets stocks is the potential returns that can be made from a well-timed investment were so big that all the costs were drowned out. Investors don't invest in emerging markets unless they think they can make a lot of money. For most of the last two decades the Russian equity market always returned at least 20% in any year that was not a crisis year but since 2008 the returns have fallen to single digits. Costs matter more now.
On top of that the reforms to Russia’s capital market in 2012 caused a revolution. The two main exchanges – the dollar denominated Russia Trading System (RTS) and its sister ruble denominated Moscow Interbank Currency Exchange (MICEX) – were merged and a Central Depository (CSD) was set up. The
RTS index performance 1996-2017
final piece was to sign the new system up to the Euroclear and Clearstream international settlement systems that plugged Russia directly into the international financial system.
Now a London-based trader can buy and sell stocks and bonds listed in Moscow from the comfort of their own chair. There is no more need for costly intermediaries and most of the Russia- based investment banks have closed or been consumed by the big state-owned banks. And there is no need for the DRs.
A third force driving the death of the DRs is the growing preference by Russian companies to list at home.
“In the 90s it was popular amongst Russian companies to list in London,” says Lapin, “that added to the value of the company’s brand.”
The Kremlin has been on a campaign to “de-offshore” the Russian economy, by encouraging companies to register themselves at home instead of using shell companies registered in some tropical haven.
“Since 2014 nearly all the Russian companies that listed have chosen to list in Moscow,” says Lapin. “It used to be 50/50.” And MOEX has been working hard to make the system even easier to use. Since December MOEX has set up the Sponsored Market Access (SMA) system that directly connects the Russian exchange's infrastructure to clients' systems abroad to make transactions easier and faster.
Sponsored Access provides clients of MOEX Member Firms direct technical access to the Moscow Exchange trading system using Member Firm's trading code. A client is able to give instructions to a Member Firm to be executed on the market directly through the trading system. To avoid erroneous
orders in the trading system, the Moscow Exchange provides sponsoring firms with risk management tools, the Exchange explains on its website.
“You can buy Russian listed shares in New York and pay for them via SMA which means you don't need to move money abroad,” says Lapin. “All exchanges are now like national exchanges subject to the local laws. It's a much simpler way to raise capital.”
Year
RTS index (eop)
% change y/y
Year
RTS index (eop)
% change y/y
1996 1997 1998 1999 2000
201 397 59 175 143
142 98 -85 197 -18
2007 2008 2009 2010 2011
2291 632 1445 1770 1382
2001 2002
257 359
79 40
2012 2013
1527 1443
2003 2004
567 614
58 8
2014 2015
791 757
-45 -4
2005 2006
1126 1922
83 71
2016 2017
1152 1124
52 -2
19 -72 129 23 -22
11 -6
Source: Aton, Bloomberg
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