Russian dreams at the funeral of the stock market

12.10.2011 — Analysis

The next few years are expected to be a very trying time for Russia. The export of capital is growing; the country is facing the liquidity crisis. Money is withdrawn by subsidiaries of foreign banks; the twenty-year-long reforms have failed to establish domestic institutions for long-term financing. Experts talk about degradation of the Russian stock market: the largest manufacturing companies refused from listing on Russian stock exchanges. After the government's shady deals with the stick of Vneshtorgbank (the Foreign Trade Bank), the population lost any interest to securities. Somber investment forecasts prompted a natural question from the RusBusinessNews columnist: What sources do some Russian regions intend to use to boost investment in their economy?

At the annual conference of the National Association of Stock Market Participants (NAUFOR) in Ekaterinburg, Oleg Vyugin, the chairman of the Board of Directors of MDM-Bank, OJSC, said that the present-day economic situation in Russia is similar to the crisis of 2008: The ruble is weakening, banks export capital, investment activity is shrinking, and the shortage of liquidity is becoming more and more pressing. Russia has become to a large extent a victim of sizeable debt obligations of the USA and Europe, which trapped the banking system of the country. Money is "exported" mostly by subsidiaries of foreign banks as well as Russian lending institutions exchanging rubles into dollars.

Whether the liquidity crisis will grow into a large-scale crisis will depend on oil prices and easing of the monetary policy in the USA and the European Union. Vyugin thinks that the Federal Reserve System will have to pep up the economy, which will result in oil price appreciation. The recapitalization of banks in Europe, which will substantially revive the market, will also be to Russia's advantage. However, the upward trend observed in 2009-2010 will not be as impressive: The Russian GDP will be able to increase maximum by 2-3%. The country is most likely heading for an L-shaped growth: the economic recession followed by long-term stagnation.

Russia is reaping the consequences of the absent national capital in the country and its excessive dependence on foreign markets. The notorious dependence of the economy on oil prices stems from underdevelopment of investment institutions, according to Alexei Timofeyev, the chairman of the NAUFOR board. Only 750 individual investors are registered on the Moscow Interbank Currency Exchange. The population is not interested in the stock market and mutual investment funds: their net asset value account only for 0.3% in the Russian GDP. It means that Russia does not have such institution as mutual investment funds. Non-governmental pension funds have nothing to boast about: This institution also stays idle.

The analysis of the stock market shows that capitals are distributed very unevenly in the country: 10 large companies account for 61.6%. The oil-and-gas sector accounts for 47% in the capitalization, which gives very clear explanation why the market depends on oil prices. Sberbank and Gazprom account for more than one half of the turnover on the stock exchange. The IPO market has died out in Russia: Manufacturers set up holding companies and have their IPOs in other countries, raising up to 70% of investment. Russian companies turn into foreign ones almost overnight.

The above trend puts an end to the plans of the RF government that intends to open an international financial center in Moscow: Russia accounts only for 2% in the world capitalization, while China accounts for 7%, and the USA - for 31%. Experts do not understand how the country whose citizens are not interested in finance can become a financial center. Only 0.7% of the Russian population is engaged in investment, while in China they account for 7%, i.e. 94 million people (exceeding the USA by four million).

Elena Kuritsyna, the deputy head of the Federal Financial Market Service, explains the Russian people's unwillingness to deal with investment by a number of reasons: There is no protection of private property; investors' rights are infringed; the adequate judicial system is absent; the decisions made by government authorities lack transparency, etc. However, the main problem is chronic poverty of the Russian population: What investment can be talked about, if the income level of the most citizens is just slightly above the minimum subsistence level? Rich people are reluctant to save: There is no sense in investing money in a non-governmental pension fund in the situation when it is absolutely unclear what exchange value of the ruble they are going to encounter in 20 years.

The government authorities leave the above problems unsolved for many years; so, there is nothing astonishing in the fact that other countries enjoy torrid growth of investment institutions and financial literacy of population, while Russia cannot get out of the economic stagnation.

Industrial regions are hit hardest by the stagnation. According to Yevgeni Sofrygin, the Minister of Economy of the Sverdlovsk Region, the growth rates are slowing down in machine-building and the population's savings are melting. The citizens have nothing to save against the rainy day, let alone to invest: The growth of the wage in 2011 (according to the official forecast - by 14%) will be "eaten away" by inflation.

Nevertheless, the minister is full of optimism: The program masterminded by the officials - Improvement of Investment Attractiveness of the Sverdlovsk Region - will triple the amount of investment in the region by 2015 - up to 600 billion rubles a year. Yet, the experts are puzzled how the government is going to stimulate business activity when funds are flowing out of the country and the country has no national capital. The answer might be found in specifics of the Russian political culture: The promise of marriage does not mean walking down the aisle.

Vladimir Terletsky