The Moscow Exchange is joining with Bank of New York Mellon Corp., the world’s largest custody bank, to ease conversion between Russian stocks and depositary receipts as it changes rules to lure foreigners to domestic equities.
The bourse is trying to overcome foreign investors’ preference for equities traded outside Russia, which has left the 30-day average value of London trades in 10 of the biggest Russian companies, including OAO Gazprom and OAO Lukoil, about 43 percent greater than in Moscow. The Bloomberg Russia-US Equity Index of the most-traded Russian companies in the U.S. advanced for a third day yesterday while RTS stock-index futures slipped 0.2 percent in U.S. hours.
Russia’s main stock exchange, whose shares have plunged 15 percent this year, is moving to a two-day settlement system and smoothing the process for changing between local shares and DRs to make the Moscow bourse more attractive. BNY Mellon, which operates 70 percent of the depositary programs in Russia, will help develop the structure to make the conversion easier and faster, according to Graham Marshall, the bank’s regional manager for Russia and the Commonwealth of Independent States.
“Until now for lots of investors there really hasn’t been a choice, they felt obliged to buy depositary receipts or to avoid Russian stocks,” Marshall said in a telephone interview from London. “That will change and we will see more people buying local stocks, which is good for the Russian market and brings more investors to Russia.”
Easing the share conversion will help eliminate the price difference between local stocks and those traded abroad, according to Eddie Astanin, board chairman at the National Settlement Depository, or NSD, a unit of the Moscow bourse. The gap between the 30-day average value of trades in the biggest Russian companies in London and Moscow has been declining from a 74 percent gap on May 3. The comparison includes Gazprom (OGZPY), Lukoil and eight other companies with at least five years of trading history in both markets.
The NSD sees the start of the expedited share conversion mechanism in the fall of 2013, NSD’s spokeswoman Tatiana Newcomb, said by e-mail today. BNY is in the process of approving the project, she said.
Russia wants to repatriate part of the fund flow from international markets back home, reducing the number of Russian equities traded abroad to between 20 percent and 25 percent of the total by 2015, from about 40 percent currently, the Moscow Exchange Chief Executive Officer Alexander Afanasiev said in an interview on June 4.
Russia’s main stock and fixed-income exchange will move from the current system of T+0, in which trades must be settled on execution, to a T+2 mode for all equities on Sept. 2, Afanasiev said on June 4. The exchange plans to introduce two-day settlement for 35 more stocks from July 8, boosting the total number of equities using T+2 and T+0 to 50, and will switch off same-day settlement for all shares on Sept. 2, according to Afanasiev. The Micex Index (INDEXCF) added 0.7 percent to 1,334.80 by 1:07 p.m. in Moscow.
DRs can only account for 25 percent of a company’s shares and 50 percent of its listed shares, according to Russia’s market regulator. The Moscow Exchange is pushing for the abolition of limits on converting local shares into DRs as it seeks to lure more foreign investors to trade on Russia’s main fixed income and equity bourse, Evgeny Fetisov, chief financial officer of the exchange, said in an interview on April 9.
Russian companies including OAO Mobile TeleSystems (MBT), the biggest mobile provider, and retailer Magnit trade as much as 27 percent higher abroad than they do in Moscow as the limits on their DR programs have been reached.
“First the government needs to create a strong local investor base,” Aleksei Belkin, who helps manage about $6.8 billion in assets as chief investment officer at Kapital Asset Management LLC in Moscow, said by phone. “Without domestic investors, we might see even more outflow of shares from Russia.”
The Bloomberg Russia-US gauge climbed 0.7 percent in New York yesterday to 86.08, the highest level since June 7. The Market Vectors Russia ETF (RSX), the largest dedicated Russian exchange-traded fund, advanced 2 percent to $25.67, a two-week high, and the RTS Volatility Index, which measures expected swings in futures, dropped 2 percent to 27.25.
Yandex NV (YNDX), Russia’s biggest Internet company, rallied 2.9 percent to $27.30 in New York yesterday, the highest level since May 30. Yandex is holding a press conference at 11 a.m. local time in Moscow today.
Gazprom, the nation’s biggest company, increased 0.7 percent to $6.92 in New York, settling at a 1.5 percent discount to the company’s Moscow-listed shares, the biggest gap this month. Gazprom’s board of directors meets in Moscow today to discuss the company’s Shtokman project, which is aimed at producing liquefied natural gas in the Arctics, the company said in a statement yesterday.
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