The premiums on stock traded abroad of OAO Mobile TeleSystems and OAO Magnit over their Moscow shares are shrinking as Russia moves to abolish limits on converting equity.
American depositary receipts of Mobile TeleSystems, the country’s biggest mobile phone company, traded at a 14 percent premium to the company’s Russia-listed shares yesterday, the smallest gap since Jan. 30. Global DRs of food retailer Magnit traded at a 15.7 percent premium Feb. 12, the narrowest spread since April 5. The Bloomberg Russia-US Equity Index of the most-traded Russian stocks listed in the U.S. climbed to a one-week high yesterday, while RTS Index stock futures fell.
Rules requiring trading accounts be set up through local custodians and immediate settlement procedures are among quirks of the Russian market that spur foreigners to buy company DRs traded in developed nations. As it modernizes the Moscow Exchange in a bid to lure more investment, Russia will scrap regulations that limit DR conversions to a portion of a company’s stock by July 2014, Elena Kuritsyna, the deputy head of the market regulator, said in Moscow yesterday.
“After the limits are canceled, the arbitrage is dead,” Ian Hague, co-founder of New York-based Firebird Management LLC which manages $1.3 billion of assets including Russian stocks, said in a phone interview from Tbilisi, Georgia, yesterday. “That is a progressive step. It has potential to increase liquidity dramatically.”
The Bloomberg Russia-US gauge rose 0.4 percent to 104.60 yesterday, the highest level since Feb. 6. Futures expiring in March on Moscow’s RTS measure fell 0.5 percent to 160,390 in U.S. hours. The Micex Index fell 0.7 percent to 1,527.10 by 2:51 p.m. in Moscow.
Current regulations limit DR conversions to 25 percent of a Russian company’s shares and 50 percent of their listed stock.
Companies including MTS, Magnit and OAO Sberbank, the nation’s biggest lender, have already reached their DR limits, spurring a swelling in the premiums on their depositary receipts as foreign investors buy and sell a finite pool of offshore-traded stock, according to Ilya Kravets, director of investment research at Daniloff Capital LLC in New York.
As Russian authorities pledge to cancel the limits they “are putting their neck on the line,” said Kravets, who helps manage $100 million of assets including Russian equities.
“The restrictions can only be removed when foreign investors feel secure and comfortable owning locally listed shares,” he said. “Otherwise there is a risk that shares of some strategically important companies will be moved outside of the country in the form of depositary receipts.”
The premium afforded MTS’ ADRs has narrowed from as wide as 29 percent in July as the Moscow Exchange seeks to move to a system of settling trades over two days, in line with international norms, and to make Russian stocks tradable on Euroclear Bank SA’s platform from July 2014.
Russia should accelerate plans to make the country’s equities available for trading through banks including Euroclear to the start of 2014, Finance Minister Anton Siluanov said in an interview in Moscow today.
Magnit’s GDR premium was as wide as 29 percent in September. In comparison, China Telecom Corp. ADRs trade at a 0.6 percent premium to the Beijing-based phone company’s Hong Kong shares, data compiled by Bloomberg show. Cia. Brasileira de Distribuicao Grupo Pao de Acucar, Brazil’s biggest retailer, trades 1.4 percent above its Sao Paolo-listed stock in New York.
The Market Vectors Russia ETF, the biggest U.S.-traded exchange-traded fund that holds Russian shares, rallied 1.4 percent to $30.67 yesterday, the biggest one-day gain since Jan. 25. The RTS Volatility Index, which measures expected swings in the index futures, retreated 0.4 percent to 21.02.
Delaying the scrapping of the DR limits until next year is “a clear negative for Russia Inc.,” Luis Saenz, head of equity sales at BCS Financial Group, said by e-mail from London yesterday. The disparities between foreign and locally listed shares are due to Russia’s “archaic ways,” he said.
“This goes against the grain on liberalizing of the local Russian market,” he said.“Why the hold up?”
The average value of Russia’s biggest companies is about 52 percent higher in London than in Moscow, data compiled by Bloomberg show.
Sberbank fell 1.2 percent to $14.50 in New York yesterday, cutting the premium on the Moscow-based lender’s ADRs to 0.1 percent over its stock listed on the benchmark Micex Index. The advantage was as much as 1.5 percent Feb. 12 and will rise to as much as 4 percent as foreigners seek out the securities, VTB Capital analyst Mikhail Shlemov said Feb. 7. Sberbank said Feb. 6 that its conversion limit had been reached.
Futures expiring in March on Russia’s ruble showed the currency little changed at 30.217 per dollar yesterday, as the ruble fell less than 0.1 percent versus the dollar in Moscow to 30.0560. The currency closed steady at 34.7241 against the dollar-euro basket used by the central bank to minimize swings that hurt exporters.
Oil for March delivery fell 0.5 percent to $97.01 a barrel in New York, dropping for the first time in three days. Brent oil climbed less than 0.1 percent to $118.72 a barrel on the London-based ICE Futures Europe exchange. Urals crude fell 0.2 percent to $116.55.
United Co. Rusal, the world’s largest aluminum producer, rose 2.2 percent to HK$4.67 in Hong Kong trading as of 10:49 a.m. local time. The MSCI Asia Pacific Index gained 0.4 percent.