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Moscow Foreign Flows Dream Doubted on Discount: Russia Overnight

The Moscow Exchange’s transition to a two-day stock settlement today won’t suffice to lure foreign investors to locally-traded stocks because of concerns over minority shareholder rights, according to BCS Financial Group.

Russia’s main stock and fixed-income exchange is moving today from the current system of T+0, in which trades must be settled on execution, to a T+2 mode. Andrey Shemetov, the bourse’s deputy chief executive officer said on Aug. 29 that he “dreams” of a day when 75 percent of Russian equity trading happens on the Moscow Exchange. The 30-day average value of trades in 10 of the biggest Russian companies tracked by Bloomberg in London is about 50 percent greater than in Moscow.

The Bloomberg Russia-US Equity Index of the most-traded Russian stocks in the U.S. posted the biggest weekly decline in two months after the country’s benchmark Micex Index fell to a three-week low. The slump sent the average valuation on Russian equities to 5.2 times estimated earnings, the cheapest among 21 emerging economies tracked by Bloomberg. Russia, ranked the most corrupt nation among the Group of 20 advanced economies, said last week that gross domestic product growth will slow.

“You can build the best of breed pipes to trade Russia, but if Russia Inc. does not shape up its corporate governance issues, international investors will continue to sit on the sidelines,” Luis Saenz, the London-based head of equity sales and trading at BCS Financial Group, said by e-mail on Aug. 30.

OAO Pharmstandard, Russia’s biggest drugmaker, announced on July 8 an unexpected plan to pay as much as $630 million to buy a company controlled by a board member and to spin off the non-prescription drug business. OAO TNK-BP Holding, the traded unit of the oil venture that OAO Rosneft bought for $55 billion, said in June the board recommended not paying dividends for 2012.

Economic Growth

Russia, which wants to make Moscow an international financial center, is also struggling to stem its steepest slowdown since a 2009 contraction. The biggest energy exporter cut its 2013 economic-growth forecast for the second time this year, Deputy Economy Minister Andrey Klepach said Aug. 26.

“It’s important that people still go to ADRs and GDRs because people don’t have too much confidence in Russia,” Alper Ince, who helps oversee about $9 billion as managing director of Pacific Alternative Asset Management in Irvine, California, said by phone on Aug. 29. “It’s going to definitely increase liquidity if this combines with increased confidence in Russia and governance.”

Boost Trading

The exchange’s transition to two-day stock settlement will boost foreign trading on the Russian market, according to Shemetov. He said the main growth in trading volumes following the move to the new system will occur next year. Eighty percent of total trades happen in T+0 and it’ll take two to three months to get T+2 volumes to the same level, he said.

Several London-based banks have started trading on the Moscow Exchange in T+2 mode and plan to offer hedge funds and other clients access by year-end, Shemetov said without naming the companies.

“We were living in a tin can, we traded inside ourselves, nobody from the West could really trade here,” Shemetov said. “The biggest achievement of this project is that we finally opened this can and let in some fresh air, meaning foreign liquidity.”

The transition to T+2 “would certainly mean that people who would instinctively veto any plans to invest in the market would at least be forced to think again,” Julian Mayo, who helps manage $2.5 billion in emerging-market assets at Charlemagne Capital Ltd. in London said by phone on Aug. 29.

Corporate Bonds

Moving Russia’s corporate bonds to T+2 has been delayed because of insufficient volume, according to Shemetov. The exchange doesn’t have a deadline for corporate bonds to transition to T+2, while government OFZ bonds will continue to trade in T+0 and T+2, Shemetov said.

The Bloomberg Russia-US Equity gauge slid 3 percent for the week to 90.06, led by OAO Mechel. The nation’s biggest producer of coal for steelmakers sank 6.5 percent to $2.89 to trade at a 0.6 percent discount to its Moscow stock.

The Market Vectors Russia ETF, the largest dedicated Russian exchange-traded fund, fell 3.3 percent to $25.81 last week. The RTS Volatility Index, which measures expected swings in the stock futures, rose 0.8 percent to 23.13 in U.S. hours Aug. 30.

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