It's A Mad, Mad, Mad, Mad Stock Market

Moscow stockbroker Alexander Mouratov was having a bad day. After flying 1,127 kilometers to a remote city in Russia's far north, he raced to be first in line at an oil company's headquarters to register a foreign client's stock purchases. But he made it only as far as the office of the general director, who had to sign the documents. A man carrying a suitcase stuffed with cash burst in and swept past him, lengthening his wait by several hours. Mouratov's ordeal ended only when his shares were finally written into a ledger.

Welcome to the crazy world of Russia's stock markets. Liquidity is low. Government regulation is virtually nonexistent. Tax liability and ownership laws are unclear. There are no centralized registration or clearing systems, so brokers such as Mouratov must frequently travel thousands of miles to register their clients' names on the books of popular Russian companies.

MONEY TALKS. But all of this is set to change soon. Brokerage houses and the Russian government feel under increasing pressure to modernize the market's primitive infrastructure. Hedge funds and other foreign investors with a big appetite for risk pumped more than $1 billion into Russian stocks this summer, fueling a bull market (chart). But until the Russians set up modern settlement systems, the really big institutional investors will be forced to sit on the sidelines. "Billions are waiting to come in," says Christopher Wood, equity strategist for emerging markets at Morgan Grenfell & Co. in London.

U.S. regulations prohibit big American pension and mutual funds from investing in Russia's newly privatized companies until there are well-capitalized clearing and custodial systems in place. Eager to unleash the capital waiting in the wings, Russian officials are hurrying to set up a custodial system that meets U.S. Securities & Exchange Commission standards. Dmitri Vasilyev, deputy chairman of Russia's State Property Committee, which oversees Russia's vast privatization effort, says such a system will be operational within six months. Meanwhile, KPMG Peat Marwick and Deloitte & Touche are working with brokers to set up computerized clearing systems in Moscow and four other cities.

The government's effort is getting a boost from Russian brokerage firms. Last month, the top 10 brokerages in Moscow each contributed $20,000 to capitalize a local clearing company. Says Martin Andersson, director of Brunswick, one of the biggest Russian brokerages: "In the summer, brokers were busy filling orders and building their businesses. Now they realize it's important to build a well-functioning market." So does the European Bank for Reconstruction & Development, which is likely to contribute funds, too.

The integrity of the registration process will also need to be improved. As Mouratov's experience shows, managers of many newly privatized Russian companies are reluctant to give up control of their share registers to independent third parties. Many are holdovers from the Soviet period, afraid that their assets will be undervalued in the secondary market.

PROOF POSITIVE. Thus, for the share buyer, the only proof of ownership is a copy of an excerpt from the company registry that could be changed five minutes after it is made. "You cannot at any point in time be sure that you own anything," says Miljenko Horvat, head of Citicorp's Moscow office. Despite the huge potential for fraud in the registration books, investors say there has been little evidence of it so far.

Electronic trading could begin as early as January. Although there are 70 stock exchanges registered in Russia, most trading is now done through private over-the-counter negotiations. In mid-October, Moscow brokers began testing two software systems for trading, one Russian and one based on the NASDAQ in the U.S.

The Russian government, meanwhile, is tightening control over the country's wild markets. On Nov. 4, President Boris N. Yeltsin created a new federal securities commission with real enforcement clout. Says Wood: "It's the best news to hit Russia's embryonic stock market since Western investors began focusing on it earlier this year." If Yeltsin can keep the drive for modernization in high gear, 1995 could see the Russian market grow way beyond the embryonic stage.

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