Russia's Securities Czar: "I Want The Market To Work"

Newly appointed Igor Kostikov faces daunting obstacles

When a band of minority shareholders showed up for the annual meeting of oil company Tomskneft in Moscow last June, they were met by a note tacked to the wall telling them the session had been moved to a town about a four-hour drive from the capital. They couldn't make it on time, and in their absence, the company's majority shareholder, Yukos Oil Co., annulled previous decisions and elected a new board. That's the abysmal state of shareholders' rights in Russia.

Enter Igor V. Kostikov, 41, Russia's new securities chief. A self-proclaimed Thatcherite, Kostikov was appointed in February by President Vladimir V. Putin to head Russia's Federal Securities Market Commission (FSMC). In a country where shareholders' rights are regularly trampled, running the FSMC is a thankless job. Indeed, Kostikov's predecessor, Dmitri V. Vasiliev, resigned last October, frustrated with the government's lack of support for the organization and the creeping pace of market reforms.

Now Kostikov has to deliver where Vasiliev failed. Newly elected Putin desperately needs more foreign capital to pull off an economic turnaround. But with ample evidence that Russian companies don't respect ownership rules, many an investor prefers to place his money elsewhere. "This is the single biggest issue--the reason why people are afraid to invest here," says Bill Browder, manager of the $450 million Hermitage Fund. Only about $30 million changes hands on Russia's benchmark RTS stock index on an average trading day--a tiny sum compared to emerging markets such as South Korea, which turns over about $2 billion to $4 billion a day on its main stock exchange.

An effective securities commission could help change that imbalance. "I want to accomplish something here," says Kostikov. "I want the market to work." To strengthen the agency, he plans to ask for an increase in its paltry $2.1 million annual budget. And he hopes to add to his staff, which numbers 1,000 civil servants who earn an average $75 a month.

How much extra money and support Kostikov gets will depend largely on Putin and the new government that will be formed after his inauguration in May. Meanwhile, the commission plans to step up its monitoring of Russia's financial markets, from the country's 12 exchanges to its 20 biggest financial companies. And Kostikov plans to propose new legislation to close loopholes in corporate-governance laws, as well as changes to the criminal code to hold company owners and managers personally responsible for violations. Currently, the FSMC isn't authorized to order an investigation, only to notify law-enforcement authorities of alleged violations. Kostikov hopes to work with other agencies on investigations.

OLD PRO. Kostikov certainly has the experience necessary to go after suspected securities-law violators. A native of St. Petersburg, he received one of Russia's first-ever securities licenses in 1991. After training in fund management in London in 1992, he returned to create his own financial company, AVK. It helped develop Russia's first municipal-bond market in St. Petersburg, one of the few regions to avoid default during the country's 1998 financial crisis. Earlier, Kostikov earned a doctorate in economics in Moscow and studied at Georgetown University and Oxford, where he completed a thesis on privatization in Britain and made friends in the Conservative party.

Kostikov's commission could face its first test cases soon. A law passed in 1998 limits foreign ownership in Unified Energy System to 25%, even though foreigners hold about 30% of the shares. Kostikov says the law violates rights of foreign investors and should be reviewed by parliament or the courts. Investors are also watching oil company Surgutneftegaz as it carries out a merger with its parent company, Surgut Holding, which some investors have protested.

As he tries to strengthen his agency, Kostikov faces problems beyond his own control as well. To enforce securities laws, he must rely on Russia's shaky court system, which is still trying to shed the Soviet-era practice of merely rubber-stamping local party leaders' decisions. "The main issue now is the courts," says Kostikov. "They just haven't had enough practice."

Still, the new securities chief is optimistic that he can make a mark. "Only the one who begins walking will get to the end of the road," he says. It's going to be a long walk.

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