Euroclear Delay Hurts Moscow Stock Trading Ambitions

A delay in the start of Euroclear Bank SA’s plans to offer international investors direct access to Russian equities is proving another setback in the country’s efforts to boost local stock-market trading.

A bill that would have streamlined corporate actions in a format similar to those used by U.S. and European investors wasn’t introduced during the spring session of Russia’s lower house, preventing Euroclear from offering the service from July 1 as had been earlier announced, according to Stephan Pouyat, global head of international markets at the world’s largest securities settlement system. The amendments needed to give investors technical access to equities may be passed next month, the National Settlement Depositary said by e-mail today.

The push to make stocks available through Euroclear is part of the Moscow exchange’s bid to attract investors, persuade more companies to list locally and take market share from London in the trading of Russian equities. The initiative ran into another obstacle last week when the debut listing of Yandex NV, Russia’s largest Internet search engine, was marred by technical glitches that left it trading as much as 36 percent above its price in international markets.

“There’s some sense of disappointment since this has been announced a while ago,” Alexander Branis, chief investment officer at Prosperity Capital Management Ltd. in Moscow, said by phone. “The depositary and the regulator and the Finance Ministry had plenty of opportunity to resolve all of these issues ahead of time.”

Valuation Gap

Shares of OAO Moscow Exchange rose 0.8 percent as of 1:54 p.m. in Moscow after yesterday losing 2.7 percent. The Bloomberg index of the most-traded Russian stocks in the U.S. gained 0.2 percent yesterday.

The 30-day average value of trades in 10 of the biggest Russian companies tracked by Bloomberg in London is about 50 percent higher than in Moscow. The gap between the two cities had fallen to as little as 12 percent prior to President Vladimir Putin’s incursion into Crimea in March, which prompted some investors to pull out of the local market.

Traders’ expectations for a July start of Euroclear has been reflected in the narrowing valuation gap between onshore and offshore-traded shares. The premium of the London versus Moscow-traded shares of OAO Magnit has shrunk to 15 percent from as much as 29 percent a year ago. The premium for the American depositary receipts of OAO Mobile TeleSystems to its Moscow shares slid to about 13 percent from 19 percent in April.

That trend could reverse as investors react to the postponement of the legislation, according to Branis.

“Spreads could widen simply on the sentiment,” he said. “Depending on which shares are more liquid, people will transfer into that.”

Exchange Overhaul

Russia has been turning away from the U.S. and Western Europe as allies of President Vladimir Putin face sanctions including travel bans and asset freezes. It has implemented several measures to lure equity investors to Moscow, including moving the Moscow Exchange from an immediate settlement of trades to a two-day settlement in September, bringing it closer to European and U.S. rules. Russia merged its two competing depositories in 2012 to bring settlement procedures into line with international norms.

The bill, which gives investors electronic voting capacity and allows the release of corporate actions in a standardized format and in electronic form, will “probably” be moved to the Duma’s fall session, Pouyat said by phone yesterday. Euroclear is working on an interim solution and is “trying” to start offering its services in July, he said.

Yandex Trading

The delay follows Yandex’s Moscow debut last week, during which traders who had just one day’s notice that the Internet company would be available on the Russian exchange didn’t have enough time to shift from positions in New York. Others who were ready to buy couldn’t because there wasn’t enough stock available to satisfy demand.

The Euroclear delay is “unlikely to be a big issue for Russian equities in our view,” Tim Love, an investment manager at GAM U.K. Ltd. in London, which manages $130 billion in assets, said by e-mail. “Volumes are either Micex or London-dominated. Global players can access either, albeit at a modestly higher transaction cost. Hence, it is not a critical change.”

The Bloomberg Russia-US Equity Index advanced to 92.68 yesterday, while the RTS Index today slipped 0.2 percent. Shares of Moscow Exchange traded at 64.41 rubles.

United Co. Rusal, a Moscow-based aluminum producer, rose 5 percent to HK$3.81 in Hong Kong trading. The MSCI Asia Pacific Index gained 0.4 percent.

The Market Vectors Russia ETF, the biggest U.S. exchange-traded fund that holds Russian shares, rose 0.2 percent to $26.50 yesterday. The RTS Volatility Index, which measures expected swings in futures, fell 5.5 percent to 25.02.

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