06MOSCOW10855, RUSSIAN STOCK MARKET REPORT 2006

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Reference ID Created Released Classification Origin
06MOSCOW10855 2006-09-27 08:34 2011-08-30 01:44 UNCLASSIFIED Embassy Moscow

VZCZCXRO1497
RR RUEHLN RUEHVK RUEHYG
DE RUEHMO #0855 2700834
ZNR UUUUU ZZH
R 270834Z SEP 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 3048
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHLN/AMCONSUL ST PETERSBURG 3409
RUEHVK/AMCONSUL VLADIVOSTOK 1676
RUEHYG/AMCONSUL YEKATERINBURG 1918
RHEHNSC/NSC WASHDC

UNCLAS MOSCOW 010855 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/RUS 
TREASURY COX/ALIKONIS/BAKER 
NSC FOR BROOKS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV RS
SUBJECT: RUSSIAN STOCK MARKET REPORT 2006 
 
REF: A. SUPPLEMENT TO 9/22/06 ECONOMIC WEEKLY 
 
     B. MOSCOW 6926 
 
1.  Since its consolidation in 1996, the Russian stock market 
has experienced growth that has led emerging markets and 
rivaled developed markets.  Capitalization was close to USD 1 
trillion by the end of August, compared to USD 346 billion at 
the end of August 2005, and USD 177 billion at the end of 
2003.  The Russian Trading System's (RTS) index of 40 common 
and 10 preferred shares climbed from its 1998 low of 40 to an 
all-time high of 1,765 in May. 
 
2.  Natural resource firms have fueled the vast majority of 
this growth, thanks to a favorable ruble exchange rate 
following the 1998 crisis and global increases in commodities 
prices.  The participation of foreign and domestic 
institutional investors is rising, as are market trading 
volumes and liquidity.  Perhaps the most unsung factor 
accompanying Russia's swelling market valuations has been the 
trend among established and emerging firms in Russia to raise 
primary market equity capital at home. 
 
3.  It is true that Federal Financial Market Service Chief 
Oleg Vyugin lamented that Russia's capital was "escaping" 
abroad when as much as 60 percent of trading in Russian 
stocks occurred on foreign exchanges in the 2003-2004 period. 
 It is also true that, in an effort to regain this capital, 
the FFMS instituted new rules in February to limit the 
percentage of new stock issuances that Russian firms can list 
abroad.  Nevertheless, the apparent preference among Russian 
firms for raising equity domestically had already 
materialized.  The decrease in net capital outflows during 
2005 suggests that a portion of the increasing volume of 
capital remaining in Russia is funding Russian companies 
(Reftel B).  Russian-sourced issuances in 2005 roughly 
doubled those of 2004.  More recently, Vyugin observed during 
the 10th Annual Renaissance Capital Conference in June that a 
bullish outlook on the market was justified.  He said the 
reason for optimism centered on results from 2005: growing 
capitalizations; an increase in household demand for 
ruble-denominated assets; and an increase in the number of 
non-resource firms that had completed equity issuances. 
 
4.  And now the rest of the story.  First, market 
capitalization remains highly concentrated in the energy 
sector.  Gazprom alone claims around 25 percent of total 
capitalization.  The next four largest firms account for 
another 40 percent.  The stock market's fortunes, 
consequently, have risen and fallen on traders' valuations of 
these firms.  Second, the GOR has approved a Financial Market 
Development Strategy to address systemic deficiencies that 
impede Russia's market competitiveness.  A top priority in 
this regard is the establishment of a central depository that 
would improve efficiency in settlement activity.  Since 
settlements can take months in some cases, many foreign 
investors opt to hold depository receipts.  Finally, the 
GOR's control over the shares of listed firms is 
considerable, although estimates vary on just how much market 
capitalization that is. 
 
5.  The Russian stock market, unlike the NYSE or the LSE, is 
not driven by the "small, individual investor" whose presence 
and diversified nature create "sticky stock prices" and more 
capably copes with financial fluctuations.  Although the 
Director of the Moscow Interbank Currency Exchange (MICEX) 
Aleksey Rybnikov has reported an increase in Russian 
investors trading in Russian equities, particularly after the 
liberalization in trading Gazprom shares last year, recent 
studies indicate that less than five percent of Russians own 
stocks or other financial investments.  Consequently, the 
Russian stock market is not yet "creating wealth" among small 
investors, as has happened in western markets.  This will be 
the next step on its path to becoming a major player in the 
global trading market. 
BURNS

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