07MOSCOW2383, OUTLOOK FOR RUSSIA’S NEW FINANCIAL MARKETS CHIEF

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Reference ID Created Released Classification Origin
07MOSCOW2383 2007-05-22 13:58 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXYZ0000
PP RUEHWEB

DE RUEHMO #2383/01 1421358
ZNY CCCCC ZZH
P 221358Z MAY 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 0476
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

C O N F I D E N T I A L MOSCOW 002383 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/RUS 
TREASURY FOR MEYER, CETINA 
NSC FOR MCKIBBEN 
USDOC FOR 4231/IEP/EUR/JBROUGHER 
 
E.O. 12958: DECL: 05/21/2017 
TAGS: EFIN ECON RS
SUBJECT: OUTLOOK FOR RUSSIA'S NEW FINANCIAL MARKETS CHIEF 
 
 
Classified By: ECON M/C Pam Quanrud, Reasons 1.4 (b/d). 
 
Summary 
------- 
 
1.  (SBU) On May 9, Prime Minister Mikhail Fradkov appointed 
one of his economic advisors, Vladimir Milovidov, as the new 
Director of the Federal Service for Financial Markets (FSFM). 
 Milovidov's appointment came in the immediate aftermath of 
outgoing FSFM chief Oleg Vyugin's announcement that he was 
stepping down to return to the private sector.  Analysts 
widely credit Vyugin with setting Russia's financial market 
regulation on the right path, a critical change from the 
tenure of his predecessor, Igor Kostikov.  Milovidov, who 
worked for the FSFM's predecessor agency from 2000-2003 and 
was Kostikov's deputy, is expected to carry on the work 
Vyugin initiated to: attract more financial market issuances 
to Russia; improve efficiency in financial market activities; 
expand the cadre of economically savvy regulators; and 
strengthen cooperation with law enforcement in the area of 
financial crimes.  While Milovidov will likely press Vyugin's 
unfinished goals of establishing a central depository and 
passing an insider trading law, any efforts toward turning 
the FSFM into a "megaregulator" will likely be delayed.  End 
Comment. 
 
Vyugin Leaves Financial Markets Service 
--------------------------------------- 
 
2.  (C) On May 8, Director of the Federal Service for 
Financial Markets (FSFM) Oleg Vyugin announced his intention 
to step down and return to a career in the private sector. 
In 2004, Vyugin left his post as a Deputy Chairman of the 
Central Bank to become the first chief of the FSFM, which had 
been created as part of a package of administrative reforms 
in 2004.  The new agency was given greater regulatory 
authority than its predecessor, the Federal Securities 
Commission, had enjoyed.  According to Sergey Drobyshevsky, 
Director of Macroeconomic Studies at the Institute for the 
Economy in Transition (Gaidar Institute), Vyugin assumed 
leadership of the new agency at a time when financial 
managers and market analysts had been sharply critical of his 
predecessor, Federal Securities Commission Chairman Igor 
Kostikov.  High transaction costs, lack of market 
infrastructure investments, and slow developments in 
ownership registration had combined to push securities 
placements to more attractive locales such as the London 
Stock Exchange.  The GOR tacitly recognized this state of 
affairs and reorganized the Federal Securities Commission to 
address these issues. 
 
3.  (C) Fradkov viewed the new FSFM as a 
megaregulator-in-waiting, calling the agency "a second 
Central Bank."  Vyugin, however, focused on improvements in 
Russia's capital markets, not on the establishment of a 
unified financial markets regulator.  His chief aim was to 
prevent Russian capital from further "escaping abroad," 
according to Rory Macfaquhar, Chief Economist at Goldman 
Sachs Moscow office.  Vyugin made significant strides in 
reducing the costs of issuing securities in Russia and 
thereby increased liquidity in the national market.  In June 
2006, the FSFM began requiring Russia's publicly traded 
companies to issue 30 percent of new securities in Russia, 
which helped significantly increase daily trading volumes 
domestically.  Vyugin also spearheaded amendments in the Law 
on Mortgage-Backed Securities to make the instruments more 
accessible to large investors.  This change allowed the 
Deposit Insurance Agency to announce in November 2006 that it 
would invest its premiums in mortgage-backed securities. 
 
Picking Up Where Vyugin Left Off 
-------------------------------- 
 
4.  (C) The consensus among financial analysts is that 
Vladimir Milovidov's tenure at the helm of the FSFM will 
probably be too short (because of the presidential election 
in March 2008) to make a substantial impact.  Renaissance 
Capital's Director of Research Roland Nash noted that Vyugin 
had brought an excellent reputation with him, which instilled 
confidence among market participants that the changes he 
sought were practical.  Deutsche Bank Chief Economist 
Yaroslav Lissovolik speculated that Milovidov's close 
relationship with Fradkov will translate into a slightly 
higher priority for the legislative goals that seemed to 
elude Vyugin: an insider trading law and creation of a 
central depository.  Lissovolik said the relationship would 
 
not, however, guarantee the approval of draft legislation. 
 
Prospects for a "Megaregulator" 
------------------------------- 
 
5.  (C) Discussions on the formation of a financial markets 
megaregulator will probably persist as the Russian economy 
continues to absorb greater streams of net capital inflows, 
according to analysts.  However, Drobyshevky suggested that 
the megaregulator bill Vyugin had been developing prior to 
his departure would probably wither and not be presented to 
the Cabinet.  Moreover, he said that the money laundering 
concerns that sparked this debate will need to be recti
fied 
before the GOR establishes a megaregulator.  (Note: Current 
legislation prohibits banks from refusing to open accounts or 
complete transactions even if the bank's risk assessments 
determine a prospective client or transaction is suspicious. 
End Note.)  Lissovolik predicted the GOR's regulatory efforts 
would be directed toward strengthening the banking sector and 
carrying on Vyugin's work to promote greater corporate 
transparency.  Lissovolik said the FSFM would also encourage 
further development of the derivatives markets. 
 
Comment 
------- 
 
6.  (C) Oleg Vyugin left office with a series of critical 
accomplishments to his name, and he leaves on a high note. 
He helped restore investor confidence, increase liquidity, 
and reduce transaction costs.  Vyugin is also widely held to 
be one of the few truly "uncorrupt" in positions of power in 
Russia--in stark contrast to his predecessor, Kostikov. 
Insiders say Vyugin's move to MDM Bank (and not a foreign 
bank, although Goldman Sachs was a strong rumor) was taken 
now to put him in a better position to come back into the 
government after the 2008 election. 
 
7.  (C) Perhaps Vyugin's departure was borne of frustration 
with not being able to develop a consensus around his vision 
for a central depository and an insider trading law.  Both 
issues featured prominently in his early public statements on 
the new FSFM's priorities.  Taking up the charge now falls to 
Vyugin's successor, Vladimir Milovidov.  Market participants 
credit Milovidov with mitigating Kostikov's "excesses" during 
his three years as Kostikov's deputy.  Milovidov's return to 
the market regulator seat has been uniformly welcomed by our 
contacts.  End Comment. 
BURNS

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