Russians wary of investing
Last year was not a lucky one for investors in the Russian stock market. Its major index, the RTS, fell 19 percent, and only 20 percent of listed funds reported profits. At the same time, the number of individual investors playing on the stock market independently increased 9.3 percent, according to RTS data.
Total trading on all MICEX-RTS markets reached $10.1 trillion in 2011, or 297.9 trillion rubles. The combined capitalization of shares traded in the MICEX-RTS system stood at $800 billion in late 2011.
Economist Denis Strebkov, an assistant professor at the Higher School of Economics, believes that the percentage of Russians who personally invest in the stock market does not exceed 1 percent of the population. In contrast, in the United States, approximately half of all households own shares in publicly traded stocks.
Russians’ interest in investing has grown slowly. Although the Russian stock market was established in 1992, for years it remained the exclusive domain of professional brokers. One reason was the underdeveloped market itself, but additionally, according to Strebkov, Russians lacked “elementary financial literacy as an essential component of market economic culture.” Potential investors did not trust financial instruments and the possibility of making money on the stock market made no sense; they only regarded securities as an alternative to bank deposits.
The mentality began to change in the mid-2000s. The general population was becoming more prosperous and people increasingly saw investing in stocks as a way to manage their personal savings. Additionally, by that time, a sustainable growth in the capitalization of the Russian stock markets had been achieved, and brokerages took off. A new kind of Russian was emerging who did not depend entirely on state paternalism and had self-management skills.
“A new bourgeois personality type emerged, gauging happiness, freedom and success by the yardstick of money,” said Strebkov.
The investment instruments that are popular today also appeared in the mid-2000s. Vladimir Solodukhi, managing director of Brokkreditservis, a leading brokerage operating in Russia, described the market as “overall, the standard Anglo-Saxon paradigm, maybe with some additional regulations applied.” An ordinary Russian wishing to play the stock market currently has two options – to invest in a collectively managed private mutual fund (which requires just a few thousand rubles) or to open an individual account with a stockbroker.
It is also possible to invest via private trust management, which is an investment instrument like a mutual fund with a personal touch – the right to decide which stocks to buy, a personal manager and a team of analysts. Taking advantage of these services requires a few million rubles.
“Investments in mutual funds are recommended as long-term investments,” Solodukhin said. “This could be an augmentation and, partially, an alternative to pension savings.”
In contrast to developed markets, where securities are acquired primarily to obtain dividends, the main objective of Russian investors is to make money on the price difference. Many Russian public companies often fail to pay dividends, and even when they do, the dividend rate is insignificant.
Prior to the 2008 economic crisis, unit funds secured their investors incomes that were two to 10 times the inflation and bank deposit rates. A yield of 30 percent was considered low, especially for companies in the oil and gas, metals and banking sectors. The trend came to a halt in 2008 and again in 2011; Russian private investors lost up to 50 percent of their capital in unit funds.
As a result, interest in the stock market waned. The drop in stock prices worldwide combined with the high volatility of the Russian market, which is caused by dependence on fluctuating raw material prices, prompted investors to exercise caution or postpone active investment.
Trend towards independence
But in the midst of crisis, a new group of semi-professional investors with access to online trading emerged. Futures on the RTS and MICEX indeces (the two merged in late 2011) became popular trading instruments with these private investors, who played the stock market independently. Short-term speculation using automated software enabled private players to increase their original investments several times over. According to data from Investfunds.ru, in the first half of 2011, net investments in unit funds were in excess of 5.8 billion rubles, which is triple the amount in the same period of 2010. In August 2011, however, the indices fell and earnings generated in the first six months depreciated.
Despite the overall increase in the number of private clients with brokerage accounts, their operations decreased in 2011, according to figures from RTS. The number of private investors conducting more than one transaction a month fell to 96,000 in 2011 from 104,000 in 2010. Finam remained the market leader in terms of the number of clients, with 18,373, followed by Brokkreditservis with 15,852 and Sberbank with 13,738.
Alternative to banks
Analysts are certain that, for the private investor, especially a relatively prosperous one, the stock market is a good alternative to banks. Yet the Russian unit fund market is very small. Vladimir Savvov, head of the analysis department at Otkrytie Bank, said: “The total net asset value of all Russian unit funds is less than 500 billion rubles, which is not much compared to the 10 trillion rubles in bank deposits.”
The government’s strategy for promoting the Russian stock market for the period up to 2020 envisages an increase in the number of private investors to 20 million. The figure was dismissed by the Audit Chamber, which cited the low activity of domestic long-term investors. “If the situation proves favorable, with no new waves of recession, we might reach 4-5 million, but by no means 20 million,” said Finam President Vladislav Kochetkov.