We have in this webinar participation from Maria Kharlashkina, deputy head of strategy of the Moscow Exchange, and Vladimir Shapovalov, at the Financial markets development department of the Central bank of Russia.

They are sharing with us their impressions of 2017 and their expectations for 2018.

Andrei Akopian: Greetings! I’m Andrei Akopian, managing partner of Caderus Capital. Welcome to our webinar.

Today we have with us Maria Kharlashkina representing the Moscow Exchange, and Vladimir Shapovalov representing the Bank of Russia, the Central bank of Russia.

They are going to share with us their impressions of 2017 and their expectations for 2018.

First of all, let us welcome Maria Kharlashkina (Moscow Exchange).

Maria Kharlashkina: Greetings! I would like to summarize key accomplishments of the Russian financial market in 2017 and discuss our plans for 2018.

Overall, this year was quite a success, as new categories of participants have entered the market along with the introduction of new financial instruments, both stocks and bonds. The volume of trading on the Moscow Exchange grew for almost all types of assets. Now, let’s have a look at the results.

First, I would like to point out that the share of foreign investors on the stock market has gone up to 65-70%. More specifically, the share of US investors is growing while European investors’ share has decreased. Russian market capitalisation has been going up, current level is about 650 billion USD with free float of about 30%.

Now turning to bonds. Foreign investors’ share of the Russian sovereign bonds’ ownership has also increased substantially. While in 2013-2014 it was at the 20% level, it has since climbed up to 30% and even 35% in some cases. Foreign investors trade more actively as well. Almost 40% of the trading volume in the Federal Loan Bonds is produced by foreign investors.

Russian government bond yield is around 7-7.5%, which is a pretty good level compared to some other markets.

As for domestic investors, their relative activity and holding share of outstanding bonds are also on the rise, especially for retail investors. A number of laws and regulations, including tax ones, have been adopted aimed at increasing the involvement of retail investors in the capital markets, which provided a boost to both the relative holding and activity levels of retail investors. To put it in numbers, a few years ago there was a million of retail investor accounts at the Moscow Exchange, this number has almost doubled by now and has reached 2m accounts.

Importantly, corporate governance has been improving in Russian corporates.

Over the recent years, positive changes have been implemented in this area.

In particular, a new code of corporate governance jointly developed with OECD was adopted, which brings corporate governance in Russian companies up to the global standards. Specifically, positive changes were implemented with regard to the Board of directors and the Supervisory board in Russian companies. The number of independent directors in Boards of directors is growing, all of the necessary committees have been introduced: Audit committee, Personnel remuneration committee, and a number of other committees.

And what is perhaps the most important for investors: the adoption of dividend policy by both private and state-owned companies. Meanwhile, the size of the dividends and the dividend yield have been going up on year after year. Average dividend yield for the Russian market is around 5.5-6%. Such a level is among the highest for emerging markets.

State-owned companies have been paying more and more dividends each year as well and this growth is planned for the years ahead.

High dividend yields combined with low valuations, such as low P/E multiples, have been attracting foreign investors to the Russian market. Therefore, foreign investors’ activity has been rising every year.

The Russian market’s sector diversification is also on the rise. Previously, the share of oil and gas sector substantially exceeded 50% of the equities market capitalization, it is now approaching 40% and many new names emerge from other sectors of the economy, such as retail, finance and IT. At the same time, many small and medium-sized young companies are entering the market instead of large state-owned companies.

It is fairly easy for foreign investors to enter Russian capital markets: it is fully liberalized, there are no investment restrictions for foreigners, the rouble is a freely convertible currency, there is a very liquid foreign exchange market on the Moscow Exchange, where foreign investors can exchange various currencies: dollar, euro, Chinese yuan and other currency pairs.

As a first practical step to gain access to the Moscow Exchange, you can contact one of the global investment banks with a Moscow office, there are about 25 major international banks, or of course, the offices of Chinese banks: ICBC and Bank of China.

The Moscow Exchange continued active cooperation with Chinese partners in 2017. We signed a number of Memorandums of understanding with Chinese stock exchanges, there are existing MOUs with the Shanghai Stock Exchange, the Dalian Commodity Exchange. We also plan to sign an MOU with the Shenzhen Stock Exchange and the Shanghai Futures Exchange.

There was a Russian financial market road show in China in November 2017. The Moscow Exchange, together with representatives of the Central Bank of Russia, visited three cities: Shenzhen, Shanghai and Beijing, and co-organized investment seminars. We saw about 100 attendees both in Shanghai and in Beijing.

Representatives of the Moscow Exchange and the Bank of Russia presented opportunities on the Russian capital markets, had meetings and discussions with investors. A similar event is planned in Moscow next year, jointly organized with the Shanghai Stock Exchange.

More conferences are planned in Shanghai and other cities in China for next year, as well as the launch of first joint investment products in cooperation with Chinese exchanges with the help of Chinese banks and brokers.

Thank you for your attention!

Andrei Akopian: Maria, thank you very much for this!

The Moscow Exchange has been actively implementing its strategy focused on the further integration of the financial markets and the infrastructure of Russia and China. Caderus Capital team is providing an active support for the implementation of the strategy.

Let us welcome Vladimir Shapovalov. Vladimir works at the financial markets development department of the Bank of Russia. Vladimir is responsible, among other things, for the interactions with the Chinese regulators.

Vladimir Shapovalov: Greetings, dear colleagues!

In 2017, the Central Bank of Russian Federation paid special attention to developing financial cooperation with Asian countries. Currently, foreign investors in Russia mainly come from Europe and the US, and we would like to strengthen our interaction with Asian investors.

2017 has been a record year in terms of financial cooperation between Russia and China. Regulators from both countries are having regular meetings and are making reciprocal country visits.

Let me give you some highlights of the realized projects in this area:

Earlier this March the Bank of Russia opened its representative office in Beijing. This became the first and only rep office of its kind of the Central Bank.

During the same month, an accounting and clearing centre for yuan operations was launched in Russia. Thus, Moscow has become one of the locations for Chinese investors to get the full range of financial services in RMB. We believe that this step will stimulate Chinese investors’ interest for Russian market.

The financial infrastructure has been formed required for Russian securities trading by mainland Chinese investors. One of the four banks with Chinese capital, operating in the Russian market, obtained securities licenses for brokerage, dealing and safekeeping of securities. Now Chinese investors who prefer to operate via Chinese banks, can register accounts in those banks and obtain direct access to the Russian capital market, bypassing international intermediaries.

In September this year the Central Bank of Russia and the Bank of China signed a memorandum of cooperation on gold exchange trading. We see demand for gold in China as well as growing production in Russia. In our view, there is a good opportunity for mutual cooperation in this area, which can be brought up to a new level.

As for the outlook for next year, we expect Russian issuers to be able to diversify their sources of borrowing not only through local or Western investors, but also with the help of investments coming from China, while our Chinese colleagues will be able to expand their investment portfolios with the help of investment instruments of good quality Russian issuers. Therefore, 2018 is bound to bring the cooperation between China and Russia up to a substantially higher level.

We also welcome colleagues from other countries to the Russian capital market both as investors and issuers. These days the Russian capital market infrastructure is conforms to the standards of other world financial centres.

Thank you!

Andrei Akopian: Vladimir, thank you very much!

2017 was really a year of good progress in brining Russian and Chinese financial markets and investors closer together.

This happened against the background of some improvement in the macroeconomic landscape in Russia and a decline in the rouble volatility.

The equity market had a slight decline, however some asset management firms showed very healthy performance levels of 20-30%.

Foreign capital continued to actively flow into the country as part of carry trading, providing additional support to the rouble.

Our expectations for 2018 are quite positive, both in terms of the Russian equity market dynamics and in terms of the rouble performance. Regarding the activities aimed at bringing Russian and Chinese financial markets and investors closer together, where Caderus Capital plays an active roles and makes its own contribution, we expect a real breakthrough in 2018 in a number of areas, and primarily in creating in Russia, on the Moscow Exchange, a new RMB-denominated investment instruments market, and primarily so called Baikal bonds, that is RMB-denominated Russian government bonds which, we believe, will finally be issued this year. Also, we see a real interest to the Russian equity market from major Chinese institutional investors which are currently doing research on the Russian market and the existing market entry mechanisms.

We will keep you informed about any progress on this in our future webinars.

If you visit caderus.com, you will be able to subscribe to our news updates about Russia (in Chinese) and about China (in Russian), as well as to alerts on our future webinars and other visuals.

Thank you!