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Sources of Capital in Russia

Sources of Capital in Russia

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Published by Korralf

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Categories:Business/Law, Finance
Published by: Korralf on Mar 20, 2012
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In accordance with US SEC Regulation AC, analyst certification can be found on the last page of this report.research@troika.ru, www.troika.ru 
RUSSIA | STRATEGY
DECEMBER 2010
End sources of financial capital inRussia, $ bln
0150300450600750
    D   e   p   o   s    i   t   s    S   y   n    d    i   c   a   t   e    d    d   e    b   t    F   o   r   e    i   g   n   e   q   u    i   t   y    F   o   r   e    i   g   n    b   o   n    d    P   e   n   s    i   o   n    f   u   n    d   s    R   e   t   a    i    l    h   o    l    d    i   n   g   s    M   u   t   u   a    l    f   u   n    d   s    I   n   s   u   r   a   n   c   e   s   e   c   t   o   r
 
Source: Central Bank, Lionshares, Cbonds, Investfunds.ru,Troika estimates for 3Q10 
Increase in domestic capital, $ bln
0306090120DepositsState pensionfundPrivatepension fundMutual fundsInsurancefundsGrowth in 2010Growth in 2011
 
Source: Central Bank, Investfunds,ru, Troika estimates 
Equity market ownership
30%29%15%14%6%6%
Free floatGovernmentOligarchManagementOther companyForeigners
 
Source: Companies, Troika estimates 
Capital raising in Russia, $ bln
050100150200250200520062007200820092010201120122013Local debtForeign debtTotal equity
 
Source: Cbonds, Central Bank, Dealogic, Troika estimates 
Kingsmill Bond, CFA
+44 (207) 822 0771Kingsmill_Bond@troika.ru
Andrey Kuznetsov
+7 (495) 933 9844Andrey_Kuznetsov@troika.ru
 
Sources of Capital in Russia
Show Me the Money
We summarize assets and liabilities for households, companies, thegovernment, banks, institutions and foreigners, and examine the natureof the debt and equity markets to identify unusual aspects of the Russiancapital markets.
 
Foreigners are the key source of longterm capital.
Foreign investors arethe providers of financial capital for the equity (75%), Eurobond (70%) andsyndicated loan (100%) markets, and provide 44% of the total financialcapital in Russia. Foreign perception is therefore arguably as important for theequity market as local reality.
 
The principal source of domestic capital is deposits.
Deposits make up82% of identifiable domestic financial capital, and are intermediated by thebanks into domestic loans, with little available for longterm investment.
 
Russia has limited institutional capital.
The total size of the Russianpension system is 3% of GDP, mutual funds are 1%, and insurance funds are1%, a fraction of what we see in Eastern Europe. If Moscow is to develop as afinancial center, it will be necessary to stimulate the growth of this capital, afinancial deepening process we have seen elsewhere.
 
Corporate debt is already high.
Given the lack of depth elsewhere in themarkets, investors should be relatively cautious about corporate debt, whichamounts to 48% of GDP.
 
Foreigners will be key to new capital provision.
As most deposits arerecycled by the banks into loans, and institutional capital growth is low,foreigners will be the principal source of capital for the coming wave of debtand equity issuance. As the current account is shrinking, and debt capital isnot so easy to attract as before, this should lead to better corporategovernance and higher rates.
 
Beware the money illusion.
In theory the government, the oligarchs andhomeowners control assets with tremendous value. However, the lack ofdomestic capital means that valuations are suspect, and these assets cannotbe realized easily. Investors should thus avoid capital raisings that are notaccompanied by very clear standards of corporate governance.
 
Who owns the equity market?
Of the free float of around $250 bln, we canidentify $120 bln in assets held by foreign longonly funds, but only $4 bln heldby Russian mutual funds, $19 bln by the banks, $10 bln by pension funds, andperhaps $25 bln by retail. The rest is held by oligarchs or hedge funds.
 
Where is household wealth?
We calculate that 84% of household wealth isin property, 12% in deposits, and just 4% in all other financial assets.
 
DECEMBER
 
2010 SOURCES
 
OF
 
CAPITAL
 
IN
 
RUSSIA
 
 
SHOW
 
ME
 
THE
 
MONEY2 TROIKA DIALOG
PAGE INTENTIONALLY LEFT BLANK
 
SOURCES
 
OF
 
CAPITAL
 
IN
 
RUSSIA
 
 
SHOW
 
ME
 
THE
 
MONEY DECEMBER
 
2010TROIKA DIALOG 3
Contents
Assets and Liabilities of Key Players..................................................................................................4
 
Households.................................................................................................................................4
 
Corporates..................................................................................................................................6
 
Government...............................................................................................................................7
 
Banks..........................................................................................................................................7
 
Oligarchs....................................................................................................................................8
 
Foreign capital............................................................................................................................9
 
Pension system.........................................................................................................................10
 
Mutual funds............................................................................................................................10
 
Insurance..................................................................................................................................10
 
Summary..................................................................................................................................11
 
Growth in domestic capital.......................................................................................................11
 
Liabilities...................................................................................................................................14
 
Capital Markets..............................................................................................................................15
 
Summary..................................................................................................................................15
 
Equity market...........................................................................................................................15
 
Government bond market.........................................................................................................18
 
Corporate bond market............................................................................................................19
 
Bank bond market....................................................................................................................19
 
Capital Raising Plans......................................................................................................................20
 
What is planned?......................................................................................................................20
 
How feasible are these plans?...................................................................................................20
 
Russia as a financial center........................................................................................................21
 
Appendix 1: How Russia’s Pension System Works..........................................................................22
 
The payasyougo system.......................................................................................................22
 
Savings part: government linked...............................................................................................23
 
Savings part: private.................................................................................................................24
 
Appendix 2: Russian Capital Flows.................................................................................................25
 

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