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RUSSIA | STRATEGY
End sources of financial capital inRussia, $ bln
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
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
+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 longterm 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 longterm 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 longonly 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.