With the launch of Euroclear operations with OTC settlement in the local RUB government bond market and its plans to expand settlement operations in corporate and municipal bonds as well as exchange-traded OFZ in the coming months, the progress for equities could be the next major push towards a Russian financial market infrastructure reform agenda. That said, last week, the Deputy Head of the Federal Financial Markets Service (FFMS) confirmed 1 July 2014 as the target for settling all outstanding issues with the infrastructure to make equities Euroclearable.
However, later in the week, Anton Siluanov, the Minister of Finance, said in an interview with Bloomberg that, 'in his personal opinionÓ access to Russian local equities for Euroclear/Clearstream will be opened from 1 January 2014, i.e. six months ahead of the 1 July 2014 date specified in last year's FFMS directive. Siluanov specifically stated that this was an important step to take in light of the forthcoming privatisations.
This confirms our expectation that as MinFin and the CBR are taking over the capital markets' regulatory agenda and the liberalisation of financial markets, the latter is likely to accelerate. In light of Euroclear already clearing OFZs and progressing rapidly with the handling of corporate bonds, technically everything is ready for equities to be added within the timeframe proffered by Siluanov.
Meanwhile, the locals/DRs discount, having tightened materially since July-September wides (caused by the delays in the launch of the Central Depository and the aforementioned directive), are still significantly wider than the levels of some 5% attained briefly in summer 2011 after the then President, Dmitry Medvedev, suggested the removal of DR limits. Siluanov's statement establishes a well-defined timing for the fungibility of DRs. With the equally weighted index of MBT, MGNT and AFKS standing at a 14.3% discount, the potential excess return for those willing to hold local stock is 16.7% over roughly a year. Even with the best intentions, the practicalities are more likely to be completed after the New Year holiday season, in our view - although in light of the recent rhetoric a more expedited outcome is a possibility.