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Pushing the Limits

22.07.2011 17:25 / Polit.ru

Russian companies will be able to place their shares entirely abroad. Lifting IPO restrictions for foreign exchanges is a least-evil solution, as restrictions imposed last year made Russians place through off-shores. Now it is openly admitted that the State regulation of the financial markets is ineffective.

Russia lifts restrictions for companies to place shares abroad. Earlier, the State set fixed limits on the amount of shares the company can place abroad. All the other shares had to be placed on Russian exchanges. Russian companies can place not more than 25% of the capital stock abroad and not more than half of the entire issue. For strategic companies and companies performing geologic exploration and mineral resources development on Federal land, the percentage is 25% and 5 % respectively.

Russian authorities have been maintaining this foreign placement restriction for a long time. The declared aim was to raise the Russian stock market appeal. Almost everyone admits that the Russian stock market (and the financial sector as a whole) is weak. The limits were seriously lowered several times, the first time as far back as 2001. In July 2008, behind talks of the Russian market as "a stability island", where one should invest at the time of serious turmoil on global trading floors, the limits were brought down from 70% (in case of the State shares registration) to 30%. At that time, it somehow seemed to the authorities that the crisis will not affect Russia. However, it stopped to seem so as early as September 2008.

The present norms are in force from April 2010. From that time onward, President Medvedev started actively pushing the idea of the creation of an International Financial Centre in Moscow. The meaning of the undertaking was clear: to make companies place shares in Russia, in order to make the Russian stock exchanges more attractive and the stock market larger. The merger of the Russian Stock Exchanges RTS and MICEX had the same aim; this process was de facto finished not long ago. Governmental experts thought the rivalry between the two trading floors makes the transaction settlement system too expensive for conservative investors and hardly complies with the international reliability requirements.

The fancy idea of raising the appeal of the Russian stock market and competing with the global trading floors (the authorities’ ambition was, and apparently remains, taking on Hong-Kong and Frankfurt) seems to be less valid in reality. Especially considering the rather questionable mechanism of choice for raising this appeal: state regulation.

Immediately after the introduction of the norms, experts warned that the limits crack-down idea will come to nothing.

"As a regulator you restrict the access of domestic companies to the financial markets and consequently restrict the competitiveness of your own economy. When the regulator wakes up next year, part of the Russian companies will be already listed through off-shores, in order to avoid the Russian jurisdiction control", Irakli Mtibelishvili, Head of the Citigroup banking arm in Russia, said in an April 2010 interview to the Financial Times.

That was exactly what happened. Kommersant estimates that only four out of thirteen Russian companies which placed their shares on foreign exchanges last year did so under the Russian jurisdiction. Others floated through off-shores.

This was followed by Dmitry Medvedev’s summary of the St. Petersburg Forum. He assigned the government with “lifting restrictions on securities placement and circulation outside the Russian Federation" by September 1. And that is what the Federal Service for Financial Markets did in a rather short time: the instructions were only published on July 1.

Therefore, we have once again seen the expense and restraint of state regulation of the economy.

We can slander liberalism all we want and call it hopelessly obsolete, yet state regulation is no cure for economic development. In today’s world, making investors jump at your command is rather difficult. You are more likely to succeed in making them run for their lives, fleeing the country. And this is exactly what our government is occasionally brilliant at.

Michail Zaharov

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