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President of Russia Vladimir Putin: Good afternoon, colleagues.
We have held a number of meetings on economic issues of late. The main priority now is to improve the effectiveness and return of each of the growth factors so vital to us and raise the quality of the key institutions responsible for encouraging investment activity.
I propose that we discuss today our financial market’s competitiveness, that of the stock market above all, and look at how we can use these mechanisms to raise capital for infrastructure projects, building new production facilities and — following the goal we set – creating new high-tech jobs.
Looking at the current situation, we see that most Russian companies list their securities on major international stock exchanges. Only one sizeable Russian company has carried out an IPO in Russia itself over the last two years, while 13 big companies have done so abroad.
”Our task is to make the Russian stock market competitive in the full sense of the word, make it attractive for Russian and foreign market players. It has to meet business’ demands and also be up to our new and more ambitious economic development goals.“
Furthermore, as I think you all know, though I will remind you all the same, Russian companies accounted for 18 percent of total trading on the London Stock Exchange in 2012. This is a good result and it shows that our market and companies are of genuine interest for global investors. But it is also a sign that Russian companies are forced to go abroad to look for money to finance their development and as yet do not see Russia’s own stock market as a convenient and profitable source of potential investment, and this is sad.
What was our aim in merging our two trading floors? They have merged, and now what? All of our big companies, including companies in which the state has a stake, are trying to raise money abroad. Our task is to make the Russian stock market competitive in the full sense of the word, make it attractive for Russian and foreign market players. It has to meet business’ demands and also be up to our new and more ambitious economic development goals.
We have taken a number of measures to improve the financial infrastructure of late. The Central Depositary began operation last year and will help us to ensure that securities rights are registered in accordance with world standards. Some of our planned measures have already been implemented, others will begin working in 2013, and still others in 2014.
I stress the point that we should not just put in place the infrastructure and regulatory framework, but also get hold of the long money we are always talking about. Serious foreign investors will often only consider entering a long-term project if they see that our own capital is taking part too, and so we need additional instruments for building up investment resources within the country. I note that Russia currently has a gross savings level of around 30 percent of GDP, and the amount of household deposits in banks increased considerably over 2012. How big was the increase, Mr Ignatyev, do you remember?
Chairman of The Russian Federation Central Bank Sergei Ignatyev: Twenty percent over 2012.
Vladimir Putin: This is a substantial increase – 20 percent over just one year. This shows that our people trust our banking system and our banks. I would like to hope that this is partly the result of the efforts we made during the crisis, when we kept our financial institutions from ruin and supported those who deposited their money in Russia’s banks. This is a good result compared with the situation in other countries, but unfortunately, only a small part of these savings are converted into investment.
The same is true of pension assets. Overall, they come to around 4.5 percent of GDP, with private pension funds’ reserves and assets coming to 2 percent of GDP. Other traditional mechanisms used to stimulate long money, life insurance, for example, have hardly developed at all here yet. Only around 1.5 million people here are involved in the stock market in one way or another. Contrast this with other developed economies, the USA, for example, where more than half of all households are involved in stock market operations.
I am not talking only about getting people to invest in the Russian economy. We have to give all of our people, including the growing middle class, additional working institutions that will help them to ensure their financial prosperity. The first priority is to reduce the risks that people face on the stock market and protect them from the schemes of dishonest brokers and unprofessional conduct by market actors. Overall, we are to establish reliable guarantees for the money invested by our citizens and also by Russian institutional investors and foreign investors.
”The main task now is therefore to establish a clear and effective system to regulate and supervise the financial market. We need an institution that will ensure a transparent and competitive environment and firm and effective oversight of the non-state pension funds.“
The main task now is therefore to establish a clear and effective system to regulate and supervise the financial market. We need an institution that will ensure a transparent and competitive environment and firm and effective oversight of the non-state pension funds. We have already discussed this on past occasions, but where is this oversight system, when will the required decisions be made? We also have to pay closer attention to the insurance companies and to developments on this market in our country.
We should prevent the emergence of stock market shell offices, speculative bubbles and fraudulent schemes. A broad discussion took place at the end of last year on setting up a single regulator for the financial market. Together with the expert community, the Government analysed the situation and drafted proposals. I know that you have examined a number of these proposals. Overall, the Government has reached a consensus now on the matter.
Mr Shuvalov, what have you agreed, what option are you considering now?
First Deputy Prime Minister Igor Shuvalov: Mr President, colleagues,
In carrying out the tasks you speak about, Mr President, those of developing the capital market the Government has examined possibilities for tightening control and supervision of the financial market and stock exchange. The experts proposed that we examine all existing possibilities in order to reach the right decision.
The first proposal we examined would involve substantially increasing financing of the existing service – the Federal Service for Financial Markets – in order to attract top class professionals who will give the service the technical skills and ability it needs to work just as well as the Central Bank in the banking sector, and to work together with the lending organisations.
The second proposal is to establish a legal entity, which would be subordinate to the Central Bank while still retaining specific powers. The service would thus operate independently but at the same time there would be mechanisms in place for its cooperation with the Central Bank.
In what would be the most decisive and significant step, the experts proposed an option that would see us merge these services and bring them under the Central Bank and transfer all regulatory, control and oversight functions on the stock market and the insurance market to the Central Bank. We met with experts, who support the various different proposals within the Open Government platform, and also together with the Presidential Executive Office, holding meetings both there and in the Government.
Mr President, in order to make this work as open as possible, we also worked together with the various public organisations that have their particular interests on these markets. Most of the experts and those who this regulation will concern have come out in favour of the proposal to establish a single regulator under the Central Bank and have asked the Government and yourself to approve this decision.
In order to avoid any problems with gaps in regulation, we propose carrying out this work in stages. If you agree with our approach, over the first half of 2013 we would make the necessary amendments to the legislation on the Central Bank. Essentially, starting from the end of this year we would be able to start the actual merger of these services and would have specific safety measures in place to ensure that no regulatory failures will crop up while we are in the process of setting up the new body.
From the end of 2013 to January 1, 2015, the service will operate within the Central Bank as an independent service, without being merged into the Central Bank’s other subdivisions, but starting from January 1, 2015, it will operate as a unified organisation carrying out control and oversight functions across the entire Russian banking and financial sectors.
The Central Bank has first-class personnel, more than 60,000 people working throughout the country, and they have one of the best equipment and technological bases in the world. The Bank is as well-equipped as any of the top economies’ central banks. We take the OECD countries as our benchmark in this area. At the same time, Russia’s Central Bank has achieved big results over the last decade in regulating and ensuring control and oversight in the banking sector. In our work with investors, the investors point to the Central Bank as the institution in which they have the greatest trust. I think this is a successful example of institution building in Russia.
Mr President, we ask you to support this project and let the Government go ahead, together with the Federal Assembly, in order to start the work this year.
”Carrying out privatisations here at home is a sign that we are serious about our plans to build a competitive financial market and that Russia has a market infrastructure it can trust and rely on.“
Vladimir Putin: Certainly, I support this decision, all the more so as we have done a lot of work with the experts. But I have a question: you said that the work will be done in stages and that the plan is not to create a separate legal entity linked to the Central Bank, but a directly subordinate department within the Central Bank. So, how will the first stage differ from the final stage?
Igor Shuvalov: The first stage will see us establish the financial market services.
Vladimir Putin: And the final stage?
Igor Shuvalov: What we will have at the end is a subdivision of the Central Bank, which will be responsible for overall control and supervision throughout the sector, rather than having separate bodies overseeing financial organisations and non-state pension funds. At least, that is how the project looks now. Of course, in the course of its implementation other proposals could perhaps emerge. As we plan it now, the people currently working for the Federal Service for Financial Markets will be kept on entirely.
Vladimir Putin: That was my second question. You said that the Central Bank has top quality personnel, and so this leads me to ask what would happen for the people currently employed by the Federal Service for Financial Markets?
Igor Shuvalov: Given that Central Bank personnel are paid considerably more than the Federal Service for Financial Markets pays its personnel, they would all be offered the chance to work in this service in the Central Bank. The service’s director would be a deputy chairman of the Central Bank and would hold some autonomous powers, but the Central Bank’s chairman would be ultimately responsible for the overall work. This autonomy would gradually be dissolved into the Central Bank’s overall activity and organisation by January 1, 2015.
As I said though, this is the plan we worked out with the experts, but we realise that new approaches could emerge during the project’s actual implementation. We will inform you of any new proposals. The main thing is to ensure that the work improves rather than worsens the current situation, and so we will proceed in stages rather than making any hasty leaps, and thus ensure better governance, transparency and reassurance for the investors.
Vladimir Putin: Mr Ignatyev, the work must be organised in such a way as not to hinder the market’s normal functioning, as Mr Shuvalov noted, and we must also make sure that no regulatory problems come up.
Sergei Ignatyev: Yes.
Vladimir Putin: Let’s look at the next item on the agenda then – the Russian financial system’s preparedness for carrying out privatisation of companies with state ownership.
”I draw the Government’s attention to the need to work in ongoing and regular fashion with the issuers and the investors and give them full information not just about the markets but also about the assets listed on them. Of course, we are to take the highest world standards as our benchmark in this work.“
I stress the point that these privatisation deals must take place on our trading floors. Carrying out privatisations here at home is a sign that we are serious about our plans to build a competitive financial market and that Russia has a market infrastructure it can trust and rely on. Let me add that if we do not begin this now we will never do it but will simply keep talking endlessly about the need to do it. Everything will just be on paper and in the realm of theory only so long as we don’t get the practical work underway.
The privatisation deals I am referring to aim among other things to help develop our own stock market and increase its capitalisation, rather than heating up foreign stock markets. Of course, at the same time, we must ensure these privatisations meet the same quality standards and satisfy the interests of companies that think that they would be able to attract more money on the well-known foreign exchanges.
Naturally, we therefore have to be sure that our financial market infrastructure and the whole system’s regulation is ready. Our markets have to meet the same demands and be worthy competitors for the top foreign stock exchanges. The top priority here is to present our assets to a broad circle of potential investors in the best way possible. In this respect, to be honest, I see no reason why work on our stock market should be organised any worse than on foreign markets. All of these road shows and the tours our companies make around the whole world in preparation for an IPO, why should they be any less intensive here than before an IPO on the London Stock Exchange, say? This is something I don’t understand. If we go about work with energy, drive and creativity, and if the assets themselves are attractive – and the assets we plan to privatise are attractive – I think we should be able to raise just as much money here as would be possible through an IPO on stock exchanges abroad.
Of course, we clearly also should support our domestic investors. I think that people who are only now in the process of developing their pension entitlements should have the chance to invest their pension savings in assets belonging to the best Russian companies. As I said, some of the privatisation deals will take the form of IPOs, but currently, a number of Russian investors, including the Pension Fund, are restricted from taking part in IPOs. In this connection, I propose that we discuss the possibility of lifting these restrictions.
Finally, I draw the Government’s attention to the need to work in ongoing and regular fashion with the issuers and the investors and give them full information not just about the markets but also about the assets listed on them. Of course, we are to take the highest world standards as our benchmark in this work.