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Financial Times (UK)
November 4, 2002
Revolution in Moscow's markets: As chairman of Russia's
stock exchange watchdog, Igor Kostikov is charged with restoring confidence in
the market. He explains to Simon Targett what he has acheived so far
By Simon Targett
Igor Kostikov gives a breathless performance, as he rattles off the list of reforms he has introduced since Vladimir Putin, Russia's president, picked him to become chairman of the country's Federal Securities Market Commission two years ago.
A former investment banker, Mr Kostikov was hired to do one thing: restore confidence in the market after the government's default on its domestic debt in 1998.
And he thinks he has made progress. "Russia has had the most stable market in the world over the last two years," he says, speaking during a brief visit to London. This can hardly be attributed to his reforms: it's still too early to gauge their impact. But he is optimistic his measures will reinforce any new-found confidence. He begins listing his reforms with one of the latest: a code of corporate governance, introduced in April this year.
To develop this, he consulted every major international code and talked to senior financiers, including David Newbigging, chairman of Friends Provident. In the early 1990s, Mr Kostikov had worked on a placement at Friends Provident, after being selected to be among the first recruits from the former Soviet Union on a UK high-flyers scheme started by Norman Lamont, then chancellor of the exchequer.
Mr Kostikov is now busily researching the likely impact of his code. But, he thinks, there is one reason why companies will sign up. "It's greed," he says.
He points to the successful companies that are promoting good corporate governance - such as Yukos, Russia's second-largest oil company, which recently hired Lord Owen, a former British foreign secretary, to run its international headquarters.
But, just in case this does not encourage compliance, Mr Kostikov has looked to Russia's stock exchange to give the code some teeth.
This month, the exchange is preparing to make it obligatory for listed companies to comply with the code or at least to disclose where they do not. Mr Kostikov expects listed companies which fail to comply or disclose areas of non-compliance to be delisted.
The purpose of the code is - first of all - to reassure domestic investors. "If we don't attract local investors," says Mr Kostikov, "we can't expect to get foreign investors."
This remains a tough challenge. He recently told journalists that Russians were hiding Dollars 80bn (Pounds 51bn) "under mattresses", amid continuing nervousness about investing their savings.
To encourage Russians to invest in stocks, Mr Kostikov has been promoting the domestic fund management community.
Two years ago, he says, it was "monopolistic": there were 11 companies, but only four dominant ones. Today, by contrast, Mr Kostikov counts 91 companies.
Last month, Russia's first closed-end funds were launched by Management Centre, a Moscow-based group. Mr Kostikov says he knows of 10 other companies which are devising Russia's first index-tracking funds.
Mr Kostikov insists the changes are working. "Russian investors are coming back to the market," he says. Even the oligarchs, the band of elite Russians who siphoned money abroad during the crisis, are returning. "The Russian oligarchs mostly invest in Russia," he says.
Foreign investors remain cautious, however. Attracting them, along with international fund managers, remains Mr Kostikov's long-term goal.
There are currently only two main foreign fund managers: Credit Suisse and Franklin Templeton. State Street has a Russian subsidiary: Pallada. Mr Kostikov says: "I've talked with many foreign fund managers, and they say they may come in three or four years' time."
Without foreign investors, Russia's companies will continue to have low valuations, typical price-to-earnings ratios will remain miserably low, and investors' interests will continue to be ignored by executives.
This is why he is about to embark on further reforms. The proposals put forward in his first white paper, written in 2000, are "almost completely done". Last month, he issued a second white paper, with a timetable for the next three years.
Asked to list its contents, he becomes less effusive. "It's a lot," he says. Beyond this, Mr Kostikov wants to do two other things: increase investors' awareness of the stock market and monitor the activity of hedge funds.
Next year, he plans to launch an education roadshow, involving a tour of the regions.
"The investing community is still not very big," he says. "This is partly a problem of education: there is a need to explain how the stock market works and what the risks of investing are. We have to tell people the truth, and not build up their expectations."
As for hedge funds - which are widely blamed for stock market volatility and which were accused of playing a big part in Russia's economic crisis - Mr Kostikov is keen to put them under the microscope.
"We want hedge funds to give us information: how much they invest in Russia, how much assets under management they have," he says. "We want them to tell us when they start working in Russia, so we can see what's happening."
It's asking a lot of fund managers who don't work by the rule book. Mr Kostikov says: "It wouldn't be regulatory or obligatory." But he is deadly serious about getting to grips with the power of the hedge fund manager.
It is likely to take some time, however. As he says, talking about the difficulty of achieving goals in the business of reforming the financial markets, "it's as close as the horizon".
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