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The key risk is ourselves

30.06.2011 10:00 / Vedomosti

Ruben Aganbegyan is the man without whom the merger of Russia’s two main exchanges would have hardly become a reality, given their inherent differences. RTS has fostered from the broker’s non-commercial partnership, MICEX evolved from the currency exchange of the USSR State Bank and is owned by the Central Bank and a few majors. The ascendancy of an investment banker with Troika Dialog and Renaissance Capital under his belt brought the two exchanges to the table.

— When did the stock exchanges merger first come up on the agenda? Where was the starting point?

— For me it began as early as 2006, when the international financial centre was initially discussed. We got the chance to sit down and think over what was happening to the market.

— You were not MICEX President yet …

— And neither did I see myself becoming one. We went over this with a pack of brokers who were MICEX stakeholders. We had shares in the stock exchange, we talked about a whole lot of things, the future of RTS, we talked about the trend. As for negotiations [re: merger], they began the day I first came to the office.

— So when you joined MICEX you already knew this was on your to-do list?

— Absolutely. There was an understanding between me and the stakeholders that the merger is a worthwhile thing, that we should give it the time and effort.

— So it was the clients’ idea, not the Central Bank’s?

— It was neither the exchange clients’ not the Central Bank’s, the idea had been around for a long time, RTS MICEX stakeholders had been talking about it. Not to mention international clients who were all over the place with this merger being a positive change for the market, making it stronger and prominent, which could happen through powerful infrastructure.

— And yet was this decision more about economy or politics, once the MIFC agenda had been brought to the table?

— MIFC for me is not about politics, it’s a straightforward economic project with high state priority, it’s about the emergence of state financial markets policy. The country has huge financial market potential, we are in the global GDP top 10. So merging with RTS is pure economy.

— What about naysayers?

— I don’t like to think about this deal in pro-contra terms. There are different approaches and opinions on how the market should develop, different economic interests, it’s perfectly okay.

— Where did the RTS valuation come from?

— There is the Discounted Cash Flow method and comparative assessment, other methods, we used them all, got results, showed the stakeholders. The valuation is right and it’s not overblown.

— Will the deal be financed by MICEX proprietary funds?

— Yes, it will.

— Will this not lead to decapitalization?

— MICEX has huge proprietary funds. We pay dividends. This lowers our capital, but the exchange retains enough cash to capitalize its entities and develop the business.

— Will there be a mandatory offer to minority shareholders?

— The law does not provide this offer. However, the structure and the terms of the deal allow us to offer the minority shareholders to join on the same terms as the majority.

— Was the deal structured specially to avoid the offer?

— No, this was not the key issue and it had no matter to the parties. The key issue was merging the exchanges into one functioning structure as quickly as possible. We could have gone about it differently and it could have taken longer, but in our case clear timeframes are vital — once the notion of merger gets around, people want it to happen ASAP. Let’s not forget that this is a merger of regulated groups and it is not easily structured.

— When will the deal be legally closed?

— End of this year – early next year. The key is state approval.

— Are you sure that the Federal Antimonopoly Service will greenlight the deal? You account for 99% of the stock market— and this is no natural monopoly.

99% of the derivatives market is FORTS. Can you call this a monopoly?

— I can’t quite agree with you on this one. There are laws that regulate the financial markets, and liquidity tends to join up with liquidity. I don’t see it as a new monopoly. Besides, we have powerful competition, both locally and abroad. The OTC market at home, and LSE, NASDAQ, Deutsche Boerse, NYSE abroad.

— When will the exchanges be united technically?

— Business units by the year-end. Platforms and IT — next year. The platform might take longer, but we do want this done by a joint team. We can only initiate the process after we get approval from the shareholders and the state. Still, our plans for the indexes and the spot market etc. will be discussed the day after we sign the merger agreement.

— What are the main risks?

— We are different companies with different histories and cultures. I see ourselves as the main risk, not being able to create a new entity. We must create new values, a new faith, new opportunities for the people, a new exciting workplace.

— RTS is famous for its team spirit. Do you like it?

— I respect it. Roman Goryunov, RTS President, is a living sign of how you should believe in these values. They managed to do it one time. If we are honest and open, if we trust each other, we can do it again for the joint company.

— What will happen to the RTS team?

— The main asset are the people – and we absolutely have planned out a future for them.

— Does that mean the old team will be kept for the new exchange?

— The key people will, although there will be shifts in responsibilities.

— Do you anticipate a conflict between teams?

— I expect a certain settling-in period, but that is common for even smaller projects. Everybody is different; everybody has ambitions, different experience. But I also do know that my colleagues have massive respect for each other.

— What about non-key players? Are job cuts inevitable?

— I see people as employees of the new structure. It is not all that simple. Many mergers around the world happen to make the most of the cost-effective synergy. We are uniting amid a growing market with huge potential. I see a long-term growth of demand for qualified personnel. We naturally have duplicate functions that will be cut, however this is not a priority. We don’t have redundant job lists. No plans either. Rumors say 20% jobs will be cut. I don’t see where that is coming from.

— What will Roman Goryunov be in charge of?

— He will be my senior deputy. He will run the markets. His key task is identifying the synergy we have between the markets. It is an enormous job.

— Is he on an open contract?

— Yes.

— You have planned an IPO for early 2013. Are you sure you will be on schedule?

— Yes.

— What will follow the IPO? Do you need an alliance with a foreign exchange?

— Given the scale of our economy, I see a potential to become one of the major global exchanges. Depending on the parameters, we must be in the global top five. We can make this happen through business and IT. To get access to these, we may form an alliance. This is not the only route, however.

— And still — what can the unified exchange do that two separate ones can’t?

— The key advantage is that one trading floor offers clients access to a very wide range of instruments— very convenient for clients and issuers and financial advisors. Both in terms of cost and technologies. The new entity will have huge intellectual and financial potential. Consolidation is inevitable in the financial sector. To be strong, to grow you need cash, and cash comes from volume. To be a global competitor, you must be big. This applies to all players— banks, brokers, infrastructure. One other important thing is that we are fighting for our place in the global financial system. When we were two, we mostly fought each other.

— Who are your competitors now?

— Our main competitor is ourselves. The make or break quality in our merger is within us, the people who will create the company and work here. Speaking of market competition, it differs by sector. In the stock market our main competitor is the OTC market. Dissatisfaction with the technologies, the settlement procedures drives trading into the OTC market. The share of the OTSC market is over 50%. The main competition for issuers comes from global exchanges such as the LSE.

— How are you planning to compete with London? Issuers are larger there, there are moer of them, the economy is strong, volumes are much higher than MICEX.

— The LSE capitalization is smaller than MICEX-RTS, have you checked that?

— Yeas, but is capitalization all there is?

— Capitalization is the mark of investor expectations towards the business model.

— How can you generate new substance, new issuers for the unified exchange?

— Well we already have them to start with. They have been floated both here and there. When regulation becomes equal, it is hard to tell what investors will prefer: the share as the original instrument or its derivative, the depositary receipt. Secondly, the state is planning to speed up privatization, so there is no problem there. Private issuers will also emerge. We must create the infrastructure and work with them. This is one of the major problems that we faced: not enough attention to issuers.

— That’s why Yandex had an IPO at NASDAQ?

— Yes, at the moment, we don’t have certain conditions, but they need to be created. I mean the Centralized Depository Act and a row of other legislative acts. But there is a progress, for instance, the latest taxation system changes, a lot of different initiatives, clearing act, there’s progress with the Centralized Depositary Act….

— It has been discussed for many years….

— Yes, it’s been going on for 15 years. Actually, I am quite skeptical. But if it’s about business, there’s no way we can stop. If you want to move forward, you have to forget about your skepticism and go ahead. As for the question about the Centralized Depository, then a lot of things get done. I mean the conflict between RTS and MICEX. Besides, we agreed on certain things with the National Association of Stock Market Participants and depositories. We also significantly succeeded with registrars and Professional Association of Registrars, Transfer Agents and Depositories.

— Even if we create a really quality stock exchange here in Moscow, there’s a slim chance of issuers floating here and attracting foreign investors. What else is necessary?

— We have to work with domestic investors. The unified stock exchange with powerful intellectual resource can be very useful in this case. I am talking about insurance, pension funds, mutual funds. We have to work on all these aspects, make a better investment climate, raise the corporate governance standards.

We need promotion inside and outside the country. It is important. Let’s say we, as an infrastructure, have very few discussions with our potential clients – investors and issuers. As a result, the market and its reputation are formed fragmentarily and not by us. We do not participate in this process.

— What’s your attitude towards the high concentration of assets in the Russian market? Five participants account for more than half of the volume, most of which is 10 stocks and a pair of contracts.

— Yes, it is an issue. We have to work on it, work on the legal system and broaden access for investors. We try to solve this. Our goal is to create more liquid traded instruments. Percent derivatives have a good perspective. They enjoy a major market share in many markets, but our market lacks them, in spite of the demand. Creation of a unified infrastructure, where all market participants are present - from shareholders to brokers and banks – gives a great perspective for development of different instruments and the market as a whole.

— According to your plans, you think that the government will continue economy liberalization. Are you sure of it?

— Russia has claimed many times that it is a part of global economy. If so, then administrative measures will stop working quite quickly, and economic incentives start growing. One of the examples is this small market of innovations and investments, the one we are developing. The government took unprecedented measures to support IPOs by partial recovery of expenses and other privileges. This is a good example of issuers stimulated to go public in a specific sector in Russia.

— None of the resource-based economies is an international financial centre.

— So why not become the first? Let’s have a look at the strategy our country tries to implement. This is the strategy of innovation. The goal is to compensate resource dependence with other potential Russia has. I mean the intellect and the expertise that people have. The financial market is very helpful in the realization of this strategy.

— Are you ready to move beyond the Moscow Ring Road if the International financial centre is to be built over there?

— For us, the key is to be there where our clients are. We need to be located with our main clients. It’s very difficult to be client oriented if you physically cannot meet your clients.

— Have you ever thought of leaving MICEX after the merger is through?

— No.

Anton Trifonov

Trading infrastructureProject Group №1Project Group №1Ruben AganbegyanRoman Goryuinov