COMMENT: How the Gamestop phenomenon hit Russia

COMMENT: How the Gamestop phenomenon hit Russia
Russia's equity market has seen a flood of retail investors, who now make up to 40% of the turnover. Some of them are getting sophisticated and Russia has suffered from its first major "pump and dump" scandal.
By Petr Ter-Avanesyan of Invest Navigator Telegram channel in Moscow May 25, 2021

Russian retail investors inspired by the speculative mania surrounding US videogame company GameStop are piling into the domestic stock market and are increasingly seeking to co-ordinate their activities.

In March this year there was a bold attempt by a group of private investors using Telegram channels to try to bid up the share price of MRSK Yuga, a utility company belonging to the state-owned Rosseti portfolio company involved in electric utilities.

The Central Bank of Russia (CBR), which is the market regulator in Russia, ordered Sberbank, VTB, Tinkoff, Alfa Bank, Otkritie Broker, BCS GM and Aton to suspend deals and operations on organised trading and to freeze the accounts of the individual clients involved. It was the first time the central bank had publicly announced it was taking preventative measures, such as blocking brokerage accounts, to stop violations to the law on market manipulation.

On Telegram channels, there were appeals made to subscribers to start snapping the unloved stock. Unlike in the US market, the organisers didn’t target hedge funds but rather those individual investors who were sucked in by the rising stock price. The CBR ordered brokers to block the accounts of more than 60 private investors it suspected of orchestrating the initial bid to front-run the shares. The Telegram channels involved were not named but the regulator said the transactions had occurred on the Moscow Exchange.

Prior to the Rossetti probe, the CBR Governor Elvira Nabiullina said in February that her team was studying the speculation in the US market by investors active in the Reddit forum to analyse possible changes in the regulation of the Russian stock market.

“Talking about Reddit there is no direct threat to our market,” Nabiullina said at the time. “Our derivatives market is not developed enough for individual investors, so it’s not an immediate threat. Besides, we have got many tools which we could use to prevent it, but from a long-term perspective, we need to closely monitor the risks.”

The share of Russians who have a broker account is still far behind the average in developed countries, but the retail takeover of the market is underway. The Moscow Exchange last year gained 5mn new investors, while the St. Petersburg Commodity Exchange (SPIMEX) gained 2.55mn new clients.

Risky bets on stocks and bonds became more appealing to ordinary middle-class Russians due to the decline in bank deposit rates and the growth of specialised mobile applications making investing cheaper and easier. Previously, any wannabe investor had to visit a brokerage office and spend many hours signing multiple documents and downloading a special trading interface onto their PC.  

Such has been the growth that retail investors are now responsible for almost 40% of demand during bond placements, according to Vedomosti. Retail investors are also increasingly dabbling in the oil futures market – previously only the domain of large institutional investors. Earlier this month, individuals increased their long position on Brent futures by 30% following a dip in the price of oil.  

With the spurt of retail interest in equities, bonds, commodities and futures showing no sign of waning, Russian brokers and banks are ramping up their offerings. According to the Moscow Exchange, total individual investors surged by 350% in 2018-2020, with growth this year set to outstrip that level.

For many reasons, an average Russian retail investor must have balls of steel. For almost 25 years, there has been a complete disregard of minority shareholders and their rights.

Taxes change all the time. Corporate bonds issued in the period 2017-2019 had tax-exempt coupons, and coupons of state bonds were always tax-exempt. However, now they are all taxable and, to make things even worse, bank deposits are now taxable at a flat tax rate of 13% for income less than RUB5mn ($68,000) a year and a 15% rate for incomes above that annual threshold.

State companies carry a constant risk of new sanctions, while oligarch risk means sanctions are possible as well as an assault by the state. Equally, privately held companies are frequently targets for hostile takeovers by the state with unfavourable terms for minorities.

To diversify away from Russia-specific risks, many individual investors have chosen Interactive Brokers (IB) to buy foreign stocks, ETFs and derivatives outside Russian legislation. However, on August 31 last year Kommersant reported that IB has started to seriously limit access to Russian clients after they had to pay a huge penalty for inappropriate money-laundering prevention procedures at IB. Accounts were closed not just for several broker firms but to lots of Russian individual investors. Hence IB, although it is still the most popular broker among Russians, is not deemed to be as reliable as it used to be.

The CBR has told the Duma that they should prohibit Russian clients from buying hard currency and foreign shares in individual investment accounts (IICs). This is a good idea, since IICs are subsidised by the state budget and investments in foreign stocks should not be allowed to increase the budget burden.

Theoretically, some patriotic deputies may try to suggest banning investments in foreign shares just like they sanctioned Swiss cheese or Polish apples in the past.

At the same time, it may be too late. In January, turnover in stocks, ETFs and GDRs on SPIMEX surpassed the turnover on the Moscow exchange by 20%. This means that Russians were more actively trading foreign instruments than local instruments (SPIMEX is leading in foreign shares trading, while Moscow Exchange has fallen behind and is more concentrated on trading Russian assets).  

High tech stocks are not easy to be found among Russian issuers, so those looking to buy hyped growth stocks have no choice but to turn to SPIMEX and buy US FAANGNMs (Facebook, Apple, Alphabet Netflix, Google, Netflix and Microsoft). The tech sector on the Moscow Exchange is represented by Mail.ru, Yandex, TCS Group, Ozon and Headhunter. Not a huge choice.  

Russians buy local stocks because they have high dividends and low valuations and many started buying the dividend plays after the 2008 crash, when the market was cheap.

Other investors started to invest in shares in 2015 when the government introduced the IICs and another cohort began buying a year ago when they compared bank deposit rates with dividend yields on Russian stocks and simultaneously witnessed unprecedented Fed Reserve measures, which made them expect higher inflation in the future, which they thought was good for commodity prices and Russian stocks.

To further develop the pool of retail investors, Russia has to improve financial literacy amongst the population, preserve property rights, protect minority shareholders and grow the number of financial advisers. Abolishing some taxes like capital gains tax or a tax on some types of bonds would be welcomed and would further boost financial markets' popularity among Russians.

Unlike on Wall Street, there are no real hedge funds active on the Russian securities market for this growing swarm of retail investors to try to take down. Until then, they will probably be facing a losing battle against state entities, oligarch groups and themselves.

 

Petr Ter-Avanesyan is the founder of Invest Navigator Telegram channel with over 32,000 subscribers. He has worked in senior trading roles at Mentatep, Trust Bank, International Financial Club Bank, and was latterly head of research at Russian Agriculture Bank.  

 

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