ndices and Price Charts for Russian Market.
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The Russian equity market began to take shape in the second quarter of 1994 following the peak of the privatization program launched in 1993. The first market to attract significant funds from international investors was the market for privatization vouchers. With the expiration of vouchers in June, the market for shares in privatised enterprises developed in major Russian financial centres. The market's development has continued apace since 1994, and it has come to occupy a dominant position in the Russian economy. After overcoming a period of marked undervaluation, the market moved from an intensely speculative and volatile infancy into its youth as a respectable emerging market. Investor interest has continued to spread throughout a broad range of industrial sectors, and increasing attention is being paid to second tier stocks as well. During 1996 Russia's equity market infrastructure developed to unprecedented levels, and rules for market participants were firmly established by the National Association of Securities Market Participants (NAUFOR). Created by major market participants to build a trading system and develop market infrastructure, NAUFOR has grown into a country-wide, self-regulating broker/dealer association with more then 400 members. Today the Russian Trading System (RTS) has become Russia's principal market for equities trading with a daily volume averaging USD 50 million. The equity market has had its share of both successes and failures, and is now characterised by the following features:
* rapid growth in the number of shares traded and issuers listed However, the market also faces continuing challenges, including:
* Russia's poor economic condition, which is further exacerbated by particular government
policies (for example in the area of taxation) Equity trading in Russia is centred around the RTS - a screen-based quotation distribution system operated by NAUFOR. Presently more then 20 brokerage firms are obliged to support the market by making markets in at least five issues each. Trade reporting is mandatory for all transactions between NAUFOR members and voluntary for transactions with clients. In the absence of centralised clearing and settlement, it is difficult to control trade reporting and ensure consistency. It is estimated that only 50-70% of trades in Russia's equity market are reported in the RTS. Additionally, a huge market exists for ADRs in some of the most liquid shares and these prices are almost never publicized. The ADR market is believed to equal or even surpass the domestic market in size, although it is restricted to a smaller number of shares. With the notable exception of Gazprom, ADR and domestic prices differ only marginally, reflecting conversion costs and block sizes. Approximately 30 shares are regularly and reliably quoted in the RTS. Quote distribution for over 1,000 less liquid and illiquid issues is carried out by brokers via phone and fax. The most reliable source to integrate and distribute this information is the AK&M proprietary database, which is updated daily. However, it is still necessary to implement sophisticated averaging methodologies to obtain pricing histories for many instruments. As trade reporting develops and public sources of quotes become more transparent, AK&M's database is the major source of information for the OTC market and the RTS as the source for the single organised market. When we began our calculations, it was impossible to rely on closing prices in the absence of strict reporting rules. The averaging of best bids and asks was the only reliable methodology. To preserve consistency even now in a more mature market, we continue to average bids and asks at the close of RTS trading (6:00 p.m. Moscow time). Bids and asks are obtained from RTS or from AK&M, depending on liquidity. Only domestic prices are used, and ADR's are not included. Therefore, Gazprom price charts do not take into account ADR market prices. It is important to note that RTS closing prices, weighted average prices, highs and lows, etc., are now publicly available through a number of sources at the market's close, as well as at certain intraday points. More then that, best bids and asks and the ticker from the RTS are now distributed via REUTERS with a 10 minute delay. Our pricing methodology provides only indicative results and cannot be used as a real trading indicator. The average figures reported do not necessarily provide accurate indications of actual transaction possibilities. Nor do we recommend our pricing for asset valuation in the Russian market. All price charts on these pages are in US dollars, the currency in which all RTS equity prices are quoted. Several equity market indices currently exist for Russia. The most widely recognised ones are the RTS Index, the NAUFOR official index, and the MT Index calculated by the Moscow Times newspaper in conjunction with the SKATE Consulting Agency. Other indices include the AK&M information agency and Commersant newspaper indices. Several brokerage houses also publish their own indices, including Creditanshtalt-Grant, the Russian Brokerage House and CS First Boston. The indices differ in almost all aspects of the methodology used, including sampling of enterprises and pricing techniques. However, all of the indices are capital-weighted, with the weighting for particular stocks reflecting (with some adjustments) their market capitalisation. All major international compilers of emerging market indices, such as International Finance Corporation, Morgan Stanley and Barings, have launched Russian indices and included Russia in their global emerging market portfolio weightings. Consequently, a broad family of Russian indices has been created, from global benchmarks used by international asset managers to local in-house products. The problems with price averaging described above influence index calculations. Weighting selection adds another set of problems. An important obstacle impeding the calculation of a representative capitalisation-weighted index is the current shareholder structure of major companies. With significant stakes still held by the state or controlled by a single entity or person, it is difficult to estimate the number of shares available for investment, or free float. If the owners of majority stakes do not think rationally and pay no attention to market prices, it is difficult to rely on capitalisation-based indices alone when evaluating securities market behaviour. In our opinion, some specific features of the Russian equity market, for example the irrational behaviour of major market players (including the government), allow us to use any cap-weighted index only to a limited extent. The Weighted Equity Index is calculated to fill some of the gaps inherent in cap-weighting methodologies. The Index is an attempt to create a "strategy oriented" index designed to show the market's performance from the viewpoint of an active market participant. An equally weighted index is believed to be representative for an emerging market, as it allows the capture of both the long-term economic trends and short-term speculative opportunities arising in non-efficient markets. The general principles behind the calculation of the Index are the equalisation of weighting for large and small companies, together with the strategy to sell what has risen in price and buy what has fallen. In our opinion, these two principles allow us to catch some important features of the market which are totally overlooked by cap-weighted indices. The index is comprised of shares which are considered highly liquid on the Russian market. The composition and calculation of the index rely heavily on expert estimations. The methodology is not completely transparent and assumes no responsibility for any financial decisions, losses or other implications derived from the use of the Index. However, the Index is a best effort to obtain timely, correct and consistent data. It is our belief that the Index, together with indices calculated by other parties, will provide an accurate benchmark for the evaluation of market conditions The following table reflects the composition of the Index and its changes over time. The dates of inclusion and exclusion of shares are shown in the table. Please note that some shares have been excluded from the index at some point only to be re-included again later due to improved liquidity.
Included Excluded
Automotive
* AvtoVAZ 01.01.95 26.04.95
* GAZ 05.01.97
* KAMAZ 01.01.95 26.04.95
15.12.95
Ferrous metals
* Krasnoyarsk Integrated Steel Plant 26.04.95 15.12.95
* Nizhnetagilsk Integrated Steel Plant 26.04.95
* Novolipetsk Integrated Steel Plant 01.01.95 05.01.97
Food processing
* Red October 05.01.97
Non-ferrous metals
* Achinsk Alumina Plant 26.04.95 15.12.95
* Bratsk Aluminum Plant 01.01.95 05.01.97
* Irkutsk Aluminum Plant 26.04.95 15.12.95
* Krasnoyarsk Aluminum Plant 01.01.95 05.01.97
* Mid-Urals Integrated Smelter 26.04.95 05.01.97
* Norilsk Nickel Integrated Plant 01.01.95
* Sayansk Aluminum Plant 01.01.95 05.01.97
Oil & Gas
* Chernogorneft 01.01.95
* Condpetroleum 01.01.95 05.01.97
* GAZPROM 05.01.97
* Komineft 01.01.95 05.01.97
* LUKOIL-Holding (LKOH) 01.01.95
* LUKOIL-Kogalym (Subsidiary of LKOH) 01.01.95 15.12.95
* LUKOIL-Langepas (Subsidiary of LKOH) 01.01.95 15.12.95
* LUKOIL-Uray (Subsidiary of LKOH) 01.01.95 15.12.95
* Megionneftegas 01.01.95
* Nizhnevartovskneftegas 01.01.95
* Noyabrskneftegas 01.01.95
* Orenburgneft 01.01.95 26.04.95
15.12.95
* Purneftegas 01.01.95
* Surgutneftegas 01.01.95
* Tomskneft 01.01.95
* Varyeganneftegas 01.01.95 05.01.97
* Yuganskneftegas 01.01.95
Electric Power
* Irkutskenergo 01.01.95
* Krasnoyarskenergo 26.04.95 15.12.95
05.01.97
* Lenenergo 26.04.95 15.12.95
05.01.97
* Mosenergo 01.01.95
* Samaraenergo 05.01.97
* Sverdlovenergo 05.01.97
* United Energy System (UES) 01.01.95
Retail
* GUM Trading Center 01.01.95 15.12.95
05.01.97
Shipping
* Volgotanker 05.01.97
* Far East Shipping Company (FESCO) 01.01.95 05.01.97
Telecommunication
* Electrosvyaz (Irkutsk) 05.01.97
* Kubanelectrosvyaz 05.01.97
* Moscow City Telephone Network 01.01.95
* Nizhnovsvyazinform 05.01.97
* Petersburg Telephone Network 01.01.95
* Rostelecom 01.01.95
* Svyazinform (Chelyabinsk) 05.01.97
* Svyazinform (Samara) 05.01.97
* Uralsvyazinform 05.01.97
The index was started at 100 points on January 1, 1995.
The number of shares in the index was set at:
January 1, 1995 30
April 26, 1995 35
December 15, 1995 28
January 5, 1997 34
All further changes in the index composition will be reported immediately, and will be accompanied by appropriate changes in the weighting (see below) to ensure the continuity of the index. Pricing Prices for securities are derived using the proprietary averaging technique on bids and asks from sources described in the PRICE HISTORIES section above. The index is constituted as a portfolio with each particular security representing the same percentage of the portfolio (for example, a portfolio with 20 shares with a weight of 5% each). Once equal weights have been set at the beginning of the time period, they will begin to change as a result of price movements. It is therefore necessary to adjust the weights, thus selling rising shares and buying falling ones. Re-equalisation is carried out for all securities when the weight for any one security drops out of the range marked by a double increase/decrease in the weight of a stock in the portfolio. In the example of a 20 share portfolio (initial weights at 5%), the range will be from 2.5% to 10%. It is important to mention that re-equalisation is carried out at the average prices for the date and without accounting for any transaction costs. Therefore performance of a stock portfolio based on the Index composition will differ from index performance, sometimes significantly. As a final remark we should note that the Index has behaved quite differently from cap-weighted indices, typically exhibiting more conservative performance . Further research is required to measure the index's relevance to the market and accurately determine the advantages and disadvantages of its usage.
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