Russia sees structured equity rise

New Angles

Russian securities dealers are beefing up their structured equity capabilities, despite a broad-side aimed at the industry last month when a senior politician called for a Federal Security Service investigation into so-called grey-share trading activities in shares of state-controlled energy major Gazprom.

Local dealers such as Renaissance Capital and Trust Investment Bank are unlikely to be put off by a letter dated August 17 from Yury Savelyev, deputy chairman of the state Duma’s Industry and Technology Committee, to Federal Security Service director Nikolai Patrushev. It called for Patrushev to investigate Gazprom shares owned by United Financial Group – a business 40% owned by Deutsche Bank – over fears that grey share trading schemes may have allowed non-Russian domiciled investors to gain a majority share in Russia’s largest energy company.

Foreigners cannot buy Gazprom shares following a presidential decree in 1997. And a 1999 law places a cap of 20% foreign ownership on Europe’s largest gas producer. But foreign investors frequently buy the rights to Gazprom equity through offshore vehicles set up by securities firms – a lucrative area of business. UFG claims Savelyev’s letter is part of a black propaganda campaign and linked to a legal dispute between the bank and a company called Stoisportservice, which

UFG believes is backed by hostile raider Pavel Svirsky, that is trying to seize $50 million of Gazprom shares from UFG entities.

Offshore trading of Gazprom shares is estimated by Oleg Jelezko, managing director for equity finance and structured products at Renaissance Capital, to account for about 40% of its daily $50–80 million turnover. Jelezko says about $3.5 billion of Gazprom’s market capitalisation is held through linked notes.

But with poor liquidity on Russian exchanges, banks such as Renaissance and Trust conduct most of their equities business offshore. Renaissance’s Jelezko puts the figure at 70%, while Trust’s director of structured products, Roman Sarytchev, estimates 85%.

Jelezko was hired in March from Credit Suisse First Boston to develop Renaissance Capital’s structured equity products capability. His first initiative is to build a prime brokerage function. This will provide clients with margin trading and stock lending capabilities for equity finance. Renaissance aims to offer leverage of two to three times notional.

He also wants to offer stock, index and basket total return swaps, forward contracts and yield enhancement trades. The final initiative is to develop capital guaranteed notes and cash-based structured notes such as those used for the offshore trading of Gazprom shares. Jelezko says the structured products will be relatively simple, for example linked to index performance.

Meanwhile, Trust Investment Bank is pushing the boundaries in Russia. It is offering a product that allows investors to short or go long individual Russian stocks such as Lukoil, Norilsk Nickel, Rostelecom and Surgutneftgaz, with leverage of up to six times with no funding cost and the right to receive dividends under forward contracts.

While the bank has yet to sign up investors, Trust’s head of risk management, Alexey Sazonov, says it will use exotic passport options (see Passport to Success by Tom Hayer, Alex Lipton and Dmitry Pugachevsky, Risk September 1997) to hedge its positions.

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