Although Ukraine is enjoying record high inflows of foreign direct investment (FDI) and increased access to external funds, the country’s stock market is still a relative backwater of trading. However, things are changing. Last year, Ukraine’s stock market boasted the second highest growth rate in the world. And in order to keep up that growth, Ukraine’s principal exchange is looking for investment.
The PFTS, which accounts for 94% of Ukraine’s formal stock trading, has decided to become a joint stock company, which will allow it to attract equity, debt or a strategic investor. A general meeting of the PFTS Association, which controls the exchange, took the decision on April 11. Of 294 members, 177 voted in favour of the change. The transformation process is expected to be completed by late summer.
Looking for money
“This transformation to a joint stock company is a very long process that will take until July or August of this year,” Maksym Savanevsky, head of PR and communications for the PFTS Stock Exchange, told Business Ukraine. In addition to registering the new company, the PFTS must get approval from Ukraine’s State Securities Commission.
In the meantime, negotiations are underway with potential investors. “At the moment, we are holding talks with foreign exchanges as well as trading solutions providers, that deal with the technical side of running an exchange,” Mr. Savanevsky said.
Attracting regional attention
According to market insiders, the PFTS’s near monopoly on Ukrainian stock trading and the market’s stunning growth are attracting interest from Poland’s Warsaw Stock Exchange (WSE) and the Russian Trading System (RTS).
Last year the WSE, Poland’s leading exchange, which has a proven regional appetite, announced that it was planning to open a representative office in Kyiv. Two Ukrainian agricultural companies, Astarta and Kernel, are already listed on the WSE. Like the PFTS, the RTS emerged in the mid 1990s. It only became a joint stock company recently.
Nick Piazza, head of sales at Galt & Taggart Securities Ukraine, says that strategic investment in the PFTS by RTS or WSE would mean a transfer of their superior technology as well as greater lobbying power for the entire industry in Kyiv.
“The RTS and WSE are more business-minded exchanges that carry clout. They could streamline some of the legislation in the Ukrainian parliament that inhibits stock trading,” he adds. Savanevsky declined to reveal whether the PFTS was in talks with the RTS and WSE or what kind of investment the PFTS was seeking. “At first, the new joint stock company will be 100% owned by the Association, then we will decide whether to do an IPO, find a strategic investor, or whatever.”
Glitches and competitors
While the exact nature of any co-op deal remains ambiguous, the motivation behind the PFTS’s decision to become a joint stock company is clearer. According to Bogdan Kochubey, Head of Research at Kyiv-based investment bank Millennium Capital, the exchange needs investment for two reasons. “The first priority is to avoid technical glitches which prevent the system from operating smoothly when the volume of trading is high.”
For example, brokers say there have been several instances of statistics from the day’s trading being held up until the next day, or trading simply being suspended. In January, PFTS President Irina Zarya promised that the Association would invest in modernising the exchange’s trading system, after it had experienced difficulties handling jittery global markets that month.
The second reason for the creation of a joint stock company, according to Mr. Kochubey, is the threat of new competition coming on the market, such as the WSE or RTS.
“They (the PFTS) have to be ready to respond to the appearance of new competition. If a powerful new exchange shows up and starts luring away dealers who currently use the PFTS, they are going to be in trouble,” he says.
The PFTS originally became popular among traders and brokers due to its low cost. But now this asset has become a liability, as the exchange doesn’t bring in enough revenue to finance the modernisation process that its growth now demands. Only by becoming a joint stock company will the PFTS be able to tap into external funds.
A small but growing market
Although Ukraine’s stock market boasted one of the highest rates of growth globally in 2007 (135%), last year’s total trade volume of just over USD 6.2 billion was small, even by comparison to the exchange’s fellow eastern European peers.
For example, Ukraine’s average daily trading volume went from USD 4.85 million in 2006 to USD 9 million in 2007. However, the average daily trading volume in Romania in 2007 was USD 21.7 million, while for Croatia the figure was USD 15.9 million.
The problem is not just the market’s still limited liquidity but rather the continued preference for over-the-counter trading. The over-the-counter market includes securities that cannot be traded on an exchange, for example bills of exchange and closed joint stock.
Europe’s highest capital concentration
Ukraine’s State Securities Commission (SSC) registered 413 share releases for a total sum of around USD 5.5 billion in the first nine months of 2007. But of these, 85% were closed issues, SSC member Serhiy Biryuk announced in January. “Ukraine has the most powerful concentration of capital in Europe: The market is formed by large owners and they decide everything between themselves,” he told a bonds conference.
With 25 full-time employees and an undisclosed budget, the PFTS is the undisputed leader among stock exchanges operating in Ukraine. It launched operations in 1997 and now has more than 150 members and over 700 securities in its stock exchange listing. Between general meetings, the PFTS Association is run by an elected Council consisting of 15 members.
