After over a decade in the doldrums, Ukraine finally appeared on the radar screens of foreign investors a few years back. Increased exposure to the Ukrainian market is generating more appetite for risk and the country is now attracting the interest of foreign securities exchanges eager to get in on an expected rise in the trading of Ukrainian stocks and bonds. In addition to inducing existing big players to trade in the open, the Ukrainian securities market is moving toward offering potential smaller players an alternative to bank deposits and real estate. But first the market needs an injection of funds and international know-how. This demand is being met by international brokerages and now, for the first time, by the representative office of a foreign exchange itself.
Poles on the ground
The Warsaw Stock Exchange (WSE), Poland’s leading trading platform, became the first foreign exchange to open a representative office in Ukraine on June 25. “The WSE offers several advantages to Ukrainian companies seeking capital for development. We guarantee access to foreign capital at a significantly lower cost than other European exchanges,” WSE President Ludwik Sobolewski commented on the appearance of the Poles in Kyiv. According to the WSE, more than 30% of its equity trading is conducted by foreign investors.
The WSE boasts a current listing of almost 400 companies and boasted the second highest number of new listings in Europe on its regulated market in 2007. It has a proven appetite for Ukrainian ties and has provided an attractive option for Ukrainians looking to expand onto the international stage. Two large Ukrainian agricultural companies, Astarta and Kernel, are already listed on the WSE. Two more Ukrainian companies with similar profiles are expected to do initial public offerings on the WSE in the near future, WSE spokesman in Warsaw Marcin Przeszlowski told Business Ukraine.
As early as last year, the WSE had announced that it was planning to open a representive office in Kyiv. Now it is preparing to invest in an existing Ukrainian exchange in order to sell Ukrainian securities at home. Mr. Przeszlowski said the WSE has already entered the negotiation phase with one of Ukraine’s trading platforms. “We are in talks with Indeks. But it’s too early to tell anything yet,” he confirmed.
Modernising Ukraine’s securities market
Although tiny compared to Ukraine’s principal exchange, the PFTS, which handles about 95% of the country’s official trading, the Indeks has been courted as a partner by exchanges in Russia as well. Bogdan Kochubey, Head of Research at Kyiv-based investment bank Millennium Capital, explained that now is a good time for foreign exchanges to come onto the Ukrainian market, arguing that a strategic investment into one of Ukraine’s numerous tiny exchanges would be a good place to start. According to Mr. Kochubey, the PFTS’s huge advantage in market share could quickly be overcome by an outsider with cash and technical expertise. “The PFTS needs serious modernisation, so in many respects new exchanges coming onto the market will be in the same start position,” he said, adding that those who delay their entry will inevitably have a more difficult time penetrating the market. Unlike the prevailing mood when the PFTS was launched in 1997, Ukraine’s securities exchange business is today widely seen as a profitable venture, with market players willing to spend the money to build a new infrastructure and claim the top spot. “They want to do it because they feel that demand for securities market investments will grow as more and more ordinary Ukrainians increasingly look for large scale alternatives to bank deposits and real estate investments,” Mr. Kochubey explained. With incomes rising year-on-year at highly competitive rates, the number of people looking to the emerging Ukrainian stock exchange as a source of both income and a long-term investment looks set to rise considerably.
One of the technical advantages new players will bring to the Ukrainian market is the introduction of an order-driven market. Ukraine’s security market is currently quote driven, allowing dealers to profit on spreads in the prices of stocks and bonds, similar to the way a currency exchange works. In an order driven market, a broker is at the centre of the system, earning money on the basis of a commission from the deals conducted. The new system is expected, among other things, to increase trading volumes.
A promising regional backwater
“With the introduction of DVP (delivery-versus-payment) that will be part of the new system, the market will become a more trusted institution and the money of smaller investors will pour in. Also current big players will tend to move their trading from OTC (Over-The-Counter or non-exchange trading) to the exchange because of this DVP added security advantage,” Mr. Kochubey said.
As it stands now, Ukraine’s securities market is still a regional backwater. Although it boasted 135% growth last year, average daily trading (USD 9 million) was less than 60% of tiny Croatia’s total (USD 15 million) and less than half that of nearby Romania’s USD 21.7 million. Ukraine’s State Securities Commission (SSC) reported that 85% of the registered share releases in Ukraine in the first nine months of 2007 were closed.
Russians on the horizon
While the Poles are entering the Ukrainian market through the opening of a representative office in Kyiv, Russian financial sector representatives are coming in through the backdoor via technical support. Earlier this month, Moscow’s Interbank Currency Exchange (MICEX) announced that it was helping the PFTS introduce a new trading system that would increase its daily volume to anywhere from USD 100 million to USD 200 million per day. Speaking during a press conference on June 6, MICEX President Aleksandr Potemkin said the new technology “will allow the exchange to attract new investors and placements.” The MICEX ranked among the top 20 exchanges in the world in 2007, with an average daily trade volume of USD 19.2 billion in the first quarter of this year.
PFTS President Irina Zarya said the new system could be up and running by the end of the year. The PFTS decided on April 11 to become a joint stock company in order to allow it to attract equity, debt or a strategic investor. Zarya denied that the April decision was made because the PFTS could not otherwise afford to carry out badly needed modernisation work.
Moscow eyeing former Soviet republics
The WSE was originally reported to be eyeing a partnership with PFTS, thought to be similar to the Russian Trading System (RTS). But on May 15, the RTS announced that it had agreed with 20 market traders to create its own open joint stock company in Ukraine called The Ukrainian Exchange. RTS spokesperson Varvara Inozemtseva said the RTS would initially own 49% of the new exchange, which could begin operating before end of year. This figure was later decreased to 40%. “Right now it is being registered,” Ms. Inozemtseva confirmed.
The Moscow Stock Exchange has also said it intends to open an exchange in Ukraine, as well as similar exchanges in Belarus and Kazakhstan. Moscow Exchange President Aleksey Ryzhikov reportedly envisions trading in all three countries being conducted in Russian rubles.
