Publications. Financial Articles : # 5

How to purchase shares in western companies in Russia
Pbl-05-face.jpg (45992 bytes) Article in the Newspaper "Financial & Business News", # 24, December 1991, page 7.

Author - Dmitry Lyubomudrov


"The only thing officials of any country can do is to promote a slogan and not interfere with its realization." This rule, popular among business people all over the world, simply can't take root in Russia. For several years, central and Russian authorities have expressed their desire for close cooperation with the world economic system. In reality, however, the share of western capital in joint ventures is declining. There are virtually no direct commercial foreign investments
Financial director, Profico industrial and financial company

Despite this fact, new Soviet (let's stick to this term for the time being) structures initiated the integration process on their own without waiting for the time when the government would get underway. More and more actively, Russian companies invest the hard currency they earn in shares of such well-known American and Japanese companies as IBM, Hewlett-Packard, Ford, Chrysler, Bank of America, Honda, etc. The shares are on sale (mostly for dollars, but sometimes for rubles) at the Moscow Central Stock Exchange (MCSE) and at the stock department of the Russian Commodity and Raw Materials Exchange. The volume of the minimum standard package bought for dollars constitutes 100 shares; for rubles - 1,000 shares. The introduction of the "compulsory minimum purchase" principle was because of the unstable mechanism of the "dollar-ruble" conversion, executed by the so-called currency exchange of the USSR State Bank (Gosbank) and the Bank for Foreign Trade of the USSR (Vneshekonombank). However, one can only arbitrarily call this a currency exchange, as the officials of these two government departments establish the exchange rate at their own choice. In addition, they can refuse, for no reason whatsoever, to sell or purchase hard currency to anyone. Consequently, foreign-share dealers seek to obtain the biggest possible packages of orders.

Today, there are two real schemes enabling foreign shares to enter the Soviet stock market.

Scheme 1. The Baltic Stock Exchange (BSE) in Riga has reportedly bought a brokerage office at the Toronto Stock Exchange for US $100,000. At the same time, the BSE allocated US $500,000 of earned hard currency to finance broker orders and organized the so-called "hard currency corridor." The settlement chamber of the stock exchange is used as the exchange office. The current exchange rate is 140-160 rubles for 1 US dollar. First, the BSE brokers gather orders for foreign company shares and exchange the rubles received from clients for dollars in the "hard currency corridor." Then the BSE brokerage office in Toronto purchases the shares and sends them to the depository in Vienna, officially formalizing them for purchasers. To conduct transactions for depositing securities in Europe, the BSE joined Investpool: this will allow the Exchange to partially save its clients from certificate remittance expenses. One may congratulate the Baltic brokers on a good start. Many Russian brokers still follow this scheme through the BSE. However, they are apprehensive about expanding their business owing to the unstable economic and political relations between Russia and the Baltics.

Scheme 2. The Sovlex brokerage office in Moscow (No. 14 MCSE) signed a contract with US Montgomery Securities Inc., active on the New York Stock Exchange, providing for joint activities to bring the foreign companies' shares into the Soviet stock market. The principle of purchasing shares for hard currency is similar to the one described in Scheme 1. But the deposit transaction is substantially different. Sovlex offers to formalize all shares bought on the clients' commission for itself and deposit them in New York. As for Russian clients, Sovlex will issue certificates on the transfer of the rights for shares. Incidentally, Sovlex is not a depository registered according to world accepted standards, and consequently such certificates are invalid in the United States. In other words, should Sovlex go bankrupt, purchasers of the shares in Russia will get nothing.

        The only consolation is that this scheme has just been worked out, and its first transaction has yet to be carried out. Today, several Russian brokerage houses are working out other ways to bring foreign shares into the Soviet stock market. Only time will tell which scheme turns out to be more successful. Obviously, given rising inflation and the impending money reform, Soviet organizations and enterprises are ready to go to all lengths to transform their piles of rubles into more liquid assets, including shares in foreign companies. Of course, they lack experience. They should be helped so that we can, at the same time, make a profit. So, western brokers, let's do it !