What do a Polish business analyst, a Russian stock broker, an American securities lawyer have in common? They, along with locals such as Oleh Mozgovoy, chairman of the Securities and Stock Market Commission of Ukraine (SSMC), agree the Ukrainian stock market has a long way to go before it can attract investment.
The meeting of international minds came at a conference Wednesday on Ukraine's capital markets organized by Mozgovoy's SSMC and Washington-based Financial Markets International. Aimed at traders and securities companies in Ukraine's regions, the well-attended forum brought small-time stock dealers together with foreign professionals.
The aim was to get the word out about outsiders' views of Ukraine's stock trading system.
The news was not good, but it was detailed. 'In order to attract foreign investment the stock market has to be well-regulated and transparent,' declared Philip Haas, president of Haas Consulting S.A. 'The legal system needs to be stable and solid. Today we must have serious doubts that this is the case in Ukraine.'
EVAM, Haas's investment company, has learned about the harshness of Ukraine's investment climate first hand. Last year, the firm used part of its $250 million turnover to take a minority position in a recently-privatized tire company.
At the time, the shares stood at Hr 75 ($37.50) each. The investment logic was simple: Ukrainian cars need tires, the company makes them, and prices should go up. 'But right now the management… is issuing new shares to itself at a reduced price,' Haas complained. 'That is diluting the value of the stocks not just for us foreign investors but for all share-holders. So far the law has not stopped them.'
In local parlance, things foreign are divided into the 'far-abroad', which means countries which were never part of the Soviet Union, and 'near-abroad' former Soviet states. But when it comes to the Ukrainian market, investors near (Moscow) and far (Europe) agree that machinations with publicly-traded stocks are common enough here to frighten away critically needed investment capital. Haas also registered less than total satisfaction with the Ukrainian government's erratic privatization program, citing as a particularly discouraging example the recent, abrupt cancellation of the privatization of the Ukrnafta energy enterprise. Enforcement of one law for all, and confidence that the laws won't change tomorrow are important for attracting meaningful foreign investment, he argued.
'You change the terms of a major privatization to exclude foreigners or favor a local company – that sort of thing gets around,' said ING Barings Ukraine Corporate Finance Director Robert Foresman. 'And that keeps the foreign money out, which is not good for the Ukrainian economy.' One investor from Moscow went further, pointing out that fears about investment safety are leaving large domestic resources untapped as well.
'We should not be talking about protecting foreign investors, we should be talking about protecting investors, period,' said Assistant Chairman of the Russian Federal Securities Commission Valery Zavadnikov. 'There are plenty of possible institutional investors in Russia who would be willing to invest locally if they felt it was a safe investment. I don't believe the situation is very different in Ukraine.'
Mozgovoy, who is charged by the Ukrainian government with enforcing the nation's law on stocks and securities, conceded that local conditions sometimes defeat the best intentions of state controllers.
'You know, when you start talking to companies to try and find out why management did something in violation of our rules, you always hear how the situation in that company is unique. That's what we heard in [the tire factory's] case,' said Mozgovoy. 'We transferred charges to the appropriate arbitration court for not holding a shareholder's meeting … but some of the problems with this secondary share emission are internal problems of the company.' Mozgovoy's job, to act as a watchdog over Ukrainian stock trading, is a daunting one. Although five stock exchanges operate in Ukraine, most company shares change ownership not just only over-the-counter but outside the capital and outside of the SSMC's range of control. Antiquated procedures for share-ownership transfer also loosen the SSMC's regulatory grip.
'You have a situation in Ukraine where to obtain a share of a company you have to visit the old owner and then the company head office somewhere out in the provinces to register the title transferred,' complained Foresman. 'And unless the transfer is reported – as is required by law – we have no immediate way of knowing about it,' Mozgovoy explained. 'And if we don't see it we can't protect the investor.'
One of the few advantages of Ukraine's delayed transition to full-blown capitalism is the opportunity to learn from the experience of others. When it comes to regulating the market better proven solutions are out there. 'We have a system of rigorous control and regulation,' said Assistant Chairman of the Federal Securities Commission of Poland Miroslav Kachinevsky. 'All stock transfers in the country are electronic, and we analyze each transaction closely.'
Advice is easy. Putting it into practice less so. 'We have a good idea of what we need to do to make the market here function more transparently,' said Mozgovoy. 'But we are short resources, time and money.'
