The electronic stock listing system is setting new turnover records almost monthly. Demand for company shares outstripped supply long ago. Big international brokers are developing offshore derivatives to sell to eager foreigners.
Ukraines market for corporate securities, stunted at birth by hamhanded regulation and sadistic settlement procedures, is growing up at fast.
The PFTS stock trading system listed transactions worth more than $11 million in June, up $4 million from the previous record set in April and more than 10 times the total in December.
What is beginning to happen is that serious international players are starting to get involved, says Joseph Kolb of Landenburg Thalmann, a New York-based investment firm. In six months this is going to be a very interesting market.
Landenburg Thalmann is one of those players. On July 9 it will launch the $60 million Ukraine Fund in partnership with Frances Societe Generale. Some of the money will be spent on company shares; all of it will likely be invested within three months, according to Kolb.
Other signs of bull-market fever abound. ING Bank is setting up a local brokerage. Wood and Co. has unveiled Ukraines first stock market index. Local newspapers that once sneered at PFTS are now requesting its stock tables.
The question is whether Ukraines fledgling securities markets are ready for all this attention. There are only a handful of transactions, and the value of stocks traded in Kyiv each month switches hands every few hours in Moscow.
With privatization stalled and managers of listed companies leery of outside investors, too many share buyers are chasing too few shares. Market insiders estimate that less than half of all share agreements are reported to the PFTS. The main reason is that buyers searching for shares high and low fear that a major purchase will push up the price of companies they favor.
As in Russia, company managers can still deny an unwanted shareholder his rights and sometimes dispossess him outright. Nobody invests unless they are invited to invest, said a Western adviser intimately familiar with the market.
Both Landenburg Thalmann and ING Bank, for example, plan to invest only in companies that are receptive. This is not yet a place for corporate raiders.
One reason corporate managers wield so much power is that the ownership structure of their firms is recorded by one of Ukraines 270 share registrars. In theory, these are supposed to be independent. In practice, many are controlled by the firms whose share registers they maintain, and have sometimes refused to register the shares of an undesirable investor.
Each registrar in effect holds a monopoly on recording transfers of shares in client firms, charging transaction fees of 1.5 to 2 percent that are excessive by international standards.
The decentralized registrar network also forces representatives of brokers and investors to criss-cross the country in order to register their purchases. That means it often takes 10 days from the date of purchase to register share ownership.
[That] is not really acceptable to Western investors. … You have a serious time lag and a serious settlement risk, says Robert Grant, ING Banks Kyiv representative.Each share purchase now involves a negotiation between buyer and seller as to whether payment will be made before or after the shares are registered. Such transactions depend heavily on trust, and trust will only go so far in a young and unstable market.
PFTS is trying to solve the problem by establishing interestbearing escrow bank accounts where money can sit until the shares it bought are registered. In the longer term, there are plans to offer instant settlements by building electronic links to registars of the most popular stocks.
That option, and others that would ease the task of registering and tracking share ownership will be set by legislation now pending in Parliament, which is expected to pass before the legislature adjourns later this month.
The law will also spell out the rights and obligations of share depositories. These entities can register shares on behalf of investors and provide firm proof of share ownership without requiring buyers to register each purchase with the registrar. A consortium of Ukrainian banks that includes Privat Bank and Ukraina has joined in the Interregional Funds Union, or MFS, which is bidding to become the dominant Ukrainian share depository. The Professional Association of Registrars and Depositories, PFTS and some smaller stock trading systems are also in the hunt.
In the meantime, Landenburg Thalmann and ING Bank are hoping to spare their clients settlement headaches by taking Ukrainian share transactions off-shore. Both firms are planning to issue derivatives that will let foreigners buy securities issued in the West but underpinned by holdings of Ukrainian shares. The schemes mirror those pioneered in Russia to reduce the risk to foreign investors of a wild and sometimes hostile market.
Boosters of Ukrainian securities argue that such innovations will let investors reap the sorts of profits that have fueled a stock market boom in Moscow. They argue that Ukraines privatization drive will soon bring to the market Ukraines blue chips its best, most lucrative enterprises.
But Ukraine lacks the natural resources that have boosted the fortunes of such Moscow stock market staples as Lukoil and Gazprom. Arguments in support of the Ukrainian markets long-term prospects often start and end with a single number: 52 million.
And while a nation of that many people ought to have a respectable stock market, it remains to be seen whether it will offer choice morsels or the crumbs of a crumbling economy.
