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PIONEERING RUSSIA'S CAPITAL MARKETS** by Eric Bruder

As U.S. and European capital flows into Russia increase at an
growing rate, Western financial service companies are staking out
positions in Russia's emerging capital markets.  As foreign
participation in the market grows, Western investors will
increasingly look to the expertise of major international
securities dealers, investment banks, and venture capital firms. 
Most international financial service companies currently operate
offshore with respect to the Russian securities market.  Based
primarily in New York or London, they trade in external debt and
provide project financing.  These firms also buy and sell Russian
equity, as agents or on their own accounts; provide investment
banking services (mergers and acquisitions, restructuring,
venture capital, and financial advisory services), and provide
private clients with portfolio management. 

In late 1993, CS First Boston became the first foreign-owned
securities firm to receive a full Russian securities license.  
The license, issued by the Russian Ministry of Finance, gave CS
First Boston the right to underwrite and place securities, and
made it one of the dominant players in the market.  Several other
Western firms followed suit in 1994, upgrading their Russia-based
operations and increasing their visibility in local markets. 
Brunswick Securities, a Swedish-based investment firm, became the
second Western firm to receive a full license.  Morgan Stanley,
which has had ties to Russia for many years, opened a
representative office, as did Goldman Sachs.   

Still operating offshore are Salomon Brothers and Paine Webber,
trading Russian external debt.  Paine Webber also runs a
Russia-focused investment fund, which was created with financing
help from the Overseas Private Investment Corporation.  At least
two joint ventures with U.S. ownership interests are active in
the Russian capital markets, as well: Troika Dialog, a subsidiary
of Dialog Bank, and Active Inc., a subsidiary of Steinhardt Fund
Management. 

Foreign banks have been actively trading government securities
and foreign-exchange instruments in Russian capitals market, but
have for the most part shied away from the corporate securities
market.  Several foreign banks are reported to be interested in
providing custodial services, however.  Particularly
well-positioned to offer these services, should they chose to do
so, are Citibank and Chase Manhattan, which have universal
banking licenses issued by the Central Bank of Russia.   
Several U.S. mutual funds, notably Templeton, have also expressed
interest in the Russian capitals market.  However, U.S.
securities law prohibits U.S. mutual funds from investing in
capital markets that lack regulatory oversight and a solid
custodial system.  As custody, registration and cash settlement
improve, U.S. mutual funds will become more active in Russian
capital markets. 

No foreign firms have registered officially yet as dealers in
Russian Government securities (mostly short-term treasury bills),
but no laws prohibit them from doing so.  Registration would
enable them to bid at official auctions administered by the
Moscow Interbank Currency Exchange.  Two of the 55 registered
government securities dealers are joint venture banks:
International Moscow Bank and Dialog Bank. The registration
criteria appear open and transparent and allow for foreign firms
to become members, as long as they have significant experience in
the market.  The only serious disadvantage they face is that
foreign investors may not buy more than 10 percent of an official
dealer's total purchase at any one T-bill auction. 
No laws discriminate against foreign companies in the Russian
securities industry at present.  However, the Russian Ministry of
Finance recently proposed a provision in a draft of the new
Russian securities law that would give regulators broad latitude
to impose discriminatory measures against foreign firms.  The
future of this particular draft is still unclear.  Due to the
general volatility of the Russian market and legal system,
Western companies should consult experienced legal counsel before
entering the market.   

** Note: This story appears here in a longer form than in the
print version of BISNIS BULLETIN--ed.
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