THE CREATION OF A COMMON EXCHANGE SPACE IS ONE OF THE GOALS OF THE EAEU STRATEGIC DIRECTIONS FOR DEVELOPING UNTIL 2025, WHICH IS SPECIFIED IN THE CONCEPT OF THE EURASIAN ECONOMIC UNION COMMON FINANCIAL MARKET FORMATION ADOPTED IN 2019 AND IN THE EEC ROADMAP FOR THE FORMATION OF A COMMON EXCHANGE SPACE ON THE TERRITORY OF THE EAEU APPROVED BY THE EEC IN 2020.
THE COMMON EXCHANGE SPACE SHOULD «PROVIDE CROSS-BORDER TRADE IN SECURITIES AND FINANCIAL INSTRUMENTS ON THE ORGANIZED EXCHANGE MARKET THROUGH NON-DISCRIMINATORY ADMISSION OF STOCKS AND BONDS OF THE HIGHEST CATEGORY OF RELIABILITY TO THE COMMON (ORGANIZATIONAL) EXCHANGE SPACE OF THE UNION» BUT THERE IS NO AGREEMENT YET ON COLLECTIVE INVESTMENTS AND CROSS-BORDER WORK OF PENSION AND INVESTMENT FUNDS.
BASED ON THE ANALYSIS OF DIFFERENCES IN THE STATE OF NATIONAL STOCK MARKETS OF THE EAEU COUNTRIES AND THE POSSIBILITY OF COLLECTIVE INVESTORS, THE ARTICLE FORMULATES PROPOSALS TO ACCELERATE THE PROCEDURES OF ADMISSION OF COLLECTIVE INVESTORS TO THE COMMON EXCHANGE SPACE, CREATE OPPORTUNITIES FOR NEW DIGITAL SOLUTIONS FOR MUTUAL INVESTMENT AND A COMMON DIGITAL EURASIAN STOCK EXCHANGE.
THE COMMON EXCHANGE SPACE SHOULD «PROVIDE CROSS-BORDER TRADE IN SECURITIES AND FINANCIAL INSTRUMENTS ON THE ORGANIZED EXCHANGE MARKET THROUGH NON-DISCRIMINATORY ADMISSION OF STOCKS AND BONDS OF THE HIGHEST CATEGORY OF RELIABILITY TO THE COMMON (ORGANIZATIONAL) EXCHANGE SPACE OF THE UNION» BUT THERE IS NO AGREEMENT YET ON COLLECTIVE INVESTMENTS AND CROSS-BORDER WORK OF PENSION AND INVESTMENT FUNDS.
BASED ON THE ANALYSIS OF DIFFERENCES IN THE STATE OF NATIONAL STOCK MARKETS OF THE EAEU COUNTRIES AND THE POSSIBILITY OF COLLECTIVE INVESTORS, THE ARTICLE FORMULATES PROPOSALS TO ACCELERATE THE PROCEDURES OF ADMISSION OF COLLECTIVE INVESTORS TO THE COMMON EXCHANGE SPACE, CREATE OPPORTUNITIES FOR NEW DIGITAL SOLUTIONS FOR MUTUAL INVESTMENT AND A COMMON DIGITAL EURASIAN STOCK EXCHANGE.
Current state of national stock markets and collective investments in the EAEU countries
The main problem of integration of stock markets in EAEU member countries is the asymmetry in their development (table 1, gure 1). While in Armenia, Belarus and Kyrgyzstan exchange trading in securities is at the initial stage with some revival in the circulation of bonds, especially government bonds, in Kazakhstan and Russia in particular stock markets are approximately at the level of development of Central and Eastern European countries. Figure 2 reects the dynamics and structure of the volume of exchange trading, which shows that in Belarus and Kazakhstan trading in Government Short-Term Bonds is prevalent, only Russia actively trades in shares. The main indicator – the volume of exchange trading in the country, of course, depends on the total capitalization of joint stock companies in the stock exchange listing. The most important indicator is the ratio of stock market capitalization to GDP (in %); the estimate of such ratio for all exchanges of the world in 2021 is equal to 132% of world GDP. The EAEU countries, except for Russia, have a very low ratio, and most importantly, full-edged trading in shares is only conducted in the Russian Federation.
For Belarus quick access to the common capital market is extremely important because of the small capacity of banking system (assets to GDP in 2021 comprised only 57%, while the global average is 75%, and in 35 countries – more than 100%, see Gospodarik, C. (2020) Analysis of the EEU Countries’ Financial Systems and Their Impact on Economic Growth. Bank Bulletin Magazine, №8/685, pp. 18–25) and lack of alternative savings instruments for the population.
Figure 1 shows the complete dominance of the Russian stock market in the EAEU, and Figure 2 gives an idea of the growth dynamics over 5 years of national exchange trading and the structure of trading – the shares of stocks, government bonds and corporate bonds.
The analysis of Table 1 shows that the EAEU member countries started to form a collective investment market late – only in the 21st century, having adopted laws on investment funds similar to the American laws (except for Armenia which copied the European legislation more). According to these laws, there are joint-stock funds and mutual investment funds, which may be open, closed and combined.
Only Russia and partly Kazakhstan, which had a signicant number of mutual funds and joint-stock funds by 2016, demonstrated high dynamics of the collective investment market, although the ratio of net assets of NAV funds of collective investment to GDP in these countries, as well as in Armenia, was small – from 1 to 24%. Belarus and Kyrgyzstan had not yet started building a stock market by 2016 because of the extremely low level of stock exchange trading; this was later partially compensated in Belarus by an increase in bond issuance, both state and corporate. In the last 5 years the stock market in Russia and Kazakhstan began to develop quite rapidly: complex forms of investment funds for professional participants appeared in the Russian Federation, while in the Republic of Kazakhstan these were private equity including venture investments. In Armenia and Belarus only bonds were still traded, and, let us repeat, these were mostly government bonds. The low percentage of trade in shares in Belarus compared to Russia and Kyrgyzstan is explained by the fact that the majority of Belarusian open joint-stock companies are owned by the state, which keeps them in the State Property Committee. In Belarus, only separate banks (Priorbank, Alfa-Bank, Sberbank, Belarusbank) are trying to form investment funds for trading foreign shares on the principles of trust management.
While analyzing table 2, we should bear in mind that apart from hybrid funds, Kazakhstan’s mutual investment funds include 4 private venture and 11 real estate funds, and the Turkic investment fund with the participation of Turkey, Azerbaijan and Uzbekistan with a capital of 350 million dollars is being created. Russia has the whole range of funds, with the largest number of combined funds. There are four companies managing investment funds in Armenia, 18 in Kazakhstan and 259 in Russia.
In terms of the structure of investments of Russian collective funds of all types the first place was occupied by investments in real estate (about 20%) and direct investments in the authorized capital. Moreover, in 2021 there were funds of long-term direct investments (17 at $978 million) and market financial foreign (399 at $15,909 million), as well as combined funds (1,236 at $70,552 million). The total number of unit holders among Russian citizens exceeded 7.7 million; investments in stock mutual funds dominate in the population.
Note that the world leaders in direct collective investment in relation to GDP are UK – 2.1%, USA – 1.8%, Israel – 0.9%, India – 0.4%, South Korea – 0.3%, Poland – 0.2%. Russia has only 0.05% with approximately $1.3 billion. There is a world ranking of countries in the field of direct investment (Venture Capital and Private Equity Country Attractiveness Ranking), in which Russia is in the 39th place out of 125. In the U.S. mutual investment funds have generated assets amounting to 125% of GDP (for more details see «Development of Alternative Investment Mechanisms: Private Equity and Crowdfunding»). – MOSCOW: CBR. – 2020. – p. 29).
Worldwide, according to statistics from the German insurance company Allianz, 42.4% of population save in the form of investments in securities, 28% – in insurance (pension) funds and only 27% – in bank deposits.
The main problem of integration of stock markets in EAEU member countries is the asymmetry in their development (table 1, gure 1). While in Armenia, Belarus and Kyrgyzstan exchange trading in securities is at the initial stage with some revival in the circulation of bonds, especially government bonds, in Kazakhstan and Russia in particular stock markets are approximately at the level of development of Central and Eastern European countries. Figure 2 reects the dynamics and structure of the volume of exchange trading, which shows that in Belarus and Kazakhstan trading in Government Short-Term Bonds is prevalent, only Russia actively trades in shares. The main indicator – the volume of exchange trading in the country, of course, depends on the total capitalization of joint stock companies in the stock exchange listing. The most important indicator is the ratio of stock market capitalization to GDP (in %); the estimate of such ratio for all exchanges of the world in 2021 is equal to 132% of world GDP. The EAEU countries, except for Russia, have a very low ratio, and most importantly, full-edged trading in shares is only conducted in the Russian Federation.
For Belarus quick access to the common capital market is extremely important because of the small capacity of banking system (assets to GDP in 2021 comprised only 57%, while the global average is 75%, and in 35 countries – more than 100%, see Gospodarik, C. (2020) Analysis of the EEU Countries’ Financial Systems and Their Impact on Economic Growth. Bank Bulletin Magazine, №8/685, pp. 18–25) and lack of alternative savings instruments for the population.
Figure 1 shows the complete dominance of the Russian stock market in the EAEU, and Figure 2 gives an idea of the growth dynamics over 5 years of national exchange trading and the structure of trading – the shares of stocks, government bonds and corporate bonds.
The analysis of Table 1 shows that the EAEU member countries started to form a collective investment market late – only in the 21st century, having adopted laws on investment funds similar to the American laws (except for Armenia which copied the European legislation more). According to these laws, there are joint-stock funds and mutual investment funds, which may be open, closed and combined.
Only Russia and partly Kazakhstan, which had a signicant number of mutual funds and joint-stock funds by 2016, demonstrated high dynamics of the collective investment market, although the ratio of net assets of NAV funds of collective investment to GDP in these countries, as well as in Armenia, was small – from 1 to 24%. Belarus and Kyrgyzstan had not yet started building a stock market by 2016 because of the extremely low level of stock exchange trading; this was later partially compensated in Belarus by an increase in bond issuance, both state and corporate. In the last 5 years the stock market in Russia and Kazakhstan began to develop quite rapidly: complex forms of investment funds for professional participants appeared in the Russian Federation, while in the Republic of Kazakhstan these were private equity including venture investments. In Armenia and Belarus only bonds were still traded, and, let us repeat, these were mostly government bonds. The low percentage of trade in shares in Belarus compared to Russia and Kyrgyzstan is explained by the fact that the majority of Belarusian open joint-stock companies are owned by the state, which keeps them in the State Property Committee. In Belarus, only separate banks (Priorbank, Alfa-Bank, Sberbank, Belarusbank) are trying to form investment funds for trading foreign shares on the principles of trust management.
While analyzing table 2, we should bear in mind that apart from hybrid funds, Kazakhstan’s mutual investment funds include 4 private venture and 11 real estate funds, and the Turkic investment fund with the participation of Turkey, Azerbaijan and Uzbekistan with a capital of 350 million dollars is being created. Russia has the whole range of funds, with the largest number of combined funds. There are four companies managing investment funds in Armenia, 18 in Kazakhstan and 259 in Russia.
In terms of the structure of investments of Russian collective funds of all types the first place was occupied by investments in real estate (about 20%) and direct investments in the authorized capital. Moreover, in 2021 there were funds of long-term direct investments (17 at $978 million) and market financial foreign (399 at $15,909 million), as well as combined funds (1,236 at $70,552 million). The total number of unit holders among Russian citizens exceeded 7.7 million; investments in stock mutual funds dominate in the population.
Note that the world leaders in direct collective investment in relation to GDP are UK – 2.1%, USA – 1.8%, Israel – 0.9%, India – 0.4%, South Korea – 0.3%, Poland – 0.2%. Russia has only 0.05% with approximately $1.3 billion. There is a world ranking of countries in the field of direct investment (Venture Capital and Private Equity Country Attractiveness Ranking), in which Russia is in the 39th place out of 125. In the U.S. mutual investment funds have generated assets amounting to 125% of GDP (for more details see «Development of Alternative Investment Mechanisms: Private Equity and Crowdfunding»). – MOSCOW: CBR. – 2020. – p. 29).
Worldwide, according to statistics from the German insurance company Allianz, 42.4% of population save in the form of investments in securities, 28% – in insurance (pension) funds and only 27% – in bank deposits.
Priorities for integration of collective investments markets and creation of a common exchange space
The measures outlined by the EEC Roadmap for the formation of a common exchange space on the territory of the EAEU are aimed primarily at the mutual admission of issuers and investors from EAEU member countries to the national stock exchanges. We are talking about simplifying the admission of brokers and dealers with their securities to stock exchanges in other countries, although they we able to do it to a large extent previously, at least through the Russian stock exchange, and from 2022 through the Kazakhstan Stock Exchange (KASE). Naturally, this requires harmonization of exchange rules for mutual admission of securities and participation of banks in investments. (see Mashnina E., Dorofeev D. (2022) Improving Legislation Regulating the Activities of Banks and NCFIs. Bank Bulletin Magazine, №5/706, pp. 3–9).
It seems that a higher priority is the creation of a supranational Eurasian stock exchange with the admission of issuers and investors meeting the established requirements. Under current sanctions, the Astana International Financial Center (AIFC) is best suited for this purpose. Creation of the Eurasian stock exchange in the AIFC under the auspices of the EEC and under its rules would accelerate the processes of forming a common exchange space and would eventually transfer trading in securities from national stock exchanges to the Eurasian stock exchange. It is reasonable (and this possibility is already being explored) to create a Eurasian fund for direct (including venture) investments on the digital platform of AIFC.
AIFC. It should be noted that the issues of formation of a common exchange market for goods, unlike stocks and bonds, within the EAEU is already quite well developed (for more details see Report on proposals for forming a common exchange market for goods in the Eurasian Economic Union. Moscow: EEC (2022) 44 p.).
The measures outlined by the EEC Roadmap for the formation of a common exchange space on the territory of the EAEU are aimed primarily at the mutual admission of issuers and investors from EAEU member countries to the national stock exchanges. We are talking about simplifying the admission of brokers and dealers with their securities to stock exchanges in other countries, although they we able to do it to a large extent previously, at least through the Russian stock exchange, and from 2022 through the Kazakhstan Stock Exchange (KASE). Naturally, this requires harmonization of exchange rules for mutual admission of securities and participation of banks in investments. (see Mashnina E., Dorofeev D. (2022) Improving Legislation Regulating the Activities of Banks and NCFIs. Bank Bulletin Magazine, №5/706, pp. 3–9).
It seems that a higher priority is the creation of a supranational Eurasian stock exchange with the admission of issuers and investors meeting the established requirements. Under current sanctions, the Astana International Financial Center (AIFC) is best suited for this purpose. Creation of the Eurasian stock exchange in the AIFC under the auspices of the EEC and under its rules would accelerate the processes of forming a common exchange space and would eventually transfer trading in securities from national stock exchanges to the Eurasian stock exchange. It is reasonable (and this possibility is already being explored) to create a Eurasian fund for direct (including venture) investments on the digital platform of AIFC.
AIFC. It should be noted that the issues of formation of a common exchange market for goods, unlike stocks and bonds, within the EAEU is already quite well developed (for more details see Report on proposals for forming a common exchange market for goods in the Eurasian Economic Union. Moscow: EEC (2022) 44 p.).
Ensuring cross-border digital interaction in the common exchange space of the EAEU
The mechanism of digital investment interactions belongs to the class of alternative collective investments. In recent years, digital collective investment platforms have grown in popularity worldwide, and especially in China, as a source of cash resources for young companies and a form of small savings for the young «digital» population. The EAEU investment ecosystem can be created in their likeness.
The simplest components of such an ecosystem are crowdfunding platforms for crowdlending (providing a shortterm loan for an investment project), crowdinvesting (‑nancing a project in exchange for a share in it) and crowdrewording (‑nancing a project in exchange for products or services resulting from the project). Thus, with the help of Internet platforms, collective investment of small amounts of money in projects or companies are made.
According to the Global Crowdfunding Market 2022 report, the global market for such investment is small – about $14–15 billion. In Russia, about $200 million were raised with the help of digital platforms. The Central Bank of the Russian Federation in its report «Development of Alternative Investment Mechanisms: Private Equity and Crowdfunding» refers to the lack of competence of Russian collective investors and formulates a number of proposals to improve the Federal Law of 2019 «On Attracting Investment Using Investment Platforms».
Analysis of the information on the Internet on investing through digital crowdfunding platforms allows us to highlight obvious risks:
As evidenced by global experience, crowdinvesting with free fundraising for projects throughout the EAEU will allow the accumulation of small funds from the technologically advanced part of small collective investors; therefore, such projects do not pose a major threat to the ‑nancial stability of the EAEU member countries.
Another area is the issue and sale of digital debt securities (tokens) in the common exchange space, as the Finstore.by platform of Belarusian Bank BelVEB is already doing successfully on the basis of Presidential Decree No. 8 on Hi-Tech Parks (HTP). Token bonds worth almost $80 million have already been issued. They could be issued by the EAEU digital exchange, and its role could be assumed by Belarusian Finstore. In the EAEU conditions, it is important that the regional digital exchange becomes attractive for Chinese investors.
The projects proposed could become sandboxes for the digital integration of collective investors from all EAEU countries, and the digitalization of the common exchange space could be facilitated by the creation of a common Eurasian ‑ntech association (see Golodova, Zh. G., & Grechkin, N. V. (2022). Developing ‑nancial integration with the introduction of ‑nancial technologies in the Eurasian Economic Union countries. Vestnik RUDN. International Relations, 22(1), pp. 166–179). It is clear that the Eurasian Fund for Stabilization and Development should participate in all of these activities.
The mechanism of digital investment interactions belongs to the class of alternative collective investments. In recent years, digital collective investment platforms have grown in popularity worldwide, and especially in China, as a source of cash resources for young companies and a form of small savings for the young «digital» population. The EAEU investment ecosystem can be created in their likeness.
The simplest components of such an ecosystem are crowdfunding platforms for crowdlending (providing a shortterm loan for an investment project), crowdinvesting (‑nancing a project in exchange for a share in it) and crowdrewording (‑nancing a project in exchange for products or services resulting from the project). Thus, with the help of Internet platforms, collective investment of small amounts of money in projects or companies are made.
According to the Global Crowdfunding Market 2022 report, the global market for such investment is small – about $14–15 billion. In Russia, about $200 million were raised with the help of digital platforms. The Central Bank of the Russian Federation in its report «Development of Alternative Investment Mechanisms: Private Equity and Crowdfunding» refers to the lack of competence of Russian collective investors and formulates a number of proposals to improve the Federal Law of 2019 «On Attracting Investment Using Investment Platforms».
Analysis of the information on the Internet on investing through digital crowdfunding platforms allows us to highlight obvious risks:
- the risk of technical failures or suspension of the platform, which would entail losses for investors;
- the risk of project default due to the fact that the platforms are usually used for venture projects, which have an extremely high risk of non-repayment of investments (it is possible to introduce, as it was done in France, the requirement to check the platform operator of companies that attract investments);
- the risk of asymmetry of information, when the investor has no opportunity to verify the information posted about the project;
- the risk of a lack of regulation (therefore, the EAEU should borrow the EU experience and introduce licensing of platforms and restrictions on the volume of investment.
As evidenced by global experience, crowdinvesting with free fundraising for projects throughout the EAEU will allow the accumulation of small funds from the technologically advanced part of small collective investors; therefore, such projects do not pose a major threat to the ‑nancial stability of the EAEU member countries.
Another area is the issue and sale of digital debt securities (tokens) in the common exchange space, as the Finstore.by platform of Belarusian Bank BelVEB is already doing successfully on the basis of Presidential Decree No. 8 on Hi-Tech Parks (HTP). Token bonds worth almost $80 million have already been issued. They could be issued by the EAEU digital exchange, and its role could be assumed by Belarusian Finstore. In the EAEU conditions, it is important that the regional digital exchange becomes attractive for Chinese investors.
The projects proposed could become sandboxes for the digital integration of collective investors from all EAEU countries, and the digitalization of the common exchange space could be facilitated by the creation of a common Eurasian ‑ntech association (see Golodova, Zh. G., & Grechkin, N. V. (2022). Developing ‑nancial integration with the introduction of ‑nancial technologies in the Eurasian Economic Union countries. Vestnik RUDN. International Relations, 22(1), pp. 166–179). It is clear that the Eurasian Fund for Stabilization and Development should participate in all of these activities.
Catherine Gospodarik, Head of the Department of Analytical Economics and Econometrics, Faculty of Economics, Belarusian State University; Professor of the Department of Business Analytics at the Financial University under the Government of the Russian Federation, Candidate of Economic Sciences
Alexander Shkut, Certified Financial Analyst (CFA)
Alexander Shkut, Certified Financial Analyst (CFA)
