Despite being hit hard by COVID-19 — much like the rest of Europe — Russia is now one of the continent’s leading international trailblazers when it comes to custody growth and technological innovation
Russia is famous for its rich history, ethereal architecture and literary heroes. For many years, it has been renowned as a global financial hub to boot, with its capital Moscow placed at the beating heart of it all. But it is particularly in the last two years that the country has offered — and been given — a rapid increase of invitations for more cross-border dealings, particularly within the asset and securities finance space.
Before the pandemic, the country steered a raft of changes, mostly led by the Moscow Stock Exchange and its accompanying National Settlement Depository (NSD), Russia’s central securities depository (CSD).
In 2019, the NSD successfully debuted on SWIFT’s gpi service which let NSD clients conduct cross-border real-time payments and track the status of payments for the first time. In addition, that same year, Raiffeisen Bank International, one of the country’s leading banks, was selected as the first foreign custodian bank to establish a foreign nominee securities account with the depository.
All positive developments, but for much of Europe, the early days of the pandemic brought extreme economic fragility and uncertainty, and Russia was not immune to this. In the months after the first wave in 2020, navigating a new working-from-home environment while still maintaining effective and efficient back-office operations was, at first, a challenge and adjustment for most.
Despite this, Russia appears to have recovered from the after effects of the COVID-19 pandemic well.
COVID-19 recovery in 2021
By the end of Q2 2021, the value of securities in custody at NSD reached RUB69.5 trillion (US$1 trillion), a 32.6 per cent increase against the same period in 2020.
Evgenia Klimova, head of custody service department at Raiffeisenbank Russia, says this is largely due to the aforementioned invitations for cross-border dealings. She cites an important cross-border admission as “the entrance of international stocks to trade on MOEX — the most popular being US and European stocks that were listed at the exchange with the primary target to capture growing retail flows”.
But the primary driver above all, MOEX indicates, was Russia’s resilient economic recovery from the pandemic, of which Russia itself had an important hand in.
Long before AstraZeneca, Pfizer and Moderna vaccines were readily available, Russia led the way in 2020 when Sputnik V — also known as Gam-COVID-Vac — became the first COVID-19 vaccine to be registered for use in any nation, way back in mid-August 2020.
Though being distributed nationally before trial tests, it faced some international scepticism. However, Phase III trial results, published in February 2021, by Gamaleya National Research Center of Epidemiology and Microbiology in Moscow, suggested that it is 91.6 per cent effective at preventing symptomatic COVID-19 infection.
Its subsequent take up, in more than 60 countries across the world, came to reflect this confidence.
Kirill Dmitriev, CEO of the Russian Direct Investment Fund, comments: “Data published by the leading medical journal The Lancet demonstrated the efficacy of Sputnik V at 91.6 per cent. The analysis of infection rate data of almost four million vaccinated people in Russia shows that the efficacy of the vaccine is even higher, reaching 97.6 per cent.”
An important enabler of getting the Russian economy back on track, Sputnik V’s wide distribution across the country, as early as the summer of 2020 — added to other vaccination programmes globally — readied “an inflow of ‘COVID’ money and new investors into the Russian market”, says MOEX.
This was combined with the “evolution of online channels which in turn supported the inflow of more investors into the market. The low key rate at the start of 2021 made the securities market look more appealing, resulting in increased securities transactions”, the exchange highlights.
Stark contrast to just a year earlier, when COVID-19 began to spread across Russia like wildfire. Lockdown was first imposed for Moscow on 30 March 2020, with other regional stay-at-home orders implemented in the following April.
However, the country’s back-office capabilities were capable of withstanding the uncertainty that came with the logistics of remote working, especially Raiffeisenbank Russia, Klimova indicates.
At the start of remote-working “there was a need for a quick reconfiguration of data servers, lines and routing infrastructure”, she says. “But the technology advancements in our bank had started several years ago, therefore we were well prepared.”
The quick adaptation in Russia to working remotely enhanced both the reliance on and resilience of technologies. However, for MOEX, artificial intelligence (AI) and machine learning (ML) were already well-utilised even before the pandemic, with their resiliency spotlighted when home-working became a necessity.
“ML helps automate the process of analysing information that used to be difficult for a machine to deal with, especially during corporate actions season, while the use of AI is being used to forecast system loads and to prevent incidents,” highlights a MOEX spokesperson.
MOEX says that in the coming years, NSD will be using both AI and ML to tackle the business task of automated recognition of unstructured information, with the development of AI being one of its “permanent priorities”.
From Raiffeisenbank Russia’s perspective, Klimova says there has been an “improvement of market practices in secured transmission”.
And for the back-office, in particular “online account opening, documents exchange, the ability to source and deliver data online [are things] which have become a must in the market these days”.
Separating trading member and clearing member status
The summer of 2021 brought the news that MOEX had introduced separate trading member and clearing member status for participants on the Russian execution venue and central counterparty (CCP), allowing foreign banks with clearing interests in the Russian market to offer sponsored access to the MOEX National Clearing Centre (NCC) CCP. This move enabled its clients to hold cash and collateral in the foreign bank’s accounts with NCC for the very first time.
This will also provide non-residents with access to the deposit with CCP segment of the money market, enabling them to manage cash positions in Russian rubles and foreign currency.
MOEX says: “These new opportunities for non-resident clearing participants allow international clients trading on MOEX to minimise credit and counterparty risks and increase the volume of transactions in Russian assets.”
It adds: “Developing business with international participants strengthens MOEX’s position as a pricing centre for Russian assets. The opportunity for international financial institutions to become direct clearing members in all markets will allow them to expand their operations.”
MOEX is further supporting this by allowing non-residents to keep collateral and cash in foreign bank accounts with NCC. MOEX says this move also acts as a tax agent for transactions concluded on MOEX by non-resident clearing members and their clients.
It adds: “This development in service will reduce the risks of non-resident clearing members, which, in turn, will increase their trading limits on the Russian market.”
However, though extremely promising, Raiffeisenbank Russia’s Klimova says the move is not without its challenges.
“MOEX and the CCP are still pretty much internalised systems-wise and not integrated or interoperable with other major CCPs”, she says. “Therefore for global clearing providers getting connected directly to a market which is pretty much different to others, is rather cumbersome.”
For now at least “it seems to be more of a good setting for a regional provider with strong local presence”, she cites.
The present and the future
Last month, the NCC was granted Qualified Derivatives Dealer status by the US Internal Revenue Service, enabling the clearing house to process dividend equivalent income on US securities.
With this development, the clearing house will be able to process dividend equivalent income on US securities, including income transferred as a result of repo trades.
In addition, since 27 September 2021, market participants have been able to trade international shares in USD, either in their own account or on behalf of clients.
By the end of 2021, MOEX expects the number of international shares available for trading on its platform to rise to around 500 — another aspect of cross-border dealings and developments leading to securities finance growth.
When asked what 2022 and beyond will bring for the country MOEX says another area of growth the exchange has a hand in is the “active promotion of sustainable development concepts in the financial market” and this is evidenced by new asset types emerging in the Russia market, including as green bonds, social bonds, environmental, social, and governance (ESG) index derivatives, ESG-focused funds and exchange-traded funds.
Addressing what comes next, particularly in the context of the pandemic’s after effects, Raiffeisenbank Russia’s Klimova says: “The market challenges we have had during the last year or two have highlighted the need to be adoptive, dynamic and structured, enabling us to address the fast changes in the market.”
She forecasts: “Given the market pace at the moment, in five years, we will see a completely new setting of technology, product set and service types at the leading service providers in Russia.”
Though she warns, as the new market paradigm in the country requires “heavy investments in IT, new views on services and product types”, the “gap between those who caught up with the market and those who did not will only widen”.
