I would like at least five Ukrainian IPOs or SPOs to happen in the near future, says Chairman of the NSSMC Magomedov
An exclusive interview with Ruslan Magomedov, Chairman of the National Securities and Stock Market Commission (NSSMC)
(Part 1)
By Mariia Boltryk, Dmytro Koshovyi
Ruslan Magomedov was appointed Chairman of the NSSMC by a presidential decree dated February 23, 2021, for a six-year term along with other members of the Commission. Four years after the formation of a new composition of the Regulator and three years after the start of the full-scale aggression, in this interview he talks about the latest changes in the Regulator’s work, shares his assessment of the current state of the market and plans for its revitalization and attraction of new investors, and responds to critical comments.
-- In recent weeks, we have seen striking examples of how the quotations of securities issued by Ukrainian issuers have been reacting to news. For example, Ferrexpo’s share price halved following the news of a $3.8 billion lawsuit filed by the state. Or the Ukrainian stock index on the Warsaw Stock Exchange jumped 20% in one day on the news of possible progress towards peace talks. But at the same time, the Ukrainian market has been silent as a graveyard: everything is quiet. How satisfied are you with this situation and do you plan to change it in any way?
The important question here is one of cause and effect—why is this the case? Because the link is severed between what is happening in the country and those pieces that people own in the form of stocks or bonds.
For the market to function, instruments are needed on the one hand, and on the other hand, to prevent a repeat of what happened when the instruments had been issued but the money raised was used for something completely different or simply stolen. Ensuring proper control by the Commission is necessary. To this end, we have begun to radically reform the Commission itself and will start changing the reporting requirements. On the one hand, we will simplify them, and on the other hand, we want to shift to the so-called risk-based approach. I hope that by the end of the year we will see results, when the media, our professional market participants, and end consumers will feel the changes that have taken place. Reporting mechanisms, prudential requirements, and requirements for the provision of this information will change.
In other words, we will make everything simpler and clearer, but control will be more precise and stricter.
-- Do you set any KPIs for trading volume on the market, apart from domestic government bonds (OVDPs), where policy is set by the Ministry of Finance? After all, on Ukraine’s largest exchange, PFTS, the share of the stock market in 2024 was 0.006%! Although the number of private investors, according to the Settlement Center (SC), has grown from 22,800 to 197,800 since the beginning of 2022, but this growth has been driven by the OVDPs market.
We also deserve credit for this. We changed the account opening mechanism and made it possible for foreign investors to easily establish business relationships with our professional market participants without having to visit Ukraine or the offices of these professional participants in person. I know, for example, that even from Japan a dozen people of so these days buy OVDPs.
Previously, only banks—PrivatBank, mono, other neobanks—were able to open accounts remotely, but now “neobrokers” can do so as well. We have simplified the procedure having allowed them to expand their geography both in Ukraine and worldwide. I consider this to be our great achievement.
Now we need something else besides OVDPs. Personally, I have set myself a KPI that by the end of my term (February 23, 2027—Interfax-Ukraine), we have had at least five issuers that are widely known across the country, and perhaps even further beyond. Most likely, this may not even be an IPO, but an SPO (secondary public offering). We need to find someone whose business is already trusted by the general public. This may not exclusively be a private business. For example, I am currently referring to Ukrposhta. We are discussing this topic with Igor Smelyansky (CEO of Ukrposhta). I think this SPO has a good chance of success because people definitely have an appetite for investment. We also have a third level of pension provision, and funds need to invest somewhere other than OVDPs and bank deposits. Ukrposhta is an understandable service, and Igor’s idea is not just to compete with Nova Poshta, but to create a Ukrainian Amazon: there will be a payments part, a delivery service, and modernized IT—in other words, there will be a clear business model that people can invest in.
-- At one of the events organized by Ekonomichna Pravda, there was a discussion where the head of the relevant parliamentary committee, Danylo Hetmantsev, acknowledged the existence of such inequality but predicted that during the war this situation would unlikely change for the reasons you mentioned.
What is the current situation? Clearly, people have money, but there are only two areas in which they can invest with zero taxation: the first is OVDPs, and the second is real estate.
Our idea is to offer a mechanism for attracting long-term money into Ukraine’s economy. There is a draft law No. 8111 on individual investment accounts. If we implement it, people will put money into investment accounts managed by investment firms, and from these accounts they will invest in stocks, corporate bonds—a strictly defined list of instruments that are of interest to the state. These instruments could be used to extract money from people’s wallets or under their mattresses and channel it into the real sector of the economy. For the state this means expanding the tax base, because money will flow into the real sector, businesses will start operating, jobs will be created, and additional taxes will be paid. Therefore, our goal in the near future is to take a more active position on this issue and begin promoting the draft law No. 8111.
-- The other day, news of Revolut’s entry into the Ukrainian market caused quite a stir, as it seemed to offer another opportunity to transfer money abroad from Ukraine. People want to spread their risks across different baskets, not just the Ukrainian one. During the war, is the Commission ready to offer investors something in this direction
Before the war, it had been possible to invest in foreign securities through a sub-broker—a nominal recipient. Similar services were launched by the former Alfa-Bank (now the state-owned Sens Bank) and mono. However, now and even after the end of the war, is there any point in investing Ukrainian money in a foreign economy?
On the contrary, we even launched a website called Vnesok (“Contribution”) so that the diaspora and other people who want to help not just with donations but with investments in our country from abroad know how to do so, for example, by purchasing OVDPs.
-- So at this point, the interests of the Commission diverge from those of investors?
As those of the Chairman of the Commission, my interests do objectively diverge. However, as someone who has worked in the stock market for many years and used to be the head of an investment firm, I understand investors’ interests and can assure you that if the situation changes, I will be the first one to give them the opportunity to invest.
People are looking for ways to preserve the purchasing power of their assets. As a patriot and as the Chairman of the Commission, I want to launch instruments that will allow people within the country to hedge their currency exchange risks, and then perhaps the demand for foreign currency will not be so high. Those US Treasury bonds, they are available for purchase in Ukraine as well. And at the same time, you are providing jobs for domestic investment companies, work for our depository, our accounting system, for their development. And if you simply channel money abroad and buy these same treasury bonds there, you spend it all there. That is why I want to provide maximum opportunities with instruments from around the world, but in such a way that every penny that could go towards developing our infrastructure and our state remains here.
-- Some time ago, an option to allow Ukrainian private investors, companies, and banks to purchase Ukrainian Eurobonds was looked into as a compromise. This is because when Ukraine starts repaying these Eurobonds, the money will return to Ukraine.
Ukrainian Eurobonds are available on our market.
-- But they appeared before the war, and one can’t buy new ones, unless one has legal money abroad.
This is not within our regulatory power, it falls under the responsibility of the National Bank. Given martial law, this is unlikely to happen. I am sure that after the war the situation will change.
-- And does private business come to you with such ideas on how to attract money? There is a lot of money in Ukraine right now, and it is locked up within. For me, the NovaPay scheme was innovative, with its issuance of bonds and the use of REPOs with them to effectively compete against banks in the deposit market.
They do come, even accompanied by consultants. But first they see the procedure that must be followed to issue securities: you have got to change the corporate structure, become transparent, prepare reports for recent periods. And then they say, “Okay, we understand, we’ve calculated how much the whole process will cost. Now, what are the chances that we’ll sell it?” I explain that this is a question for your underwriter, but I understand that a problem does exist here.
In addition, there is a tax burden, and the problem lies not only in its volume but also in its administration. Currently, bond issuers are often reluctant to offer bonds to retail investors because the bond issuers would have to act as tax agents for all these people. This is a serious burden for them, which increases the cost of borrowing.
As for NovaPay, for me it is a perfect example of how to sell your brand. And this is what we are working on now at the Commission. I want to redesign the mechanisms to make issuance simpler. It is a kind of evolutionary stage. We used to have a lot of stocks and bonds because they were easy to issue, so we issued everything we could. My predecessors cleaned this up and tightened the screws. Our task now is to turn off this tap and install a filter so that clean water flows, and all that dirt, because of which the screws had to be tightened, is filtered out. We want conscientious issuers to appear, and that it becomes easy and clear to understand what to do: three or four simple steps and you have a public offering in two months. As a result, I want to see at least five IPOs or SPOs in the near future.
Ukrposhta, state banks, maybe Ukrzaliznytsia. No one is saying that the state should give everything away, no, we are talking about a minority stake. This adds to the so-called reliability that the state is in control and will not abandon anybody. I am sure that if Smelyansky makes his SPO, it will be acquired; I simply see no other options there. Then someone else from the corporate sector will come along and will also want to issue shares. That’s the way it works.
-- Some progress has already been made with corporate bonds, and we have been following your meetings closely. Previously, issuers were almost exclusively financial companies that could compete with OVDPs in terms of interest rates, even after taxes, but now other companies have started to appear. What do you attribute this to, and how far do you think this process will go?
As I have already said, these people are selling their brand. They have decided that this price is acceptable for them, and they are doing it. Take Nova Poshta, for example. They have created a quasi-bank. Why? Because they understand that a large customer base (if I am not mistaken, it is larger than that of PrivatBank) means they have people to work with.
There is a feeling that money is locked up inside the country, and there is a desire to get it directly, not through banks.
-- There has been a lot of talk lately about plans to improve infrastructure: the Commission is talking about it, the National Bank is talking about it, the EBRD is talking about it, and it is mentioned in the program with the IMF. What are your plans?
There is a couple of ideas initiated by our international partners. The European Bank for Reconstruction and Development (EBRD) is looking for a strategic partner with experience in operating these stock exchange issues. We are very interested in this idea and are seriously considering it in order to create a holding company to which the state will give shares in the National Depository of Ukraine (NDU) and the Settlement Center (SC), the National Bank will transfer the accounting of OVDPs to the National Depository, and the EBRD and their partner will set up an exchange. And all this will be owned in certain proportions by the state in its various forms: by the Securities Commission, by the Ministry of Finance, by the National Bank, by state banks, and so on.
This is just a first approximation, we will be working it through. We understand that perhaps the best model is when everything is business-based, i.e., there is no state involvement. But since this is clearly not a super profitable business idea at the moment, the state needs to provide this initial impetus.
I repeat, we are currently engaged in discussions, but the question that will really emerge here is what the partners will agree on: who will be in control, and what form that control will take: 75% + 1 or 50% + 1. If there is consensus at all levels, it could do the trick.
-- As I understand it, both state-controlled NDU and the SC may join this holding company. And what about private stock exchanges, of which there are currently only two on the market—PFTS and Perspektyva, not counting the Ukrainian Exchange, which has been unable to resume operations after you revoked its license in the summer?
This question is more for partners—if they agree, I am in favor and the Commission is in favor, but in my humble opinion, it is much easier to set up a new exchange. It used to be difficult because, according to law, there had to be 20 securities traders among its founders. But now that’s no longer the case—if you have money and an impeccable business reputation, you’re welcome. However, we will also be asking you about software and the business model—everything is the same as at the National Bank.
Therefore, most likely, it is going to be a new exchange, in my opinion.
-- Can commodity exchanges also become part of this holding company?
No. It’s not because international partners don’t have an appetite for commodity exchanges, it’s just that Ukraine doesn’t have anything to put into the commodity part. If we are talking about clearing, the Settlement Center could easily clear obligations on commodity exchanges. But the National Bank’s doctrine is to not engage in activities that are not within its scope of responsibility. And the NBU is currently the foundation of reliability and trust in a clearing organization. When the EBRD comes in together with some reputable player, then this new entity will be comparable to the National Bank in terms of size, and the market will be able to trust it.
In my personal opinion, if this holding company is going to only deal with stock market instruments, it will take much longer for it to break even than if it immediately starts dealing with the commodity market. This is because commodity markets offer something that can be traded, including mineral resources, which are currently being written about and discussed all over the world in the media. There is simply no desire to do so.
