The state has taken the “chessboard” back and must ensure that the rules of the game are followed—Chairman of the NSSMC on Ukrnafta, Motor Sich, and ZTR

An exclusive interview with Ruslan Magomedov, Chairman of the National Securities and Stock Market Commission (NSSMC)

(Part 2)

By Mariia Boltryk, Dmytro Koshovyi

 

-- Kyivstar announced the first listing of a Ukrainian company on the stock exchange after a long pause. However, this refers to the U.S.-based Nasdaq. I asked Kyivstar CEO Oleksandr Komarov about the possibility of dual listing, as this company would certainly be of interest to investors in Ukraine, but I have not yet received a response.

I understand that they want to place 100% of Kyivstar shares in an SPV (Special Purpose Vehicle) account and trade them on Nasdaq. This means that these securities will not be traded in Ukraine.

I would prefer them to take a different approach, because otherwise there will be no dual listing. In my opinion, the ideal scenario would be for Kyivstar to transfer some of its shares out of Ukrainian jurisdiction, where they would be traded on Nasdaq, while the rest would remain in Ukraine and be traded here. This would create conditions for arbitrage, meaning that market makers would be able to profit from the difference in the value of Kyivstar shares on Nasdaq and those traded in Ukraine, bringing this difference closer to zero. This approach is very important, and I keep insisting on it in discussions with some of our top officials who propose issuing securities of Ukrainian companies directly on foreign marketplaces. This is not right. If our company goes public on Nasdaq, WSE (Warsaw Stock Exchange), LSE (London Stock Exchange), etc., we are sponsoring foreign infrastructure. That means the business stays here, but all the money goes there. And there will be no such thing as dual listing.

But if we keep the shares here, start trading here, but also create a “link” so that they can freely enter foreign markets and return back, this will be the beginning of the development of the domestic stock market. Then everyone who is interested in investing in this company will be buying here. If they want so, they can transfer securities through this link to their accounts in depository institutions in Europe, America, or anywhere else. But by following this way, they are allowing Ukrainian exchanges, depository institutions, and investment firms to operate.

 

-- So you believe that we still have a chance to follow in the footsteps of, if not the Warsaw Stock Exchange, then, hypothetically, of the Bucharest Stock Exchange?

I would say so, but there is not enough money to make this investment happen, and there is not enough business in domestic securities trading. I am sincerely happy for PFTS, which managed to meet the prudential liquidity requirement and has now resolved the issue of revoking its exchange license. But if they do not come up with some kind of instrument or product that will generate income for the exchange’s clients and investment firms, there is a risk that they will run out of money again. I want PFTS to use this momentum for something worthwhile.

On my side, I think the best way we can help the market is with the draft law No. 8111 on investment accounts, because it will bring “long-term money” into the real sector of the country’s economy. Currently, the tax on investments by individuals is 23% (18% personal income tax + 5% military tax). In contrast, the idea behind the law is that individuals transfer money to an investment account and invest in instruments on an approved list. If, within 3-5 years, individuals do not withdraw funds from this investment account, they will receive a partial or full tax exemption on these funds.

In addition to investment accounts, the accumulative pension system should also become a source for the “long-term money” in the real sector of the economy. Poland is a striking example of this, where the lion’s share of the economy was financed by Polish pensioners.

 

-- I didn’t want to bring up this topic because, first of all, it’s very extensive, and secondly, I don’t believe that such a reform can be launched during the war, especially given the stance of the donors.

Sure, but the issue of accumulative pensions still needs to be discussed. The solidarity (pay-as-you-go) system is starting to fail, we need to ease the burden on the budget. How can it be eased? The idea behind the accumulative system is to reduce contributions in the form of the unified social tax (UST) while also reducing the budget’s obligations to pensioners. And the money not collected in the form of the UST goes into the accumulative system to be paid as pensions to its participants at a later time. And where will we be investing the money from this accumulative system—once again, back into the budget in the form of OVDPs (domestic government bonds)? This would place an even greater burden on the budget, as interest would have to be paid. Therefore, additional reliable instruments need to be created for investing pension money, which would not compete with borrowings by the Ministry of Finance.

These instruments could become shares of profitable state-owned companies that would pay dividends. One such company, as we already mentioned in the first part of the interview, could be Ukrposhta. And that is how the whole thing will start working.

I am absolutely sure that without the stock market, we will not be able to ensure the proper reconstruction of the country’s economy. We will not achieve the necessary results through direct investment, by selling mining licenses. Investors will not always be willing to commit such large sums. Therefore, we need to provide portfolio investment instruments that are clear to understand by European and global investors (shares and other corporate securities).

I repeat once again that if we manage to set up the “link” in a proper way, Ukrainian securities will start to be able to be easily transferred to foreign markets via Euroclear, Clearstream or other depositories. Foreign investors will be able to buy them without opening accounts here. And our market participants will make money on this because this is cheaper for foreigners than opening accounts in Ukraine.

 

-- Is there already a plan for when this should be done?

We expect such a “link” to become a reality this year.

 

-- Something similar to what the National Bank did last year for government securities?

I want to do this for all securities. In fact, there is already a “link” between the NDU and the Polish central depository KDPW. This means that Ukrainian securities can be transferred to Poland.

 

-- In the first part of the interview, we discussed the prospects for a possible revitalization of the Ukrainian market through IPOs and SPOs. However, it is difficult to imagine this given the current state of investor protection. When and how will the story with the clients of LLC Freedom Finance Ukraine, who have been suffering from sanctions imposed on this professional market participant for three years now, come to an end?

First, I would like to emphasize that recent amendments made by the President to the 2022 Decree on the introduction of sanctions in accordance with a decision by the National Security and Defense Council confirm that the Commission has been in the right all these years with regard to this case. We were manipulatively accused of inaction, but the decree confirms that we were right—we simply did not have the necessary powers.

Now that the changes have been made, a mechanism has emerged that we are working on together with both depositories, the bank, and the law enforcement agencies involved. We have already published the Commission’s Resolution for everyone’s attention so that everyone understands how this will work out.

 

-- Within what time limits, at least approximately, will first clients of Freedom be able to get back their money or securities?

We are already in dialogue with them, and Commissioner Yaroslav Shliakhov communicates with them once every two weeks to prevent any kind of speculation and manipulation. When investors understand how the process is going, it is easier to wait. My subjective feeling is that settlement will begin in the summer and will proceed very quickly. If it starts earlier, it will be a pleasant surprise.

The main thing here is not to violate the state’s sanctions policy. I understand that people are waiting, and we are definitely on the side of investors so that they can get their assets back as quickly as possible. At the same time, we will not allow anyone connected to the sanctioned owners to receive the assets. And such a check is not within our competence: we need to get the go-ahead from our colleagues in state regulation and in law enforcement agencies.

 

-- Last summer, the Commission appointed a temporary administrator for Freedom. Did he conduct an audit? What is the current status of these frozen client assets and how securely are they protected?

The audit was conducted, its report submitted. The assets are present, and there is enough money. The previous management handled the matter conscientiously. Therefore, there should be no problems with payments.

 

-- Colleagues from Ekonomichna Pravda have reported that other unlicensed activities are taking place on the basis of Freedom.

Anyone can create anything, but nothing can be set in motion. All accounts are blocked. For half a year, we were even unable to enter the manager’s details in the USR (Unified State Register). Therefore, no other activity is possible.

 

-- What guarantee exists that tomorrow similar sanctions will not be imposed on another professional market participant and that its clients will also not be deprived of access to their assets for several years?

I hope this will not happen again. But if something similar happens, there will also be some lessons learned what to do in such cases. I mean, there exists the office of interim manager, methodologies and practices. I would like to remind you that when sanctions were imposed on Freedom in October 2022, the old law on the NSSMC was still in force, and we had no appropriate instrument.

 

-- In addition to “Freedom,” there is another important case—the transfer to the state of corporate rights held by private shareholders of Ukrnafta, Motor Sich, and Zaporizhtransformator. If there is a truce, the end of martial law and the war, what is the Commission going to suggest the government do to compensate investors for their assets and restore their trust?

Some of these companies are former blue chips that were not just included in the index but were leaders with the largest shares in it, so people hoped that the rules of the game would be followed. It may not be the best example, but it’s like playing chess and getting hit with the chessboard. But I’m not talking about the state, I’m talking about the management that they used to have. Now the state has taken the “chessboard” back, and as a conscientious player, it must fulfill its obligations for those periods.

For example, Ukrnafta, where there were so-called “selective dividend payments”—some people got paid, while others did not. I am sure that it is up to the current management to ensure that dividend payments for previous periods have been made and that people understand that the issuer is now really starting to “play chess.”

As for the transfer of shares to the state, it should be understood that there is a war going on and such a transfer was necessary for victory. After the war ends, it will be necessary to analyze how much it cost and how it will be returned or compensated. It’s like when they take your car for the needs of the Armed Forces of Ukraine: if it’s intact, they return it to you; if not, they compensate you for its fair value. That is what needs to be done. It will send a signal to all investors that the state understands what corporate governance and stock market rules are about and that the rights of investors must be restored.

 

-- To protect investors, at the initiative of the Commission, the National Depository has introduced registration of LLC shares in its own system. However, the number of companies that have chosen this option is not very large. Among the reasons for the low interest fairly high prices are cited.

I heard that some people complained. But, as far as I know, the NDU has significantly reduced the cost of this service.

In my opinion, this service should be better promoted. But I know for sure that the NDU has seen a surge in demand for it due to the recent enemy cyberattack on the USR. This demonstrated the advantage of registering LLC shares with the NDU. Those who had managed to switch to the NDU did not feel the effects of the attack.

Another positive aspect is that if registered with the NDU, this share can be used as collateral for a loan, as the depositary has how to restrict it, in the form of blocking.

The third advantage is DVP (delivery against payment). During the sale of a business consolidated under an LLC, the counterparty risk is eliminated. The moment of the mutual transfer of money and alienation of shares is controlled by the NDU.

 

-- The National Bank has recently attempted, for the first time, to stop unlicensed consumer lending by its special decision, using BitCapital as an example. What is the Commission doing to combat unlicensed activities?

Our quite popular website “Vnesok” contains a section on scam projects, where we warn investors about fraud. We also publish this information on the official website of the Securities and Stock Market Commission. Incidentally, our list is posted on the IOSCO website (International Organization of Securities Commissions—Ed.) and included in the list of dubious investment projects that IOSCO already publishes on its website, although the NSSMC is not yet a full member of the organization.

Moreover, where possible, the Commission seeks to hold the organizers of such scam projects accountable for violations related to unlicensed activities and violations of legislation on advertising.

In addition, we also publish a digest on how to recognize fraudulent schemes[3] when investing.

 

-- Does the Commission have any telephone hotline for investors, like that of the National Bank?

Yes, we have one: (044) 280-28-26 (Mon-Fri from 10:00 AM to 4:00 PM). In addition, our employees independently monitor offers using trigger phrases. We sort them out because not everything with the word “investment” falls under the ban as fraud. We have many years of experience and expertise in this area, and therefore good results.

There was even a case when one of the companies asked to be removed from this list because, according to its representatives, it did not operate and promised not to operate on the Ukrainian stock market, and the presence on the NSSMC list of scam projects prevented it from deceiving people in another jurisdiction. And when IOSCO started using our list, it really became a big problem for them.

There has been another case where a company initially protested against being included in the list, but then applied for a license and is expected to receive it soon.

 

-- A few words about the organized commodity market. What is its current state, in a nutshell?

It already has what to trade in. Conditions had to be created, and we did it. Briefly, I can say that we have proven that the organized commodity market is already functioning in our country, even during the war. The state receives more taxes, and everything is transparent and clear.

However, there is some unhealthy activity regarding forests: by means of the Law “On Timber,” there is an intention to exclude it from exchange trade. I think this is bad. We have already proven that the exchange market works better than “Prozorro.Sales.” If I am not mistaken, Lithuania adopted our model. We support the version of the draft law that was prepared by the committee for the second reading. We want the timber trade to be conducted in accordance with international standards. It was not us who came up with the idea that timber is an exchange commodity.

 

-- I heard a compromise option that Prozorro.Sales should simply obtain an exchange license.

Yes, that would be the best option. There currently exists a misconception that the absence of buyer names in the “Depth of Market” is a bad thing. However, in developed markets, buyers are not visible specifically to prevent manipulation and to ensure that the “Depth of Market” remains anonymous.

As for the identification of market participants, it is already in place. It is established by the rules of exchanges which are registered by us, the Commission. In addition, there are KYC (know your customer) and AML (anti-money laundering) requirements, and everything complies with the FATF (Financial Action Task Force) requirements, while no such control is exercised outside the exchange. And most importantly, exchanges ensure control over the execution of settlements. To do this, an exchange requires a cash deposit (CD) from buyers who want to participate in trading.

A different story here is that the CD is itself a problem because of currency exchange regulation. When a non-resident participates in a trading session, he transfers money needed to participate. However, if he did not win, he needs to get back the CD but cannot withdraw money from Ukraine due to currency restrictions imposed by the NBU. It would be great if the NBU made an exception in this case.

In general, there has been real success, and I would like us to repeat it in the grain market as well.

 

-- About professional market participants. Again, the NSSMC is often compared to the National Bank, which cleanses all subordinate markets. What are your dynamics?

At one point in the evolution process, the Commission did indeed have a task to reduce the number of professional market participants because there was a lot of “fraud-fraud-fraud”. Now we are making sure that they really work. The purpose of the prudential standards we applied was not to “kill” or “strangle” anyone. We wanted to explain that a financial company on the stock market cannot exist without money, just as an insurance company or a bank cannot exist without money.

Following the introduction of prudential requirements, many owners of professional stock market participants began to consider which of their existing licenses they really needed to conduct business.

The most striking example, in my opinion, is the PFTS exchange. We were pressured, being told: “This is the oldest exchange, and if you take away its license, only one (exchange) will remain, Perspektyva!” We were openly demanded to create discriminatory regulatory conditions and allow exchanges not to comply with prudential standards, but we withstood this pressure. Now I can proudly say that if people need services, they find the money to pay for them. PFTS found this money by taking it in advance from its current clients.

That is why I believe that this approach works. Coming back to the question of how to get people to buy shares, it is important that those involved in this see it as a real business, not part of captive schemes. Then everyone who remains in the market will start selling shares, attracting investors, offering them something, developing new applications, making them more convenient, and simplifying the account access system. This is one of our main tasks.

 

-- How dangerous is EU integration for professional market participants? There have been fears that capital requirements will rapidly move toward EU standards, while the market remains half dead.

We are on the side of the market in this game because our international partners really wanted to “whack” us with EU standards as quickly as possible. But I said that, with all due respect, we do not have EU salaries. The average salary in Kyiv is not EUR 3,000, and a professional market participant in Ukraine does not earn EUR 1.5 million to be fined EUR 1 million. Under such conditions, there will be no domestic players left on the market, and we will simply be preparing the ground for EU companies to come in and take over the empty field. That is why we keep saying that all requirements must reflect the realities of today.