RUSSIA - The emerging non-state pension fund industry is unlikely to flood the Russian financial markets, as many had previously anticipated, according to a report from investment researchers Troika Dialog.
The October deadline for individual workers to choose a pension fund manager for the funded portion of their state pensions is rapidly approaching, and these funds are due invest their capital in the market in January.
The Russian pension reforms, while revolutionary, do come with flaws. There are low savings contributions, limited incentives to report ‘grey’ income, and a high degree of government restriction, said the report. As a consequence, the system is unlikely to accrue funds in excess of 2% of GDP over the first five years, whereas by comparison Poland accumulated 6.5%.
However, unlike the situation in Poland, Russia will not suffer a shortage of liquid equity and corporate debt instruments.
By 2006, $10.5bn should have accumulated in the non-state pension fund (NPF), although due to poor communications of the reforms to the public, only about 40% of this will be redirected to markets in the next three years.
The rest will be managed by the state-owned company and invested in sovereign debt, which the Troika report predicts should create an environment of artificially low yields on the domestic fixed income market.
Andrei Ivanov, analyst at Troika Dialog, also noted: “The NPF assets will represent a very small portion of the equity market and is unlikely to drive it in the coming three years.”
By the end of 2006, not more than $1.1bn in pension money will be invested in equities, which is less than 3% of the estimated capitalisation of the market free float. Further ahead, an average of $1bn a year should be invested in equity, which is 1.5% of estimated Russian trading turnover on the equity market.
The pension reform’s greatest influence should be on Russia’s sovereign and corporate debt markets, with over 40% of NPF’s assets to be invested in corporate debt over the next three years.
“The real influence of pension money in the market will be felt within six to eight years,” said Ivanov. “Comparing pension resources to the size of the economy indicates that pension money will be quite small and not exceed 5% of GDP in the coming 10 years.
“Everything depends on the ability of Putin to enforce administrative reform in Russia, say in 2006-2008. These two years will be of critical importance to Russia and the pension system.”
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