Kyiv, 30 April 1998 (RFE/RL) -- Infant stock markets tend to run before they know how to walk -- and fall down when they try to run. Investors who jumped into Ukraine's haphazardly regulated stock market last year have learned that, like human infants, fledgling stock markets can lead to sleepless nights.
A giddy bull run through all of last summer was cut short by the financial crisis in Asia, along with the political uncertainty in the run up to Ukraine's March parliamentary elections and Kyiv's continued failure to implement economic reforms.
The decline has been steady. When the Wood-15 index was launched 10 months ago to chart the PFTS --Ukraine's over-the-counter electronic exchange-- it debuted with a base of 1,000 points. The index climbed to nearly 2,600 points in the first four months. But since then, it has steadily fallen back to the 1,200 mark. Trade volumes have declined along with prices. The flow of money through the system has slowed to trickle -- a worrying development considering that the PFTS accounts for more than 90 percent of public share trading.
Meanwhile, western market analysts say the recent election of a leftist-dominated parliament is a recipe for four more years of economic drift. They predict the exchange won't rebound to its peak level for months or even years.
Daniel Butler, an equities dealer at the investment firm Atlantik East, said his company has been advising would-be investors to test the waters before pumping any money into the system by waiting until the parliament convenes in May.
But even if there is a stampede back to Ukrainian stocks, the bulls are likely to confront the same obstacle they first encountered last year. The tiny stock market is so illiquid that getting into it can be hard, and getting out can be even harder. Ukrainian managers view outside investors with suspicion. With the slow pace of privatization also limiting new share issues, too many buyers end up chasing too few shares when the market is good.
Meanwhile, market insiders estimate fewer than half of all transactions are reported to the PFTS for fear that share prices will move accordingly. Philip Haas, president of Haas Consulting, said he wants his customers to be able to buy and sell shares without affecting the overall market. But in Ukraine, that task can be difficult.
The PFTS has tried to improve its liquidity by setting up a top tier of the most popular stocks and by providing incentives for brokers to act as market makers -- listing both sell and buy offers. But progress has been negligible.
And the ailments of the PFTS are even worse at other exchanges, whose business is dwarfed even by the modest volumes of over-the-counter transactions. The Ukrainian Stock Exchange, which has 26 affiliates across the country, subsists largely on government sales of shares in newly privatized firms.
Weekly trading volumes average about $200,000 with a total turnover in 1997 of about 23 million hryvnas. A relative newcomer, the Ukrainian Interbank Currency Exchange, finished 1997 with a share trading volume of about 10 million hryvnas. Turnover last year was even less at the Kyiv International (4.7 million hryvnas) and Donetsk Stock exchanges (2.2 million hryvnas).
Finding a desired stock for sale is only half the battle for would-be investors. As in Russia, company managers can still deny an unwanted shareholder his rights and sometimes dispossess him outright. The country is not yet a place for corporate raiders. In the words of one western investment adviser, there is little investment at Ukrainian exchanges unless a buyer is invited.
One reason corporate managers wield so much power is the lack of independence for the 270 share registrars who record ownership structures . In practice, many are controlled by the firms whose share registers they maintain. Some have refused to register sales to an investor who is viewed by current managers as a challenger.
In effect, each registrar holds a monopoly on recording transfers of shares in client firms. The decentralized network also forces representatives of brokers and investors to crisscross the country in order to register their purchases. It often takes 10 days before a sale is properly registered. Robert Grant, head of the Dutch bank ING Barings' Kyiv operation, says that time lag and the settlement risk it causes is not acceptable to Western investors.
The Securities and Stock Market Commission has pushed for new laws that would improve share depositories and clearance systems, including electronic registration of share ownership. Oleh Mozgovy, chairman of the Securities and Stock Market Commission of Ukraine (SSMC) said the basis of a "civilized securities market" has been established. But many of the improvements have yet to be put into practice.
The commission has been more successful in allowing investors greater access to corporate information. In October, it opened an information office to make corporate filings public. It has also set up an office to investigate security law violations. Still, it has not required share issuers to adhere to international accounting standards. Hopes for another market rally now rest on speeding the privatization of loss-making state firms like the telephone monopoly. But too many times in the past, anticipated share issues are canceled at the last moment due to opposition from a ministry or state managers who fear losing their control.
Robert Foresman, ING Barings director of Corporate Finance in Ukraine, says Ukraine has a bad reputation amongst international investors because it often alters privatization plans to exclude foreigners or to favor a local company.
Foreign analysts says the situation is becoming so desperate at the Ukrainian treasury that the government will soon have no other choice than to sell. When that happens, institutional investors who have already set up Eastern European funds will buy simply to fill out the allotted Ukrainian fraction in their high-risk market portfolios.