Russia's nascent structured products industry is small compared to other markets, but is growing and evolving rapidly despite Western sanctions against Russia's finance sector, the fall in oil prices and the consequent devaluation of the rouble, according to Elizar Bubnov, head of asset management at KIT Finance, an active structured products distributors in Russia, who points that investors have turned to this asset class in pursuit of capital protection.
"The Russian structured products market is very young and has seen rapid growth in recent years, so sanctions, the fall of oil prices and the rouble devaluation could not stop its development," Bubnov said. "In 2015-2016 KIT Finance was able to triple the amount of assets under management in the structured products segment, as many of our clients ran from risks of the Russian stock market to the capital-protected structured products at that period."
Full capital protection is favoured by the typical Russian investor, with product terms of typically between six and twelve months, according to Bubnov. "The most sought-after underlyings are the USD/RUB, the Russia Trading System (RTS) index and various exchange-traded funds (ETF) shares,"Bubnov said.
"The most profitable ideas of 2016 at KIT's structured products business were based on rallying oil & gas prices, gold, rising US banks, falling Japanese yen and climbing emerging markets," said Bubnov, adding that other providers also saw significant interest in exchange-traded notes (ETNs) listed in the Moscow Stock Exchange linked to baskets of the European or the American stocks, Russian ADRs (American depositary receipt) or Russian Eurobonds.
KIT issued 166 products in 2016, according to the SRP database, including 75 FX-linked offers, 72 products featuring equities and 19 referenced to commodities. Only nine products of the total marketed offered less than full capital protection.
Competition in the marketplace is intensifying and the product offering is maturing, with more complex structures being developed by an increasingly professional structured products workforce, according to Bubnov.
"There's still only a relatively small number of structured products investors in the Russian market, so every player in the market has the opportunity to significantly grow their customer base," he said. "In my opinion, the Russian structured products market is waiting for a bright future."
Similarly, Erwin Parviz, head of structured products and managing director at Sberbank CIB, told SRP in November that the Russian structured products market is evolving and fresh initiatives are being launched to encourage retail investment in the capital markets, which could be bolstered by a further decline in fixed-income deposit rates.
According to Parviz, a further decrease in rates will complement 'an increasing level of sophistication in the market and boost demand for structured products'.
Bubnov also said that the Central Bank, which acts as the primary regulator for the structured products market, published several advisory reports on the packaged retail and insurance-based investment products (Priips) market regulation in 2016.
"These reports contain many borrowings from the Regulation (EU) No 1286/2014 of the European Parliament and of the Council," he said. "Representatives of the Central Bank also said that the legislative definition and regulation of structured products in Russia would be fixed in 2017-2018."
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