Other Financial Institutions
A Russian securities market has evolved with the rest of the economy. When the first Russian stock market was established in 1991, few private companies existed to offer shares, so trading activity was quite low. The securities market got a large boost from the Russian government's privatization campaign. Shares in privatized firms were issued, and then a secondary market emerged for the privatization vouchers that the government issued to each citizen (see Privatization, this ch.). As the first phase of the privatization program ended and companies' capital requirements rose, an efficient securities market became increasingly important.
Russian laws and regulations of the stock market and other elements of the securities market have not kept pace with the growth in the industry, fostering irregularities in the market. Among the most infamous was the operation of the MMM investment company, which developed into a pyramid scheme guaranteeing investors very high returns on their investments. A number of Russian small investors, whose savings had been eroded severely by inflation, were attracted to the scheme and eventually lost large sums of money. The head of MMM, Sergey Mavrodi, was arrested and jailed on tax fraud, but the MMM case underlined the lack of Western-style commercial laws in the Russian legal system. The Russian securities market also lacks a modern communications infrastructure, so registration and reporting of financial transactions are very slow.
In 1993 the Government added a new element to the securities market by issuing treasury bonds to help finance its budget deficits. In addition, Russian citizens are able to buy and sell rubles for foreign currency at selected banks. The exchange rate is established through weekly auctions on the Moscow International Currency Exchange (MICEX).
Insurance remains a small part of the Russian financial market. In 1996 approximately 200 insurance companies were operating in Russia, including the privatized versions of former Soviet state insurance companies. According to experts, Russia's relatively new financial institutions are likely to face a long period of adjustment as weaker banks close or merge with stronger banks, and a regulatory framework must be developed to ensure public confidence in the banking system and enable banks to offer reliable support in the development of private enterprise--a role that has expanded rapidly in the first five post-Soviet years. Other aspects of the financial system, such as securities markets, also lack the degree of standardized regulation required for large-scale domestic participation. However, as the private sector's role in the national economy grows and as Russia develops needed regulations and infrastructure, the securities markets and other nonbank financial institutions are expected to follow the banks as important elements of the economy.