I met and interviewed Oleg Vyugin at the Federal Financial Markets Service last week. As I stood waiting in the rather ramshackle Gosstandart office on Leninsky Prospekt, it struck me it was almost exactly two years since I was last at the agency, when it was still called the Federal Commission for the Securities Market (FCSM), and Igor Kostikov was in charge.

Kostikov, with the assistance of various PR companies, managed to sell himself to several western journalists, including myself, as the Russian equivalent of Eliot Spitzer, in other words as a crusading idealist trying to clean up Russia’s capital markets.

This was a masterpiece of spin – those in Moscow financial circles knew that Kostikov was anything but a crusading idealist. In fact, he introduced a number of amendments which directly benefited his own St Petersburg brokerage company – AVK. He also harassed and slandered other brokers and investment companies, accusing them of financial abuses in the press, without ever showing evidence to support his charges.

By the time of his departure in early 2004, the FCSM did not have a good reputation with bankers and investors, not that it mattered, as it didn’t have any real powers either, so bankers and investors could more or less do what they wanted. Russia remained a weirdly unregulated corner of global finance.

Bankers reacted positively when Vyugin was appointed in mid-2004. He was well known in the private sector from his time as chief economist at Troika Dialog, and before that through long stints at the Ministry of Finance and Central Bank. But above all, he was known to be clean.

But still, the FFMS got off to a fairly rocky start. For about a month, Russia didn’t have any regulator at all – the FCSM was closed down, but the FFMS hadn’t yet been started up. When it was started up, it was in the midst of the confusion of administrative reform, when Prime Minister Fradkov had just taken charge, and no one knew what was going on. The market gossip was that even the document agreeing the agency’s new name sat on Fradkov’s desk for six weeks waiting to be approved.

Many investors and bankers said and still say that, while Vyugin is a very good candidate for the job, it is a very difficult job. He’s inherited a lot of the bureaucracy of the FCSM, which is rather woeful, and he’s working inside a government that is by turns over-ambitious and apathetic. For the first year of its existence, it’s fair to say the FFMS was invisible.

Now, however, it is showing signs of life. In our hour-long interview, Vyugin outlined at least 10 different laws or amendments he plans to introduce, some of them far-reaching.

The most interesting was the re-start of pension fund reform. The government’s first attempt at reform in 2003 was, in my opinion, one of the more disappointing efforts of the Putin regime. People were given a choice between their pension funds being managed by the state fund manager – Vnesheconombank – or by private fund managers. They had to choose by a certain date, and if they didn’t make a choice, then the state fund manager became their manager by default.

Unfortunately, the health and social development ministry, under the command of Mikhail Zurabov, made no effort to explain the reforms to the population, and didn’t even send out enough forms for people to choose, with the result that about 95% of the capital went to the state fund. Private fund managers complained that it was a stitch-up by the government, because it wanted to use future pensioners’ money for its own political purposes, which is a pretty shoddy way for a government to behave, when you think about it.

Vyugin says the government now plans to have another go at reform. Under a new amendment set to be passed in the next few months, at least Ru40 billion of all new pension fund money will go to private fund managers. As Vyugin put it, if people don’t make a choice themselves, bureaucrats will choose for them, and in this case, bureaucrats are choosing to diversify the capital to private fund managers. That’s good news for the equity markets, as the state pension fund only invests in government bonds (thereby losing pensioners money) while private funds can invest in some equity.

But Vyugin wants to go further. He wants to loosen the rules governing pension funds so they can take on more risk, and invest more in equity and alternative investments, as they do in Europe or the US. He says the ministry of trade and economic development and the ministry of finance are against this, at the moment, because they’re worried about a fund going bankrupt and them taking the blame. But at least finally someone seems to be driving pension reform in the right direction.

The FFMS is introducing several other amendments or laws in the next few months - a new law on insider trading, for example, which will finally give the FFMS powers to prosecute those found guilty of share manipulation. Everyone knows that share manipulation happens quite a lot in Russia, and that it often involves bureaucrats leaking information to personal brokers just before they announce it to the market. Vyugin says his agency won’t shy away from going after dirty bureaucrats. We’ll see.

He’s also introducing amendments on mortgage bonds and other forms of securitization, which is long, long overdue – every other major market in Europe has a securitization market. Kazakhstan has been doing it for a while. Securitization would be a good way for Russian banks, which are facing a capitalization crunch, to free up capital by securitizing mortgage or consumer loan portfolios.

As usual, Vyugin also complained about Russian companies doing IPOs in London but not listing in Moscow as well. This is a fair point – companies should do dual listings. But he can’t expect companies to list just in Russia, as the capital markets simply aren’t deep enough to support anything more than perhaps a $200 million deal.

All in all, I was impressed with the clarity and energy of Vyugin’s reform proposals, and hope he gets at least half of them done. He obviously has a clear perception of international legal norms for finance, and he’s working to try and adapt Russia’s sometimes idiosyncratic legal codes to those international norms.

At the moment, he seems to have the backing of various ministries and the presidential administration in his efforts. That’s because, as he says, the government has realized the political and economic importance of the stock market. More and more ordinary people have exposure to it, through mutual and pension funds. And more and more Russian companies are raising capital through it. Moreover, minister German Gref seems to be embracing IPOs as a way of partially privatizing state companies such as Rosneft or Unified Aircraft Manufacturing.

Let’s hope this political backing continues, and Vyugin can continue building a financial regulator that enjoys the respect of the market.

Julian Evans, a British freelance journalist based in Moscow.

April 21, 2006