First step

Moscow bourses: The merger of Moscow's two main stock exchanges, MICEX and RTS, reflects strong pressure from the Russian government. The merger is a necessary part of the Kremlin's dream of turning Moscow into an international financial centre. But without many more reforms, the bourse merger is far from sufficient.

Talks have been underway for years, but had foundered on RTS's reluctance to be swallowed up by its bigger competitor. The two bourses are different creatures. Whereas MICEX is dominated by Russian investors and is 30 percent owned by the Russian central bank, the smaller over-the-counter RTS is internationally preferred.

Government pressure has been augmented by generous deal terms. The offer values RTS at $1.15 billion, a 37 per cent premium to its market valuation, although RTS shareholders will only receive 35 per cent of the consideration in cash, with 65 per cent in shares.

Despite the political nature of the deal, the merger will be welcomed by investors.

They can look forward to more streamlined procedures. It is common for investors to engage in trades that use both exchanges. MICEX is preferred for investing long, while the RTS leads in derivatives trading. The need to use separate accounts can add days to settlement. It also increases the cost of laying collateral.

Still, of the many gripes that investors have about the Russian stock market, the complexity of trading is hardly the biggest. More serious worries centre on weak market regulation, corporate governance that leaves vast amounts to be desired, and the generally shaky legal system. Russia is moving slowly to improve its laws - it finally got round to banning insider trading in January. But new laws will change little if, as usual, enforcement is weak.

What Russia sorely lacks is a large pool of domestic institutional investors, needed both to provide stability to the market, and to tempt companies to list in Russia rather than abroad. Foreigners provide 75 percent of equity market capital, with mutual funds and pension funds still miniscule by international standards. Without more incentives and guarantees, Russians are unlikely to become any less sceptical about investing. That will not change with a merger of bourses.