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Analysis & Opinion
08.07.10 Banking On The Capital
By Tai Adelaja

Russian President Dmitry Medvedev pressed ahead on Wednesday with plans to turn Moscow into an international financial hub, by formally creating an ad-hoc group to prepare a launch-pad for this ambitious project. By personally promoting the project, president Medvedev was hoping to capitalize on some of the obvious advantages Russia enjoys over other financial centers, including a large economy, an educated workforce, a liberal tax regime and an advantageous geographic position between Europe and Asia.

An up-and-running international financial center is also expected to give the Kremlin a chance to diversify the nation’s mono-cultural economy, which Medvedev described as humiliating, and to help its modernization program. Medvedev first unveiled plans to turn Moscow into an international financial center and to make the ruble into a leading regional reserve currency in June of 2008, barely three months into his presidency. He said that both steps were crucial to building a competitive financial system in Russia.

The Kremlin has stuck to its guns, even as the global economic crisis threatened to derail the plan. Last month Medvedev called for work on the project to be expedited. “The main task is to make conditions of work on the Russian financial market attractive for foreign investors,” Medvedev said. “It's a whole set of issues – it's not just our legislation, but the way our authorities enforce this legislation, as well as the way the rights and … interests of businessmen and investors are protected.”

A decree Medvedev signed on Wednesday confirms Alexander Voloshin, the former head of the Russian Presidential Administration, as the head of the group that would realize Kremlin’s ambitions. First Deputy Prime Minister Igor Shuvalov will supervise the group's activities, as well as the government's activities related to international financial integration, RIA Novosti reported. Presidential Aide Arkady Dvorkovich said earlier that the group, which will operate under the presidential council for financial markets, would be joined by senior experts from countries that already have financial centers. Representatives of foreign banking groups who met with the president in April have said that they are ready to finance the project, the Kommersant business daily wrote, citing Ruben Vardanyan, the chairman of the Board of Directors and CEO of Troika Dialog, who attended the meeting.

With the economy again showing signs of recovery, many analysts say the time is ripe for Moscow’s gradual transformation into an international financial hub, if only the government would make some changes to improve the investment climate. Vladimir Osakovsky, an economist at UniCredit Aton, said that Moscow’s financial markets already enjoy a pride of place as the largest and fastest growing in the CIS. “The government’s goal is to make Moscow more important as a financial hub both in size and efficiency,” Osakovsky said. “Within the next few years, there will be a massive expansion of Moscow’s financial market, whether the government propels growth or not. This is evident in the influx of investors into the country despite a host of problems, including a corrupt bureaucracy.”

Last year Russia ranked 146th among 180 countries in the Transparency International Corruption Perceptions Index, on a par with Zimbabwe, Sierra Leone and Cameroon. It is the 20th riskiest place to do business, according to Maplecroft, a risk-management adviser. The study of 172 countries ranks respect for the rule of law, property rights, access to the legal system, corruption, corporate governance and regulatory frameworks.

Osakovsky said, however, that the government’s efforts should be geared toward improving the regulatory framework rather than just zooming in on corruption. “One of the key issues the government needs to address is ensuring independence of the judiciary, as well as property rights protection,” Osakovsky said. “These are very crucial to the very essence of capitalism, but I suppose this is also the most difficult task the government is facing.”

The need for an overhaul of the legal system as a precondition for attracting investors was stressed in a recent interview by Alderman Nick Anstee, the lord mayor of the City of London, who pledged London's support to make Moscow a global financial hub. Foreign companies intending to develop business in Russia, he said, pay close attention to legal certainty, legal standards and continuity in decision-making, RIA Novosti reported.

Troika Dialog economist Anton Stroutchenevski said that the main impetus needed for the creation of an international financial center is strengthening the national currency. "As it were, Moscow is already a significant financial center, but it would take gradual steps to turn it into an international financial hub,” Stroutchenevski said. “The economic climate in the country is such that Russia can seriously talk about creating an international financial center. The ruble is on free float as an independent currency and the general macro-economic situation has improved. This emboldens the authorities to create a center that would attract investors in part to help finance budget deficits.”

In addition to better growth indicators, recent proposals by some countries to impose a tax on banks may have also bolstered Russia’s ambitions, according to Bloomberg. Some European countries like Britain, Germany and France have called for a levy on banks, and president Medvedev made no secret of Russia's intension to benefit from the harsh regulatory controls being imposed in other countries. “We invite to Russia everyone who is suffering at home,” Medvedev told a meeting of U.S. venture fund managers in May. First Deputy Prime Minister Igor Shuvalov told the Upper Chamber of Russian legislature last month that Russia has no plans to impose a tax on banks similar to the one proposed by some European countries, but added that Russia will carefully “monitor all possible restrictions of a financial and tax-related character” in those countries.

Analysts say however that such an open-door policy will not in itself translate into an influx of investors into Russia if the regulatory environment remains shaky. Alexei Moiseyev, a senior economist at Renaissance Capital, said that the government would need to adopt a raft of laws, including risk and solvency regulation of depository institutions to regulate various aspects of the financial markets. “Lack of proper regulation hinders not only the creation of an international financial hub, but the proper functioning of Russian financial markets,” Moiseyev said. “This is the primary reason why Russian companies prefer to list abroad.”

Some government officials have also raised the red flag. Deputy Finance Minister Sergei Storchak warned last month that Russia can’t become a financial hub unless markets are regulated by British law and English becomes more prevalent, as in Dubai and Hong Kong. He said that the absence of these two features is of concern to him. “To think that capital inflow can be stimulated without resolving these two issues is somewhat odd,” Bloomberg reported him as saying.

During a series of meetings and public statements on the issue, the Russian leader showed a grasp of the intricacies involved and of the investors’ concerns about the project. Early last month Medvedev said that it is necessary to establish normal and favorable conditions for capital and the relevant tax and customs facilities, to ensure effective judicial protection of property rights, to use modern models of risk insurance and to create the necessary infrastructure. He has also charged Moscow Mayor Yury Luzhkov with creating "comfortable work conditions" for foreign investors in Moscow. "They must feel no less comfortable than in London, Geneva or New York," Medvedev said.

Responding to orders from the Kremlin, Moscow Mayor Yury Luzhkov told local TVC television last week that city authorities need to create a comfortable atmosphere for people coming to an international financial center, including a place for sports such as tennis, bowling, golf and other entertainment. “If there's no golf,” he joked, “then there won't be an international financial center.” But despite such good-humored intentions, experts say image-damaging events such as last week’s highway blockade, when thousands of passengers missed flights at Sheremetyevo Airport because of minor repair works, will continue to scare people away.

Regardless, the Kremlin remains upbeat. Finance Minister Alexei Kudrin told a June 4 meeting involving Medvedev that Moscow's prospects for becoming a global financial center were good, citing the Global Financial Centers Index, in which Russia is ranked 68th among 75 major financial centers, The Moscow Times reported. He said that it was a positive sign that the experts questioned by the survey had included Moscow on the list of global contenders, along with Dubai, Peking and Shanghai. "We are at the beginning of the list in terms of the potential we have to unlock," Kudrin said, a transcript on the Kremlin’s Web site reads.

The biannual report, composed by Z/Yen Group and commissioned by the City of London, grades the major financial centers in terms of their competitiveness, based on assessments from international financial services professionals. Moscow, ranked two spots above St. Petersburg, "does not yet have sufficient depths or breadth as a financial center to be considered a specialist or diversified center," said the report, which was published in March. According to the report, Moscow performed poorly in almost all competitive categories, including infrastructure and business environment, where Moscow was ranked 73rd and 71st, respectively.
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