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Analysis & Opinion
21.09.10 Lame-duck Contender
By Tai Adelaja

The Kremlin’s efforts to turn Moscow into an international financial center that can compete head-on against other global financial hubs have once again suffered a set back. International financial services professionals continue to give the project the cold shoulder and consistently rate Moscow’s efforts as an ineffectual campaign at best. But the Russians aren’t giving up.

The September issue of the Global Financial Centers Index (GFCI) report published on Monday placed Moscow in an unenviable 68th position in the rankings of 75 global financial centers, despite massive efforts by the government to improve the status quo. The report, an update of similar research conducted by the Z/Yen Group and published in March, ranked St. Petersburg, Russia's second largest city, a distant 71st position. “The only Global Contender is now Moscow which is assigned a global profile because there is widespread awareness of its activities, but its financial services are not currently sufficiently broad and deep for it to be considered a leader,” the authors of the report said.

The latest GFCI research provides profiles, ratings and rankings for 75 financial centers, drawing on responses to an ongoing online questionnaire completed by international financial services professionals. Respondents are asked to rate those centers with which they are familiar and to answer a number of questions relating to their perceptions of competitiveness. Overall, 33,023 assessments from 1,876 financial services professionals were used to compute the latest report, which tracks the changing perceptions of cities as financial centers on an ongoing basis.

The GFCI was first published in March 2007 but has subsequently been updated every six months. “Successive growth in the number of respondents and data has enabled us to highlight the changing priorities and concerns of finance professionals, particularly since financial crises began to unfold in 2007 and 2008," GFCI analysts said in the report. The ratings and rankings are calculated using a ‘factor assessment model’, which combines instrumental factors and questionnaire assessments. Key factors that combine to make a financial center competitive, according to the authors, include personnel, the business environment, infrastructure, market access and general competitiveness. The overall rating of a center is based on a range of factors. For example, evidence about a fair and just business environment is drawn from a corruption perception index and an opacity index.

Z/Yen Group analysts awarded Moscow, the only listed global contender from an emerging market, 506 points out of a possible 1000 in September. This was a drop of 10 points from March. London and New York scored 772 and 770 points respectively, followed by Hong Kong with 760 points. Trailing Hong Kong are three other Asian cities – Singapore, Tokyo and Shanghai, garnering 728, 697 and 693 points respectively. Also featuring in the top-10 are Chicago, Zurich, Geneva and Sydney. The report notes that London continues to maintain first place in the terms of asset management and the provision of professional financial services, while New York remains the unassailable leader in regulatory indicators and banking. Hong Kong leads other financial markets in the area of insurance, but the authors predicted that Singapore, which now lags behind its Asian rival by only 32 points, will close in pretty soon.
The Russian government first considered plans for building an international financial center in Russia in February 2009. This followed a September 2008 directive from President Medvedev, who saw the project as a way to bridge the deepening gap between the Russian financial market and other global financial centers.

During a meeting on April 20 this year chaired by President Dmitry Medvedev, a presidential council on financial markets was created, with Alexander Voloshin, a former chief of the presidential administration, as its head. An advisory board with representatives of investment companies was set up to help jumpstart work on the council. The priority, Medvedev said, should be “to make the conditions of the Russian financial market attractive to foreign investors.” “It’s a whole complex of problems,” Medvedev said. “It's not just our laws but also the manner in which these legislations are implemented by state authorities, and in what manner the rights and lawful interests of businessmen and investors are being protected."

Even before this meeting, officials were considering ways of scaling down the president's ambitious project. Two weeks previously, First Deputy Prime Minister Igor Shuvalov consulted privately with representatives of some investment banks, including Credit Suisse vice chairman Urs Rohne, VTB Capital chief Yury Solovyov, and the heads of the Moscow offices of Morgan Stanley and Goldman Sachs, the Kommersant daily reported. Participants considered measures that would make the MIFC project "less fantastic" than had earlier been planned, the paper wrote, citing an unnamed participant at the meeting. Measures discussed include creating a special legal jurisdiction for the future center, luring Western investors by exploiting newly-imposed harsh measures on banking and financial institutions in the EU and United States, as well as focusing attention on Russia’s near-abroad market in the CIS.

Finance Minister Alexei Kudrin said at a meeting held in June this year and chaired by Medvedev that the government aims to improve market infrastructure and expand the range of securities traded in Russia. He reiterated earlier statements that his ministry would ensure that necessary regulatory acts on stock markets and clearing operations are prepared within the next three years. Russia’s bourses, he said, are ready to trade the bonds and currencies of the Commonwealth of Independent States. The government has so far pledged 38 billion rubles to develop the center starting next year and another 140 billion rubles is expected to be spent to develop infrastructure and improve the business environment over the next three years.

Despite such efforts however, the latest report appears to underpin the meager progress Russia has so far made in addressing the structural challenges of corruption, weak rule of law and political risk that define Russia’s investment environment. Rather than tackle such problems head-on, analysts say, state institutions have tended to resort to “diversionary tactics.” Last month, the Economic Development Ministry proposed a large-scale advertising campaign to help turn Moscow into an international financial center, involving a dedicated Internet portal, work with Russian nationals abroad and more emphasis on “success stories,” Vedomosti reported.

According to a draft plan cited by the business daily, targeted advertising campaigns in support of the international financial center could help give the project a positive image. The strategy proposed is set to employ both world experiences in branding as well as Soviet developments in the field of propaganda. One of the main projects would be the creation of an Internet portal for the international financial center, where users could get information about Russia, as well as its investment and economic potential. Initially, the site will be in Russian, English, German and French, with plans to expand eventually to include other languages of BRIC countries, as well as Arabic. The Economic Development Ministry also wants to include information about Russian financial services on the site. Another section would focus on "compatriots abroad," which would seek to build ties with Russian finance specialists living outside the country.“There is no way this is going to work,” said Alexander Lebedev, president of the National Reserve Bank. “Finance specialists working in Hong Kong, London or New York have certain basic expectations from international financial centers, such as lack of traffic congestion, the absence of rampant corruption and a good ecological status. The host city is also expected to have normal hotels, good transport infrastructure and impeccable services. However, in addition to ubiquitous corruption, we still have problems with infrastructure, high prices, and property rights protection.”
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