Thursday, 24 January 2019

Widening its repertoire

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  • Widening its repertoire

The global financial system stands to gain with Moscow as an international financial centre, but only if Russia commits to long-lasting reform.

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A law that allows for the creation of a centralised securities depository in Russia, and the merger of the country’s two exchanges, the MICEX and the RTS, have added new firepower to an item that’s been key to the Russian agenda for some years now: Building Moscow up into an international financial centre that will be on a par with any other in the world.

The idea has had great appeal in Russia since 2008 and it makes sense to others outside Russia. The country is, after all, a key player in the global oil and gas trade. It also occupies an important place within the broader Eastern European region, so developing Moscow into a strong financial centre would prove beneficial for many different parties, not least because the financial crisis underscored the fact that the international economy is exposed to risks from many different quarters.

“We need diversification in terms of both financial centres and in the currencies that are used by the international financial system,” said Ousmene Mandeng, co-head of the public sector group at UBS in London. “In that way, it makes perfect sense for Russia to want to become a major financial centre, and the rouble is also nearly convertible, so as a currency it’s already playing an international role.”

In Moscow, things are moving along quickly.

“The working group on turning Moscow into an international financial centre headed by Alexander Voloshin provides a unique platform where regulators, representatives of the ministries of finance and economic development and market participants have a chance to discuss measures and steps required to support the changes needed and find solutions,” said Nataly Nikolaeva, vice-president and managing director at Citigroup in Moscow. “A great deal of progress has been made on many fronts and we expect the positive momentum to continue.”

But just how realistic the Russian goal is will depend very much on the kind of infrastructure Russia can provide and the kind of regulatory framework it can create, Mandeng warned.


Indeed, as much as Russian authorities may be keen for their country to become a kingpin in the global financial system it is not going to be that easy. Russia’s track record on the transparency front and its  notoriety for endemic corruption will require far-reaching changes to convince people that things have really improved and that the rule of law does apply.

Creating a financial centre of note and convincing the rest of the world of its merits vis-a-vis both existing and new financial centres in other parts of the globe means that Russia must have an unwavering commitment to deeper and very necessary reforms that need to result in a complete overhaul of the economy, said Chris Weafer, strategist at Troika Dialog in Moscow.

“Whereas countries like India and Brazil have diversified economies, Russia’s domestic economic base is dwarfed by the importance of oil and metal exports, and there wasn’t any pressure to diversify during the boom years because oil covered everything. That has changed now and Russia needs a more diverse economy”

“Russia stands out from the other BRIC nations in that its domestic economic base is dwarfed by the importance of oil and metal exports. Whereas countries like India and Brazil have diversified economies, Russia’s domestic economic base is dwarfed by the importance of oil and metal exports, and there wasn’t any pressure to diversify during the boom years because oil covered everything. That has changed now and Russia needs a more diverse economy in order to have a lasting domestic capital base, which a financial centre would then be able to serve.”

Russia also lacks an established domestic institutional investor base – particularly for equities – which is key to bolstering the success of any financial hub.

“Here, insurance companies cannot invest in equity, pension reform has been delayed, we don’t yet have meaningful capacity in private managed accounts and people favour depositing in banks rather than mutual funds,” Weafer said. “All of that has to change if we’re to have a proper and credible financial centre here.”

Convincing banks of Russia’s merits, particularly with respect to future business opportunities, is also a challenge. As much as banks had rushed into the country over the past years, to the point where experts felt there was a saturation in the number of players, many are now actually closing up shop in Russia. Although domestic banks are strong and capable of taking on a big load, it’s clear that any international financial centre needs a variety of different entities in order to survive and thrive.

Starting point

Russia’s recent entry to the World Trade Organization, a step that was close to 20 years in the making, is the perfect starting point for deeper reform capable of enhancing Russia’s appeal across the board. Each country that has joined the organisation has had to commit to long-lasting economic changes, and in the case of Russia, WTO membership also validates the idea of a financial centre, Weafer said, since the measures that remove trade barriers and tariffs will make it easier for companies to come to Russia, so having a financial centre on the ground to facilitate money flows will make commerce easier.

Russia also wants to play a greater role in pricing oil and gas, so a financial centre would serve as the perfect venue for creating a local pricing structure and possibly an exchange where these commodities can be traded in roubles, he said.

“Creating a financial centre here that can work with the global financial services industry, and where the rouble can become a better and easier currency to trade, would be highly beneficial to Russia and to the rest of the world, but the commitment to reform has to be lasting,” he said.

No doubt the Russian authorities are aware of this, because political action appears to be keeping pace with both the will and the desire to make the country into an international financial centre. Indeed, the Russian authorities have undertaken an extensive reform of the Civil Code, which is the basis of all law in the country, and there’s a firm commitment to passing legislation to support reform in the many different areas that would encourage a financial centre capable of serving both local as well as international needs, Nikolaeva said, and it includes a thorough plan for a new financial architecture that addresses everything from securities law to insider trading, corporate governance and transparency.

Stamp of approval

Recent discussions have addressed the development of a local investor base and the changes that need to be made to the listing requirements and investment rules for pension funds, she said.

“Most importantly, Russia is a huge country with lots of issuers that until recently, have gone only to the international capital markets for funding, so a deeper local market would mean less dependence on international capital in these troubling times. Russia is also a natural hub for former Soviet Union countries that are keen to have a regional financial centre,” she said.

To that end, the European Bank for Reconstruction and Development gave its stamp of approval to the idea of Moscow as a regional financial centre by partnering with the Russian Direct Investment Fund to acquire respective stakes of 6.29% and 1.25% in the MICEX-RTS stock exchange, as part of a long-term strategy to promote the development of local capital markets in Russia and broaden the regional and international appeal of this recently unified exchange. The move is particularly significant because it marks the first time the EBRD has invested in a trading exchange in one of its 29 countries of operation.


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