Moscow as a global financial center -

Modernizing financial infrastructure in Russia

February 2011

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Moscow as a global financial center - Modernizing financial infrastructure in Russia

In November 2008, Dmitry Medvedev acknowledged the need for a developed and globally competitive national financial system as a key component of Russias economic modernization agenda. He particularly called for the planning of a financial center in Moscow with minimal government interference into the industrial and financial sectors in efforts to modernize the financial infrastructure in Russia. A major global city as well as the economic hub of the expansive CIS region, Moscow has a clear potential to become a leading international financial center. Building on the countrys well-established banking infrastructure, Russian authorities have undertaken a series of initiatives aimed at boosting the attractiveness of Moscows financial sector to international investors.

CREATING A GLOBALLY RELEVANT REGIONAL FINANCIAL CENTER: WHY? In his keynote speech at the World Economic Forum in Davos on January 26 2011, President Dmitry Medvedev said the goal is to turn Moscow into a major international financial center that will not only become a nucleus for the Russian financial system but will also act as a catalyst for the economies of other Post-Soviet states. Instead of trying to overtake financial hubs like New York or London, the plan is to build upon Moscows central role in the CIS region and equip it with the means of Russias international ambitions. This prospect has been welcome by leaders of other global financial centers such as the head of Dubai International Financial Center Abdullah Al Awar, who said: Moscow would be a welcome addition to other major cities. Moscow already displays strong assets in this regard. This has to do with the already established banking and financial infrastructure in Russia, as evidenced by a series of recent indicators: o The market capitalization of Russias stock market accounts for half of all stocks traded in the former Soviet Union and is larger than the combined value of equivalent Central European exchanges. Moodys recently upgraded the Russian banking systems ranking to stable amidst signs of improving regulatory standards. A 2009 European Bank for Reconstruction and Development report found Russias securities market regulation to be in medium to almost high compliance with global standards.

Recent developments on Russias markets have also demonstrated the need for an international financial center based in Moscow: o Though IPO offerings were down for a third year after peaking in 2007, economists predict that large state-owned asset sales will revive domestic offerings on Moscows stock exchange. In late December 2010, the London Stock Exchange was among several major international exchanges seeking to enter the Moscow Micex exchange. Other firms included Deutsche Boerse and possible partner RTS (a lesser Russian exchange), the NYSE and Nasdaq.

KEY INITIATIVES In April 2010, First Deputy Prime Minister Igor Shuvalov announced the revival of project put on hold during the financial crisis, with specific approaches and deadlines. Presidential adviser Arkady Dvorkovich said that the legal and regulatory framework will be set in the next three years with the project expected to yield results in ten years.

On May 18, 2010, a project group, headed by Alexander Voloshin, was created under the Presidential Council for financial markets to oversee Russia's efforts to establish the international financial center in Moscow. The project rests on the development of a wide range of tax incentives and the current financial infrastructure in Russia. Initiatives already taken in this regard include: March 2010: Launch of a National Payment System by 2014, the goal of which is for each Russian to possess a single payment card enabling them to receive social security and pension payments, while also allowing them to pay for annual purchases and taxes. September 2010: Duma approval of a law denoting and banning insider trading: According to Herbert Smith CIS LLP, the law aims to increase transparency in Russian financial markets by creating a legal mechanism to prevent the use of insider information in trading, and specifically lists those who are considered insiders. The law will go into effect January 27, 2011, with two exceptions. The first which specifies what is specifically considered insider information and administrative liability for violations of the law comes into force on July 30, 2011. The second which concerns the criminal liabilities facing those convicted for illegal use of insider information goes into effect July 30, 2013. December 2010: A unified clearing system and the establishment of Moscows own bourse for big forex and debt holders: as central bank member Sergei Shvetsov put it: The major project for the next year (2011) is the creation of the treasury bourse. Recently, President Medvedev has gone further and asked St. Petersburg and Moscow city administrations to ease visa and registration rules for foreign businessmen and financial service professionals in order to help develop the financial infrastructure in Russias cities.

OTHER FACTORS OF PROGRESS As developing an internationally relevant financial center also requires tackling a broader range of issues, a number of other aspects of Russias modernization agenda may prove particularly beneficial in this regard. Fight against corruption, bureaucracy and abuse of power by government officials: A major overhaul of the Law on Economic Crime was undertaken in the summer of 2010, and once passed will make businessmen less vulnerable to unjustified prosecution by government actors. The immediate effect of the law will see 100,000 executives released from jail or have their sentences reduced. Corporate Raiding Law: On December 27, 2010, the court system of Russia adopted criteria garnered from the Corporate Raiding Law, which halts the practice that was rampant in the Russian business world during the 1990s. Regional economic integration: The customs union, which is currently being developed between Russia, Kazakhstan and Belarus, will further strengthen Moscows significance in the CIS region along with its currency. With relations Ukraine and Belarus steadily improving over the course of 2010, prospects of linked economic interests appear solid. Beyond this customs union, recent statements by Prime Minister Putin recently demonstrated Russias determination to pursue economic integration from Western Europe to Asia. Russias accession bid to the WTO now has the backing of the United States and the EU, and once completed will necessitate a natural opening of the countrys economy to the standards of the organization.

Improving the quality of living is widely considered as an important parameter to attract the talents who make a financial center thrive. As showed by Mercers Quality of Living rankings, Moscow still has a lot of room for improvement, particularly with regards to traffic and transportation issues. Moscow Mayor Sobyanin made the improvement of the traffic gridlock the main priority of his new mandate.

KEY PEOPLE Alexander Voloshin was appointed by executive decree as a member of the presidential council for financial reform the body in charge of establishing Moscow as a financial center. Voloshin is a former chief of staff for President Boris Yeltsin and Vladimir Putin as well as recently being the chairman of Norilsk Nickel. First Deputy Prime Minister Igor Shuvalov will coordinate international integration aspect which will seek to bring in outside experts in the fields of finances, banking, and infrastructure management for the planned financial center.

FURTHER INFORMATION Moscow city government International Financial Center site The Moscow RTS Bourse Micex Stock Exchange The International Organization of Securities Commissions