International Financial Centre in Moscow in Search of Work

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December 2013
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International Financial Centre in Moscow in Search of Work

March 2012

Former Head of the Russian Presidential Administration, Alexander Voloshin

“We are still in the early stages of developing an IFC. It's good that some invisible hand has placed us in these rankings. It's clear that experts see potential in Moscow.”

Work towards the formation of an International Finance Centre in Moscow is currently limited by institutional concerns: the establishment of a comprehensible (to international financiers) legal order and the necessary infrastructure for dealing with large financial streams, as well as improving the business and living environments. But even that isn't enough, experts warn. In order to avoid falling victim to an influx of high-risk capital, it is necessary to offer investors interesting long-term projects, preferably not connected to the commodity sector of the economy.

The ambitious idea to create an International Finance Centre (IFC) in Moscow was first proposed in 2008 as part of the development stage of the first draft of the “Socio-Economic Development Strategy 2020”. The main objective is to promote the development of the Russian financial market to a level capable of meeting the needs of the domestic economy through reliable and inexpensive investment resources. It is assumed that the process of forming an IFC in Russia will help to create a stable and modern financial system, improve the business environment and increase international confidence in our country and its companies.

Moscow currently stands at 61^st place (out of 75) on the popular British IFC ranking, Z/Yen Group, having climbed seven places during 2011. “We are still in the early stages of developing an IFC. It's good that some invisible hand has placed us in these rankings. It's clear that experts see potential in Moscow”, says Alexander Voloshin, the Head of the IFC Development Working Group and former Head of the Russian Presidential Administration.

Dmitriy Medvedev, President of Russia, and Nicolas Sarkozy, President of France, at the St Petersburg Economic Forum in June 2010

The presentation of the IFC project to the international business community took place at the St Petersburg Economic Forum in June 2012. There, Russian President Dmitry Medvedev held several meetings with representatives of the world's leading financial institutions, inviting them to actively participate in the formation of an IFC in Moscow. The President attempted to pique the interest of international financiers with the promise of a safe financial harbour with comfortable and familiar working conditions and regulations. Against the backdrop of growing pressure on fiscal business from state regulators (as a part of the implementation of anti-crisis programmes), Moscow's proposals were met with great interest and taken very seriously. French President Nicolas Sarkozy, appearing at the forum as a Guest of Honour and inspired by Russian initiatives, discarded his prepared statement and instead gave a sharp rebuff to the attempts of individual countries to create a hothouse environment for the financial sector.

The Road to an IFC

Moscow City Business centre at sunset

Since then, the work towards the establishment of an IFC has included the merging of the MICEX and RTS stock exchanges. Joint trading began on December 19, 2011. A law was passed concerning the Central Depository. As of 2012 the International Financial Reporting Standards (IFRS) have not only been recognised in Russia, but have even become mandatory in a number of sectors. Precedential court proceedings are de facto being implemented within the Court of Arbitration.

The main efforts of the IFC Development Working Group, headed by former Head of the Presidential Administration Alexander Voloshin, are aimed at improving the investment climate in the country. The first major step in this direction was the Russian business law reform capable of changing administrative and judicial business practices. The founders of the IFC decided to concentrate on creating conditions wherein primarily domestic business will be interested in investing in the country's economy. If Russian capital stops flowing out of the country and begins to be poured into our own financial institutions, then the positive changes will not go unnoticed by foreign players.

A new edition of the Civil Code (CC), presented in early February 2012 by the Presidential Council for Codification and Improvement of the Civil Law, can be considered the first concrete result. This document came into being as a result of compromise with the IFC Development Working Group's lawyers, who, together with the Ministry of Economic Development and the Chief Legal Office of the President of the Russian Federation, suggested the integration into Russian civil legislation of the most important provisions of international business practice. Although they were not wholly successful in this endeavour, experts say that the legal barriers are not as frightening as they were.

An IFC Cannot Be Artificially Created

General Director of Russian Survey Dmitry Vinokurov

“Russian anti-corruption laws are constantly being tightened. Now they're talking about the necessity to monitor not only the incomes, but the expenses of officials. But the severity of the law is offset by the reluctance to impose it.”

The main problem with our economy is the lack of interesting projects into which funds could be invested at a volume comparable to other IFCs, asserts the General Director of Russian Survey Dmitry Vinokurov. This is why even a lot of Russian businessmen are currently carrying out investment projects outside of Russia. According to the Central Bank of Russia, last year alone saw over USD 84 billion leave the country. The expert warns that there is no basis to suggest that creating an offshore haven would result in money flowing in our direction.

All of Russia's problems do not hinder the flow of investments into such highly-profitable, mainly raw material-based and consumption-related industries as, for example, the automotive and food industries, recalls Arsen Aivazov, General Director of investment company “FINAM”. He draws attention to numbers from the Russian State Statistics Office, which show that until 2010 the Russian economy drew USD 2,150 per capita in foreign investment, one of the highest rates amongst developing nations. “Russia needs a strong state investment policy aimed at expanding the range of interests of foreign investors in the real sector of the Russian Federation. The growth of the state's share in projects helps to reduce the determination of businesses to gain as much money as possible, as quickly as possible”, says the expert.

“The IFC's task is not only to facilitate access to foreign capital on the Russian market, but also to redistribute it across the most important economic sectors for the country's development. This is what developed countries are doing right now, those interested in 're-industrialisation'. Only the most speculative capital is ejected from those countries onto developing markets, and this can result in the appearance of investment 'bubbles'”, warns Mr Avaizov.

In fact, foreign investors are afraid, not of Moscow's traffic jams, not of the imperfections in the Russian law, but of the “great and terrible” corruption, concludes Dmitry Vinokurov, speaking from experience. “This issue has been so powerfully broadcast that this is the answer you'll get from any foreign businessman now, even those who have never worked in Russia. And, unfortunately, he won't work in our market because he is absolutely certain that it's practically impossible for the aforementioned reason”, says the expert. Russian anti-corruption laws are constantly being tightened. Now they're talking about the necessity to monitor not only the incomes, but the expenses of officials. But the severity of the law is offset by the reluctance to impose it, says Vinokurov. “And this concerns not only the given problem, but all aspects of doing business in Russia, making it unpredictable”.

An IFC cannot exist in a hostile environment, but even in a friendly environment it needs to have something to do

Part of the failure to restore legal order in the country is connected with disinterest in the process on the part of Russian business. “The adoption of and strict adherence to rules that are understandable to foreign investors will significantly change the structure of business, negatively affecting its profitability”, affirms Mr Vinokurov.

An IFC cannot exist in a hostile environment, but even in a friendly environment it needs to have something to do. For this reason experts are convinced that it is impossible to artificially create an IFC. However, one can work on changing the conditions to create an environment conducive to its emergence.

Andrei Susarov,
Tax columnist for the Moscow news
Exclusively for Russian Survey

“It should be comfortable and enjoyable to come to Moscow”

Alexander Voloshin, Head of the IFC Development Working Group

From the presentation by Alexander Voloshin, Head of the IFC Development Working Group, at the Moscow Urban Forum, December 9, 2011.

In order to develop an IFC in Moscow we must fulfil the following three tasks. It is entirely realistic that within the next 3-5 years we can bring the quality of financial regulation and the level of development of the financial infrastructure up to world standards. Improving the urban infrastructure will be much more difficult. The city's problems have been neglected for an extremely long time, in many cases for centuries, and in others, decades. It will take 10-12 years to fix them.

Finally, there's the overall task of improving the investment climate, most of which can only be done at the federal level. This is partly a psychological and sociological problem. This country has lived for over 70 years in the complete absence of private property, and recently at that. By and large, this task will require a generational shift.

By some parameters we are already not looking too bad. The MICEX-RTS joint stock market is one of the ten largest in the world. In terms of trading derivative financial transactions we are also among the top ten centres in the world. This may be due to the fact that we are good in terms of mathematics and information support from the perspective of derivative trading. Moscow also remains one of Eurasia's largest transport hubs.

There are other parameters by which we will never look good. It is unlikely that we will ever improve the climate. Our winters will always be quite cold. Our only hope is global warming, which is a slow process. We do not want to wait so long.

How long will it take for Moscow to become a leading financial centre

This is the outcome of voting by participants in the Moscow Urban Forum in December 2011

Moscow has to compete with other cities for an influx of professionals. This is a global trend; competition is becoming keener, not for mineral, but intellectual resources. This means that, despite our difficult climate, we must present people with something attractive to motivate them to come to Moscow and work here.

In fact, nothing particularly special is needed for the city to become an IFC. First and foremost, the city should be suitable for a high quality of life. The financial industry should, without question, be one of the dominants of the city's development strategy. But apart from that, the city needs diverse business, science, medicine, a large number of well-educated people, a well-developed student environment, and a rich and active cultural agenda. Visiting the city should be comfortable and enjoyable.

What business requires should be summed up and used as a basis for legislative initiatives

Igor Protopopov, Deputy of the Moscow City Duma, Chairman of the Duma Commission on Economic Policy, in an exclusive interview with RS

Igor Protopopov, Deputy of the Moscow City Duma, Chairman of the Duma Commission on Economic Policy, in an exclusive interview with RS.

What do you think hinders foreign investors from being active in the Russian market?

My guess is that this is affected by a whole host of factors, and they extend beyond Russian realities and Russian legislation. We have undoubtedly yet to do a lot in this area, improving both legislative regulation of investment and taxation and law enforcement practices, working to secure better effectiveness of the judicial system, enhancing the transparency of governmental agencies’ supervision procedures, reducing institutional expenses incurred by businesses, to mention but a few.

At the same time, finances circulate globally in present-day conditions. Therefore, whether any investment is attractive depends on worldwide trends.

Investees that are found appealing by investors today may turn out to be less attractive tomorrow. Furthermore, capital can flow from country to country under the influence of global factors. For example, a good few subsidiaries of foreign banks operating in Russia had to close investments projects down to help their Europe-based parent banks due to the euro crisis that broke out last fall. And this example is just one of many.

So, I wouldn’t single out any specific reasons: you should assess the appeal of some jurisdiction or other for investors as a whole. This is impacted by a combination of national regulators, national legislation, and the global market situation.

How interested is Russian business in changing the existing situation and the rules of the game?

I believe that Russian business is not homogeneous and does not have common interests, including formulating its requirements regarding government policy on taxation and investment. In actual fact, big business shares the same platform with small and medium-sized businesses and foreign market entrants. Moreover, big business is not limited to companies belonging to extractive industries and their infrastructural chains or business resulting from public monopolies (Russian Railways, energy companies). It also encompasses the metallurgical, chemical, food processing, and other industries. Each of them has its own requirements with respect to infrastructure, legislation, and so forth.

The regional factor should be taken into consideration too. Russia is a vast country, and businesses’ interests differ, depending on where they are based. For instance, the capital’s businesspeople are more concerned about urban planning policy and improved transportation infrastructure for their logistics.

But overall, it is possible and necessary to have businesses’ requirements summarized and use this summarization as the basis for legislative initiatives.

Will it add to Moscow’s appeal for investors as a financial center if Moscow is turned into a sort of offshore jurisdiction that avails itself fully of the attraction of these jurisdictions?

Today, the idea of an international financial center is in the phase of studying and discussing where it is difficult to definitely say how this institution would influence Russia’s attraction to investors. It’s beyond doubt that to turn Moscow into an international financial center will require adjusting Russian legislation, including tax laws, and bringing it into line with international standards applicable to investment projects. We already have an example of legal regulation for such projects, Skolkovo. To some extent, this principle applies to the Sochi Olympics project.

What is evident at the moment is that it will take a lot of effort to set up an international financial center and have it integrated into the global investment process. And the eventual result depends directly on how the integration will be systematized, how it will be formalized legislatively, and how we will succeed in implementing the initiatives for this project with the required quality.