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Статья «Russia: Becoming a Global Financial Centre» о перспективах формирования в России международного финансового центра и проблемах, препятствующих формированию финансового центра. Статья опубликована в журнале «World Finance Review».

Russia: Becoming a Global Financial Centre

By Youri Danilov, Director of Centre for Capital Markets Development, Head of Finance in the International University (Moscow), Head of the Financial Markets Research Laboratory, Higher School of Economics, the State University

The contemporary tendencies of the world’s capital markets globalisation can be seen in the formation of international financial centres. In our opinion there are three main features of an international financial centre: concentration of capital with a considerable share of foreign capital; concentration of financial intermediaries, including those in the sphere of infrastructure; concentration of financial instruments. The most important among them is the high level of demand for investment capital. Concentration of capital within a financial centre leads to an outflow of capital from other countries that fall into the financial centre’s gravity, which gives rise to additional opportunities of the world’s wealth redistribution for the benefit of this financial centre.

In the next 15-20 years there will be no isolated national markets remaining in the world and it will become not possible to classify markets as developed and emerging. Only large centres that will be able to accumulate global liquidity will survive, while national emerging markets will run shallow and disappear.

Thus, the fair processes of the world’s capital market globalisation put the question of survival to even such dynamically growing national markets as the Russian market. What are the prerequisites of the Russian market to grow into an international financial centre?

The following factors can be seen as preconditions “for” Russia’s becoming a financial centre:
• Firstly, it is the size and the dynamics of development of the Russian financial market and its role in the economy;
• Secondly, it is the fact that Russia is already turning into a centre that accumulates liquidity on the global scale.

The active and progressive development of the Russian financial market which we witnesses in the recent years resulted in the fact that it has already become one of the largest emerging markets in the world. The majority of sectors of the Russian financial markets demonstrate growth that is more rapid than the economic growth as a whole. In the last 8 years (from 2000 to 2007) the ratio of market capitalisation to the GDP increased from 17% to 100%. In the same period the ratio of issued corporate bonds to the GDP grew from 0.5% to 3.7%; the ratio of investment funds’ net asset value to the GDP – from 0.1% to 2.3%; the ratio of banks’ assets to the GDP – from 33% to 61%. The only segment lagging behind the overall economic dynamics is the insurance market.

Russian financial market has already started to perform its function in macroeconomic development by transferring savings into investments. An increasing number of enterprises in real economy treat the financial market as the main source of raising funds to finance fixed capital and acquisitions. In the year of 2007 the volume of investments raised in the domestic securities market reached 32.7 billion US dollars, which made 13% of the total fixed capital investments by Russian enterprises. The peculiarity of the year 2007 was the fact that a large portion of investments were raised on the equity market: by means of IPO issuers raised 14.7 billion US dollars and another 18 billion US dollars were raised in the bonds market. From the foreign equity and bond markets Russian enterprises raised 47.3 billion US dollars of investments. In the last several years the volume of bank loans to the real economy was showing growth as well: the value of long-term loans to enterprises increased 28 times reaching 4.4 trillion roubles (equivalent to 180 billion US dollars).

Competitiveness of the national capital market on the global scale has also improved. Russia’s ratio in the world’s total capitalisation increased from 0.66% in 1997 to 2.43% in 2007, and the country’s share in the world’s total stock exchange turnover increased from 0.09% in 1997 to 1.51% in 2007. Moreover, the Russian market is the only one amongst emerging markets that has characteristics of a developed market in terms of its turnover to capitalization ratio. From 1997 to 2007 this ratio for Russia increased from 0.14 to 0.92. For the same period China’s turnover to capitalisation ratio declined from 1.9 to 1.67; India’s – from 0.69 to 0.61; Brazil’s – from 0.75 to 0.44. The weighted average ratio for 11 emerging markets declined from 1.41 to 1.06, whereas weighted average for 8 developed markets increased from 0.89 to 2.05. This fact evidences that the Russian market is concentrating financial operations, just like other developed markets.

Factors that may undermine the ability of Russia to establish itself as an international financial centre are:
• A gap that still exists between Russia and developed countries in terms of the volume of financial markets and their role in the economy;
• A non-competitive tax regime;
• Non-efficiency of the State and general weakness of the law institutes;
• Lack of other (non-financial) prerequisites necessary for financial centre development, such as transport infrastructure, availability of commercial and residential real estate, overall quality of life;
• Distorted information about Russia that leads to the county’s unfavourable image in the eyes of foreign investors.

If compared to the countries with developed financial markets, the volume of almost all segments of Russia’s financial market is low with the only exception being the equity market. In Russia, securitisation in its broad sense has touched a very limited number of economic agents unlike in the developed countries.

Very illustrative of this point is the rating of Moscow as a financial centre that was evaluated within the project “The Global Financial Centres’ Index” conducted by the City of London. As of March, 2008, when the results of the project were released, Moscow held 56-th place out of 59. The fair part of the expert assessments is true, showing the obstacles that prevent Moscow from becoming a large financial centre. In fact Russia has neither independent court procedures, nor adequate transport infrastructure, nor sufficient office space.
The entry costs of establishing a business are very high in Moscow: rent expenses (both on office and residential space), labour costs, etc. Tax burden is excessive: according to the March Index of global financial centres the ratio of all corporate taxes and entrepreneur profits constituted 52% in Russia, while in the USA it was 46%, in the UK – 36%; in Switzerland – 26%, in Hong-Kong – 24%, in United Arab Emirates – 14%.

At the same time the low rating of Moscow as a financial centre also results from information deficiency. For instance, due to lack of information on Russian stock exchanges, their quite high ratios of trade volumes and capitalisation have not been taken into account.

The nature of existing obstacles and challenges lead us to the conclusion that whether or not an Russia is able to establish itself as a financial centre of a global scale will depend mainly upon the effectiveness of efforts by the State and participants of financial market directed at achieving this ambitious goal.

The Strategy for Financial Market Development that was elaborated by The Federal Financial Markets Service (FFMS) of Russia is based on the Report by the FFMS “On Measures for Improving the Securities Market Regulation and Development for the period 2008-2012 and for the further perspective”. This report highlights 12 tasks of high priority, by solving which Russia will contribute considerably to establishing Moscow as an international financial centre. These tasks, however, are limited to measures on the financial market development. The FFMS is not empowered to solve such problems as the court system’s independency, corruption, criminality, high real estate prices, low quality of industrial infrastructure, high costs of starting a business, etc.

Unfortunately, the Russian State does not do enough either to solve the abovementioned problems. Moreover, while discussing problems related purely to the financial sector, administration takes a tunnel vision. The Ministry for Finance is vows against the decrease in the tax burden on investors to the level that is common for the majority of countries - competitors of Russia in the global capital market. The Ministry for Economical Development and Trade, which should find solutions to strengthening the investors protection system, industrial infrastructure, and the real estate market – preferred, within the program on financial centre creation, to prepare a plan of administratively regulated offshore. Among the world’s vast experience on the establishment of international financial centres, the model was chosen that was the only one that led to a failure: Kasakhstan’s Program of the Regional Financial Centre of Almaty. What features of Kasakhstan’s program have attracted the attention of the Russian administrators? In the first place – the possibility to open or to close voluntarily the access to this internal offshore; and secondly,– the opportunity to move from the state chairs to the chairs of managers of organisations gathered in this offshore oasis and to manage the excessive funds allocated by the State for the creation of such organisations.

This example inevitably shows that the main problem of Russia in achieving the goal of becoming an international financial centre is the non-efficiency of the State.

Quite at the contrary, the financial market participants are vitally interested in the progress of Russia on this way. The so-called Ideal Stock Market Model for the Russian market development for the period until 2020 was prepared by the National Association of Securities Market Participants. The model takes into account the world’s experience in financial centres creation and in its practical part correlates with the FFMS’s Report.

To conclude, whether or not Russia will be transformed into an international financial centre will depend upon the outcome of the battle between the society’s interests, with which the interests of financial market participants correlate, and the interests of administrations and civil servants.

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