Amid Market Plunge, State Eyes a Brighter Future

MTA trader studying market prices on the 51st floor of Renaissance Capital's offices in Moskva-City earlier this month. Outside the window, cranes are working on VTB's new high-rise offices.
The middle of a stock market meltdown might seem like a strange time to be talking of building a world-class financial center, but President Dmitry Medvedev last week gathered the government's top economic and banking officials in the Kremlin to discuss just that.

Medvedev said such a center would both allow Russia to better compete in the global economy and increase Russia's economic integration with the CIS and other countries.

The idea has been growing for years, and plans to bring together the country's financial markets and companies together in the Moskva-City area of the capital are nearer to fruition with the building of a cluster of huge skyscrapers in the area, close to the Moscow River.

"Despite the fact that this isn't the simplest period for the international financial markets, this task isn't being taken off the agenda and perhaps just the opposite. For that very reason, it's becoming all the more important," Medvedev said.

Medvedev's comments, however incongruously timed, were perfectly in tune with investors' sentiment -- until recently.

"In some ways, it is more than a little surprising to be talking about Russia's potential emergence as one of the world's global financial hubs less than 10 years after the economic crisis that devastated Russia's financial sector," Renaissance Capital chairman Christopher Baxter said in a speech at last year's Russian Economic Forum in London. "But this is in Moscow's reach -- such is the speed of change in Russia's economy and the lightening-quick development of the country's financial markets."

Referring to the stock market's stellar growth this century, Baxter also noted, perhaps presciently: "When has Russia failed to surprise us?"

That surprise came this summer in a different form, however, when the commodities boom finally came unstuck and Russian markets fell in line with the fall in oil prices from their record high of $147 per barrel. The dollar-denominated RTS Index has lost more than half its value -- some $750 million -- since the end of May, leading many to point to the economy's still-heavy dependence on oil and other commodities and a slowness in diversifying away from natural resources.

Medvedev, in his Kremlin meeting last week, acknowledged the risks of a more diversified stock market, where falls can easily spread to infect the economic system as a whole.

"One should remember that a transparent capital market contains a lot of risks," he said. "The likelihood of an unbalanced inflow or outflow of funds could cause problems, as regards to banking liquidity, increasing inflationary risks and the economy overheating."

But the president also insisted that the stock market slump "obviously does not reflect the objective state of the economy. The Russian stock market remains very promising for investments, and serious investors understand this."

Medvedev did acknowledge that building the country's financial muscle was not just a question of bricks, mortar and financial software but was also dependent on building a more investor-friendly legislative framework.

He pledged to review financial legislation and the access foreign issuers have to the Russian market and to combat insider leaks and price manipulations. That meant that the government had to work on improving the investment climate and simplifying regulations in everything from visa procedures to property registration, he said.

Natalya Orlova, chief economist at Alfa Bank, said after the Kremlin meeting last week that it was "a bit strange to hear about the return of this financial center [idea]," Orlova said, referring to the fact that serious discussions on the topic first started a couple of years ago.

"For political reasons, I can understand why they're retracing this story, but realistically I think it's much more difficult now. To establish a financial center, you need a very stable financial market," Orlova said.

"Realistically speaking, Russia needs to work on the fundamental changes in the economy to implement this financial center," she said, referring to problems regarding infrastructure and regulations.

Mattias Westman, chief executive of Prosperity Capital Management, a leading Russia-focused investment fund, said there were a number of things the government could do to improve transparency, "and this type of thing in the long run will improve these problems."

"There are long-term solutions not short-term ones," Westman said.

"They could, of course, loosen the rules a little bit on what financial funds can do," he said, referring to the country's notoriously stringent regulations. "That would link in well with Russia becoming a financial center."

Westman also identified bolstering the judiciary system and simplifying visa procedures as key ways to boost the financial sector and said it could happen if the political will was there.

"In principle, people are for deregulation, but they want their regulation to remain. Someone needs to override bureaucrats and make sure they actually do it," Westman said. "But of course, it can be done."

"[Russia is] not going to be New York or London, but I think there's a good chance Russia will be a financial center like Paris," Westman said.

Baxter, of Renaissance Capital, said in e-mailed responses this week that he still believed that Moscow could "take its rightful place alongside New York, London, Tokyo and Shanghai as one of the top five or six financial markets in the world. The turbulence we've seen on the Russian market over the past several weeks does not alter the fundamental view."

He added that, while the West's financial problems were "fundamental, ... the problems in Moscow are reputational. It's easier to fix the latter than the former."