Russian Economic Reform

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Moscow as an International Financial Center (IFC)

Published on December 25 2014
Posted by: jeff

This article initially appeared in the December 2014 issue of “Baltic Rim Economies” published by Pan-European Institute.

In 2010 the Russian government launched the Moscow International Financial Centre (MIFC) project and sought international assistance, including from TheCityUK (the self-described “representative voice of Financial Services in the UK”). A Memorandum of Understanding between the MIFC Taskforce, TheCityUK and Vnesheconombank was signed in Moscow in 2011 in the presence of President Dmitri Medvedev and Prime Minister David Cameron.

Subsequently a number of reports were produced, mainly by TheCityUK and the IBRD.

Right from the beginning there were fundamental delusions. An early 2011 survey of “260 participants from leading Russian and foreign entities active in the Russian financial market” reported such views as Moscow as a “regional financial centre for CIS”, and “Moscow is where East meets West. It is a blend of different cultures and nationalities. It will be easy for everyone to come to do business”.

The idea that Moscow could be a “regional financial centre for CIS” was doubtful even before the recent events involving the Ukraine. As for “East meets West”, I know from my own experience working in Russia that European orientated Muscovites generally have little knowledge of the “East” (apart from Central Asia).

While Moscow may have time-zone advantages, they are only partial because of competition from places like Dubai.

The IBRD and TheCityUK reports highlighted a considerable number of problems with Moscow’s aspirations.

Russia’s large state-owned banks have the advantage both of existing economies of scale and preferential treatment from the state (although it is never easy for foreign banks to enter a market and compete with established, even if initially less efficient, local retail banks).

The IBRD identified corruption, poor law enforcement, and a bad reputation as “major obstacles”.

It also reported that “the current legal environment makes it difficult to create new types of securities because only those types specifically enumerated are permitted. Every innovation, therefore, requires enabling legislation. Nor is a single law sufficient: in each case, amendments must be made to the Civil Code, the Tax Code, the law on Joint Stock Companies, the law on Securities Markets, the law on Insolvency (Bankruptcy), the law on Foreign Currency Regulation, and the law on Banks and Banking Activity. The creation of a separate legal environment for the financial markets would make innovation much easier.”

One option mentioned by the IBRD for Moscow was to take the Dubai path of essentially importing a “common law” legal framework for its IFC. “The Dubai IFC is an independent jurisdiction under the UAE Constitution, and has its own independent civil and commercial laws, which are written in English and which default to English law. It also has its own courts, with judges taken from the common law world including England, Singapore and HK.”

But Moscow was never going to take this totally top-down approach (any more than Shanghai will) because it makes little sense if the IFC must also serve a large domestic market. Moscow’s own top-down ideas seemed to center on a new suburb to house the IFC, and not enough was done on the basic reforms included in a Dubai-type package.

In any case, Dubai is an exception. Today’s top IFCs have generally been created organically and over a considerable period of time. New York got there because of its huge domestic markets. London initially got there for the same reason, but was also lucky because the UK’s direct successor as an economic power-house (ie the US) had a common language and similar legal system; and then London followed this up with sure-footedness. Hong Kong and Singapore got there through a combination of being international trade hubs, luck (ie much the same luck that London had) and sure-footedness.

In reality, the idea of Moscow as an IFC was almost dead from the start, and the 2014 events in the Ukraine should have completely killed it.

However, this may not be totally the case.

In November, I surveyed via email a significant group of Russians who reported that they spend “about 50% or more” of their work-time thinking about financial issues. Over 40% thought that “Moscow will become an ‘international’ financial center (for example, like London, New York, Tokyo, Singapore, Dubai) by 2020”.

And, both China and continental Europe were strongly favoured over the US and the UK as places with which Russia should have close financial relations; with over 90% saying that Russia should have closer financial relations with China.

It seems clear that US-lead sanctions are adversely affecting the view of educated financial workers in Russia about the UK and the US. But they may also be leading to a revival of the idea of Moscow as an IFC, in order to in some way make Russia more financially independent.

But, rightly or wrongly, President Putin’s Russia now has such a bad image that there is, in my view, no possibility of Moscow becoming an IFC by 2020.