International Financial Centres: Benchmarking Russia by Lúcio Vinhas de Souza World Bank Development Prospects Group

Outline 1.Hard Figures: how important are the financial markets in Russia? 2.Indexes of liberalisation: how does Russia perform? 3.Trends: is it getting better? 4.Not all is lost: regional financial centre… 5...and the importance of policy commitment. 6.Recap/Conclusions.

Hard Figures Russia market capitalisation in 2009 was close to USD 860 billion. This is a large figure, but just not quite large enough to classify Russia as a true global financial centre...

Market Capitalisation in USD

Hard Figures Of course, Russia is (still..) one of the ten largest economies on the planet, so the absolute size of its financial markets reflects that too. This becomes clearer by looking at the value of market capitalisation a % of GDP.

Market capitalisation a % of GDP.

Liberalisation Indexes Using relevant international comparator indexes, Russia shows a relatively low level of financial liberalisation/infrastructure/sophistication… …usually uniformly disappointing across all components of indexes used to measure it. Why such a relatively disappointing performance? Well, the usual suspects…

GCR 8th pillar: Financial market sophistication

Elements of the GCR 8th pillar: Russia vs. benchmarks

Trends in liberalisation Indexes Is the situation getting better? Well, in the relevant aggregate GCR Index pillar Russia fell from 109 th. place in to 119 th. in … …while in same period, according to the WB’s “Doing Business” “Protecting Investors” Indicator, it fell from 83 th. place to 93 th. place….

Not all is lost: positive elements As all in life, and especially in economics, it depends. Among other things, it depends on what one define as an “international financial centre”. If by this one also understands the regional provision of financial services, say, in the CIS area, Russia already has this role. The scale and sophistication of its (domestic) financial industry outperforms the ones in other CIS countries: the same financial liberalisation/sophistication indexes that shows Russia below other regions, place it relatively comfortably among the CIS countries. Also, language, historical links, cultural similarities provide it with significant comparative advantages in providing financial services to this region.

Not all is lost: positive elements Additionally, the past is not necessarily a good guide for the future. Real, long-term policy commitment and a consistent and achievable set of policy reform priorities, if adequately implemented, may improve such situations rather fast. As examples of this, during the same period in which Russia worsened its relative GCR financial pillar ranking by 10 places, countries like Brazil and China improved theirs by, respectively, 22 and 37 places. Policies do matter!

A current study financed by the EU, and coordinated by me together with the Russian Ministry of Finance (IET Russian partner), includes policy recommendations for the Financial System reform: 1.Implementation of the Moscow International Financial Centre Strategy; 2.Creation of a monetary environment conducive to transition to inflation targeting 3.Creation of an environment conducive to the mobilisation of capital to finance investment projects and the development of a defined-contribution pension system. 4.Alignment of regulatory basis with G20 decisions. Those are interrelated reforms!

Implementation of the Moscow International Financial Centre Strategy The implementation of the Moscow-International Financial Centre Strategy involves a series of steps, including: 1.Improvement of the stock market infrastructure; 2.Improvement of primary market operation rules; 3.Improvement of regulation and supervision systems.

Creation of a monetary environment conducive to transition to inflation targeting The implementation of this also involves a series of steps, including: 1.Development of currency risk hedging instruments; 2.Development of oil risk hedging instruments; 3.Unification of taxation regimes in FX forward contracts.

Mobilisation of capital finance and the development of a defined-contribution pension system The implementation of this implies, inter alia: 1.Deeper OFZ markets (enabling the creation of a yield curve); 2.Privatisation/infrastructure bonds; 3.Primary dealers; 4.Better use of NGPFs for investment purposes.

Alignment of regulatory basis with G20 decisions This involves, among other steps: 1.Further reform/implementation of Basel Standards (“Basel III”) 2.Uniform international requirements towards international ratings; 3.International “Board of Regulators”.

Recap/Conclusions 1.Russia, in terms of financial development, is far behind either global or emerging regional competitors, in spite of its considerably large financial industry. 2.This relative underperformance is observed across several areas. 3.However, Russia does have a regional CIS role. 4.Also, there are existing examples of fast financial development from a (relatively) low basis. 5.But for this to happen, real, consistent and effective commitment to reform is crucial.