Moscow lays foundations for financial hub
In terms of financial services, Moscow is a regional, not a global player. But authorities hope this will change with a new focus on the sector that will power Russian growth for years to come. Solomon Teague reports.
Moscow has lofty aspirations to go with its status as the capital of Russia, at the heart of the CIS and its 279m people. Kingsmill Bond at Sberbank Investment Research says Moscow, ultimately, sees itself competing with London.
Indeed, Russia is well positioned to capitalise on European woes. If it can draw in business from Europe’s increasingly decimated banking system, that could accelerate Moscow’s rise to prominence in financial services.
Moscow also has one of the greatest concentrations of wealth in the world, with estimates suggesting that more billionaires call it home than any other city.
Therefore there are the beginnings of a solid foundation upon which to build a global financial centre. But more work is needed. Moscow lacks an institutional investor community of pension funds or mutual funds that can form the bedrock of demand for deals across the various asset classes.
The city’s ambitions will take time to fulfil and its development as a financial centre is a long term process, with the government having to amend legislation, as well as improve infrastructure.
“Capital markets have been the focus of development so far as they sit at the core of financial services,” says Chris Cummings, chief executive of TheCityUK in London, which is working with the Moscow International Financial Centre Taskforce, led by Alexander Voloshin, to change the perception of Russia as a difficult place to do business. “But the other sectors that support and feed these markets also need to be addressed and this is starting to happen. Focus is now being brought to the way the collective industries, such as pensions, life insurance and mutual funds, develop.”
It is sometimes said Russia has an image problem but this is incorrect, says Bond. “Russia’s problem is not a PR issue but rather a question of setting up better systems and structures, developing a domestic capital base, and playing to the undeniable strengths of the largest country and arguably the largest city in Europe,” he says.
Arndt Roechling, CFO at Raiffeisenbank in Russia, says there are no particular differences in banking products and services in Russia which require specific skills. “We are seeing growth in the Russian retail banking market across all standard types of products, such as credit cards, consumer loans but also deposits,” he says. “Products do not differentiate so much compared to other CEE or Western markets.”
Bond adds that there are two particular areas of finance in which Russia has considerable advantages that it could exploit to become a leading global player: commodities trading and the trading of rouble assets. While Russia is a commodities-driven economy, its focus is squarely on exports, and there is no Russian commodities exchange. This is something it should look to address and as a producer at the heart of global commodities flows, it makes sense to trade in Moscow, the hub of a huge hinterland spanning most of Eurasia, says Bond.
With many predicting that commodities have reached their peak and are set for a sustained period of falling prices, Russia could be pushed into loosening its grip on the strategically important resources sector. A round of privitisations would generate business in financial services and help its metamorphosis into a global financial centre.
In finance terms the banking industry is dominated by the bond market, with the equity culture still underdeveloped. Rouble denominated bonds are a big market and there is considerable scope for growth of rouble trading. “As a commodity currency the rouble should be a viable alternative to other liquid commodity currencies like the Norwegian krona or the Australian dollar,” says Bond.
Legal and regulatory changes will be crucial for Russia, given that corruption is still high on any list of concerns for many business leaders. There are sketchy plans in place to create a super-regulator to bring all financial market regulation in Russia under the umbrella of the central bank. It is not yet clear exactly how this will work, but the change is expected this summer, in conjunction with the arrival of a new central bank governor.
This will lend more coherence to the framework in which the central bank oversees banking, while the Federal Financial Markets Service is responsible for securities.
More importantly, it will give a more powerful voice to the financial industry within the government, making policy more reactive to the needs of the industry. Legislation and regulation of finance has been poorly co-ordinated and even sometimes contradictory, but a single entity will be well placed to give clear strategic direction, and ensure changes that are needed can be dealt with swiftly.
The appointment of Alexander Voloshin to head the Moscow taskforce is testament to the importance the government attaches to this project. Voloshin is a political heavyweight with the authority to bring about that coherence and urgency.
A traditional criticism of Russia has been the lack of dynamism and the length of time required to get things done. “Execution can be very slow in Russia, you need a lot of patience to do business here,” says Roechling. “At the same time, when something is urgent people have the ability to be flexible and innovative, specific problems can be resolved quickly.”
Cummings adds: “Russia is increasing transparency and accessibility across the sector and there have been a number of significant developments recently.” The authorisation of the NSD as the central securities depository, foreign nominee account access, the introduction of T+2 settlement and ICMA’s market standard Global Master Repurchase Agreements being validated as enforceable for cross-border use have all reduced risk in the securities markets, he says.
The derivatives changes will be particularly welcome. The business has grown from nothing in 2006 when the law changed to legalise what was until then considered a form of gambling.
But more work is needed to reform the civil code to encourage lending, says Joerg Bongartz, chairman of the board of Deutsche Bank in Russia. “The legal system is much better than it was and is relatively liberal, certainly when compared to China or India, but there are still deficiencies,” he says. Essentially it is about trust in the court system.
This too can be tackled by a centralised regulator headed by a senior politician who can advise what changes are needed to improve the legislative framework. “Courts do not always understand the intricacies of the financial markets they are ruling on, and we see wrong decisions from time to time,” he says.
Yet here again the problems pale when set in their historical context. “Russian commercial law has become far more transparent in recent years, and Moscow lawyers talk about the ‘expanding middle’ of good quality commercial law,” says Bond. Almost all listed Russian companies now have internationally audited accounts, suggesting Russia is falling in line with international norms.
For employers in Moscow hoping to lure the best talent to the city, the ace up the sleeve is a 13% rate of income tax. Combined with salaries that are high compared to many competitor financial centres, moving to Moscow can be a very lucrative. The law of highly qualified specialists, passed in 2011, has taken steps to make it easier to fill the gaps in its own labour market with talented foreigners.
However, more work needs to be done to make it easier for foreign nationals to work in Russia. Depository and custody specialists require licences before they can legally work in Russia. “For development of the Moscow International Financial Centre it would be good if they allow foreign professionals to take exams in English,” says Bongartz.
Even with the government clearing obstacles for foreign recruits, Moscow remains a tough sell. Compared to many other financial centres it does not have the same allure for people with young families. Its extreme winters and controversial politics will put many off.
However, other changes and initiatives are planned to help boost the talent pool. A training programme is being created to improve skills in corporate finance.
Meanwhile, Moscow’s deputy mayor, Andrei Sharonov, has made a name for himself as a tireless advocate for the city, encouraging investment, championing infrastructure projects and fighting traffic, perhaps the biggest scourge on life in the capital. The recent introduction of paid parking in the city centre should improve the lives of all Muscovites, while investment in trains between the centre and the airports will be a big help in developing the city as a business centre.
How much of an issue the labour market is now is debatable. “The labour market has improved substantially but there is still a shortage of financial markets specialists, which makes hiring a challenge because it is expensive and difficult to manage,” says Bongartz.
Deutsche is especially well placed to comment on this challenge, having lost a third of its Russian workforce to VTB Capital in 2008. While this was an extraordinary event banks will rarely be forced to cope with, the underlying dynamic — the expansion of Russian banks as they look to become more international in scope and outlook — remains an issue, as might be expected in a city with close to 100% employment. It remains common for whole teams at one bank to be poached by a rival, a situation that will not change any time soon, says Bongartz.
It is bad enough that some banks are moving their less sophisticated business functions out of the capital to cheaper locations where attrition rates are lower. Raiffeisenbank for example has an office in Yaroslavl where it has a call centre and conducts some other operations, including credit underwriting. “We could bring at a later stage also other functions such as credit analytical works or accounting functions to our shared service centre,” says Roechling.
Even if there is still fiercer than usual competition between banks in Russia for staff, meaning investment in training can be wasted if people jump ship for a competitor, movement between institutions can bring benefits, reinforcing business links. And while it can be difficult to deal with labour market rules that only require a two week notice period, it cuts both ways, allowing banks to lay off staff quickly if necessary.
Pressure on staff is accentuated by the extreme concentration of Russian financial activity in Moscow, where up to 80% of bank business takes place, according to the central bank. However, the importance of the regions is growing, and as lower-end bank functions are moved from Moscow it should relieve pressure on the capital — while increasing interest in finance careers among students in the regions.