Russia debate: Russia pushes on with financial markets developments

Russia debate: Learn more about the panelists

	Executive summary • Moscow’s ambition to become an important international financial centre rests on the creation of a deep pool of liquidity • The financial centre’s development requires a substantial legislative reform of the financial system that is already well under way • Competition from other financial centres will not undercut Moscow’s offering • A broadening and deepening of Russian capital markets is being achieved with new laws, culminating in a curb on insider trading and market manipulation • A shortage of long-term bond issuance is being overcome • Infrastructure developments should underpin Moscow’s financial centre plans

SR, Euromoney One of Moscow’s key objectives is to be a significant international financial centre. But what elements of a financial centre do you think are important?

YR, City of Moscow On the most basic level we would like to establish a system that allows for the effective deployment and use of capital to the mutual benefit of issuers and lenders.

VM, FFMS Clearly a financial centre can be thought of as a concentration of international financial trading, or of banking institutions or of registered companies – such as Ireland and some offshore areas. We proceed from the assumption that, to be relevant, a financial centre must be a significant intermediary in capital flows and must therefore contain and promote an efficient banking system.

GN, Denholm Hall There is one other factor that has become more important in the post-crisis world, and that is tax. Obviously this is not new – Hong Kong started out as a trading centre and became a tax haven and Switzerland is a financial centre purely because of tax. But you find Dubai growing again because of the specific treatment of expatriates on the tax front and, as governments are looking to tax individuals more heavily in certain countries, that is becoming a more important factor than it used to be.

SR, Euromoney Mr Goryunov, would you agree?

RG, RTS Stock Exchange I believe that an offshore zone is not a main feature of a financial centre, rather just one element of the way centres can market themselves. I believe that what is most important is strong and liquid capital markets based on the participation of both domestic and international capital. Given sufficient liquidity, a market can attract foreign borrowers and investors and this is what defines a successful international financial centre. Moscow has great potential both in developing the domestic market and in attracting participation from the region and further beyond.

IO, Ministry of Economic Development I agree. I do not think special tax treatment is necessary. Clearly the primary objective is a market in which Russian companies can raise significant investments. We naturally need to foster a centre of liquidity, which should be attractive for international capital and for international investors. It will be attractive to buy liquid assets, to create a liquid market, to give investors an opportunity to create a diversified portfolio from the perspective of industries and regions. And we need both the interest of international investors in Russian and regional assets as well as the interest of international issuers in tapping new sources of capital.

SR, Euromoney Mr Davidyuk, from an investor’s point of view how do you find Moscow’s potential as a financial centre?

GD, Mint Capital The city has an ambitious agenda that I hope will be realized. Right now we need more liquidity and we need to make sure that these ambitions can be realized comfortably within the existing legal framework. In order to increase liquidity we need to attract more international capital, while understanding that this may contribute to volatility. And we need to make sure that there is a level playing field for domestic and international players.

SR, Euromoney Mr Roslyak, why do you want Moscow to become an international financial centre? What benefits does it confer to have that particular status?

YR, City of Moscow First, Moscow is already the financial centre of the Russian Federation, so it makes sense to build on those foundations. Second, Moscow needs investment and if we can develop liquid capital markets here we will reduce our needs for issuing overseas. Third, developing a sophisticated financial sector is a way to create jobs and revenues for the municipality. This is why we came up with the initiative to create such a financial centre and it became a national objective approved by our president.

SR, Euromoney What does it mean for the other regions of Russia? Will they lose out?

VM, FFMS I don’t think that there will be any conflict of interest. Moscow is already the capital of Russia and is already a financial centre. Also, most large developed countries have multiple financial centres. In the US, we talk about New York, Chicago, Los Angeles and San Francisco. And it will be the same in Russia.

RG, RTS Stock Exchange It’s the same in China, where along with Shanghai you have Beijing. Beijing now may claim that it is a global financial centre, although you won’t find a huge stock exchange in Beijing. Similarly we have both Moscow and St Petersburg. It seems to me that the creation of a financial centre in Moscow does not contradict the idea of growth in other regional cities. It may even contribute to the creation of other centres. Sooner or later we will be talking about the creation of a financial centre in the Asian part of this country. Just look at the plans for the summit in Vladivostok.

SR, Euromoney George, what is your view?

GN, Denholm Hall I look back 16 years to when I first came to Russia. I remember the efforts of the St Petersburg stock exchange, the St Petersburg Commodity Exchange, the St Petersburg Currency Exchange, RTS and Micex and I have to say Russia has fulfilled our best expectations. It has been a huge success. Moscow has set an example not just to Russia but also to the whole of eastern Europe on how to behave as issuers of securities and as a place to attract business. When we came here in 1994 and Moscow was beginning to think about issuing securities, St Petersburg had just issued securities, and everybody was saying: “This is never going to work, Moscow is a very complicated city”. In fact the exact opposite has happened. As I reminded Sergey before the meeting started, in 1998 Moscow didn’t default and that was a huge affair and it was a beacon of what the city stood for. That is something that allows Moscow, ahead of most other places in Russia and most corporates in Russia, to stand up and say “we have something to teach you about the way forward”.

As far as turning Moscow into the financial centre, the city has done more than one could have expected and is still doing more. The problems lie more on the federal level, with some of the issues that exist in the legal system and the banking system.

Perhaps there is again a future for the St Petersburg Stock Exchange, but inevitably, Moscow being such a rich city and such a well-run financial centre, it is going to be difficult for other places to compete.

SR, Euromoney Mr Roslyak, perhaps you could outline what the ambition is. Is the ambition ultimately to be a competitor to New York, to London, to Hong Kong or is it to develop an expertise, a hub in a particular area, perhaps natural resources or commodities? Do you have a role model and if so, which city should that be?

YR, City of Moscow We have a strategic plan for the development of Moscow and the expansion of financial activities is one of our strategic goals. Naturally we also want Moscow to be a competitive high-tech centre given the huge science potential that Moscow has. We also say that Moscow should be a pleasant city for its inhabitants. Moscow is also an element and representative of our national policy in the sense that it represents Russia’s ambitions for growth, development and innovation and also in the concrete sense that Moscow should become an instrument with the ability to raise capital to realize the economic potential of Russia. We must be able to provide funds on the most cost-effective terms and conditions for development to support the process that is evolving now in Russia.

On the other hand we need to create a secure environment for the providers of capital, with a reliable judicial system and all the relevant up-to-date legislation. These are our objectives now; it is premature to think about New York or London.

On all of these fronts we have an officially approved programme. There are some 160 draft laws in preparation. There is development of all types of infrastructure. And all of this is being done taking into account the continuing global financial crisis.

SR, Euromoney What are the immediate priorities?

IO, Ministry of Economic Development The plan which is already in place, and which has already been approved by the president and by the Russian government, contains many items that require significant changes in existing Russian law. This plan is a multi-year federal programme that includes improvement of the entire Russian legal environment, changes in corporate law, changes in the law needed for securities operations, clearing business, stock exchanges, accounting – everything related to securities – taxation, tax regulations. We have said we are not interested in creating an offshore tax haven. Nevertheless much has been done in our tax law to make sure that our markets do look attractive for foreign and domestic investors.

SR, Euromoney Mr Roslyak, do you not feel under pressure from the likes of Beijing, Shanghai, even São Paolo, especially given that Brazil and China in particular have fared better through the financial crisis than Russia has?

YR, City of Moscow Competition is a fact of life. But I do not think Russia is at a disadvantage versus these other centres.

GN, Denholm Hall I agree. China, for example, is a huge country with rapid economic growth and it will clearly have its own financial centres. That doesn’t mean that you should compare Moscow to Beijing and Shanghai and say “it is the same cake, but most of it has been taken by the Chinese”; I don’t think it is like that. Moscow has a unique geographic position and it depends what Moscow is going to trade outside the domestic instruments, where there has been huge success over the last decade. On the trading side I think that Russia is a natural place for a large amount of future business to happen that will not happen in Asia. I don’t see Asia as a threat to Moscow.

Capital markets development

SR, Euromoney A topic that we have already touched upon but perhaps should discuss in more detail is capital markets. Mr Milovidov, Russia has made a lot of progress in terms of its capital markets, but what do you think is the biggest single reform that still needs to be implemented to deepen and broaden the capital markets?

VM, FFMS It is always difficult to answer a question that implies that there is one overwhelmingly important step that needs to be taken. This is especially true in this context, because of the complexity of the changes to the legal environment that are necessary. My answer to the question is as follows: my colleagues have already mentioned that there is quite a big set of bills in the pipeline, which are intended to change the financial landscape of this country and to make our financial system adequate and able to create a system that will be on a par with any other financial system in the world.

As of today Russia is a member of the Financial Stability Board, which was created at the initiative of the G20. Our colleagues from the ministry of finance and the central bank and our agency participates in the meetings of this board and we all discuss the key issues relating to the financial markets and have already made some practical steps. For example, we are looking at derivatives regulation and the use of a central counterparty; we are discussing securitization and a law on securitization in Russia passed the first hearing in the Russian parliament, a very important bill that will dramatically change settlements in the Russian market and will update the Russian financial infrastructure; the law on clearing, the law on the stock exchange, a bill on the central depository – all these bills have passed their first hearing in the Russian State Duma. We hope that they will soon be approved.

If we look at the remaining key reforms, the most important is the law on insider activities and market manipulation. The bill has passed its first hearing at the State Duma and is being prepared for a second hearing. I am convinced – my colleagues will confirm that – that very shortly, probably during the spring session of our parliament, the law will be approved. It will mean that Russia will enter all international organizations and communities as a fully fledged member and it will resolve the only remaining problem that we have in Russia. Once this bill is approved there will be no lagging behind in the Russian legal framework for financial markets.

SR, Euromoney Mr Salaschenko, what are the biggest complaints you hear from investors, for instance regarding the equities market here?

AS, RTS Stock Exchange Communicating with investors is interesting. Their key concerns are always changing and as soon as you resolve one they find another. Last year one of the biggest concerns was taxation, particularly related to derivatives and repo transactions. Our regulator had already started work on that area a year and a half before investors started to pay attention to it. Why did investors suddenly pay attention to that issue? The crisis was the reason – as when you have a very positive cashflow you pay less attention to your problems than when you have negative cashflow. The regulator has addressed the issue and addressed it in a very short timeframe. So now investors have another issue, which concerns securities owned for more than a year. The ministry of finance is already on top of this. Investors are concerned about protection in the event of bond defaults. There are bills covering this in the pipeline.

More general comments concern the range of available investments. Investors want to be able to invest in more than just the 50 securities of the RTS index. They can see that Russia has many interesting opportunities outside the blue chips, which means that we have to attract mid-cap companies to the market. Once we achieve that we will see an inflow of investors and capital and we will have more assets.

SR, Euromoney Mr Roslyak, isn’t it incumbent upon government and government authorities and agencies to set these benchmark instruments for corporates and the financial institutions to then price off. I know the Russian government, at federal level, is active, but what plan does the City of Moscow have as regards that?

YR, City of Moscow Well, I think we have been extremely proactive in this area. We were the first Russian issuer to re-enter the capital market and in the same position as before. Clearly we cannot simply issue in order to create benchmarks; we issue because we have economic and social objectives. And we issue within tight constraints on deficits and on the use of funds. This is true of municipalities and governments in many countries and it means that our first obligation is to the underlying rationale for borrowing, rather than simply creating a yield curve. And remember that both the federal government and also large state entities such as Gazprom are also active in the market, which gives other issuers guidance on pricing in the domestic market.

SR, Euromoney One issue in the local debt markets has been the scarcity of long-term issuance. There are a number of reasons for this, but there is a legal issue: there is still some lack of clarity about who the ultimate obligor is, what bondholders’ rights are in the event of default and obviously this all holds back development of capital markets.

SP, City of Moscow Well, I would disagree somewhat with the premise. In fact, although it is true bank loans are generally not long-dated, there is an opportunity for high-quality credits to issue long-term bonds. This is a major difference between the situation in 2008/09 and the situation of 1998/99.

For example, in the Russian market last year, in a very difficult environment, we started with one-year bonds, but by autumn 2009 we successfully placed eight-year issues. This year we have already placed a 12-year bond in the domestic market – City of Moscow bonds. This is the longest-dated issue placed by any Russian issuer in the post-crisis period. So there is long-term money in this country.

Borrowers with lower credit ratings still have access to the markets, but yes, they have to be content with shorter-term bonds. But that is no different to other markets. And plenty of major Russian corporate borrowers successfully used the domestic debt market to replace their international debt. Now that the situation is becoming more stable, Russian issuers – both corporate and sovereign – have increasingly been able to successfully tap international markets.

And this leads nicely on to the topic of Moscow as a financial centre. I think recent developments have shown clearly that Moscow has every opportunity to become a leading international financial centre where issuers, including foreign issuers, will be able to place rouble-denominated debt. I am talking about international banks and corporations that are already present in Russia and that need rouble funding as well as those issuers that see an opportunity to issue in roubles and swap into their target currency.

SR, Euromoney But the long-term market is closed to most borrowers?

SP, City of Moscow Well, as in most countries, most borrowers fall into the lower credit rating bands. This means that the price of long-term debt for them would be prohibitive, even if it were available. There is also an issue with the general investment horizon here. Most people are unwilling to look at projects that extend past two years and this is a hangover from the 1997/98 crisis. This is the reality and it affects both the supply and demand for term financing.

SR, Euromoney Is there uncertainty about the economic outlook or fears of inflation or something else?

SP, City of Moscow People are concerned about volatility, as I have said. And they worry about the quality of corporate governance in small and medium-sized businesses here. We need to address all the issues if we are to attract international players into the Russian markets and it is important that we do that because by attracting foreign capital we increase the size and liquidity of the Russian market. And I think that the state has a role to play here and should become a more active player.

GD, Mint Capital There is a chicken-and-egg problem. Liquidity begets liquidity, but where do you start? We need a reliable and steady domestic class of long-term investors; there are some pension funds, insurance companies and banks but the majority of investors are short-term. But we need long-term issuers to help create this class of long-term investors.

VM, FFMS Paradoxically the largest companies can raise billions of dollars at long tenors but the problem is at the $100 million to $200 million level. These kinds of companies still dream of London or Hong Kong or at least Frankfurt. I agree with the statement that one way to make progress is for the state to play a more prominent role but it is also true that these mid-size companies do need more transparency, better corporate governance, better accounting and more attention paid to investors’ rights. That said, I do believe that we have made great progress on all these fronts in the past 10 years.

GN, Denholm Hall Yes, market regulation in Russia has come on in leaps and bounds. However, while I agree that second-tier and third-tier companies need better corporate governance, this is true in the west and Asia too. The difference is that in the west it is very clear that if you lend money to a company and the company doesn’t repay the loan, the consequences are clear and the law is applied. So while market regulations have progressed, the fundamental legal framework is still an issue.

What needs to be developed is the law specifically on lending and recovering debt and, of course, some of the practices in the application of the law in the judicial system.

SR, Euromoney You are talking about the enforceability of the original contract and also the lack of clarity regarding the bankruptcy process or the legal process, regarding that contract.

GN, Denholm Hall That’s right, what you have to do to go to court to get a judgement, all of that stuff, which is developing. It takes much longer to develop that than to develop some of the technical aspects which have adapted very well.

SR, Euromoney Do you see signs of progress?

GN, Denholm Hall I see the willingness for progress. There is a huge willingness from businesses and the state to do something about it.

SR, Euromoney Mr Salaschenko, on the equity side investors still worry about the lack of progress on a central depository and registrar system. Do you see a similar willingness to reform on that issue?

AS, RTS Stock Exchange We are still looking at it. We have two depositories in Russia and this is very close to what we need. But we have to change investors’ perception: investors think, “no central depository – big problem”, and we need to show that that is not the case.

VM, FFMS I talked to a representative of a major US fund investing in many countries throughout the world. She said that the Russian depository system has the necessary functionality but that explaining the structure to her internal compliance people was difficult and so she preferred to invest in depositary receipts. In my view, depositary receipts contain many of the risks of the underlying securities that she is concerned about, so this view is strange. It is a matter of investor education.

SP, City of Moscow I’ll give you an even better example; I had a conversation with a huge investment institution from the west, one of the biggest in the world, interested in getting into the rouble market and specifically City of Moscow bonds. However, its global custodian, another very large and well-known western institution, stood in the way. Why? Because it knows very little about Russia; it does not understand the trading and clearing systems; it does not know how to buy our bonds. I completely agree with Mr Milovidov that on the level of lawyers and custodians, they don’t know the market and they care even less.

GN, Denholm Hall I think one of the problems is that the biggest investors in the world are from the US and by and large they have stayed away from Russia. As the wish to invest in Russia grows then they start to press their lawyers and their custodians to understand what is going on. If this increases, then you will have a great opportunity to use their brains directly and ask them for their suggestions on improvements.

Lessons from the crisis

SR, Euromoney If we broaden that out to the regulatory environment in general, Mr Milovidov, what is the single biggest lesson that you have learnt from the crisis?

VM, FFMS First, don’t panic in the face of a crisis; number two, crises help regulators get things done. The crisis made it possible to introduce changes quickly that had been harder before; in 2009 we managed, working with the government and the Duma, to introduce nine laws, which was an all-time record. That was laws on securitization, laws against market manipulation, a law on clearing, a law on derivatives, a law on bond issues, a law regulating bond issue requirements.

SR, Euromoney Mr Davidyuk, do you think that regulatory powers should be streamlined, that it should be consolidated into one government supervisory body? What is your view?

GD, Mint Capital I don’t think that I should propose any changes in the federal arrangement. What is important is how much progress has been made recently and how quickly. My opinion is very simple: we should implement incentives and existing initiatives and everything should be done at both local and federal levels. The biggest problem is people’s perception of the Russian market and it is difficult to change attitudes quickly.

Infrastructure ambitions

SR, Euromoney If we move on to the last theme which is the infrastructure, both human and physical, necessary to create a financial centre. Mr Roslyak, one of the things that I know is being planned is this Moscow City Development; I just wondered if you could give more details of what the purpose of that will be? Will the model be based on something like in Dubai where you have the Dubai International Financial Centre, which is a physical infrastructure, where businesses have to be based in that particular building and are regulated separately to entities outside that particular building, or will it be more of a seamless, integrated structure as we see in New York and London?

YR, City of Moscow Our most important priority is to increase the prosperity of Moscow’s population. If we analyse that, then we are talking about better jobs, better infrastructure and all the ingredients for successful development. Creating financial flows and from that a financial centre is part of that. Speaking about development of course we know how important it is to support businesses, especially small businesses.

You mentioned the Moscow City Development project. Well, we have three major airports, which are air hubs. The Domodedovo Airport project is still in progress, the city is working on the Vnukovo Airport, and a new international terminal in Vnukovo is to be opened later this year, with a similar construction programme under way in Sheremetyevo. A new terminal has been built that has a direct railway link with the city. In terms of new office space, next year the first part of Moscow City Complex will provide 1 million square metres of floorspace for corporate customers. In the past we have had issues with the security of supply of electricity; in a matter of three years we resolved this challenge and last year we spent Rb36 billion ($1.24 billion) to improve security of electricity supply to the city, particularly in the winter season.

SP, City of Moscow The city has very ambitious plans. These plans have a much longer horizon than five or 10 years; we have a long-term programme for the development and reconstruction of Moscow that dates back to 2005 and goes through to 2025. There is an assumption that Moscow will become a global financial centre and centre of services. We, in Moscow, always emphasize that we are not creating a financial centre, we say that we are developing Moscow as a financial services centre. In an ideal scenario we are going to have a huge global financial hypermarket where investors, issuers, corporates, businesses, banks, can find any financial service that they may need in any currency that they may desire and at a level of service that will be on a par with international best practice.

I would reiterate what I have already said, we have made a lot of progress; we learnt a lot in those volatile 1990s; we are totally different people from that time; different in professional terms and naturally we are 10 years older.

From the perspective of human resources it is with deep satisfaction that I can say that over this decade we have now grown a whole generation of young bankers, people working in financial market infrastructure, managers, debt managers, and these people, in my opinion, are as good as you will find anywhere. They are well educated and they have vast experience in the domestic and the international markets.

SR, Euromoney I am talking to people and they are saying there are still a number of hurdles in terms of being easily able to employ talent from abroad. One of the issues brought up was the examinations that have to take place in order to work here.

SP, City of Moscow There are some issues that need to be addressed and Moscow and the federal programme have outlined these issues already. There are some measures intended to be taken to create better conditions for foreign specialists to work in Moscow. The treatment of foreign specialists, foreign employees, is, as in any country in the world, built on the reciprocity principle and I know that foreign companies that want to hire Russian people to work in London or New York or in Frankfurt have to overcome a lot of barriers, while in their own countries they have to meet a lot of requirements of their law and of their regulators. Each country protects its labour market; Russia is not an exception here. However, there is a steady flow of highly skilled professionals coming to this country. They work not only in subsidiaries of foreign banks and corporations, but plenty of Russian companies and banks successfully hire foreign, highly skilled professionals. In Moscow, in my opinion, we see emerging a very interesting community of professionals from different nations, who work for the same goals: the development of this country through the success of their own business.

SR, Euromoney George, you are a finance professional in London, looking to move abroad or being sent abroad; why choose Moscow when say in Dubai you can pay no taxes, have an easy lifestyle and all the red tape can be sorted out in two days?

GN, Denholm Hall The incentive at the beginning, looking back to 1994, was that here is a nation of very well educated and very clever people who had a deep desire to develop their economy. I found that very attractive and there was a huge economic opportunity. If you want to be a tax exile and you have a lot of money, perhaps living in Dubai is better. On the other hand, Moscow offers an experience much more akin to Hong Kong in the 1950s and 1960s. The foreigners then, largely of course British, loved Hong Kong and stayed there. We have had hundreds of people in Moscow; not one has complained about the city or Russia and usually it is their first visit when they come here. The people who stay here find there is a community and, yes, there are big local differences and difficulties, but it is a place that is personally rewarding, in the same way that the Brits found Hong Kong rewarding 50 years ago.

VM, FFMS I am convinced that Moscow already has the status of a financial centre. Naturally we are not yet a global financial centre in a broad sense, but I think that within five years we will approach this mark. As I have already said, by improving Russian laws, by harmonizing them with international standards, we will be able to achieve that in a shorter timeframe. Then we will work on the positive image of Russia as a whole and Moscow in particular.

SP, City of Moscow I would like to make a comment some might find provocative. Not everything international is good, especially in the field of financial services regulations – not before the crisis, obviously, and now after the crisis where we seem to be witnessing a global knee-jerk bureaucratic reaction. Suddenly proposals are being made not for the continued liberalization of the market, not deregulation, but quite the opposite. We should look carefully at what is going on there, but we should try not to copy it slavishly. Globalized financial capital will go to where it is convenient to work from the point of regulation, human resources, geographical location and the legal and taxation systems. If we bring our legal taxation standards closer to what is acceptable globally, I am sure we will see an inflow of foreign institutions from the places that are overregulated to work here.

GN, Denholm Hall I think it’s important to understand the opportunity. This is a $1 trillion market; who would imagine in 1997 that there would be $1 trillion in Russia?