The long road to an international financial centre
RT:What are the key areas of the Russian financial system that need development?
GA:“I think there are a number of areas that need to be developed.Some of them are things like a domestic savings base, an institutional investor base, pension funds, life insurance products, etc, etc.But I think the point that we would draw, I would draw attention to, is the fact that establishing an international financial centre is not a goal in and of itself.The idea is that it brings some value to society as a whole, and the elements that are needed for a financial centre to be developed and successful in Russia are the same ones that would bring benefits to people across Russia.Not just an international financial centre in Moscow, but a stable legal base, a functioning judiciary, a defensible system of property rights, that would apply not just to financial assets but or to banks, or to complicated financial instruments, but across society as a whole – including to small and medium sized enterprises.”
RT:A key issue for the system is to make it deeper, so as to be able to handle larger volumes (with greater institutional capital). How can this be developed?
GA:“I don’t think your question is so much volume of money that is available, but the right kind of investor base, that can invest for longer periods of time.So that the right instruments are available.For example, larger volumes of dollar investments in Russia may not be the right way for things to go.For a lot of Russian enterprises that effectively have rouble cash flows – those that are not exporting oil and gas and minerals – borrowing in a foreign currency might actually be dangerous for them.So we need to develop not just larger amounts, not just bigger impressive numbers, but the instruments that are appropriate for households as borrowers, for example mortgages in Russia really should be given in roubles.So the focus should really be on developing those instruments that are most adapted to what enterprises in the country need, and households as well.”
RT:Is Russia developing the insurance/complex financial instruments, and saving/investing culture which will see the expansion of its capital base?
GA:“Of course Russia is seeing the introduction of complex financial instruments.I would say that sometimes too much attention is paid to developing complex financial instruments – some of the more basic financial instruments also need to be developed, savings products for households, a deeper pension fund base, for example.Right now a very significant proportion of the pension industry is effectively concentrated in the pension fund of Russia, which is normal at this stage in development, but those products that need to be developed for savers, for example, are not necessarily complex in nature.That said there are some complex financial instruments – derivatives and what not – which do need to be there, again to allow enterprises to borrow in roubles, for example the question of interest rate swaps, derivatives swaps and what not, both onshore and intermediated and domestic, are also quite important.”
RT:Does Moscow have the ancillary services required for a modern financial centre? Is it developing them?
GA:“I think there are areas of significant development that still need to be there to, for a truly international financial centre, to be developed.Clearly language skills are important, the number of professionals with deep knowledge of English is quite high in Moscow, but drops off dramatically outside the capital.But I guess what I would say is that here is one of the issues that is a challenge for Moscow as an international financial centre, is that if you look at most of the other major financial centres, they were trading centres and primarily ports.They were trading in commodities that, if you think of London, Hong Kong, Singapore, Amsterdam/Rotterdam, they were financial centres that developed organically from the ground up, as you had a need for financial instruments, legal protections etc, that supported the development of those cities.Again primarily ports to begin with, the ancillary services, and everything else related to it, grew up, organically from the ground up, and what is happening right now is an attempt to create this as a form of national project, with the President and others suggesting that we develop these things top down.I am not saying that approach is incorrect.If you look at it more as an attempt to seize upon a national project, or idea, as a way to ensure that various elements of the judiciary, the government, the various institutions that are responsible, support the same idea, and get behind the project.This is going to be the difficulty – that ancillary services don’t come from nowhere, they grow from the ground up, and the attempt to create a national, international financial centre, by decree is by nature impossible.So there has to be a balance of the various ministries and everyone else creating the legal framework that allows it to develop on its own organically.Its not something that can be done in the space of a year, and that’s where I see the issue of how much money is being invested is not so much the issue.It’s of creating the culture on so many levels to support it.And if I can add one thing – this is particularly key to insure that the benefits of having Moscow as an international financial centre accrue not just within a narrow physical area of what we call Moscow City, but that those benefits of having a good legal structure accrue across the country, in many different regions, for the benefit of small businesses, quick registration of businesses, simple application of tax regimes, that way the benefits will accrue not just to a few high rises in the centre of the city of Moscow, but across the country.”
RT:Does Russia have sufficient numbers of skilled people to provide the human capital for a modern financial centre?
GA:“Frankly speaking, right now no. There are a lot of additional services that need to be there and what not.Again this is something that an international financial centre and human capital – the skills related to it – really need to accrue over a generation, at least 5 or 10 years.To think that we are going to go from a period where Moscow is a significant financial centre in Russia, increasingly an important regional financial centre, to move from there to have a truly international one, in my view, is going to take decades.Hopefully sooner, but its natural that somebody who has been in a particular line of business for five years has not seen the full financial cycle, and really understood the depth of the financial instruments that there is need for.That’s a normal thing.Fortunately or unfortunately, right now, there’s been a significant global financial crisis which have brought people back – you asked the question about complexity – it bought people back to the importance of basics when structuring financial instruments, the basics of how a loan or mortgage is written and enforced.A lot of those things will take at least decades, if not generations.And again if you look at the history of other global financial centres, Hong Kong Singapore and others, typically they have taken decades.”
RT:What are the key factors which drive Russian companies to look offshore when listing and placing debt?
GA:“Well, when placing or listing debt, obviously there is a question of where the money is.The old line – when they asked a famous bank robber about why he robbed banks – he said that’s where the money is.Right now significant amounts of financial capital are abroad.It is understandable that Russian companies will attempt to list offshore, to raise debt offshore, but I think there is clearly a question that they couldn’t do, international investors do come, they are willing to consider domestic issues here, it is clear they would be more willing to do so if they felt that domestic rouble bond structures were better regulated, that various other instruments of other protection were there, a simple basic fact for many borrowers is they want to use the legal system they are comfortable with.Primarily an English law system, English – New York law, but an English law system in a court room jurisdiction that they are comfortable in the long term.And that is a factor.”
RT:Does the Russian legal framework facilitate the emergence of a financial industry/centre?
GA:“The point I would make here is that the elements of what makes a global financial centre effective are not that different from the ones that make for a good investment regime for locals.Some of these things will take a long time to develop, and Russia has really made tremendous progress in certain areas over the last ten years, for example. I would draw attention for example to the mortgage market, where we have now been through a very painful financial crisis – there was a period before the financial crisis where there was a lot of money being invested in mortgages, and it was done very quickly, but there were very few actual cases of enforcement of mortgage claims.There was a certain amount of uncertainty, fear, that in the event of a crisis, that mortgages would prove to be unenforceable or difficult to enforce.I think one of the positive developments of this financial crisis is the way that the authorities handled the effects of the financial crisis – is that one of the core financial instruments, claims were not undermined.Mortgages rode through the crisis not without some difficulty, because obviously there were some, lots, of people out of work who had more difficulty making their mortgage payment on a timely basis.But for the most part, banks handled these relatively responsibly, restructured loans when they could, so that people would not have to be moved out of their apartments, or evicted.In the cases where the individuals were simply no longer able to pay, the courts, again largely speaking, respected the underlying essence of the mortgage loan that the bank – in the event of non payment – could repossess.That’s a tremendous achievement, there are many, many countries where the ability to enforce a mortgage, even though the loan can be written that way, it is still difficult and fundamentally in question.In Russia we have effectively come to a situation where the registration of the rights of the lender, that is the bank for a mortgage loan, have been fundamentally respected during a massive crisis.There are lots of countries where with hundreds of years of developments in mortgage lending, this has not taken place. So in that respect Russia has moved very quickly.We are going to need a lot of chances of testing these instruments, to make sure that they are enforceable.”
RT:Do rule of law perceptions (in particular shareholder rights) about Russia help the development of its financial services industry?
GA:“It’s fundamental that if investors don’t believe that their rights, particularly as minority shareholders, are going to be respected, they are not going to be interested in working in a given jurisdiction.And again this is something that I would draw attention to. The experience of foreign creditors, local creditors, foreign investors, minority investors during this recent crisis, again in a situation where a lot of difficult negotiations had to be held, and major restructurings had to be done is – and there are some exceptions of course – for the most part, not the government level, but the individual company level, the owners the stakeholders, the lenders, others – all of them got together and negotiated difficult solutions.Yes some people lost money, but for the most part the core essence of the contractual claim that they were entered into, were respected.That’s a major development, and again, it is not something that can be created out of thin air or decree – it has to develop both in a legal framework, but also in a business culture that supports it.And again, with some exceptions – there are always exceptions in most jurisdictions – this crisis has come out with a much stronger financial sector because it has been tested and lived up to the test much better than was the case in 1998.”
RT:How vital is it that Russia further develop its regulatory and institutional support for a contemporary financial sector?
GA:“I think a lot of progress is being made in developing the institutional framework for a well functioning financial centre, but there is clearly a lot of work that needs to be done.I think , actually, in some of the more advanced financial products, Russia is perhaps ahead of the curve, in implementing the types of ones that are needed – the types of institutions and laws, regulations, etc that are needed.Where there is a little bit of delay is in insuring enforceability at the lower level, and again I think this is an important development for the Russian Federation, because if those systems of defending the rights of investors spread through the system, and are not just applied to the top 50 companies that are listed, these are benefits that will accrue across the country.”
RT:Do Russian disclosure, clearing and depository mechanisms compare well internationally?
GA:“I think the technical infrastructure in most of these areas – for disclosure and what not – is fairly strong.There continues to be an issue across the board in the area of form over substance – that the list of things to be disclosed is incredibly long, but they must be respected more in a formal manner than in substance – and I think a classic example of this, or a very important example in Russia right now, is that most investors of any size, including most Russian investors, want to see disclosure under International Financial Reporting Standards, because there the focus is much more on the substance of transactions, and what is going on.The disclosure of what is happening is stronger than under the Russian accounting standards.Now they are moving towards some form of convergence, as is the case in much of the European Union, for example, really across the world.But still the Russian version of those, even under this conversion, is much more focused on disclosing the form of transactions – the legal form – rather than the true substance of the transaction.And that is very important to outside investors.”
RT:How significant are other 'lifestyle' factors (roads, public transport, health etc) in creating a financial centre and how does Moscow compare internationally? What progress is it making?
GA:“There is a lot of discussion about how much the factors of lifestyle etc.The amount of traffic in Moscow is important, is a major factor for outside people.I think that clearly is an issue for industries where Russia needs to import human capital from abroad.It is a factor which raises costs for some. It will delay the development of a truly effective financial sector in the short term at least. In he long term, you know, investors – international banks etc – if the money is good enough they will come no matter how difficult the circumstances are.But the point I would make is that it is important not just for the tiny portion of the financial sector, but for the between 8 and 12 million people who live and work in Moscow. The factors that are important to an international bank are not really that different from what the average Muscovite needs.”
RT:How does Russia promote confidence in investing in Russia and using its financial system?
GA:“I think the key issues that I hear expressed from investors all the time, that worry them, is the perception of large amounts of corruption.That is the single most important one that we hear, the concern that business people will not be able to come in.I wont say that those concerns are always well founded or well structured, but the perception of it is very damaging.Again I would say that this is a case where, if Russians themselves don’t feel confident in investing – if their perception of corruption in the country is very high – its going to be very hard to convince foreign investors that the situation has improved.So the real answer there is that the hard work must be done – of improving the system so that there are less of these types of cases.There is also some work which can be done at the federal level – from the top down if you will – of removing some inadequate portions of the law, of the regulatory framework, of the all of the various institutions involved in supporting it.But if it doesn’t get down to the level of the average citizen – where they can register a business quickly, where they don’t feel that they are subject to corrupt demands – then clearly it will not have achieved its goal.I support entirely the project of establishing an international financial centre, as long as it is not a goal in and of itself – to create a financial centre that is cut off from the rest of the country.It has to be one that benefits citizens on the ordinary level.If they do that citizens will feel more comfortable saving for the long term, and that will create a financial sector that growing and more stable domestically in the long term.So it is either a virtuous cycle or a vicious cycle – and the key thing for the government in implementing the plan for an international financial centre is to make sure that it’s a virtuous cycle.That the top down efforts also support the circumstances in which small and medium sized enterprises work, in which households make their economic decisions – of saving and investing, etc.If it is used to create a virtuous cycle it will ultimately be a successful project.”