Moscow's Capitalist Manifesto

by Robert Maciejko

Wall Street Journal
May 27, 2011

Russian President Dmitri Medvedev has said he wants to transform Moscow into a global financial center. And he has made this transformation a core element of his plans to modernize the Russian economy. Yet Russia experienced $21 billion of capital outflows in the first quarter of this year. And Mr. Medvedev's own top economic adviser admitted recently that the president believes that "we did not have real progress in improving the investment climate. We need progress now in the short term. Investment is very low and capital flight is high."

The adviser's comments capture just one piece of the larger challenge in Moscow's quest to become a financial center. There are a number of significant obstacles to overcome.

Corruption is a corrosive force in the country. Russia comes in at 154th out of 178 countries on Transparency International's 2010 Corruption Perceptions Index. The country also has a well-deserved reputation for stifling bureaucracy. In a World Bank survey of the process required, in 182 countries, to obtain construction permits, Russia's was found to be the second most difficult in the world. Other obstacles include inadequate infrastructure, which contributes to massive traffic tie-ups, and occasional forced shutdowns of the stock market, a practice that began during the financial crisis.

For these and other reasons, the latest Z/Yen survey of 75 financial centers throughout the world ranks Moscow 68th, behind Manila, Jakarta and Malta.

Moscow's lowly status is also reflected in the local investor base, which is small in terms of both retail and institutional investors. Large Russian companies, even global leaders in their industries, frequently choose to raise capital in London or Hong Kong. Price-earnings ratios in other BRIC countries are, on average, 50% higher than those in Russia. The country's ratio of market capitalization to GDP is two to three times lower than in the most developed G20 countries, and lower also than in Latin America and in Eastern European countries like Poland. The upside potential for Russia, therefore, is large.

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