By Andrei Skvarsky.
Tim Reucroft, a London-based consultant who has advised Russia and other emerging markets on capital market infrastructures, has said the Kremlin’s plan to turn Moscow into an international financial centre has “zero prospect” of materialising.
An IFC is all about cross-border flows, and so the Russians are wrong to be focusing on the domestic infrastructure, Reucroft, director of research at the Thomas Murray cash and securities risk management firm, argued at a conference in Moscow early this month and in a subsequent emailed interview with EmergingMarkets.me.
Reucroft advised the Russian government on the IFC project back in 2008 and designed an architecture for cross-border financial business in Moscow and St Petersburg.
“The main message of my work was that an international financial centre was all about the cross-border flows and had nothing to do with the domestic flows,” he told EmergingMarkets.me.
“One of the precursors to [a successful IFC] was, of course, sorting out the domestic infrastructure, which back in 2008 was still a mess. The domestic infrastructure is now well on course for becoming a global player but I see zero prospect of Moscow becoming an IFC.”
Reucroft gave examples, one of them being his former London-based job as derivatives manager for Salomon Brothers.
“All my clients came from Salomon in New York and they were trading all derivative exchanges from London eastwards to Tokyo and Sydney,” he said.
“I paid margins to the relevant exchanges and collected/repaid funds to/from Salomon New York – average daily movement $100 million gross. This activity was almost completely independent of any UK infrastructure … I sat in the middle of a cross-border business and it was this model that made London an IFC.”
“In a limited way both Dublin and Luxembourg are the same – they are well recognised international financial centres with little or insignificant local infrastructure. You do not need to have good domestic infrastructure to be an IFC. I see no evidence that Moscow is structuring its IFC around any cross-border business,” Reucroft said.
One more weak point of those running the Moscow IFC project is there is no workforce in Russia to operate an international financial hub and there are no efforts in evidence to create any, according to Reucroft.
“While the numbers vary depending upon economic circumstances (which are not good at the moment), but at the best of times there can be 600,000 people working in the financial sector in London. This is the total population of Frankfurt – so you can see they have no chance of being an IFC. For Moscow to build up such a workforce they would need to recruit 10,000 people per month for the next five years – 500 people per day. That’s before training, transport and telecommunications,” Reucroft said.
“So my zero prospect assertion is based on two factors – (i) understanding what an IFC actually is, (ii) having the domestic workforce or ability to attract an international workforce of sufficient size to put Moscow in a dominant position,” he said.
“The main long-term economic strength of Russia is its demographics – it will eventually emerge as the dominant BRIC – but in the medium term the demographics works against Russia in terms of being an IFC,” he added.
The Global Financial Centres Index for 2011 – a rankings list of 77 cities, regions and countries – released by Z/Yen Group in March 2012 puts Moscow in 65th place, four positions down from the GFCI list for the previous year.
The World Bank’s 2012 Ease of Doing Business rankings list of 183 nations puts Russia in 120th place, four rungs up from last year’s list.
“If Russia is really going to do it, then they need something along the lines of the Malaysian Capital Markets Master Plan … they went for the Islamic bond market many years ago and stole all the business from the Middle East, and still dominate that market,” Reucroft said.