Russia once had ambitions to make Moscow a hub of international finance. Putin’s war destroyed the dream
- Russia once had ambitions to make Moscow an international financial center.
- But its annexation of Crimea in 2014 triggered a wave of sanctions and curbed foreign investment.
- Russia is now cut off from the international community, which is crucial to building a knowledge economy.
- For more stories, visit Business Insider.
Only a decade ago, Russia was working on its grand ambition to make Moscow a global financial center.
At a conference in St Petersburg in 2010, then-President Dmitry Medvedev said the country’s interest in becoming a global financial center was “obvious”. BBC reported at the time. Russia needs “a developed and globally competitive national financial system” to modernize the economy, Medvedev said.
“The Kremlin was pushing hard to make Moscow an international financial center,” said Hassan Malik, senior sovereign analyst at Loomis Sayles, a Boston-based investment management consultancy.
“Various Russian politicians, including Putin, have talked about making Russia an international financial center for years,” Malik, who lived in Russia from 2005 to 2008, added to Insider.
Over the next 10 years, Russia began to lay the groundwork for its vision. There have been official efforts to raise the profiles of Moscow and St. Petersburg, and the Kremlin has pushed to make the ruble a global reserve currency, Malik said.
As a large resource-rich economy, Russia – despite its risks – was an attractive investment destination. Global financial powers such as Goldman Sachs and Citibank settles in Moscow. The The 4 major accounting firms – PwC, KPMG, EY and Deloitte – were also present in the country.
But Russia illegal annexation of Crimea in 2014 and its 2022 invasion of Ukraine have jeopardized its ambitions as a financial center.
In the months following the invasion, countries slapped Russia with sweeping sanctions. Big banks and international financial institutions have removed from the country en masse. The Big 4 accounting firms have all withdrawn from Russia or started to do so, as have Goldman and Citibank. Moreover, the war has not only jeopardized Moscow’s position as a financial center: it also marks a reversal from Russian President Vladimir Putin’s efforts early in his reign to modernize the economy.
Economic expansion and reform in Putin’s early years
The Russian economy has not always shrunk.
When Putin came to power as Russia’s president from 2000 to 2008, he advocated reform and modernization, wrote Anders Aslund, economist and senior researcher at the Stockholm Free World Forum, a think tank. At the time, Putin “often championed sensible reforms while promoting initiatives aimed at modernizing and diversifying the Russian economy,” Åslund wrote on the Atlantic Council blog on June 13. Among his major reforms were tax reform and red tape reduction for the creation of small and medium-sized enterprises.
Putin succeeded in completing all of the progressive economic reforms launched in the 1990s by the administration of Boris Yeltsin, who served as Russia’s first president after the collapse of the Soviet Union in 1991, Åslund added. Putin has also championed Russia’s far-reaching international integration, pushing for the country’s membership in the World Trade Organization, Åslund noted.
“These policies paid off. Russia enjoyed a period of exceptionally strong economic expansion during the early years of the Putin era, with annual growth rates of around 7% from 1999 to 2008,” wrote Aslund.
Foreign direct investment, or FDI, in Russia rose steadily in the 2000s until the global financial crisis, when it plummeted, according to world Bank The data. After the recession, FDI in the country resumed a general upward trend from 2009 to Russia illegally annexed Crimea of Ukraine in 2014, prompting a series of US and European sanctions.
Even after the annexation of Crimea, Russia continued to push ahead with its financial ambitions: the Moscow Stock Exchange which was established in 2011 and trades today. The country’s main central banker, Elvira Nabiullina – who has led the institution since 2013 – was highly respected by her peers and named by several trade publications, including Eurocurrency in 2015, as the best monetary policy maker in the world.
Towards isolationist policies
By the time Putin began his second presidency in 2012, he had “already started adopting isolationist policies, protectionism and import substitution”, Åslund said.
Today, Russia is anything but an international pariah, with global financial institutions pulling out of the market left, right and center due to sanctions.
In March, just days after the invasion, TheCityUK – a leading industry group – tore up a memorandum of understanding with Russia that backed Moscow’s path to becoming an international financial hub.
In the 100 days since its creation, a US-backed Global Task Force blocked and froze more than $330 billion in assets belonging to sanctioned Russians and the country’s central banks.
At least tens of thousands of jobs have been affected – the Big Four accounting firms employ around 15,000 employees collectively, while Western banks employ approximately 40,000 employees, according to the Financial Times.
Russia turns to weather sanctions, but it will be hard to hit the big leagues of knowledge economies
Despite the departures, unemployment in Russia has remained stable as foreign companies leave in an orderly fashion and The Kremlin tries to save jobs through implicit pressure on employers — a tactic the Putin regime has used over the years, Malik said. This contributed to a wave of deals involving foreign companies selling their businesses and stakes in their Russian operations to local buyers who would continue to operate them under a different brand.
Russia is looking to turn inward to resist current sanctions, but it will be difficult for the country to break into the big league of knowledge economies, experts say.
“A knowledge economy depends on interacting with the cutting edge of whatever field you’re in – that means international interactions,” Malik said.
The Russian economy is expected to decrease by 8.5% in 2022, with a further decrease of 2.3% in 2023, the International Monetary Fund expected in an April report. It would be the biggest decline in the economy since the years following the fall of the Soviet Union in 1991.
“The 2014 invasion of Ukraine dealt a serious blow even to the equivocal progress that had been made up to that point, and after the events of the past few months, it is difficult for me to see how Russia will emerge in as a global financial center for the foreseeable future,” says Malik.