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Developing international financial
centers in Russia, India, and China
based on a report for the Ministry of Economic Development of Russian Federation
Alexei Goriaev
New Economic School / CEFIR
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What is an IFC?
 Financial center:
 Concentration of asset demand from individual and
institutional investors
 Broad range of financial instruments (asset supply)
 Effective infrastructure and financial intermediation
 International financial center:
 Focus on the foreign capital, investors and
intermediaries
 Transnational operations: fund raising, asset
management, risk management, tax management,
exchange trading, project financing (e.g., for PPP)
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Why do RIC countries need an IFC?
 Additional funding for national companies at a lower cost
 More efficient asset allocation for local investors
 More risk management opportunities
 Making ruble/rupia/yuan a reserve and settlement
currency
 Deeper economic integration with other countries
 Diversification of the national economy


Directly: raising the share of financial sector in GDP
Indirectly: stimulating young, growing industries
 …at a cost of higher sensitivity to global risks
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IFC competitiveness index (2007)
Leading
IFC’s
Place
Rating
London
1
795
New York
2
Hong Kong
Emerging
IFC’s
Place
Rating
Dubai
24
585
786
Shanghai
31
554
3
695
Mumbai
48
481
Singapore
4
675
Moscow
56
423
Zurich
5
665
Frankfurt
6
642
Geneva
7
640
Chicago
8
637
Tokyo
9
628
Sidney
10
621
Source: Report “The Global Financial Centers Index 3” by the Z/Yen Group for the City of London.
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Best practice of leading IFC’s
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Flexible legislation
Stimulating taxation of financial operations
Unified regulation system for all segments
Efficient legal system (often, a specialized court)
Modern centralized financial infrastructure
Global integration, openness to foreign market
participants
Developed financial intermediaries
Broad range of instruments
Large and flexible labor market
Favorable business environment
Stable and positive macroeconomic situation
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Traditional IFC’s: London, New York
 Strong national economy (EU region for London)
 Democracy and rule of law

Anglo-Saxon legal system
 Multinational, multilingual workforce

Easy to develop connections to the countries of origin
 Strong financial intermediaries and institutional investors
 Language
 Openness, no capital controls
 UK: unified, flexible, principles-based regulation
 US: business education and research, innovations
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Young IFC’s: Singapore, Hong Kong
 State-driven development of the financial sector
 Globally oriented strategy (due to relatively small size of
the national economy), no capital controls

Mostly focused on the Asian region
 Efficient infrastructure

Trading, transport, communications,…
 Workforce relying largely on expatriates
 Regulatory and fiscal incentives to foreign institutions
 HK: has profited from its role as a gateway to China
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Emerging IFCs in RIC countries
 Increasing financial globalization and competition

Either national financial centers become internationally
competitive or concede to leading IFCs
 The ongoing financial crisis questions the current
financial system

…and leadership of traditional financial centers
 Large, dynamic national economy (f)needs development
of active, efficient financial markets
 IFC requires reforms in legislation, regulation,
infrastructure, labor market, and business environment


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Develop long-term institutional investors and attract population
Impose more transparency and disclosure requirements
Increase liquidity and scope of financial instruments
Need to overcome bureaucracy, corruption
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Russia: Moscow
 The concept of creating an IFC was adopted (only) in October 2008
 Most developed financial market in the region, but
…cap and liquidity are concentrated in the blue chips (mostly oil&gas)
Segmented, non-flexible legislation and regulation system
Tax pressure on financial companies and operations due to high
effective tax rates and inefficient administration
Lack of efficient and transparent legal system
Low standards of information disclosure
Segmented financial infrastructure, not well-integrated into global
capital markets (no central depository, RTGS, DVP+3 trading)
Tough access for foreigners (inefficient visa and migration regime)
Low level of social and business environment
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Shanghai and Mumbai
 Gradual development of national financial markets as IFC
For foreigners, access granted only to qualified institutional investors
 Narrow market for qualified local labor, rely on ‘brain drain’ reversal
 The infrastructure needs to be further developed
 India:
 Anglo-Saxon legal system and rule of law
 Unified regulator of financial markets (SEBI)
 High corporate governance standards, compulsory IFRS reporting
 English language and links to the UK
 Over 9,000 stocks are listed, but most are illiquid; active equity futures
trading
 China:
 More conservative approach, controlled by the state
 Enormous potential for the internal market
 Separate regulators for financial markets, banks, insurance companies
 Slow-to-change codified legal system, bureaucracy

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Regulation system: protecting investors
vs. enforcing contracts
Measures
London
New York Frankfurt
Mumbai
Shanghai
Moscow
Rule of Law, World Bank,
2007, from 0 to 100
92.9
91.9
94.3
56.2
42.4
16.7
Regulatory quality, World
Bank, 2007, from 0 to 100
98.1
90.8
92.7
46.1
45.6
35.0
Ease of doing business (rank
from 178 countries, IFC,
2008), incl.
6 place
3 place
20 place
120 place
83 place
106 place
Protecting investors
9 place
5 place
83 place
33 place
83 place
83 place
Enforcing contracts
24 place
8 place
15 place
177 place
20 place
19 place
Paying taxes
12 place
76 place
67 place
165 place
168 place
130 place
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Taxation system: rates vs. administration
Measures
London
Individual income tax rate
10-40%
Capital gain tax rate
10-18%
(indiv.)
21-28%
(inst.)
Dividend tax rate
25% (indiv.)
0% (inst.)
New York Frankfurt
to 35%
to 35%
0-30%
15-45%
25%
20%
Mumbai
Shanghai
Moscow
30%
25-33%
13%
Non-resid: 30%
33%
13%
Non-residents:
30% (indiv.)
24% (inst.)
10%
9%
Non-residents:
30% (indiv.)
15% (inst.)
10-40%
20%
20%
0-30%
0%
20%
10%
13%
Non-residents :
30% (indiv.)
20% (inst.)
35.7%
46.2%
50.8%
70.6%
73.9%
51.4%
# tax payments, IFC 2008
10
21
39
162
104
58
Time spent on tax reporting
(hours/year), IFC 2008
22
122
65
105
167
151
Interest income tax rate
Total tax rate (% from the
firm’s profit), IFC 2008
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Financial markets: cap vs. trading
Measures
($bln) (% GDP)
London
New York Frankfurt
Mumbai Shanghai
Moscow
Stock market cap in a
country
3 851.7
139%
15 650.8
113%
2 105.2
63%
1 819.1
166%
3 694.3
113%
1 221.5
95%
Annual equity trading
volume in the exchanges
10 334
373%
29 910
216%
4 325
130%
344
31%
4 069
125%
1 261
98%
Volume of IPOs
50.4
76.5
10.4
17.6
63.3
26.7
Face value of exchangetraded bonds
3 782
136%
29 240
211%
5 335
161%
468
43%
1 565
48%
243
19%
Face value of exchangetraded corporate bonds
453.2
16%
17 418.7
126%
1 146
34%
38.3
3%
486.7
15%
50.2
4%
Trading volume of bonds
at the exchanges
3 603.1
130%
-
315.6
10%
60.4
5.5%
26.3
8%
115
9%
Open positions of options
172 848
6 234%
402 235
2 906%
33 242
1 001%
397
36%
0
0%
52
4%
Open positions of futures
451 757
16 294%
857 278
6 193%
137 581
4 141%
2 557
233%
0
0%
240
19%
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Source: BIS Quarterly Review (as of end-2007)
Institutional investors vs. banks
Measures
($bln) (% GDP)
London
New York Frankfurt
Mumbai Shanghai
Moscow
Assets of non-state pension
funds
1 763
78.5%
13 310*
100.5%
116*
4.0%
33
4.2%
38
1.7%
19.2
1.5%
Assets of mutual funds
820*
34%
12 496
100.5%
348*
12%
36
4.6%
56
2.5%
32
2.5%
Assets of insurance
companies
2 184
97.9%
6 074*
45.9%
1 224
43.8%
104
13.3%
141
6.3%
9*
0.9%
Bank deposits
2 930
122%
10 028
76%
3 033
104%
640
73%
4 469
169%
415
32%
Bank loans
3 289*
140%
8 278
71%
-
278
41%
4 018
208%
426*
33%
486
253
106
29
74
71
21.6%
11.3%
5.7%
0.6%
5.6%
0.4%
-
15.5%
9.8%
0.4%*
-
1.2%
# foreign banks
Share of population
investing into stocks
Share of population
investing into mutual funds
Source: OECD (as of end-2007, with exception of * as of 2006)
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General competitiveness: freedom vs.
political risk
Measures
London New York Frankfurt Mumbai Shanghai Moscow
Human development index (from
177 countries, UNDP 2008)
16 place
12 place
22 place
128 place
81 place
67 place
Global competitiveness index
(from 131 countries, WEF 2008)
9 place
1 place
5 place
48 place
34 place
58 place
Index of economic freedom (from
157 countries, Heritage 2008)
10 place
5 place
23 place
115 place
126 place
134 place
Index of press freedom,
from 0 to 100 (WB 2008)
93.8
85.1
94.7
58.7
5.8
20.2
Government effectiveness index,
from 0 to 100 (WB 2008)
93.8
91.5
92.4
57.3
61.1
42.2
12 place
20 place
16 place
72 place
72 place
143 place
66.3
55.8
81.3
17.8
32.2
23.1
Corruption perception index (from
180 countries, Transparency Intl
2007)
Index of political risk, from 0 to
100 (WB 2008)
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Conclusions for RIC countries
 The crisis exposed weaknesses of RIC markets

…but also gave them a chance to avoid mistakes of the
traditional financial centers
 Need unified risk-based regulation approach across
different countries and types of financial services

Hedge funds, sovereign wealth funds,…
 Minimize infrastructural and legal risks

CSD, contract enforcement, role of offshores,…
 Make financial engineering transparent
 Put more responsibility and disclosure requirements on
financial intermediaries
 Revise the role of the state
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