Putin’s war in Ukraine has crushed the ambitions of the Russian financial center


  • Russia once had ambitions for Moscow to be an international financial center.
  • But its annexation of Crimea in 2014 triggered a series of sanctions and curbed foreign investment.
  • Russia is now cut off from the international community, which is crucial in building a knowledge economy.

Only ten years ago, Russia was working on its great 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,” the BBC reported at the time. Russia needs a “developed and globally competitive national financial system” to modernize the economy, Medvedev said.

“The Kremlin has been making a lot of efforts to make Moscow an international financial center,” said Hasan Malik, senior sovereign analyst at Loomis Sayles, a Boston-based investment management consultancy.

“Various Russian politicians, including Putin, have been talking about Russia becoming an international financial center for years,” Malik, who lived in Russia from 2005 to 2008, told Insider.

Over the next 10 years, Russia began to lay the foundations for its vision. There have been official efforts to raise the profiles of Moscow and St. Petersburg, and the Kremlin has pushed for the ruble to become a global reserve currency, Malik said.

As a large, resource-rich economy, Russia — despite the risks — was an attractive investment destination. Global financial powerhouses such as Goldman Sachs and Citibank have set up shop in Moscow. The Big 4 accounting firms – PwC, KPMG, EY and Deloitte – were also in the country.

But Russia’s illegal annexation of Crimea in 2014 and its invasion of Ukraine in 2022 put the ambitions of its financial center in jeopardy.

In the months following the invasion, countries slapped Russia with sweeping sanctions. Large banks and international financial institutions have withdrawn en masse from the country. All four major accounting firms have pulled out of Russia or begun steps to do so, as have Goldman and Citibank. Moreover, the war has not only threatened Moscow’s position as a financial center: it also marks a reversal of Russian President Vladimir Putin’s efforts at the start of his reign to modernize the economy.

Economic expansion and reforms in Putin’s early years

The Russian economy has not always moved backwards.

When Putin came to power as Russia’s president from 2000 to 2008, he pushed for reform and modernization, wrote Anders Åslund, an economist and senior fellow at the Stockholm Free World Forum, a think tank. At the time, Putin “often advocated sensible reforms while promoting initiatives to modernize and diversify the Russian economy,” Åslund wrote on the Atlantic Council’s June 13 blog. Among his major reforms were tax reform and cutting red tape to set up small and medium-sized businesses.

Putin managed to complete all the progressive economic reforms started in the 1990s by the administration of Boris Yeltsin, who was Russia’s first president after the collapse of the Soviet Union in 1991, Åslund added. Putin has also pushed for Russia’s far-reaching international integration, advocating for the country’s membership in the World Trade Organization, Åslund noted.

“This policy has paid dividends. Russia enjoyed a period of uniquely strong economic expansion during the early years of the Putin era, with annual growth rates of around seven percent from 1999 to 2008,” Åslund wrote.

Foreign direct investment, or FDI, in Russia rose steadily in the 2000s until the global financial crisis, when it declined, according to World Bank data. After


recession

FDI into the country continued a general upward trend from 2009 until Russia illegally annexed Crimea from Ukraine in 2014, prompting a series of US and EU sanctions.

Even after the annexation of Crimea, Russia continued with its financial ambitions: the Moscow Stock Exchange, which was founded in 2011 and is traded today. The country’s top central banker, Elvira Nabiullina — who has headed the institution since 2013 — was respected by her peers and named the world’s best monetary policymaker by several trade publications, including Euromoney in 2015.

Turning to isolationist politics

By the time Putin began his second presidency in 2012, he “had already begun to embrace isolationist policies, protectionism and import substitution,” Åslund said.

Today, Russia is anything but an international pariah, with global financial institutions pulling out of markets left, right and center due to sanctions.

In March, just days after the invasion, TheCityUK — a prominent industry group — tore up a memorandum of understanding with Russia that supported Moscow’s drive to become an international financial centre.

In the 100 days since its creation, the US-backed global task force has blocked and frozen 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 accountancy firms together employ around 15,000 staff, while Western banks employ around 40,000 workers, according to the Financial Times.

Russia is turning to weather sanctions, but it will be difficult to hit the big league of knowledge economies

Despite the exit, unemployment in Russia is stable as foreign companies exit in an orderly fashion and the Kremlin tries to preserve employment by implicitly putting pressure on employers — a tactic the Putin regime has used for years, Malik said. This contributed to a flurry of deals in which foreign companies sold their operations and stakes in Russian operations to local buyers who would continue to run them under a different brand.

Russia is trying to turn around the current sanctions, but it will be a challenge for the country to break into the big league of knowledge economies, experts say.

“The knowledge economy depends on interacting with the cutting edge of whatever field you’re in — and that means international interactions,” Malik said.

Russia’s economy is expected to shrink by 8.5% in 2022, with a further decline of 2.3% in 2023, the International Monetary Fund predicted in an April report. That would be the biggest economic downturn since the fall of the Soviet Union in 1991.

“The invasion of Ukraine in 2014 dealt a serious blow to even the unequivocal progress that had existed until then, and after the events of recent months, it’s hard for me to see Russia becoming a global financial center anytime soon,” Malik said.



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