Russia once had ambitions of making Moscow an international finance hub. Putin's war has crushed the dream.
Huileng Tan
Updated 6 min read
Russian President Vladimir Putin championed domestic reform and international integration when he first took power in 2000.Mikhail Svetlov/Getty Images
Russia once had ambitions for Moscow to be an international financial center.
But its annexation of Crimea in 2014 unleashed a rash of sanctions and curbed foreign investments.
Russia's now cut off from the international community, which is crucial in building a knowledge economy.
It was only a decade or so ago that Russia was working towards its grand ambition of making Moscow a global financial hub.
At a 2010 conference in St. Petersburg, 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 was advancing a lot of efforts to make Moscow an international financial center," said Hassan Malik, a senior sovereign analyst at Loomis Sayles, a Boston-based investment management consultancy.
"Various Russian politicians, including Putin, 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 started to lay the groundwork for its vision. There were official efforts to elevate the profiles of Moscow and St. Petersburg, and the Kremlin pushed to make the ruble a global reserve currency, Malik said.
As a large and resource-rich economy, Russia — despite its risks — was an attractive investment destination. Global financial powerhouses such Goldman Sachs and Citibank set up shop in Moscow. The Big 4 accounting firms — PwC, KPMG, EY, and Deloitte — were also in the country.
In the months since the invasion, countries have slapped Russia with sweeping sanctions. Major banks and international financial institutions have pulled out of the country en masse. The big 4 accounting firms have all pulled out of Russia or begun the steps to do so, as have Goldman and Citibank. What's more, the war has not only jeopardized Moscow's standing as a finance hub: 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
Russia's economy wasn't always moving backward.
When Putin first came to power as Russia's president from 2000 to 2008, he advocated for reforms and modernization, wrote Anders Åslund, an economist and a senior fellow at the Stockholm Free World Forum, a think tank. At the time, Putin "often championed sensible reforms while promoting initiatives to modernize and diversify the Russian economy," Åslund wrote on the Atlantic Council's blog on June 13. Among his major reforms were tax reform and cutting red tape for the setup of small and medium enterprises.
Putin managed to complete all the progressive economic reforms started in the 1990s by the administration of Boris Yeltsin, who served as Russia's first president after the Soviet Union collapsed in 1991, Åslund added. Putin also championed far-reaching international integration of Russia, pushing for the country's membership into the World Trade Organization, Åslund noted.
"These policies 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," wrote Åslund.
Foreign direct investments, or FDI, into Russia rose steadily in the 2000s up until the Global Financial Crisis, when they slumped, according to World Bank data. After the recession, FDI into the country resumed a general trend upwards from 2009 until Russia illegally annexed Crimea from Ukraine in 2014, prompting a raft of US and EU sanctions.
Even after the annexation of Crimea, Russia continued to push ahead with its financial ambitions: The Moscow Exchange that was set up in 2011 continues trading today. The country's top central banker, Elvira Nabiullina — who has been helming the institution since 2013 — was well-respected by her peers and named by several trade publications, including Euromoney in 2015, as the world's best monetary policymaker.
Turning to isolationist policies
By the time Putin began his second presidency in 2012, he had "already begun embracing isolationist policies, protectionism, and import substitution," Åslund said.
Today, Russia is all but an international pariah, with global financial institutions withdrawing from the market 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 path to becoming an international financial center.
In the 100 days since it was founded, a 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 impacted — the Big Four accounting firms employ about 15,000 staff collectively, while Western banks employ about 40,000 staff, according to the Financial Times.
Russia is turning inward to weather sanctions, but hitting the big league of knowledge economies will be hard
Despite the exits, unemployment in Russia has been steady as foreign companies are leaving in an orderly fashion, and as the Kremlin has been trying to preserve employment through implicit pressure on employers — a tactic Putin's regime has been using throughout the years, said Malik. This has contributed to a flurry of deals involving foreign companies selling their businesses and stakes in their Russian operations to local buyers who would continue running them under a different brand.
Russia is seeking to turn inward to weather current sanctions, but it'll be challenging for the country to make inroads 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 — which means international interactions," Malik said.
Russia's economy is expected to shrink 8.5% in 2022, with a further decline of 2.3% in 2023, the International Monetary Fund projected in an April report. That would be the economy's largest decline since the years following the fall of the Soviet Union in 1991.
"The 2014 invasion of Ukraine dealt a serious blow to even what equivocal progress there had been until then, and after the events of recent months, it is difficult for me to see how Russia will emerge as a global financial center in the foreseeable future," said Malik.
