Russia needs to create a mandatory Central Securities Depository (CSD) that is compliant with US rules, which in turn would alleviate foreign investor concerns and move them away from registrars and would therefore push Russia into becoming a new international financial centre, says Citi in an exclusive interview with Global Custodian .
A key challenge for Russia becoming a new international financial centre is the creation of mandatory CSD, which is compliant with requirements of US Second Rule 17F7, says Alexei Fedotov, Director, Head of Securities & Fund Services Russia and CIS at Citi. Current draft Law does not make the CSD mandatory thus potentially leaving the possibility for certain foreign investors not to recognise it as eligible foreign CSD and forcing such investors to use registrars. We strongly believe that without the mandatory use of CSD Law [this could slow down Russia becoming a new international financial centre.
Russia is a burgeoning market that has long been viewed as niche area, requiring specific understanding and approaches to tap into the vast array of resources and financial services, as for many years, the country had been deemed difficult for foreign investors to access.
However, after a raft of governmental initiatives and changes to legislation, Russia is positioning itself to become a major international financial centre (IFC).
Several steps have been made to make the Russian securities market more attractive to foreign investors, which is key to allowing the country to become a true IFC.
For example, on 8 June 2011, the new Law (Tax code of the Russian Federation, Federal law No 132 ) amending the Tax Code came into force, which states that income received by foreign investors from sale of Russian equities listed on a stock exchange is not subject to any withholding tax in Russia.
However, despite progress being made by the Russian government to push the Russian financial markets into a new era, Citi outlines some more key hurdles that need to be overcome in order for the region to fully become an IFC.
Another key challenge is the Capital Gains Tax, says Fedotov. It continues to prevent foreign investors from investing in Russian equities in RUB in spite of recent liberalisation. Further consultations are required, while the Foreign Nominee issue also remains the key question to be addressed, in order to make the market transparent and acceptable for foreign investors. The draft Law is in place. We hope it to be adopted along with Law on CSD this year.
Citi also say that there should be some major changes to custody services in the region, following the push for Russia to be a new IFC.
We expect to see new fundamental changes followed by the expansion of custody services within the next 2 to 3 years, says Fedotov. This expansion could include contractual settlement and corporate actions, electronic pre-matching and standardisation of corporate actions for example.
For the full feature on Russia becoming a new IFC, which includes several exclusive interviews with Citi, Deutsche Bank and ING for example, please check the next issue of Global Custodian
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