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Moscow: Overcoming a Bad Rap
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The skyscrapers of Moskva-Citi loom over Soviet-era Moscow like gleaming beacons beckoning a new era. The cluster of high-rises, Moscow's answer to La Defense or Canary Wharf, was born of the pre-financial crisis oil boom, when Russia was keen to use its newfound wealth to catapult itself to the forefront of the global economy. Times have changed, but Moscow's ambitions have not. Dmitry Medvedev, the soft-spoken president who has sought to make subtle liberalization the hallmark of his presidency, first seized upon the idea of transforming the Russian capital into a global financial center two years ago. In recent months, the effort has taken center stage.

"Major changes have taken place in Russian society and the Russian economy," Medvedev said in Davos earlier this year, pitching his idea of Moscow as the newest global financial capital to the World Economic Forum. "We are developing and we are moving ahead."

Moscow's rapid transformation from the starved center of Soviet demise to the bustling capital of uber-capitalist Russia has produced a sort of urban shock. The gridlocked roadways, the overstuffed metro, and the glut of over-priced goods and real estate all testify to Moscow's newfound status as an emerging-market darling. Underlying it all, however, there remains a bureaucracy tainted by widespread corruption and endless red tape—systemic flaws in Russian society that all the conspicuous consumption, daring architecture, and lofty rhetoric in the world cannot hide.

Bang-for-Buck vs. Rule of Law

Since formally announcing his intention to build Moscow into an international financial center, Medvedev—in good bureaucracy-loving tradition—has created a presidential commission to oversee the task. Visa requirements for foreign investors and bankers have been eased. The country's two stock exchanges, RTS and MICEX , announced a long-awaited merger, creating a single platform to encourage international and domestic listings. In January, after years of discussion, the nation's parliament (the Duma) finally enacted Russia's first law banning insider trading. And Russia seems closer than ever to achieving its nearly two-decade-old goal of joining the World Trade Organization.

Despite these steps, Moscow was ranked 68th out of 75 cities in the March 2010 Global Financial Centers Index commissioned by the City of London. The city was included because of substantial investor interest, but received a low ranking because it "does not yet have sufficient depth or breadth as a financial center," the report said. It's certainly true that some essential financial infrastructure is still lacking. But Russian officials are aware of those gaps and have set about addressing them. High on the list of priorities are the creation of a central depository—a register of securities trade records—and a planned strengthening of property rights.

Still, what investors seek in a financial center is more than just growth opportunities and financial know-how. They also want rule of law and predictability—commodities that are not particularly abundant in Russia. The country's ranking in Transparency International's corruption index slips every year. In 2010, it was ranked 154th out of 178 countries—below Zimbabwe, Nicaragua and Nigeria, and well below any other G-20 nation, including Argentina (105) and Indonesia (110). Medvedev himself has identified corruption as Russia's biggest problem. But he lacks the power—or perhaps the ability or will—to reduce it. He has announced countless initiatives to crack down on corrupt officials, and every month or two sees a new sweep of firings. Yet, according to Transparency International, corruption has only grown under Medvedev, infecting every level of Russian governance—from lowly traffic cops to senior Kremlin officials.

Adding to the problem is endless red tape. It takes hundreds of documents and inspections by various agencies to set up a business in Russia. That, in turn, creates opportunities for graft. It's much easier to pay off a few officials than to spend years following proper procedures—without any guarantee of success. Many firms, including foreign investors, set aside funds precisely for the purpose of bribery, according to sources at Western consultancies. Patience is beginning to wear thin. In 2009, the Swedish furniture giant IKEA announced it...

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