The instability of the global economy and global financial markets generates complex external conditions for the development of the Russian economy and Russian financial markets in the short and the medium term. A stable and efficient financial system is needed to ensure rapid economic growth.
The systemic risks built into the financial sector have increased in the early 21st century. We have witnessed how the 2008-2009 financial crisis spread rapidly across the globe. This phenomenon is called a “financial epidemic” or a “contagion effect.” The consequences of this crisis still linger. Advanced economies eventually recovered from the crisis by late 2011. However, a few European nations experienced a sovereign debt crisis, and there is a high risk of economic stagnation and recapitalization.
A major cause of the recent financial crisis was the recapitalization of the global economy. In 2007, the global ratio of capital to GDP was roughly 120%, with speculative capital representing the largest share of total capital. The capital intensity measure can be used to assess market conditions (Fig. 1).
Fig. 1 Russian Ratio of Capital to GDP in 2009-2012.
The maximum permissible value of the ratio of capital to GDP is 150-180% for developed economies and 100-150% for developing countries. In 2007, the pre-crisis value of the GDP capital intensity was 144% in the United States, 141% in the United Kingdom, 165% in Canada, and over 190% in China. The sharp depreciation of financial assets, the plummeting of stock market capitalization and the deterioration of credit conditions led to the financial crisis the following year and its rapid spread across the globe.
It is clear that when capital intensity exceeds its threshold limits, the stock market may collapse and economic growth may slow, i.e. a classical financial crisis may ensue
According to some estimates, the total value of the global derivatives market in 2008 was roughly $65 trillion, which significantly exceeds the global GDP value. Today, the value of various financial assets is 100 times greater than the size of the global economy measured by the value of the goods and services produced. Creating mechanisms to prevent the bursting of stock "bubbles" that could wreak havoc on the global capital market is essential.
In the second half of 2012, all of the major developed economies, including the United States, Eurozone countries, the United Kingdom, and Japan, showed signs of a recession. This trend continued in 2013. The global economy has not yet recovered from the U.S. economy’s severe slowdown in recent years, while the EU has already created a dangerous situation through bank system capitalization in troubled markets.
For instance, Ireland has fulfilled all of the fiscal austerity measures requested by the Euro Group, but the situation in Greece has failed to improve, even if half of its debt has been written off. Meanwhile, another anti-crisis recipe is being tested in Cyprus. At the same time, France may be the next country to request more time to take care of its budget deficit obligations at the final EU summit this year in order to prevent a recession.
The instability of the global economy and global financial markets generates complex external conditions for the development of the Russian economy and Russian financial markets in the short and the medium term. These conditions require government intervention in order to modernize the Russian financial system. A stable and efficient financial system is needed to ensure rapid economic growth. Specific attention should be paid to the most pressing issues facing the Russian financial market, such as the unfavorable investment climate, the shortage of long-term funds, and the lack of investment instruments, among various others.
The Russian banking system continues to develop extensively due to the unrestrained borrowing of international capital. In 2012, its total bank equity, bank assets, and retail credit grew at an annual rate of 8.5%, 9.4%, and 36%, respectively. The largest share of the growth occurred in the top five banks, and their total share of the country's bank assets reached 51.1%.
Russia’s financial authorities have a number of strategic objectives with regard to modernizing the financial system. The major objectives are to preserve the stability of financial institutions, ensure the liquidity of the banking system, transform savings into investments, and manage financial risk.
However, effectively solving these problems is impossible without improving the quality of state governance in the financial sector and corporate management in banks and other financial institutions. Therefore, the primary focus of these activities must be:
- Creating organizational and tax incentives to develop the IPO market for small- and medium-sized and high-tech companies, as well as stimulating the IPOs of Russian companies on the Russian market;
- Nurturing the conditions for infrastructure bonds on Russia’s financial market;
- Developing the commodity derivatives market;
- Increasing funds in public capital markets, collective investment institutions and pension funds;
- Effectively regulating the financial market, ensuring a greater role for self-regulatory organizations, organizing a coherent international standard legal and regulatory framework for Russia’s financial markets;
- Ensuring international corporate governance practices in line with highest global standards and best practices;
- Establishing a regulatory framework for accelerated stock and commodity market development;
- Expanding securities for the Russian Pension Fund;
- Improving listings and information disclosure based on global practices and standards;
- Ensuring greater investor confidence in the Russian financial market by establishing compensation mechanisms (funds), introducing FOREX market regulation, modifying advertising legislation, and creating advertising services restrictions.
