As Russia watches its foreign capital flight continue its Deputy Finance Minister admitted to CNBC that even among Russians confidence in the country’s systems is very low but insisted that regulatory and structural reforms were underway.
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“There are problems with the domestic investor and we need to build an infrastructure which is sufficiently attractive to Russian savers to channel all their savings into the domestic market. But the trust in the system is very low and deposits into banks increased ten-fold since 2005 when the deposit insurance guarantee scheme [was] developed,” Alexei Moisseev, told CNBC Europe’s “Squawk Box” in London.
Russia’s RTS index is down 10 percent over the past year and 45 percent since the height of the market in May 2008.
Over the last four years the country has seen capital flight in excess of $300 billion.
The country has long battled its image of a difficult place to do business in due in part to corruption and a lack of transparency. The government has voiced its commitment to an open Russia claiming it is ensuring market liberalization through legislation. (Read more:Russia an Undervalued Growth Opportunity?)
Moisseev insisted that financial reform was key to turning the tide on the massive capital flight that the country has experienced in recent years.
“One of Russia’s many problems is that the investment ratio is much smaller than the savings ratio because of this capital flight. There are many things we need to do to improve, but the biggest problem is the quality of the market infrastructure. As well as [improving] property rights protection [and] the court system,” he said.
The Russian Economy Ministry has admitted that the flow of capital into the country can no longer be relied upon in a post-financial crisis world.
Last month’s acquisition of BP’s stake in Russian oil venture TNK- BP by Russia’s Rosneft saw old concerns about a Statist business environment being reignited.
According to reports, the real reason for BP’s sale of hugely lucrative venture was its exhaustion over political interference and bitter disputes with Russian oligarchs which owned part of the TNK-BP venture.
Moisseev said the deal was actually a good move because Rosneft was a publicly-listed company, whereas TNK-BP was not.
But others have been more critical.
Neil Shearing, chief emerging markets economist at Capital Economics told CNBC that a ‘statist mentality’ permeates Russian business but is particularly acute within the natural resources sector.
“It is clearly a factor with the BP deal, not least because it has been fantastically profitable. There are wider issues about the business environment within Russia and relative to its peers in Eastern Europe its ranking in surveys of places to do business is low.
The change in politics has moved to a more ‘statist’ model especially within the strategic sectors,” Shearing said.
Russia’s Deputy Finance Minister also said the government would continue to focus on privatization, but would try and make sure government firms were listed domestically, rather than just on foreign stock markets.
His comments followed criticism of the government’s decision to list Sberbank, Russia’s largest bank, on the London Stock Exchange.
Moisseev acknowledged that regulations in Russia would need to catch up with developed market regulation before businesses would be confident in investing in the country but said work was being done to improve the legal environment and to create a more robust financial reporting system.
-By CNBC's Shai Ahmed, Follow her on Twitter @shaicnbc