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As the world's top investment bankers flock to Russia's second capital this weekend for the St. Petersburg economic forum, attention will once again focus on Dmitry Medvedev's efforts to transform Moscow into an international financial centre.

The President's initiative is central to efforts to diversify the economy from its dependence on exports of raw materials and to shield it from global market shocks by strengthening the domestic capital market.

Though the drive may still seem quixotic to many investors, the President has in recent months unveiled a series of measures that aim to elevate Russia's standing from a volatile local market widely perceived as plagued by red tape and a mercurial legal system, to a regional financial powerhouse.

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Among the first big concrete steps is the merger in February of the country's two main bourses, the RTS and Micex stock exchanges.

This will help centralize capital markets and simplify the structure for investors.

Roman Lokhov, chief executive officer of Otkritie Securities, the Russian brokerage, says he believes the creation of a centralized clearing house and depositary will follow.

He says the growing appetite among Russian investors for access to sophisticated derivatives means "there is huge potential for the market that is not utilized yet."

Alexander Merzlenko, deputy chief executive of Renaissance Capital, the Moscow investment bank, agrees that the long-awaited merger is now close to being "irreversible," while the government's privatization drive to sell more than $32-billion (U.S.) in state assets over the next three years could also boost domestic capital markets.

While big Russian assets have traditionally headed to the London Stock Exchange to attract deeper, longer-term pools of cash, the government is considering selling big state assets on the local exchange, Mr. Merzlenko says.

"One of the [top] priorities is the development of domestic equity markets," he says. "The government is asking investment bankers how to manage the objectives of getting the best price and raising the profile of the company, and also developing financial markets here."

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In one potential endorsement of the domestic market, German Gref, chief executive officer of Sberbank, the country's biggest bank, proposed conducting the sell-off of a 7.6-per-cent stake in the state-controlled entity via the Micex exchange either this year or next, as part of the privatization drive.

Improvements must be made to the investment climate and the legal system, though, if Russia is to attract the investments needed to develop into a top ranking capital market.

To this end, Mr. Medvedev has unveiled a series of initiatives aimed at empowering minority shareholders and boosting transparency.

He has ordered the removal of government ministers from the boards of state companies, to start dismantling the system of state capitalism known as Kremlin Inc. established under Vladimir Putin.

Mr. Medvedev has called for the adoption of international accounting standards by all companies and for greater disclosure of information to minority shareholders.

Critics say these moves may gain little traction against the entrenched interests of officials. Igor Shuvalov, first deputy prime minister, says government ministers on state company boards are likely to be replaced not by independent directors but by trustees who will vote according to government directives.

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"We have a situation where Medvedev is forwarding concrete initiatives but he has no means to implement without the government, which is blocking them," says Alexey Navalny, the corporate governance activist, who recently faced criminal investigation in what some say is a backlash against his activities uncovering corruption at state companies.

Indeed, as long as uncertainty remains over whether Mr. Medvedev will lead Russia beyond presidential elections in 2012, or whether Mr. Putin will seek to return to the presidency, investors cannot be certain whether the impetus to transform Moscow into an international financial centre will continue.

"The political will is there at the moment and this is very positive. We just need to see if the political will is there over time," says Alexander Branis, head of the corporate governance committee created as part of the Kremlin's international financial centre initiative.

Mr. Branis, who is also a fund manager at Prosperity Capital Management, says his committee started work only last December and many proposals are still under discussion.

One of the biggest challenges is deepening the pool of domestic cash available for investing in local capital markets, both by bringing back hundreds of billions of dollars stashed in bank accounts abroad by the country's tycoons, and by embarking on pension reform. This will be impossible without improvements in upholding the rule of law, analysts say.

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