Ben Aris in Moscow -

Russian President Vladimir Putin has started his second stint of two possible terms as president by launching a sweeping programme of reforms. Changes to the financial system are the most advanced and possibly the most important.

Putin met with senior officials to discus the development of the financial markets on Friday, January 25. Two things came out of the meeting: changes to the market regulator, and a renewed privatisation effort.

Now the two main exchanges - RTS and Micex - have merged, the next major markets development will be to set up the so-called mega-regulator to oversee both the banks and the domestic capital markets. Former finance minister Alexei Kudrin is tipped to head up the mega-regulator, according to local media reports - although he has denied being offered the job.

And the Kremlin is pushing for more state-owned companies to be floated on the domestic exchange, frustrated with the slow pace of privatisation that has drawn withering criticism from observers - and Putin himself. "What was our aim in merging our two trading floors? They have merged, and now what? All of our big companies, including companies in which the state has a stake, are trying to raise money abroad," said Putin at the meeting. "Most Russian companies list their securities on major international stock exchanges. Only one sizeable Russian company has carried out an IPO in Russia itself over the last two years, while 13 big companies have done so abroad."

Putin went on to point out that Russian companies currently account of 18% of London Stock Exchange's total market capitalisation, "a good result and it shows that our market and companies are of genuine interest for global investors."

"These privatisation deals must take place on our trading floors. Carrying out privatisations here at home is a sign that we are serious about our plans to build a competitive financial market and that Russia has a market infrastructure it can trust and rely on," Putin told the assemble heads of the financial services. "If we do not begin this now we will never do it but will simply keep talking endlessly about the need to do it."

Bourse listing

A crucial listing will be the exchange itself. In the next few months Micex will list on its own exchange, given good market conditions. It's trying to look as attractive as possible to investors: the exchange is planning to raise its dividend 50% over the next two years.

As of the end of December, 694 issuers are trading on the securities exchange, including some of Russia's largest companies by market capitalisation such as Lukoil, Rosneft, Sberbank, VTB and Gazprom.

However, evidence of the lack of appetite amongst foreign investors for Russian state-owned stocks was clear from the listing of state-owned retail giant Sberbank. It finally managed to list in 2012 and raised almost $5bn for a 7.6% stake, but only after many delays. The companies on the slate for sale this year are not as attractive but equally valuable and will be hard to sell in the depressed market.

There are other reforms being worked on. This month Russia's capital market will be further opened up to international investors after being hooked up to international clearing systems Euroclear and Clearstream - but only for bonds; the Kremlin wants to run this system in beta mode for up to two years to see what effect removing all controls on capital movements in and out of the bond market has on capital flight before doing the same for the equity business.

Pulling off these reforms - by no means a given - is crucial to Russia's future. Two big problems over the next decade will be how to pay for the growing number of increasingly expensive pensioners and how to finance many billions of dollars of badly needed infrastructure investment. Both of these things can be paid for if the capital market reforms can be made to work and marshal the population's savings.

Currently Russia's pension assets under management amount to only 4.5% of GDP (mostly in the state pension fund), says Putin, only fractionally more than the 3% when pension reforms were launched in 2002. "Other traditional mechanisms used to stimulate long money, life insurance, for example, have hardly developed at all here yet. Only around 1.5m people here are involved in the stock market in one way or another," Putin complained. "We have to give all of our people, including the growing middle class, additional working institutions that will help them to ensure their financial prosperity."