Challenges Facing Russia

Moscow, Russia, 04 February 2009
  • Speech by Ambassador Michael Tay, Executive Director, APEC Secretariat
Introduction
I'm not an economist, so I won't dwell on the economic challenges that Russia faces.
But I am the Executive Director of APEC, a free-trade grouping of 21 member economies - including Russia - that together represent 40% of the world's population, 44% of world trade and 54% of world GDP.
Therefore, I'm well aware of the effects this economic crisis is having on international trade, and in turn on employment and standards of living - so I will give my perspective on what Russia should do to make sure the benefits of free trade keep flowing.
And, given that for 6 years, right up until October last year, I was Singapore's Ambassador here in Moscow... I know Russia well, I understand the problems the country faces, so I will give my views on why I believe Russia is well-positioned to overcome them.
The challenges facing Russia
In my view Russia faces two major challenges - the challenge of overreliance and the challenge of lack of international confidence - but the good news is that I think both can be tackled through APEC.
 A. Challenge of overreliance
 

The current crisis has affected all economies without exception, and the theory of decoupling has been debunked.
This means that contrary to previous dogma, commodity based economies like Russia are no longer a safe haven.
In fact, as Prime Minister Putin said last week at the World Economic Forum in Davos, the crisis has made Russia's overreliance on raw materials more evident.
As you all know - gas, oil and metals and mining make up the lion's share of the economy's output.
But what you might not be as well aware of, is Russia's overreliance on certain trading relationships.
Russia is not a member of the WTO, so APEC is the only international multilateral free trade grouping to which it belongs.
Generally, when economies join APEC it leads to a pick up in trade with other members.
Not so for Russia. When Russia joined APEC in 1998, its total merchandise exports to APEC economies comprised 17% of its total export trade. By 2007, they'd shrunk to just 12% of Russia's total trade.
By contrast, Vietnam, which also joined in 1998, has seen its trade with APEC member economies increase dramatically as a proportion of its total exports - from 54 to 70%.
Similarly, in total dollar terms, Russia has failed to leverage its position in APEC to the same extent as other members.
Russian exports to APEC economies have merely tripled over the duration of its membership, whereas Vietnam has achieved more than a six-fold increase in the same period.
Instead of focusing on accessing the high growth economies in Asia - such as China - it seems that Russia has relied on its traditional trade partners to the south and the west.
 B. Challenge of lack of international confidence
 

The second challenge is that of confidence.
As we've seen in the past week the IMF has massively downgraded its projections for global economic growth in a period of just 3 months.
The fundamental reason for this is a global crisis of confidence.
Investors and households have been spooked by governments' inability to act quickly and with conviction to address the financial crisis.
This has prompted households and businesses to postpone expenditures - turning a financial crisis into an economic one, and a recession at that.
This matter of crisis of confidence is a global issue, but in Russia it is especially acute.
Investor confidence in Russia has evaporated, with some US$55bn flowing out of the country in just a couple of months at the end of last year.
Currency traders are depressing the value of the ruble.
And depositors, fearful of further devaluation or a collapse in the banking system are withdrawing rubles and converting them into dollars, creating a vicious circle.
Russia is well positioned
So how does Russia get out of this situation?
Most importantly, Russia has a lot going for it:
  • There is low leverage in the economy - Russia's loans to GDP ratio is very low, around 40%, and in fact, some 34% of the bankable population is yet to use formal banking
  • It has a large population of 142 million, with an indomitable spirit and brains, a wealth of natural resources, fertile lands and an entrepreneurial culture
  • It has survived bigger crises than this before, and a history of rising phoenix-like from the ashes
Confronting the challenges
Of course, a multitude of domestic measures must be taken - including fiscal and monetary stimulus packages - to help get the economy back on track.
But I also believe that Russia needs to look beyond its borders for solutions.
This is not a time for isolationism - it's a global problem that demands global solutions.
In this regard, I want to draw attention to the potential that lies in Russia's membership of APEC.
APEC's raison d'être is generating growth and prosperity in the Asia-Pacific region through free and open trade and investment. As history shows us, resorting to protectionism at times like these only causes further economic trauma, civil unrest and international conflict.
This is not what Russia needs or wants.
 A. Meeting the challenge of overreliance
 

In terms of brute economic power the value of being part of APEC cannot be doubted. It's a grouping that generates 54% of the world's GDP and includes economies like China, and many emerging economies, that are being held out as the catalysts of future growth. This is in stark contrast to the economies of old and eastern Europe, where the outlook is not so rosy and the political scene not so stable.
But as I explained earlier, the trade flows show that Russia has not made the most of its membership of APEC.
Russia should be using its membership of APEC to develop what in the Chinese speaking world is called guānxi - relationships that are built over time and used to mutual benefit.
This is a time for Russia to address its overreliance on certain industries and trading partners, to maximise opportunities and diversify risk.
In practical terms, engaging more in APEC would guarantee better access to a wider range of markets for Russian exporters, and ensure that Russian businesses and consumers benefit from cheaper and cutting edge imports.
I have direct experience of creating these linkages between Russia and its partners in APEC.
During my time as Singapore's Ambassador to Russia, I set up the Russia-Singapore Business Forum, the only international business-to-business platform engaging Russian business - and I am still its Executive Director.
For years now I have been bringing Singaporean and other Asian businesspeople to Russia to seek win-win situations. Unfortunately, visitors to Russia are often fearful of a win-lose situation, with the risk falling on their side.
However, I believe in Russia, and I have seen benefits for both sides. Singapore has seen a 40% increase in inbound Russian tourists, and a 10 fold growth in the Russian diaspora in the short space of 6 years - with the knock-on benefits of more trade and business linkages.
Russia on the other hand has benefitted greatly from Singapore's assistance in developing special economic zones in Tomsk and Tatarstan: these regions are aimed at diversifying the Russian industry base and attracting foreign investment.
So, while a little has been done, there's a lot of potential still out there.
The provision of economic and technical cooperation is a key focus of APEC, and Russia should draw on these resources to help build capacity in areas where it is lacking. APEC is also keenly focused on investment at the moment, and the new APEC Investment Facilitation Action Plan should be a valuable tool for Russia in the future.

 B. Meeting the challenge of lack of international confidence

 

The current economic crisis has taught us that often perception becomes reality.
Therefore, it is vitally important for Russia to project the right image.
First, investors and businesses need to see that difficult internal reforms are being implemented.
In recent years APEC has concentrated on structural reform: it has developed recommendations on corporate and public sector governance, competition policy, regulatory reform, and on strengthening economic and legal infrastructure.
Russia can use these guidelines to do the housekeeping it needs to do.
Then, Russia needs to show the world that reforms and advances are being made.
And APEC can help with this too.
Vladivostok is slated to host APEC in 2012 - it will be the first ever meeting of its kind in Russia, and all eyes will be focused on it.
It might seem like a long way away, but now is the time to start developing the agenda, to showcase what Russia has to offer and to ensure that Russia gets what it wants out of it.
Peru reaped many rewards from hosting APEC last year:
  1. FDI doubled in 2008, and the Peruvian government estimates that FDI will triple this year as a direct result of APEC.
  2. During APEC 2008 Peru signed FTAs with China and Singapore; announced the start of FTA talks with South Korea; and signed an investment treaty with Japan.
  3. This is on top of the 3 FTAs that Peru has already signed with APEC partners - namely Canada, Thailand and the United States. Negotiations with Mexico continue.
  4. Peru welcomed some pretty serious trade missions during the year including from:
    • Russia: President Medvedev's delegation included the heads of VTB Bank and Gazprom. Marked the first time since the end of the Cold War that there was a major Russian initiative in Latin America.
    • And Singapore: in November PM Lee Hsien Loong toured the region with 14 business leaders, after signing an FTA with Peru in May.
    Already, the Primorsky/Vladivostock region is witnessing the benefits:
    1. Federal funding of some 283 billion roubles has been committed
    2. Infrastructure is being built: construction of two bridges has commenced- one over Golden Horn Bay and the 3km long bridge to Russkiy island. A water treatment plant and a freight terminal are in the pipeline, and a conference and press centre planned for use during APEC will later be used to establish the Far Eastern Federal University
    3. Tourism: new hotels and the largest aquarium in Russia are being constructed
    4. Investment: enduring partnerships with foreign investors are being created. For example, bilateral trade with Japan increased 39% in the final months of 2008, thanks to Japan's involvement in APEC-related infrastructure projects.
    Conclusion
    It's a cliché but it's true: challenges create opportunities if you rise to them.
    And to my mind there is no country that knows this better than Russia.
    For Russians, survival, success and pleasure has always been a continuum - it just happens that for now we've been pushed closer to the survival end of the spectrum.
    To confront the challenges that I have identified today, and to move to a position of sustainable success, Russia should seize the benefits presented by its membership of APEC, and by the fact that it will host the APEC 2012 meetings. It is Russia's opportunity to truly connect with the region and to maintain economic growth in the future.