COMMENT: Gaidar Forum highlights the problem with Russia

By bne IntelliNews January 18, 2013

Ivan Tchakarov of Renaissance Capital -

I just attended the key session of the Gaidar Forum, here are my impressions:

· A monkey wrench in the works

The session dealt with Global Competitiveness and Russia's place in it, including the pros and cons of WTO membership. Being the habitual Russia Bull that I am, I am genuinely unhappy to throw a (may be not so little) monkey wrench in my own optimistic reading of what is transpiring in Russia. This necessarily implies that I need to qualify a bit even the already very cautious statement by [Rencap Global Chief Economist Charlie Robertson] who said yesterday that "Russia may be indulging in long-term thinking" exactly when most western governments dabble in "short-term fire-fighting". Why so? The exchange between Denis Manturov, Minister of Industry and Trade, and Pascal Lamy, Director-General of the WTO, was so meaningful, yet so disturbing, that it enraptured the audience and served to set my mind thinking.

· Only a "recycling duty" or something even more?

The bone of contention (a very little bone, by the way) was Manturov's statement that Russia will vigorously defend its right to impose the so-called "recycling duty" on foreign imported cars even within the context of the WTO (I am not going to go into the details, but this is basically illegal under WTO rules). He was readily supported by Mikhail Abyzov, Minister of the newly established Open Government. Now, Pascal Lamy reacted with dismay (he was actually trying hard to contain his ironic smile, but he could not). He was crystal clear that he finds it amazing that Russia, being a full-fledged WTO member now, even contemplates abiding (or not) by WTO rules. It all sounded to me like Russians may not be very clear that, once in, they can't continue saying we will not do this and we will not do that because we don't like it. Even not being Russian, I felt embarrassed for Russia and Russians. This very exchange represents the very problem that Russia has with the world and itself - it creates good laws and regulations, but mostly fails to follow up on them, it strives to become a well-deserved member of the global family, yet flouts its obligations when it finds this useful.

· German Gref's lack of clarity

German Gref, an accomplished speaker and chairman of Sberbank, only succeeded in confusing me even more. On the one hand, he argued that Russia's current economic model based on commodity exports is doomed and he correctly pointed out that Russia's real export growth has grinded to a halt, as Russia is not competitive enough to export anything too much besides oil/gas and metals. He went on to suggest that the only way out for Russia is to create its own competitive advantages based on developing local institutions and human capital, and that these in turn depend crucially on education. He augmented the argument by saying that Russia can only benefit from being a part of the global production chain and by being a member of key international organizations, as this allows Russia an inside position to influence their workings. So far, so good, this is exactly what modern growth theory postulates. Yet he then went on a tirade against the WTO, IMF and WB for creating rules that fit only developed economies and fired broadsides against the process of globalization for increasing global income inequality.

· The problem with Russia

My own Russia bullish philosophy has always been centered on the simple recognition that we do things in life if and only if we are properly incentivized. What I refer to as "The Great Macroeconomic Transition from Twin Surpluses to Twin Deficits" serves well to exemplify this principle. Up to 2008 Russia ran significant fiscal and current account surpluses, so there were simply no incentives for Russia to strive to make itself attractive to foreigners, fight corruption, treat minority shareholders better and improve the business climate. There was money galore and enough to go around for both corruption and significantly improving the living standards of the population. Now that this easy money is not available, Russia has all the incentives to address these issues to finance these deficits, this should be simple. But to have the Russian Minister of Industry and Trade overtly saying at the Gaider Forum that Russia may not be fulfilling its own obligations (just because we don't like it) is a painful reminder that my optimism may be, well, too optimistic. A seed of doubt has been planted.

· The possible problem with me

It is possible that I just did not have a good night sleep or that I forgot to bring my rose-tinted glasses with me today, but I regret to say that this exchange may turn out to be the defining moment of the 2013 Gaidar Forum. This would be sad. I am sure we will hear yet many more nice words about the gradually declining government control of the economy, about improving doing business in Russia, about regional convergence, customs union and so forth. These will all, however, pale in comparison to the simple truth that change in Russia will happen only when we have a change in the mentality of those in power and this is a process that may be a bit more drawn-out that we would like it to be. And I do remain a Russian Bull, but may be a bit less so.

Ivan Tchakarov, Chief Economist, Russia & CIS at Renaissance Capital

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