MOSCOW BLOG: Russia goes east

By bne IntelliNews November 6, 2012

bne -

The world's centre of economic gravity is starting to move rapidly east. The FT published on November 6 a guest post by Russian Prime Minister Dmitry Medvedev, in which he says must Russia accelerate its move towards Asia. The process of rebalancing the Russian economy in that direction is already well in hand.

"Given that the global economy's focus is shifting east, Russia simply must be more active in the Asia-Pacific region. That region is becoming the centre of global economic growth, generating about 55% of global GDP and nearly half of global trade," Medvedev writes.

This is part of a long slow process of Russia turning its back on Europe and America thanks to the cold shoulder it has received as a result of foreign policy. President Vladimir Putin was the first international leader to call George W Bush following the 9/11 attacks. He followed that up by calling Condi Rice to tell her the Russians were standing their army down as America put its on full alert - an unprecedented gesture that was extremely well received at the time.

Putin was making a genuine effort in 2003 to reach out to the US and restart relations. The Russian president followed up by closing a high tech listening post in Cuba that could tap into the entire telecoms network on America's East Coast. "I can't believe it," a US security official said at the time. "That is far too valuable to them. They would never close it."

The comradery reached its zenith when Bush famous talked of looking into Putin's soul after their first meeting in Moscow; a comment for which he was widely ridiculed. But, everything went downhill after that, leading to Putin's Munich Security Council speech in 2007, which threw down the gauntlet, saying Russia would not wait forever for its overtures to be met with some sort of rapprochement.

Things only got worse, however. Following Medvedev's succession to the post of president he went to London where he repeated the same message, saying Europe was Russia's "natural ally" but that the West needed to meet Russia half way. He called for a new European security arrangement to replace NATO - a call that is entirely justified in historical terms as NATO was set up to fight the Soviet Union - but one that has been entirely ignored.

The process of moving apart continued this summer, when Putin called on the US to give up its role as "global leader" and step aside in favour of the G20 as the new global authority in his keynote speech at the St Petersburg Economic Forum in June.

Moving closer

Meanwhile, the Kremlin has accelerated its plans to move closer to Asia - and China in particular. That was made clear by the effort and money that was poured into Russia's hosting of the APEC (Asia-Pacific Economic Cooperation) summit in Vladivostok in September.

The process of gradually moving closer to China began in 2004, when the Kremlin decided to massively expand its delivery of oil to northwest China by rail, a sharp turnaround in policy. Part of the reason that Yukos owner Mikhail Khodorkovsky was thrown in jail in 2003 was his ambition to build an oil pipeline from western Siberia to China's under developed northwest territories. However, within a year, after taking over Yukos assets - including its rail fleet - the Kremlin was working on a similar plan, and has since even committed to building the same route, plus a gas pipeline.

A speech by former German Chancellor Gerhart Schroeder in Berlin in 2007, when he was already working for the Russian pipeline firm Nord Stream, repeated the warning: "Russia is our natural ally, but there is a window of opportunity to engage with them. And that will close eventually."

In addition to the push east is the advent of the Customs Union, which went into effect in January 2010. Commentators have largely dismissed this, as it only contains Russia, Belarus and Kazakhstan. However, the EBRD is due to release its Transitions Report report tomorrow in which it will conclude the Customs Union has been a success and boosted the prosperity of the members.

Moreover, this body continues to develop and will become the Eurasia Economic Union in 2015. It will then remove all restrictions on the flow of capital, labour and goods. It's telling that Medvedev devoted quiet a bit of space to this in his blog.

"Together with our Belarusian and Kazakhstani partners, Russia itself is involved in a large integration project. In 2015 we will found the Eurasian Economic Union, which will aim to open our national economies and create the conditions for establishing a common economic space from Europe's westernmost point to the Pacific Ocean. I am convinced that when the Eurasian Economic Union is fully operational we will be able to remove barriers hindering the movement of goods, capital and services in Eurasia," Medvedev wrote.

Again the EEU - a facsimile of the EU, but without the EU's flaws (that's the idea) - is ignored by most commentators. But what if China were to join? Imagine China's 1.3bn population and hoard of over $3 trillion in reserves tying up with Russia's seemingly limitless natural resources. What would be the economic effect of this block if they removed all barriers to the movement of goods, money and labour? What sort of economic powerhouse would that be? Who could stand in its way? It would rapidly become the dominant global force in every sense.

The problem with this is that the Russians and Chinese don't like each other and it is not natural partnership. But even the halfway house that Medvedev is talking about will create a major political and economic alliance. That bit of work is well in hand. Medvedev goes on in his blog to list the infrastructure - especially transport - projects that are already tying the two countries together.

Best of the Bric bunch?

Finally, the irony of this reorientation is that while the politicians and the international press blithely dismiss Russia as a backward kleptocracy that is on the verge of collapse (and has apparently been for 12 years now despite its manifest growth) international companies have an entirely different opinion.

A second post on the FT's site this morning points out that trend. Brics: less risky? by Avantika Chilkoti notes that multinationals are rushing into Russia.

As bne has reported, a raft of fast food multinationals has been opening up in Russia in the last year or so. Just last week, Burger King announced it will roll out hundreds of restaurants in Siberia for example. However, this trend is moving beyond the very bottom of the food chain (both literally and figuratively).

A survey by professional services company BDO that interviewed over 1,000 CFOs from international medium-sized companies found that 45% are now planning to enter the Bric markets, compared with only 29% last year.

Allan Evans, global head of client service at BDO, told the FT that perceived risk in the Bric markets is falling: "The Brics have been around as investment destinations for years now, with past experience on the ground to give investors confidence. And the Brics themselves have improved their regulatory environment to be more welcoming of inward investment."

The Kremlin has launched a major investment drive, with a rise on the World Bank's Doing Business ranking as the flagship reform. Last week it was announced that Russia has gone from 120th in the list to 112th, although it is still well shy of the top 20 place Putin wants to reach by 2018. Still, it is progress and the businessmen, if not the journalists or politicians, have noticed.

Russia still has problems of course - the CFOs in the survey cited corruption and ethics as the main Russian risks - but there are opportunities too. Of the reasons cited for wanting to go to Russia, surprisingly 81% cited the market's size, the highest proportion of all the Brics - only 69% cited market size for China and 64% for India. Commentators tend to look at the population sizes, but businesses look at the number of consumers and their spending power - and Russia is a stand out winner in these terms as it is by far the richest of the Bric bunch.

The same logic applies to Russia's relation with Asia, which is advancing rapidly in Russia's trade balance. Medvedev made it explicit in his blog: "Russia has long been ready to co-operate to [with Asia]. We have centuries-long experience at the crossroads of different cultures and civilisations. No wonder Russia is called a Eurasian or a Euro-Pacific country, as some would have it. This will undoubtedly be a major asset in developing cultural dialogue between regions and continents and also in building a common economic space from the Atlantic Ocean to the Pacific."

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