RUSSIAN INTERNATIONAL FINANCE By: Andriy Lahush 250459077 For Dr. - - PowerPoint PPT Presentation
::gold::oil::gas::diamonds::minerals:: ::gold::oil::gas::diamonds::minerals:: RUSSIAN INTERNATIONAL FINANCE By: Andriy Lahush 250459077 For Dr. J.D. Han, Economics 3370a King s University College 2011 s University College 2011 For
By: Andriy Lahush – 250459077
For Dr. J.D. Han, Economics 3370a King For Dr. J.D. Han, Economics 3370a King’ ’s University College 2011 s University College 2011
::gold::oil::gas::diamonds::minerals:: ::gold::oil::gas::diamonds::minerals::
Illustration 1 Presnensky District – Home of Moscow’s Financial District
Table of Contents :: Relevant Background and Statistics ::Investigation of Russian Economy’s Sources of Growth ::2008 Global Financial Crisis and its effects on Russia ::Russia and European Union ::Russia and “Near Abroad” ::Russia and Japan ::Current Developments ::Conclusion Purpose There currently are lots of exciting new developments in the economy of Russia, which deserve a closer attention.
part because USSR lost to China in the United States’ bid for a preferred business partner due to their unwillingness to adopt new technology.
management of Russia's windfall energy wealth
and many strategic minerals, timber. Even though, like in Canada, climate, terrain, and distance hinders resource exploitation, the world demand is gradually making it feasible to exploit the above resources.
:: Source : CIA World Factbook ::
Long Term Growth is Due to Real Factors Long Term Growth is Due to Real Factors
Productivity (leads to higher profits, so that firms can invest in new technologies, create in new technologies, create jobs, pay more in wages and dividends) jobs, pay more in wages and dividends) Total factor productivity growth of 5.8 percent has been the dri Total factor productivity growth of 5.8 percent has been the driving force behind average ving force behind average GDP growth of 6.5 percent over 1999 GDP growth of 6.5 percent over 1999 – – 2005 due to utilization of excess capacity, 2005 due to utilization of excess capacity, relocation of labour and capital to more productive sectors (Wo relocation of labour and capital to more productive sectors (World Bank) rld Bank) But: But:
Russian firms have exhausted the post-
soviet productivity gains derived from more efferent labour and capital allocations. The capacity utilizatio efferent labour and capital allocations. The capacity utilization rates rose from 42 percent n rates rose from 42 percent in 1999 to almost 70 percent in 2005. (The World Bank) in 1999 to almost 70 percent in 2005. (The World Bank)
Low Investment Rate Prevents Russian Economical Growth Russia has a wide range of natural resources, demand for which i Russia has a wide range of natural resources, demand for which is rising, but the s rising, but the investment rate in only 21.5% of GDP (2009 est.) (74 investment rate in only 21.5% of GDP (2009 est.) (74th
th Globally (CIA
Globally (CIA Factbook Factbook) )
:: The Old Saint Petersburg Stock Exchange :: CIA Factbook ::
Therefore Therefore To sustain growth Russia needs to increase productivity in terms To sustain growth Russia needs to increase productivity in terms of
technology, foreign development and foreign know technology, foreign development and foreign know-
how, as the growth from the post-
socialist transition is running out. Russia needs to make foreign investment more gn investment more attractive to make up for its low domestic investment. Russian attractive to make up for its low domestic investment. Russian government is currently government is currently taking steps to do the above. taking steps to do the above.
Reliance on commodity exports makes Russia vulnerable to boom and bust cycles that d bust cycles that follow the highly volatile swings in global commodity prices (CI follow the highly volatile swings in global commodity prices (CIA A Factbook Factbook) )
Russian government and people, awash with money, were convinced their economy was their economy was invulnerable to the world financial crisis until the 2008 crash invulnerable to the world financial crisis until the 2008 crash of oil prices and world
markets (The Seattle Times) markets (The Seattle Times)
Russia made the mistake of confusing high oil prices with the genius of their economic nius of their economic management.
Rory MacFarquhar MacFarquhar, Goldman Sachs in Moscow , Goldman Sachs in Moscow
Kremlin and Duma Duma failed to let businesses and the economy diversify. (The Seatt failed to let businesses and the economy diversify. (The Seattle Times) le Times)
Heavy focus on oil resulted in no paved roads from Moscow to Vladivostok for Russian divostok for Russian people and businesses, 10 people and businesses, 10-
20% interest rates for entrepreneurs (0% is optimal, as discussed in class), and scientists leaving for better equipped discussed in class), and scientists leaving for better equipped laboratories and universities laboratories and universities in Europe and America (The Seattle Times), devastating home in Europe and America (The Seattle Times), devastating home-
grown research and innovations. innovations.
Russian government acknowledged these vulnerabilities of the Russian State sian State’ ’s economy s economy and currently is working with international bodies, such as EU, and currently is working with international bodies, such as EU, Japan, and ex Japan, and ex-
Soviet states to strengthen Russian economy. to strengthen Russian economy.
ambitious program to reduce this dependency and build up the country's high technology sectors. (CIA Factbook)
Almost half Russian imports and exports are with EU states. (Spiegel Online) EU is the biggest egel Online) EU is the biggest trading partner of Russia. Russia is EU trading partner of Russia. Russia is EU’ ’s third largest trading partner (Spiegel), allowing the block to s third largest trading partner (Spiegel), allowing the block to press their political agenda against Russia, even though busines press their political agenda against Russia, even though businesses, like Siemens and Volkswagen ses, like Siemens and Volkswagen (Spiegel), that can benefit from a more free trade lobby its gov (Spiegel), that can benefit from a more free trade lobby its governments to change their position. ernments to change their position.
In Germany Putin criticized obstacles to Russian investment in Europe. According to him, Russian
companies are keen to invest in European firms, but encounter re companies are keen to invest in European firms, but encounter resistance from the European side sistance from the European side again and again. (Spiegel Online) Such cooperation would impro again and again. (Spiegel Online) Such cooperation would improve Russian productivity and access ve Russian productivity and access to technologies. to technologies.
Governments in Berlin, Warsaw and Paris are not completely open to such cooperation. They fear to such cooperation. They fear domination by the Russian state domination by the Russian state’ ’s energy giant s energy giant Gazprom
. (Spiegel)
EU is under Russian energy dependence. “ “What will you use, firewood? But you will need to go to What will you use, firewood? But you will need to go to Siberia to get the firewood, too." Siberia to get the firewood, too." – – V.V. Putin in Berlin Nov 2010 V.V. Putin in Berlin Nov 2010
This exerts economic and political pressure on the European bloc. .
Russia is number 2 producer of natural gas globally. #1 is USA, but it is used there domestically. but it is used there domestically.
Economically there is no choice, but to cooperate with Moscow for EU. ( r EU. (EUbusiness EUbusiness) )
Therefore, the declining European bloc is forced to cooperate with Russia in order to generate th Russia in order to generate profits for its enterprises, and to achieve stability in the ene profits for its enterprises, and to achieve stability in the energy sectors. Russia should (in its rgy sectors. Russia should (in its interests) and does apply these advantages to push Europe to put interests) and does apply these advantages to push Europe to put its isolationist policies against its isolationist policies against Russia aside, and to build a freer economic relationship. In Eu Russia aside, and to build a freer economic relationship. In Europe governments fear that the rope governments fear that the future will bring economic relations on markedly Russian, rather future will bring economic relations on markedly Russian, rather than European terms. than European terms.
Russian politicians refer to the ex Russian politicians refer to the ex-
soviet block as the “ “Near Abroad Near Abroad” ” (Wikipedia) (Wikipedia) and exert political and economical pressures to control them. and exert political and economical pressures to control them. For example, when with Russian backing a pro For example, when with Russian backing a pro-
Russian government came to power in Ukraine in the early 2010, the trade turnover increased power in Ukraine in the early 2010, the trade turnover increased 70% in 6 70% in 6 months (RIA months (RIA Novosti Novosti), largely due to sale of uranium reserves and aviation ), largely due to sale of uranium reserves and aviation industry capital. industry capital. Russia wants a Russia wants a ‘ ‘single economic space in the post single economic space in the post-
Soviet area” ” (RIA (RIA Novosti Novosti) ) and to establish Rouble as a key currency in the region. and to establish Rouble as a key currency in the region. Russia, Belarus, Kyrgyzstan, Tajikistan and Kazakhstan agreed to Russia, Belarus, Kyrgyzstan, Tajikistan and Kazakhstan agreed to create a create a single economic space by January 1, 2012 as Eurasian Economic Co single economic space by January 1, 2012 as Eurasian Economic Community. mmunity. Ukraine withheld (RIA Ukraine withheld (RIA Novosti Novosti), as it is a member of WTO. (Kyiv Post) ), as it is a member of WTO. (Kyiv Post) Russia is attempting to re Russia is attempting to re-
establish a monetary hegemony in the “ “near abroad, near abroad,” ” which will give it control over the monetary systems of the regi which will give it control over the monetary systems of the region.
Russian relations with a formerly socialist Poland have warmed u Russian relations with a formerly socialist Poland have warmed up after a plane p after a plane crash of an openly crash of an openly-
hostile to Russia former polish president under mysterious circumstances over the Russian territory. For the first time by circumstances over the Russian territory. For the first time by a Russian head of a Russian head of state in nine years (MSN News), Dmitri state in nine years (MSN News), Dmitri Medvedev Medvedev visited Poland on December visited Poland on December 6 6th
th 2010 and paved over historical problems with a new
2010 and paved over historical problems with a new russophile russophile government. government. He signed a series of economic agreements for bilateral investme He signed a series of economic agreements for bilateral investment between nt between
:: Photo: CIA Factbook – Russia ::
As the world demand for raw material is growing, Russia starts d As the world demand for raw material is growing, Russia starts developing its deposit reserves further and eveloping its deposit reserves further and further into its challenging terrain. This includes the Pacific further into its challenging terrain. This includes the Pacific, specifically the disputed with Japan Kuril , specifically the disputed with Japan Kuril Islands. Islands. “ “We are interested in people to stay here. The development is imp We are interested in people to stay here. The development is important here, we will certainly invest
money here. money here.” ” -
Medvedev (Tatar Inform) (Tatar Inform) The islands are believed to have offshore hydrocarbon reserves The islands are believed to have offshore hydrocarbon reserves (New Europe) (New Europe) Critics await ASEAN 2012 conference in Vladivostok, as it is pre Critics await ASEAN 2012 conference in Vladivostok, as it is predicted that by then Japan and Russia will dicted that by then Japan and Russia will resolve a deal for a co resolve a deal for a co-
development of the region, without giving up sovereignty, which is politically is politically
Japan Japan’ ’s s Mit Mitsui and sui and Mitsubishi Mitsubishi work with Russia work with Russia’ ’s s Gazprom Gazprom on the Sakhalin II field and Japanese companies
would also like to be involved in the development of the would also like to be involved in the development of the Yamal Yamal peninsula, despite that both countries are peninsula, despite that both countries are technically still at war. ( technically still at war. (NewEurope NewEurope) ) High savings rate of Japan, its technological ability and know High savings rate of Japan, its technological ability and know-
how will prove crucial in developing the lucrative Russian mineral and petrochemical deposits. This show lucrative Russian mineral and petrochemical deposits. This shows how international finance can supersede s how international finance can supersede political or emotional tensions. Pecuniary reasons and good eco political or emotional tensions. Pecuniary reasons and good economics cause foes to collaborate. nomics cause foes to collaborate. A mutual cooperation is seen with Korea, where Russian side is u A mutual cooperation is seen with Korea, where Russian side is used as a conduit for trade with Europe, sed as a conduit for trade with Europe, trans trans-
Korean railway liked with the Siberian railway system forces North Korea to be more open and lays th Korea to be more open and lays steps toward a peaceful re steps toward a peaceful re-
unification, and reduces gas dependence from the Middle East (U.S. Army War
College). KOGAS is leading the development and investment in Irk College). KOGAS is leading the development and investment in Irkutsk, Russia (Subsea O&G Directory) and utsk, Russia (Subsea O&G Directory) and in the in the Kovykta Kovykta field (TNK.BP). Such cooperation for Japan field (TNK.BP). Such cooperation for Japan’ ’s waning economy means trading its innovation s waning economy means trading its innovation driven know driven know-
how for the investment opportunities in Russia, where Korea and China are already doing China are already doing business. business.
“ “Trade Trade can improve productivity by providing access to new investment can improve productivity by providing access to new investment capital, capital, technologies, expertise and export markets, but this has not hap technologies, expertise and export markets, but this has not happened in Russia. pened in Russia.” ” “ “Russia Russia’ ’s s integration into global production integration into global production chains remains limited. chains remains limited.” ” “ “Export diversification Export diversification towards greater sophistication of products needs to be promoted towards greater sophistication of products needs to be promoted. .” ”
The World Bank 2007
Nov 25, 2010 – – Vladimir Putin proposes creation of a harmonious economic commu Vladimir Putin proposes creation of a harmonious economic community (a nity (a free trade zone) stretching from Lisbon to Vladivostok There he free trade zone) stretching from Lisbon to Vladivostok There he reaches an agreement on reaches an agreement on the elimination of tariffs on raw materials such as wood (Spiege the elimination of tariffs on raw materials such as wood (Spiegel Online) and railway freight l Online) and railway freight (MSN News) on November 7 (MSN News) on November 7th
th.
.
Moscow is hoping to become a member of WTO in 2011 (Spiegel Online) with US backing. ne) with US backing.
The government is now in process of easing restrictions and opening deposits of up to 250 ing deposits of up to 250 (up from 50) tons to foreign firms. (Russia Today) Anything ove (up from 50) tons to foreign firms. (Russia Today) Anything over the limit is a strategic r the limit is a strategic resource and falls under government jurisdiction. resource and falls under government jurisdiction.
Max Keiser, a Russian economist states: “ “The UK is long gone, continental Europe is outside The UK is long gone, continental Europe is outside
– doesn doesn’ ’t produce anything. t produce anything.” ” Markus Markus Kerber Kerber, a professor of political science at , a professor of political science at Berlin University, says economic crisis can be used an opportuni Berlin University, says economic crisis can be used an opportunity for Russia and Germany ty for Russia and Germany to open a new chapter in their trade relationship. to open a new chapter in their trade relationship. According to him According to him “ “Russia is a natural ally Russia is a natural ally to Germany to Germany” ” (Russia Today), at least economically, as its resources are nee (Russia Today), at least economically, as its resources are needed to match ded to match German high productivity. Russia needs German technologies and German high productivity. Russia needs German technologies and investment to increase investment to increase its productivity, and the government of Russia currently lobbies its productivity, and the government of Russia currently lobbies EU governments and EU governments and businesses for a closer and less restricted economic cooperation businesses for a closer and less restricted economic cooperation. .
September 2010 -
Vladimir Putin’ ’s Government invested 5 billion roubles into Moscow s Government invested 5 billion roubles into Moscow State University and allocated money for an additional 50 billio State University and allocated money for an additional 50 billion rouble investment from n rouble investment from non non-
government sources. (XinHuaNet XinHuaNet) This will boost productivity through R and D. ) This will boost productivity through R and D.
Closing Closing – – The Good The Good
Russia does not have an entrepreneurial culture. Entrepreneurshi Russia does not have an entrepreneurial culture. Entrepreneurship and p and leadership are alien concepts for an average Russian. Russia is leadership are alien concepts for an average Russian. Russia is a well a well-
educated
Skolkovo School of Management, scheduled to School of Management, scheduled to be open by 2012 has gained national attention and Putin's suppor be open by 2012 has gained national attention and Putin's support. According to
Ruban Ruban Vardanian Vardanian, a founder of the school, "Russia's future lies in its people, , a founder of the school, "Russia's future lies in its people, not not its oil and gas. its oil and gas.“ “ (The Seattle Times) (The Seattle Times) All things considered, it seems that Russia has learned from the All things considered, it seems that Russia has learned from the 2008 economic 2008 economic crisis and its on its way to become a more open country with a g crisis and its on its way to become a more open country with a greater diversity reater diversity
an investment
ing new technological and managerial knowledge. However, Russia needs t technological and managerial knowledge. However, Russia needs to invest
more in its people and diversify its industry. Signs that the l more in its people and diversify its industry. Signs that the leadership is paying eadership is paying attention to these issues emerge. Russia now invests heavily in attention to these issues emerge. Russia now invests heavily into IT, is now a to IT, is now a net agricultural exporter, and a the middle class in emerging. net agricultural exporter, and a the middle class in emerging. (CIA (CIA Factbook Factbook) ) However, a lot is yet to be done to ensure that Russia does not However, a lot is yet to be done to ensure that Russia does not fall victim to the fall victim to the next economic downturn. next economic downturn. Economic forces supplant the political, historical and nationali Economic forces supplant the political, historical and nationalistic policies of stic policies of Russia and its neighbours, as the world demand for natural resou Russia and its neighbours, as the world demand for natural resources increases. rces increases.
In Russia power and wealth is still largely concentrated in the hands of oligarchs, hands of oligarchs, and 15.8% (November 2007) below poverty line (CIA and 15.8% (November 2007) below poverty line (CIA Factbook Factbook). ).
In the past decade Russian government officials traded in their rusty rusty Volgas Volgas for for bulletproof, shiny Mercedes, and invested in an Elton John conce bulletproof, shiny Mercedes, and invested in an Elton John concert, while they rt, while they could have brought to Moscow Harvard business professors, Cornel could have brought to Moscow Harvard business professors, Cornell agricultural l agricultural scientists, Microsoft's managers, developed nanotechnology or bu scientists, Microsoft's managers, developed nanotechnology or built new genetic ilt new genetic research labs. (The Seattle Times) Now the government is trying research labs. (The Seattle Times) Now the government is trying to get on track to get on track and catch up with innovations and bids for foreign investment. and catch up with innovations and bids for foreign investment.
Protection of property rights is still weak and the private sector remains subject to
heavy state interference (CIA heavy state interference (CIA Factbook Factbook), threatening foreign investment. ), threatening foreign investment.
European Union foresees an uneven playing field while dealing with Russia, this th Russia, this impedes their bilateral economic cooperation. Europe is constan impedes their bilateral economic cooperation. Europe is constantly trying to tly trying to buffer against Russian Influence. buffer against Russian Influence.
Low domestic investment rate due to poor entrepreneurial culture, high bank , high bank interest rates, and lack of opportunities and free market. interest rates, and lack of opportunities and free market.
Long-
term challenges for Russia include a shrinking workforce, a high level of level of corruption (which was once describes as number one industry in R corruption (which was once describes as number one industry in Russia on BBC ussia on BBC News), and poor infrastructure in need of large capital investme News), and poor infrastructure in need of large capital investment (CIA nt (CIA Factbook Factbook) )
Sources
World Bank (2007) Russian Economic Report http://siteresources.worldbank.org/INTRUSSIANFEDERATION/Resources/Chap2.pdf Central Intelligence Agency (2010) The World Factbook – Central Asia: Russia https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html RIA Novosti Russia expects CIS countries to create free trade zone by yearend http://en.rian.ru/exsoviet/20100617/159463469.html RIA Novosti (2010) Russia-Ukraine trade up 70% in 6 months – Yanukovych http://en.rian.ru/russia/20100828/160377834.html Spiegel Online International Putin's Free-Trade Proposal Is 'Just a Smokescreen‘ http://www.spiegel.de/international/europe/0,1518,731370,00.html MSN News EU opens WTO door to Russia in 'milestone' deal http://news.ph.msn.com/top-stories/article.aspx?cp-documentid=4507188
Sources Continued
Vladivostok 2012 (2010) http://www.vladivostok2012.com/review/?p=6&rpp=53 KyivPost (2010) Yanukovych: Ukraine won't join Customs Union http://www.kyivpost.com/news/nation/detail/65139/ Russia Today (2010) Russian gold looks to strategic law change for growth http://rt.com/business/news/strategic-law-growth-going/ Tatar-inform (2010) Russia interested in development of Kuril Islands - Medvedev http://eng.tatar-inform.ru/news/2010/11/01/32387/ New Europe (2010) Russia, Japan near Kuril Islands endgame http://www.neurope.eu/articles/103618.php AH6HY - David Flack (2003) Japan/Russia (disputed IOTA islands) http://www.qsl.net/ah6hy/occupied.html EUbusiness (2010) EU should consult Russia on energy reforms: Putin http://www.eubusiness.com/news-eu/russia-germany.79j/
Russia Today (2010) Putin talks post-crisis economy with Merkel http://rt.com/news/putin-talk-post-crisis-economy/ The Seattle Times on Russia Blog (2008) Russia's Economic Crisis Could Have Been Avoided http://www.russiablog.org/2008/12/russias_economic_crisis_could_have_been_avoided_mamchur.php XINHUANEWS (2010) Russia to invest 5 bln roubles in its top university http://news.xinhuanet.com/english2010/culture/2010-09/27/c_13532523.htm Voice of America (2010) Medvedev's Visit Signals Warming Relations with Poland http://www.voanews.com/english/news/europe/Medvedevs-Visit-Signals-Warming-Relations-with-Poland- 111533384.html U.S. Army War College – John W. Bauer (2009) Unlocking Russian Interests on the Korean Peninsula http://www.carlisle.army.mil/usawc/parameters/Articles/09summer/bauer.pdf Subsea Oil and Gas Directory (2009) KOGAS Korea Gas Corporation http://www.subsea.org/company/listdetails.asp?companyid=2771 TNK*BP (2010) Kovykta Project http://www.tnk-bp.com/operations/exploration-production/projects/kovykta/
Sources Continued 2
Moscow Kuril Islands Vladivostok
Europe China Japan U S From the U.S. Army War
Trans Korean Pipeline and Railroad, which is envisioned to facilitate Korean unification, once
cooperation is envisioned
This shows how economic forces facilitate international development, despite the political intrigue and conflicts.