Russia, European Union and the Baltic Sea Region: Before and After the Crisis Gdansk, July 2nd, 2009

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Russia, European Union and the Baltic Sea Region
Before and After the CrisisGdansk, July 2nd,
2009
Denis V. Kadochnikov Senior Research
Fellow International Centre for Social and
Economic Research Leontief Centre (St.
Petersburg, Russia)
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Structure of the Presentation

• Economic dynamics in Russia during the last
  decade
• Russias trade with the World, EU and BSR
• Russia BSR economic cooperation and integration
• Post-crisis realities for Russia and Russias
  North-West
• Possible scenarios of Russias development

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Major Drivers of Economic Growth in Russia
1998
2008
2004
2006
2001
Ruble Devaluation and Imports Substitution
High Oil and Gas Prices
Capital Inflow and Domestic Fiscal and Monetary
Expansion
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Russias Net Capital Outflow / Inflow
5
Russias External Debt
6
Russias Share in the World Trade
7
Russias Exports and Imports as of GDP
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Russias Exports Composition
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Russias Imports Composition
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Russias Exports Partners
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Russias Imports Partners
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Merchandise Exports to Russia as of Total
Exports
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Merchandise Imports from Russia as of Total
Imports
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View of Baltic Sea Region by the North-West
Businesses

• (Based on a survey conducted by Leontief Centre
  in 2008)
• Source of Imports of equipment, machinery and
  raw materials
• Training ground
• Not a Market for Exports other than Commodities
  Exports, as there is large and underexploited
  Russian market

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View of the North-West of Russia by Foreign
Businesses

• (Based on a survey conducted by Leontief Centre
  in 2008)
• Key purpose of appearance of foreign companies /
  foreign investors in St. Petersburg is gaining
  the access to local and Russian market.
• Exploration of external markets in the future is
  not excluded however.

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Russia Baltic Sea RegionBusiness Interaction

• Interaction of companies working in St.
  Petersburg with businesses of the Baltic Sea
  Region is usually limited to
• Purchase of raw materials and equipment,
• Transit of cargo through their territories.

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Russia Baltic Sea RegionBusiness Interaction
The target of exploring Baltic markets is not
perceived as a priority by Russia-based
companies. Respondents rather note interest of
investors from Baltic States to St. Petersburg
and Russia.
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Foreign Investments in the North-West of Russia

• Major investing countries, except Germany, are
  located outside the Baltic Sea Region.
• The largest sector of FDI is consumer services
  sector, focused on the Russian consumer market

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Russian Investments Abroad

• Russian companies now operate world-wide and no
  longer focus on the CIS and the former Soviet
  Republics in the BSR. Russian companies,
  specializing within the resource-based sector,
  cooperate with relevant partners no matter where
  they are around the world. They act as part of a
  global specialised networks not restricted to any
  kind of regional imperative.

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Russian Investments Abroad
Resource-based industries continue to dominate
outward investments, although financial, telecom
and retail trade companies are also venturing
abroad. The volume of Russian FDI in Baltic
Sea Region is relatively low and concentrated in
sectors such as energy, transportation, industry
and trade.
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Russian Investments in the Baltic Sea Region

• Russian FDI in the BSR is very much strategically
  motivated by Russian interests in obtaining
  access to the EU and other international markets.
  
• Examples
• Sea-port of Sillamae in Estonia, co-owned by a
  Russian company
• Oil pipeline from Russia via Belarus to the
  Latvian harbour of Ventspils, also co-owned by a
  Russian company
• Nord Stream Pipeline project connecting Russia
  and Germany.

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Global and Russian Economy Prospects

• World Bank report Global Development Finance
  2009 Charting a Global Recovery

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New Economic Realities for Russia

• Lower commodities prices and negative net capital
  flows
• Deteriorated external financing conditions and
  higher interest rates
• Federal and subfederal budget deficits
• Smaller state and CB reserves
• Greater economic, social and political
  uncertainty
• Greater state role in the economy
• Greater Social and Political Pressures

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New Realities forRussia's North-West

• Weaker demand for exports from the North-West
• Lower transit trade
• Lower tourism figures

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Major Challenges to Russia-EU Economic Cooperation

• Protectionism on both sides
• Investments restrictions and barriers
• Political and economic instability in neighboring
  countries
• Problems of transit trade

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Possible Development Scenarios and Strategies

• Scenarios / Strategies of Russias Development
  formulated by SIGMA group / Institute of Modern
  Development (Moscow)
• Inertia
• Rentier
• Mobilization
• Modernization

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Inertia Scenario

• No radical socio-economic reforms
• Political stability as a priority
• Problems are addressed as they appear
• No strategic actions
• Maintaining status quo
• Obstacles Lack of resources in the short run
  stagnation in the long run.

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Rentier Scenario

• Accumulation of oil and gas revenues in the state
  budget and further redistribution to finance
  social programs
• Paternalism as the state policy
• State-directed investment programs
• Obstacles Falling budget revenues due to lower
  profits (or losses) of oil and gas companies in
  the short run Recession and social instability
  in the long run.

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Mobilization Scenario

• Mobilization of state resources to support and
  modernize selected priority industries
• State corporations domination in the priority
  industries
• Innovations support in the priority industries
• Obstacles Inefficiency of state ownership and
  state planning, growing bureaucracy, rent
  seeking.

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Modernization Scenario

• Institutional reforms
• Improving business climate
• Focus on the efficiency of budget expenditures
• Obstacles Results will be felt in the long-run
  social and political support may be hard to
  secure.

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Thank you!

• Denis V. Kadochnikov
• dkadochnikov _at_ yahoo.com
• International Centre for Social and Economic
  Research Leontief Centre (St. Petersburg)
• www.leontief.net