Russian Economic Reform

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APEC, Russia and Australia

Published on September 09 2012
Posted by: jeff

Both Russia and Australia are experiencing some sort of increase in official interest in Asia. There is nothing cultural in this, as Russians would in their hearts prefer to look toward Europe and Australians would prefer to look toward the US and UK.

Despite the fact that in many ways Russia is geographically better placed to take advantage of the economic growth of China, Australia is likely to continue to outperform Russia in taking advantage of the economic rise of Asia. But with one proviso – which I will address later!

In Russia, the most obvious manifestation of the interest is the huge spending (and often stupidly excessively, a la bridge to Russky Island) on the APEC Summit in Vladivostok and recent creation of a “Far East” Ministry.

In Australia, the most obvious manifestation of the interest is an “Australia in the Asian Century” report being prepared by a team led by former head of the Australian Treasury, Dr. Ken Henry. See: http://asiancentury.dpmc.gov.au/about

In a July speech, Henry said: “In our work, we have had to reflect on how our region has changed and how it will evolve out to 2025. …  And, we need to do this thinking across a broad canvas; considering the implications for our economy, our society and our strategic relationships.” 

Henry said that the report would have three basic pillars to support the analysis: economic, social-cultural and political-security. He said: “We have decided to focus our efforts on Australia’s relationships with Indonesia, India, China, Japan, South Korea and Vietnam. I must emphasize that this doesn’t mean we’re not thinking about Malaysia and Thailand and the emergence of Burma and all the other nations ….. It’s rather that their speed of development and a number of strategic considerations argue for a closer look at these six nations.”

He added: “Australia is facing a future in which our largest trading partner (ie China) is not a partner in a close alliance friendship, or even the partner of a close ally (as Japan is to the US). … Having China as our largest trading partner is different in some respects from what we’ve experienced for the past century or more.”

Australia has, in the past, performed well in terms of taking advantage of Asian economic growth for a number of reasons. In particular, South Korea and Japan were under the strong influence of the US, and Australia as a strong US ally was a welcome trading partner. And in 1989 a government commissioned report by Prof. Ross Garnaut, “Australia and the Northeast Asian Ascendancy”, increased the focus. In March 1990, the Australian Foreign Minister, Gareth Evans, said:

“The 1980s will probably be recorded as something of a turning point in the way Australia perceived Northeast Asia, by which I mean the region encompassing Japan, the two Koreas, China, and the economies of Taiwan and Hong Kong. More so than any previous decade, the ’80s were characterised by a sense of enthusiasm and opportunity about the future of Australia’s relations with Northeast Asia, in trading terms as well as in terms of building up relations of greater depth and texture.”

While Australia was thinking quite a bit about its relationship with Asia, Russians were preoccupied with internal problems related to the crumbling of the command economy and eventually the USSR. So, it is not surprising that little was done by Russia in the last decades of the 20th century to develop economic relationships with (other) countries of Asia which were not part of the USSR. Other impediments were surviving Cold War attitudes, territorial disputes with Japan, and the inclination to look to Europe when considering economic relations (for historical reasons and because most of Russia’s population is much nearer Europe than Asia).

There was also Moscow’s neglect of Russia’s own territory in Asia; indeed (as I can attest from personal experience having spent a lot of time in the Russian Far East in the early 1990s), Moscow citizens in general tended to look upon Vladivostok as being on another planet.

However, the Russian neglect of the relationship with Asia in the first decade of the 21st century is much less understandable. Too much of the presidencies of Vladimir Putin has focused on recovering the past rather than developing the future. Expert Group 21 of the Russian “Strategy2020” project was concerned with “Development of economic and social integration in post-Soviet area”, which includes the Customs Union of Russia, Belarus and Kazakhstan and a possible currency union. (See Expert Group 21 in right-hand column)

Apart from the Customs Union, the Russian proposals for increasing Asian engagement remain rather “pie in the sky” – such as an eventual Eurasian economic and free trade area stretching from the Atlantic to Pacific Ocean.

A much more concrete proposal has been made by Dr. Kimelman, from the Academy of Mining Science, and a member of Expert Group 1 of the “Strategy2020” project. My first blog/article on this site, on 11 June last year, covered his ideas for developing the Russian Far East and Russia economic relationship with China. I entitled my blog “New Russian steel industry on China’s door step!” It can be accessed here: http://russianeconomicreform.ru/2011/06/test-3/

Kimelman makes the rather contentious claim that China will not be able to import all its iron-ore needs in coming decades (due to lack of world supply!!). He says that Russia should take advantage of this by finding and developing iron ore deposits in regions which are situated close to China. But rather than just export raw materials, he wants to see the “economic rents” (super/excess profits) used for a “new industrialization”.

Kimelman is scathing of many of the big infrastructure/development projects presently being undertaken in Russia, and says that there is no explanation as to why some major projects receive massive public funds. The state, together with business, is continuing to implement some disparate infrastructure projects which are the result of “oligarch” lobbying and which have no common theme.

One does not need to agree with everything that Kimelman writes to understand that he makes a number of good points. A recent report, entitled “Big government of Vladimir Putin Politburo 2.0″, by Minchenko Consulting, was supposedly partly based on interview with members of the ruling elite, and suggested considerable competition within the elite to get their hands on money flowing to Far East development. 

Kimelman wants Russia to develop a “strategy, institutional structures and economic mechanisms for the participation of Russian (but not “off-shore”) business in world natural resources”, and aimed at implementation of large-scale projects, such as the Soviet project to develop the hydro-carbons of Western Siberia in the 1970s and 1980s. The necessary conditions for implementation of such mega-projects include integrated and synchronized interaction between government, business and civil society on the principle of private-public partnerships and social-state regulation and control — so that there is unconditional approval by society and confirmation by government (passing federal legislation). These new-type regional “special economic zones”, conglomerates, operations and infrastructure projects can be financed by the mining royalties and taxes on super-profits. Thus, Russia can organize its own full metallurgical processing of extracted raw materials. Creating such facilities in Siberian – Far East region should be considered a national priority. No less important, are projects to produce various types of fuel for China.

In all this, Kimelman assumes that there will be significant economic rents in what could be very high cost Russian mines. As I understand it, Australian mines have the advantage of a relatively benign geography and climate.

I have covered Kimelman’s view in some detail not because I agree with all that he says, but because the Russian government might be tempted to adopt aspects of such an approach.

In my view, Russia would do better to develop basic infrastructure and the general Russian institutional environment for private investment, including foreign, which is not connected with specific lobbying by vested interests. Indeed, this is something that is needed throughout Russia!

To the extent that this is happening, it is happening ever so slowly and is one reason why Australia will continue to perform better than Russia in terms of economic relationships with Asia.

Another reason is that, to some extent, Russia has already missed out on much of the “Northeast Asian Ascendancy”. South Korea and Japan are already quite “mature” economies and apart from natural gas (in the case of Japan as it attempts to reduce its dependence on nuclear energy) are unlikely to greatly increase their consumption of raw materials. Such increase in the future are more likely to occur in countries closer to Australia than Russia – such as Indonesia.

Indeed, it is for this reason that I am slightly mystified why Ken Henry is putting so much emphasis on South Korea and Japan. I assume that they are included because of the “strategic considerations” Henry mentions. And this leads me to elaborate on the “one proviso” – which I noted at the beginning of this article – on the superior performance of Australia over Russia.

One of the odd things is that the Henry report was commissioned in September last year, and has had apparently enormous resources devoted to it, but still has not been completed. Just as odd are reports that Allan Gyngell, head of the Australian “Office of National Assessments, (ONA site is here: http://www.ona.gov.au/) had been brought in to work on the final report. Gyngell is a strong supporter of the Australia – US alliance and presumably has been given the task of ensuring that the Henry report slants arguments towards bolstering support for this alliance.

It is just these “strategic considerations” that might become Australia’s “Achilles Heel” in dealing with China. Some of Australia’s top political leaders are implicit racists and seem to think that only native English speakers have an “inbuilt sense of morality” (which will be news to many Russians), and their natural reaction when they think about the growing power of China is to hug the US even more tightly. 

This might not matter that much while China and the US manage to avoid confrontation in East Asia. However, actual confrontation or rising tensions would – particularly, if Australia fell for the trap of taking sides in this – serve to heighten a natural Chinese desire to diversify sources of raw materials. And, supplies from Russia are one possible way of doing this.

Russia will have an interest in a strong Chinese economy exporting to the US (and other countries), but this does not necessarily mean that it is in Russia’s interests that China and the US become the “best of buddies”!