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Russians coming to APEC bringing valuable trade ideas

30 August, 2007

The phrase ‘the Russians are coming’ was often used in the Cold War days as a fearful warning to all and sundry in the west.

But now in the post-Cold War era, the arrival of a major Russian delegation to Australia to take part in APEC means economic opportunity and a chance to learn about the new Russia and other emerging economies of Eastern Europe and Central Asia that formally made up the Soviet bloc.

Indeed, it is expected that a high level delegation of 40 major Russian companies will be arriving in Australia soon as part of President Vladimir Putin’s visit to Australia, the first by a sitting Russian head of state. On the agenda will be the Australian-Russian bilateral economic relationship and, of course, President Putin’s participation in the APEC Leaders Forum in Sydney.

In fact, APEC itself is important to Russia’s emergence as a player on the world economic stage. People often forget that Russia is a Pacific as well as a European country. Russia has been a part of APEC since 1997 when then US President Bill Clinton lobbied for Russia’s entry into APEC to help then Russian President Boris Yeltsin, who was in the midst of economic difficulties that culminated in the Russian financial crisis of 1998.

Fortunately, a decade on from those times and the ‘short, sharp, shock’ transition period of the early 1990s, Russia has experienced relative economic stability thanks to its large resource endowment, a worldwide boom in commodity prices and increased openness to foreign investment.

Since the end of the financial crisis, the Russian economy has achieved an average annual growth rate of around 7 per cent and has looked beyond its key resource sectors in oil and natural gas sectors to build a broader economic base through increased international trade and inward foreign direct investment (FDI). Net FDI (inward minus outward) increased 27-fold in 2006 as much of the foreign capital that exited in the 1990s has now returned.

From an Australian point of view, BHP Billiton and Rio Tinto have major investments through respective joint ventures with Norilsk Nickel. Macquarie Bank recently announced a joint venture with Russia’s largest investment bank Renaissance Capital to invest in infrastructure projects. In the industrial sector, major Australian players like Orica have major significant manufacturing plants in Russia.

But it is Russia’s outward investment which is the big story. In fact, since Moscow gained entry into APEC, Russia’s influence in the world as an economic player has increased. According to Anne Miroux, the head of investment issues at the United National Committee on Trade and Development (UNCTAD): “The Russian transnational companies are definitely in the picture now and among the top multinationals from emerging economies. It’s a major change to the 1990s.”

According to UNCTAD, until 2006, no Russian company appeared in the top 50 rankings of emerging market multinationals, now there’s two with more expected to be on their way. Along with Norilsk Nickel, well-known Russian energy companies like Gazprom, Rosneft, Lukoil and Rusal are becoming household names worldwide, along with the ambitious steel maker Severstal and even telecommunications companies MTS and Vimpelcom. In fact, Vimplecom was the first Russian company to list on the New York Stock Exchange 11 years ago.

Russia’s influence has not gone unnoticed in Europe. Jean Lemeirre, President of the European Bank for Reconstruction and Development, noted: “For the first time, Russia is becoming a partner in the global economy not only by producing natural resources but also by being an investor.”

Norilsk Nickel, Gazprom, Rusal and Russia’s largest coal company SUEK will be amongst the Russian business delegation visiting Australia during APEC.

The visit of such a high-level Russian business delegation comes at a time when the Russian-Australian trade relationship is an increasingly healthy one. According to Dan Tebbutt, Australia’s Senior Trade Commissioner in Moscow, Australia’s two-way trade with Russia has increased dramatically in recent years, with a 65 per cent increase in two-way trade to $719 million in 2006.

“Australian exporters have enjoyed strong growth in Russia’s vast retail market, which is now the tenth largest in the world,” he said. “Meat exports are booming with a 14-fold increase in beef, a three-fold increase in lamb as well as a major increase in wine sales of around 40 per cent in 2006.”

Tebbutt believes that the Russian resources boom is generating “a lot of opportunities for services providers in energy technology and infrastructure and that Australia companies can also cooperate in Russian investment in third countries in Asia and on the Pacific coast of Russia.”

So what are the risks? There are always questions about economic institutions in Russia, although UNCTAD says that western countries should “take a fresh look at these rapidly changing multinationals and recognise that they are driven by commercial logic and competitive advantage – not by political agendas.”

Also given Russia’s strong energy sector, could there be a risk of a ‘Gregory effect’. The Gregory effect or ‘Dutch disease’ is named not after a Russian Tsar Gregory but Australian National University economist Bob Gregory who suggested that a strong energy export sector could cause excessive appreciation of the exchange rate and crowd out other sectors (which occurred in the Netherland in the 1970s).

Russian economists Vladimir Tikhomirov, a Senior Economist of Nikoil, who studied in Australia and was influenced by Gregory, believes that “the efforts to diversify the Russian economy, along with institutional reforms will help avoid possible adverse consequences of depending on a strong energy sector.” But there is still a long way to go.

So it’s official – the Russians are coming and will be in Australia soon ready to do business. Let’s welcome our guests to Australia and, given Russia’s status as a Pacific country, let’s hope we can look forward to a future APEC Leaders meeting in the Russian Pacific port city of Vladivostok in the near future.

Source: Tim Harcourt, Austrade

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