Globalizing the Eurasian Way. More on Globalizing Russia.

November 17, 2006

I am just back from a professional trip to Moscow.

Despite all the negative news we are served in the West on Russia’s energy policies, big stick politics in Georgia, oil-related power neighbourhood policies, and other political murders and restrictions on political freedoms – I insist: Russia is one of the “good news” stories of the moment.

With caveats of course. But these caveats are not worse than, say, in a country like China your average economist and investor is enthusiastic about, when it comes for example to corruption, restriction to political freedoms, worrying expressions of virulent nationalism, regional divergence and growing income inequality. What makes perceptions of Russia often be more negative than China or India? The cold?

Russia is, along with China and India, one of the culprits of the current destabilization of the global labour markets hotly debated at the moment following Richard Freeman’s recent study which finds that the doubling of the world’s labour force following these countries’ entry into the global market has considerably shifted the balance of power from labour to capital. Yet Russia’s contribution to this problem is marginal – its population is “only” 142 million, tendency declining, in a country spanning over 11 time zones… And given that foreign direct investment, though soaring, is only about 3% of the country’s GDP, Russia is not the problem in that sense. Also, Russia, in contrast to China and India, has no comparative advantage in cheap labour. It is land and natural resource abundant and will have to develop its human capital to build a services and knowledge-based society. Its development path will have to rather resemble Chile’s than China’s.

Russia is also one of the world’s most quickly globalizing countries, believe it or not. In the recently published 2006 Globalization Index published by Foreign Policy, Russia has climbed 5 “notches” compared to last year (the greatest leap, along with Romania) – to rank 47th. China ranks 51st, and has only risen 3 notches. India is somewhere on rank 61, same as last year…

So, where is Russia heading?

  • Towards the WTO, soon, in principle, as the remaining biggest non member economy. It is expected to have a liberalizing stance on agriculture, should at any point liberalization negotiations start again at the WTO. Another heavyweight to counter agricultural protectionism in the EU and elsewhere? All depends on what type of involvement it will choose to take in the WTO. If the liberal forces within the government prevail – the WTO accession will probably contribute to it – one can expect a rather pragmatic approach.
  • In terms of economic policies, is it heading towards a specific Russian or “Eurasian” model? If one believes Deutsche UFG’s chief economist Yaroslav Lissovolik who recently spoke at an FT Business seminar, current government policies are taking an “Asian”or rather, “Eurasian” turn . Apparently President Putin, in his aim to control strategic businesses is looking closely at how South Korea managed its business sector in the 1950s. This included a “negative” bargain based on absence of abusive practices by the government if tax payments and national industrial priorities were respected. And of course, no considerations for political freedoms.

In the current Russian case, this particular model is a blend of Washington-consensus type of market-friendly moves – Rosneft’s IPO, liberalization of Gazprom, reforms in the financial sector, already achieved trade reforms, Special Economic Zones, sound macroeconomic management – with dubious state-intervention through share-taking and management- board-seats occupying in industries dubbed as “strategic”, as well as the politicized treatment of foreign investors who disturb a bit too much (see the case of Bill Browder).

  • In the meantime, Russia is discovering the consumer society and the beginnings of a middle class with the necessary purchasing power. Last time I was in Moscow early March, one of the striking symbols of misguided Soviet-style building, the Hotel “Rossiya” was still standing just next to the Red Square. This time, the building had disappeared (more on the story here). Huge panels hiding the empty lot awaiting construction on probably one of the most expensive areas (in terms of price of the square meter) in the world are advertising what is coming next: a MEGA mall. Yet this is not only a Moscow story. In a recent study on, for example, food retailing by one the most highly respected banks in Russia, MDM Bank, it is said that “the sector will post annual (…) revenues of 16% from 2006-2010. The food retaling sector is benefiting form a consumer shift away from outdoor markets and drab Soviet-style shops to modern format discounters, supermarkets and hypermarkets (…) [For retailers], regional expansion [outside Moscow and St Petersburg] has emerged as a priority”.
  • An “Eurasian” path to democracy too? The 2006 Globalization Index mentioned above shows that, with the notable exception of Number One Singapore, the most globalized countries in the world are also the most democratic. Regarding Russia, international media coverage tends to focus more on Russia’s restrictions of political freedoms than on the beginnings of a fundamental shift towards a social structure that can actually support democracy – an affluent middle class. What will prevail politically, the “Eur-”, or the “-asian”? At the moment, approval rates for Vladimir Putin are as high as ever and not only to be explained by tight media control. The people are grateful for the stability, the growing job opportunities especially in the services sector, and, of course, the better shopping…. I do not like to repeat myself, but the excerpt from Neil Buckley’s recent article already mentioned in my previous post does summarize it all:

“In the early 1990s our people were paupers – and it’s ridiculous to say they were free,” Vladislav Surkov, a senior aide to Mr Putin seen as the Kremlin’s chief ideologist, said recently. “When you have a car to ride in and things to buy – that’s freedom.”

Sadly enough, it’s not only a fact, but seems indeed to be the prevailing ideology…


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