Interview with German O. Gref Minister of Economic Development and Trade of the Russian Federation
Russia special issue produced by Focus Reports Published by International Business Daily-Mofcom, November
While Sino-Russian trade reached US$ 30 billion in 2005, President Hu and President Putin have set an ambitious target of increasing this figure to US$ 60-80 billion by 2010. Do you believe this target to be realistic?
It is quite feasible and to ensure that we will reach this target we have undertaken a number of actions. For example, for the first time research was conducted to forecast how the structure of bilateral trade will look like in five years as a result of the implementation of this target. Moreover, we are working on drastically modernizing the transport infrastructure for it to be able to deal with these levels of trade. Furthermore, together with our Chinese counterparts we have endorsed a joint document which sets the guidelines for us to succeed at reaching this goal.
What is you assessment on the current trade structure between the two countries?
We are not very pleased by the fact that energy resources represent around 70% of our exports to China, particularly taking into account that for the upcoming decade we are set to increase our supply of these products to China. Thus, we are now facing the task of increasing the share of machinery and hi-tech products in our exports. We had this in mind when setting up the Sino-Russian fair.
The Sino-Russian fair is a good step in order to diversify trade. However, so as to diversify trade away from commodities, probably the first issue to tackle should be the competitiveness of the Russian companies, in particular in the actual scenario of an expensive Ruble. What can be done in order to enhance the competitiveness of the Russian economy?
We should implement a comprehensive programme that was developed with this objective. This programme addressed the task of enhancing the national competitiveness at three different levels: the human competitiveness from an education and health perspective; the competitiveness of the authorities in terms of efficient administrative systems and controls; and the efficiency of the economy and the economic agents. On each of these individual areas we have foreseen an appropriate plan which would result in a significant increase of Russia's competitiveness.
The Russian government has identified Machinery and IT as sectors that could play an important role in diversifying trade with China. Do you believe that Russia is more competitive in these sectors than its European, American or even Chinese counterparts?
Areas like Machinery and IT include a vast amount of different specialisations. For example, in terms of IT, some countries like India, Ireland or Germany are each the most competitive in different segments. Russia is also the most competitive country for some particular areas of IT. It is important to bear in mind that Russia has conceded to the world a lot of discoveries in the subject of mathematics as we have a very strong school in this subject.
The reason why today we are still not that strongly represented in the area of IT is that the peak of the information revolution arrived in the 1990s at the same time in which the Soviet Union was facing its disintegration. Thus, this industry had to develop in a scenario of a 40% loss of the GDP and a steep decrease of fiscal income. This is why Russia is still not a major competitor in IT, but this will come with time. There are many spheres such as system integration and architecture of databases in which Russian companies are currently becoming frontrunners. Moreover, we are putting in place a whole series of measures to develop high-tech industries including special taxation and the creation of technoparks and special economic zones. Thus, you can be certain that our competitiveness in these and other sectors will continue growing. We have the core skills and we will take an essential position in the world markets, it will take time but it will definitively become a reality. It took China 30 years to embrace and follow this path. Russia has a had a stable chance of development for only 6 years now and in this time our GDP in dollar terms has more than doubled. The next ten years will certainly be quite a hectic time in terms of robust development of the country.
To penetrate a foreign market you do not only need competitiveness but also commitment. In terms of Sino-Russian relationships we can clearly see this commitment at the governmental level. However, do you consider that Russian businessmen are currently looking East?
They surely do. In our code of arms our eagle is double headed. Russian businessmen have looked West for a long time because of historic reasons and because this region has shown a significant development of its economies. Nevertheless, the business community is now more and more setting their sight towards the East because they do understand that the future rests in these markets.
A challenging issue in Sino-Russian trade today is the high level of informal border trade. What is being done to tackle this problem?
Cross border trade ought to be promoted and barriers should be eliminated because the more people that participate in this trade the better. In order to eliminate the informal trade the governments should put in place the necessary infrastructure for trade and work in boosting up the income of the population of these areas, as the more prosperous they become the less they will be willing to break the laws. Together with the Chinese government we have set up a working group for cross border trade which on a regular basis tackles these issues. We are taking steps to ensure that cross border trade is eliminated.
In terms of investment we have seen an increase of Chinese FDI in Russia in the last years. Nevertheless, Chinese investors, such as other foreign investors, have expressed their concerns about the investment climate in Russia. How do you asses the investment environment in terms of common obstacles to doing business such as red tape and corruption?
The right people to ask this question to are actually the foreign investors themselves. This year's survey of foreign entrepreneurs operating in Russia showed that more than 75% were highly pleased about investing in our country. When asked about which were the main obstacles for developing their businesses, they identified bureaucracy as the main problem and only in second place corruption. Corruption is not a characteristic exclusive of Russia, it is a problem that most countries around the world have to face. There is still a lot to do to improve the investment climate in this country, but there is probably much more that we have to do to improve the investment image of Russia.
What do you believe that Russia can learn from China?s success story in attracting FDI?
Our success stories in this area are actually very different. Firstly, the Soviet Union had a relatively high level of development with a robust social welfare program and a developed industrial complex. Today, although incomes are growing at a pace of 12% per year on real terms, we still have not been able to reconstitute the income levels of the past, which has generated some social tensions. On the contrary, in China there used to be no social safety net and the income level actually increased, so with China undergoing such a dynamic development, the authorities have consolidated a high level of support amongst the population. Secondly, it could be said that China is "constructing on an empty field" while Russia is "rebuilding", which can sometimes be more challenging. It is easier to build a new factory in which you just have to start from scratch and hire your human resources than to restructure an obsolete and inefficient factory which employs dozens of thousands of workers. This is what we have been facing for example in the Aircraft industry where some companies which employed large number of workers because they used to produce thousand of aircrafts are now producing less than a hundred units. This is a big problem, as these factories have a high level of social responsibility.
A similarity between the two countries is that Russia and China are such large countries than an error in policy making is felt throughout the whole of the world. I agree with Lee Kuan Yew's , the father of modern Singapore, view that the most important thing is not the speed at which you are moving, but the direction in which you are heading and the consistency of your movements. Misjudgements are very hard to remedy, so we should make planned movements and stand on the shoulders of the experience and expertise of other countries that have gone through similar processes. This is a key similarity between Russia and China.
In this reconstruction of Russia do you believe that the Russian government is playing the role of a "modernizer" or just a "stabilizer"?
The chief task of the government is all about creating the conditions and the environment for the private sector to develop, not about taking its place. Someone should be very naive to believe that only one agent, as large as this might be, could replace millions of talents. National success can only be built upon the economic activity of millions of people. Thus, any government who does not manage to put in place the necessary economic freedoms is destined to failure, it will only be a matter of time.
What would be your final message to International Business Daily's 3.9 million readers?
We have a very strong relationship with China and that is the best guarantee and legacy that our nations have inherited. Frankly speaking, we are very fond of China and of its culture and we have many friends in that country. Moreover, we know how to treasure and value friendship and on friendship you can always easily do business for the benefit of our two countries.
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