Seminar on “EU and Russia - Partners in Modernisation”

A first activity of DER — Dialogue-Europe-Russia

The newly established think tank DER — Dialog-Europe-Russia, with its secretariat in Vienna, held a first seminar in Brussels on 24 February 2011. The seminar dealt with the most important aspects of socio-economic modernisation. The modernisation of Russia has been declared a strategic policy goal by Russian President Medvedev. In his introductory remarks, the President of DER, Austria´s former Federal Chancellor Wolfgang Schuessel, pointed out that a group of former politicians, business leaders and scientists guided by the desire to foster ties between the European Union and Russia gathered in Brussels in order to make an intellectual contribution to the EU-Russia Partnership for Modernisation. Despite huge political, economic and social differences, the EU and Russia today face similar challenges and problems. In order to remain competitive on a global scale both the EU and Russia are preparing long-term economic and social development strategies (up to 2020).

1.Diversification, modernisation and innovation of economies

Anatoly Chubais (CEO of RUSNANO, Co-Chairman of the EU-Russia Industrialists’ Round Table)

Twenty years ago, the Russian Federation proclaimed two strategic goals: The transition from a centrally planned to a market economy and the transformation of the Soviet totalitarian state into a genuine democracy. While Russia has been recognised by the EU as a market economy, the second goal has not yet been achieved. At present, Russia stands at a new crossroads: Its economic system requires an overhaul and the 2012 presidential elections will determine Russia’s medium-term political future.

The EU-Russia Industrialists’ Round Table is focussed on technical aspects of modernisation, such as research and innovation. Modernisation offers many opportunities to both sides. However, even more important than economic modernisation is the respect for fundamental values, which was lost in Russia during the Soviet era. These values should unite Europe and Russia. The violent clashes between Russian nationalists and non-Slavic people which occurred in the centre of Moscow last December indicate that our common values are under threat. As most countries in our Greater Europe are faced with major problems resulting from immigration, the EU and Russia should exchange their experiences with the integration of people belonging to other ethnic or religious groups.

In his concluding remarks, Mr. Chubais reminded that “there is no Russia without Europe and no Europe without Russia”.

Aart de Geus (Deputy Secretary General of OECD)

Russia benefits from high energy prices and has very low foreign debt. But due to its rapidly ageing population, pressure on Russia’s fiscal system will significantly increase over the coming forty years.

Russia will probably join the WTO before the end of this year and could be admitted to the OECD in 2012 if she adopts stricter anti-bribery legislation (after becoming an OECD member Russia must adhere to the Anti-Bribery Convention) and improves its performance in environmental protection. The application of OECD-standards on “freedom of investment” will make Russia more attractive for FDI´s.

Already in 2005, the OECD conducted a review of innovation in Russia and recommended to the Russian government to strengthen inter-ministerial coordination, remove regulatory barriers and protect intellectual property. Recently, OECD initiated a new review process on innovation in Russia.

Investment in education has the highest potential of economic return. However, there are significant challenges to the quality of education in today´s Russia, which means that Russia risks losing out in the international competition for talents. At the end of May, the OECD Ministerial Council will discuss Russia´s application for OECD membership, in the presence of Russia´s Finance Minister Kudrin.

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Dennis Snower (President of the Kiel Institute for the World Economy)

The world economy is undergoing fundamental change, driven by the rapid growth of emerging economies, path-breaking advances in information and telecommunication technologies, fundamental changes in the organisation of production processes and work as well asand changes in the international division of labour.

The new advances in information and telecommunications technologies, together with huge improvements in logistics, enable firms to decompose their various stages of production geographically into clusters of tasks, locating each task cluster in the country or region where it is most profitable. Jobs in growing sectors can be outsourced or off-shored and occupational barriers are breaking down. Middle class entrepreneurs have best chances to succeed because they are flexible. In order for If …..Europe and Russia to thrive in this new environment, economic restructuring is essential.

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2. Development of a financial system that serves the real economy

Sergey Dubinin (Member of the Board of Directors of VTB Capital)

It is doubtful whether Russia’s banking sector will be able to finance the recovery of the country´s real economy. Russia requires huge investments, but flight of capital is putting these investments at risk.

Russia´s GDP growth will not exceed 4%, which is much less than the growth of other emerging economies. Russia will therefore not be able to become a developed economy in a foreseeable future.

The weaknesses of Russia’s economy are well known: Overdependence on oil and gas, lack of “long-term money” to be used for investments, lack of labour market efficiency and labour mobility, high investment risks as well as an inadequate judicial and law enforcement system.

WTO membership will expose the Russian economy to more international competition and thereby raise its efficiency.

The Russian banking sector has a “dual nature”: The 73 largest banks avail themselves of 85% of the assets, while the remaining more than 1,000 banks represent only 15% of total assets. Increasing competition and declining profitability will drive consolidation. The requirements of Basel 3 are nearly met by Russian banks.

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Alessandro Profumo (former CEO of UniCredit Group)

The interaction between banks and their customers will change in the future and social networks will have an impact.

Supervision of the banking sector should not be separated from its regulation; Both tasks should remain with Central Banks. A solid banking sector needs a solid financial system and long term savings must be transformed into long term investments.

In Russia only few banks meet international standards, and the insurance and fund markets are underdeveloped.

However, the Russian banking sector has recently proven its crisis-resilience and major Russian banks will increase their efficiency and expand abroad.

In the ensuing discussion Mr. Chubais answered a question concerning the role of venture capital in the innovation of Russia´s economy. He said that among several venture funds in Russia the most efficient is the newly created “Russia Venture Cooperation”, which provides state venture capital to private companies using innovative technologies.

Mr. Dubinin indicated that private pension schemes are almost inexistent in Russia because they are not trusted by the people. However, the state pension fund would collapse without constant fiscal support and raising the retirement age (at present 55 for women and 60 for men ) will be unavoidable even though the political leadership denies plans for such an unpopular move. Mr. De Geus explained that early retirement is often a consequence of the traditional “job for life”-thinking. In the future people will have to change jobs over their lifetime.

3. Support of small and medium-sized enterprises

Sergey Borisov (President of OPORA RUSSIA )

SMEs play an important role in Russia´s modernisation. There are about 600,000 SMEs in Russia, employing a total 17m people (22% of working age population); they contribute 21% to Russia´s GDP.

SMEs form joint ventures with Russian universities and scientific centres. But innovative businesses require highly qualified personnel, which is scarce due to demographic trends and emigration. Other problems SMEs are struggling with in Russia are corruption, administrative barriers, property disputes and problems with tax authorities.

SMEs enhance economic competition, there should be more of them in Russia.

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Matti Vanhanen (former Prime Minister of Finland, Director of the Finnish Family Firms Association)

Finnish SMEs encounter numerous problems in Russia: Lengthy administrative and other procedures, constant change of regulations, protectionist tendencies of local standards, unpredictability of decisions by customs authorities, restrictions for foreign experts, corruption and requirement of cash payment due to lack of trust in transfer payment. Nevertheless, Russia is an important market with great opportunities.

In the following discussion it was suggested that business schools should teach how to become an entrepreneur and that SMEs should be more active in politics in order to defend their interests.

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4. Promotion of an active civil society

Jaroslaw Bratkiewicz (Political Director, Ministry of Foreign Affairs of Poland)

Modernisation requires a social system that is ready to accept innovations. Socio-economic modernisation is inherently linked with democracy and human liberties. Selective and limited modernisation induces contradictions within a political system which eventually lead to stagnation, decline and possibly collapse. As historical experience proves it is the middle class and its backbone- small and medium sized entrepreneurship- that constitute a solid foundation for civil society. Modernisation assumes getting rid of notorious faults and misdeeds of the past. The destalinisation in contemporary Russia re-orients popular mindset towards modernity and broadens conditions for reform and change.

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Ella Pamfilova (Chairwoman of the non-Governmental Movement “For Civil Dignity”)

Through modernisation, Russia should become a normal European country. Modernisation should not be limited to the socio-economic domain and should also cover politics, culture and ethics. Russia needs fresh impulses in the fields of democracy and human rights to close the gap between political statements and reality, protecting citizens from state arbitrariness, establishing genuine political parties, raising the level of political awareness within the society, fighting ethnic and religious radicalism and by eradicating poverty ( justice, including social justice, is the basis for freedom and democracy).

Civil society in Russia has become more active since 2010: more citizens participate in protest movements and social networks are changing the world and Russia.

Conclusion

The participants of the first DER-seminar appreciated the interesting presentations of the keynote-speakers (available texts are attached ) and the lively discussions. It was announced that DER will hold a second seminar dedicated to the EU-Russia partnership for modernisation in May 2011 in Moscow. The agenda of the next seminar will be focused on
• The state of the preparation of Russia´s accession to the OECD
• Vocational training; how to rebuild a vocational school system in Russia?

A very timely subject for a third DER-seminar would be a comparison of pension systems in EU countries and Russia and various concepts for reform.