Seminar on aspects of the EU-Russia modernisation agenda

In cooperation with the Moscow Institute of Contemporary Development (INSOR) and the EU-Russia Industrialists’ Round Table (IRT), “Dialog-Europe-Russia” (DER) organised a seminar to discuss important issues related to the EU-Russia Partnership for Modernisation. The meeting was held in Moscow on 31 May 2011 at the premises of INSOR, and was dedicated to

In addition, the discussion on two topics addressed at a preceding DER seminar (Brussels, 24 February 2011) was resumed at the beginning of the Moscow seminar.

1. Promotion of small and medium-sized enterprises

Sergey Borisov (President of the All-Russian NGO of Small and Medium Business “OPORA RUSSIA”)

The share of SMEs in Russia’s economy will be raised from at present 22 % to 60 % . SMEs play an important role in the innovation of Russia’s economy; they cooperate with universities and research centres. Russia’s SMEs have formed regional clusters for sectoral innovation, i.a. in Arkhangelsk for wood processing, in Tatarstan for automotive parts and in Perm for chemical products. OPORA draws on the experience of SMEs in about 50 foreign countries. EU-Russia business cooperation is focussed on clean technology and energy efficiency, which is a very relevant field for SMEs.

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

The most important preconditions for prosperity of SMEs are stability of rules (especially tax legislation) and fair competition. SMEs operating in small cities and villages offer local solutions. Innovation must be driven by market demand. State subsidies should only be granted for R&D and not for the operational activities of SMEs. SMEs need a well functioning banking sector, with long-term relationships between banks and entrepreneurs.

2. Development of a modern financial sector

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

The Strategy for the Russian Banking Sector up to 2015 which was recently adopted by the government and banks is based on the assumption of a 25 % growth of Russia’s financial sector. The Ministry of Finance is inciting Russian banks to ease their lending policy in order to boost economic growth in Russia (in 2011 Russia’s GDP is expected to grow by only 4.5 % compared with 7 % before the crisis of 2008). The assets of the Russian financial sector amount to only 55 % of Russia’s GDP (vs. 200% in the USA). In Russia nearly 80 % of all banking activities are done by the five biggest banks (of which three are state owned: Sberbank, VTB, Rosselkhosbank). Russian banks are slowly adjusting to the requirements of Basel III. Propensity to save is very low in Russia due to low interest rates on deposits. Since the last financial crisis foreign banks are reducing their exposure in Russia, positive exceptions being Raiffeisenbank, UniCredit and Chinese banks.

Patrick Butler (Member of the Managing Board of Raiffeisen Bank International)

As Alessandro Profumo already said at DER’s Brussels seminar the Russian financial system demonstrated its resilience during the last crisis. However, both consumption and investment in Russia continue to be restricted by weak demand and tight credit conditions. The challenge now for the Russian financial sector is to revive credit activity across the economy and not just for blue-chip companies.

The Russian banking sector must be further strengthened by upgrading its legal framework. Priority should be given to addressing the inadequate supply of long-term capital.

The Russian banking sector is overcrowded, especially at the bottom (c. 1,000 financial institutions, of which the 100 largest command 84% of the sector’s total assets). The very high number of banks complicates proper supervision.

Accounting rules, which still differ substantially from international ones, should be made more uniform.

3. Reforming vocational training in Russia

Marina Solinova (Deputy Director of the Federal Institute for Educational System Development, Director for Social Programmes at INSOR)

A pilot project in the Russian Far East and the Baikal Region to comprehensively modernise vocational training has been initiated by INSOR. The aim of this project is to better use the regional economic potential by upgrading the efficiency of human resources. INSOR seeks international expertise (best practices in hiring and training personnel). The strategic goal of this pilot project is to prevent a depopulation of the Russian Far East and the Baikal region by strengthening the local economy in these remote parts of Russia.

Igor Yurgens (Chairman of the Management Board of INSOR) added that the OECD and UNESCO are preferred partners for modernising vocational training in Russia (twinning). In this context, the Federal University in Vladivostok serves as a bridge between the Asia-Pacific region and Europe.

Johannes Collini (CEO of Collini-Group – Applied Surface Intelligence)

An apprenticeship training-programme in the metal and electrical industry of Vorarlberg was initiated in the 1970s when this industry was lacking adequate workers in Austria’s western-most region. According to this programme the apprentice is employed by a company where he works 80 % of the time – going to school the remaining time. The education of the apprentice is “market-driven”: the company knows what skills are needed most. Beside professional knowledge, the apprentice also acquires managerial and other practical skills. The duration of training for technical professions is about four years. 50 % of the teenagers of Vorarlberg start an apprenticeship; annually 1,200 apprentices complete their training programme. Apprentices from Vorarlberg are regularly winning all international competitions.

4. Reforming the Russian pension system

Yevgeny Gontmakher (Deputy Director of IMEMO and Director of INSOR’s department for problems of socio-economic development)

The prerequisites for pension reform are a well developed financial system and a sufficiently high level of popular income. In Russia, the average per capita income remains below USD 800.

Russia’s population is aging rapidly: Today, ¼ of the country’s 142 million inhabitants are pensioners. Out of approximately 75 million employed people, only 55 million contribute to the pension system financially (20 million people are assumed to be working illegally). By 2030, the number of working people in Russia is expected to equal the number of pensioners, with the average pension continuously decreasing.

What can be done to reverse this trend? First of all the retirement age has to be raised. At present, the retirement age in Russia is officially 55 for women and 60 for men; in reality it is even lower. Although the Russian government promises no change, sooner or later a higher retirement age will be unavoidable. However, this will be problematic for the following reasons:

The Russian state is unable to provide efficient social security; the pension level depends on the availability of budgetary means. The Russian pension system is hostage to negative demographic trends and slowing economic growth.

Mikhail Dmitriev (President of the Centre of Strategic Research)

The decline of the working population in Russia is sharper than in the USA, the EU or Japan. The pension replacement rate continuously decreases (at present at 36 %); without adjustments it might fall to 25 %. Raising the retirement age in Russia is a necessity, although an unpopular one. One has to keep in mind that life expectancy of Russians is still very low by European standards (although it slightly increased over recent years).

In summing up Mr. Gontmakher pointed out that the transition from the Soviet pension model (which can no longer be financed) to a modern one is extremely difficult.

Vladimir Dlouhy (The Trilateral Commission, IMF, former Minister of Economy of Czechoslovakia)

Russia faces similar pension system challenges as most Central and Eastern European countries. The experience with a second pension pillar in three CEE countries (CZ, PL and H) shows that the following implications should be taken into account:

Lessons to be learned by Russia from the three CEE countries:

Mr. Dlouhy is also convinced that a sustainable pension system in Russia is only achievable by raising the retirement age.

Alexander Demidov (Managing Director of GfK Rus)

According to an opinion poll recently conducted by the International Institute for Market and Social Research GfK Rus, only 2 % of interviewed Russian citizens believe that the pension they will receive upon retirement will be enough to live from. The majority of respondents do not understand the principles of the Russian pension reform of 2002. 60 % do not want to make voluntary contributions to receive a supplementary non-state pension mainly because they lack available financial resources and distrust non-state pension funds. The opinion poll comes to the conclusion that future Russian pensioners lack any retirement strategy.

Ella Pamfilova (Chairwoman of the All-Russian NGO “For Civil Dignity”

Civil society in Russia should be involved in major political decisions. So far, the ruling political elite is not used to taking into account the opinion of Russian citizens.

Russia’s way into the Organisation for Economic Cooperation and Development

Vladimir Voronkov (Russian Foreign Ministry, Director of the Department for All-European Cooperation)

Russia actively participates in international economic integration. Russia’s interest in joining WTO and OECD has noticeably increased recently. Membership in both organisations is supposed to accelerate the socio economic modernisation of Russia and to improve the investment climate. In this context, increased contact between the civil societies of Russia and the EU is important.

On the eve of the seminar, Russia’s Deputy Finance Minister Sergey Storchak declared that joining the OECD is a win-win process for Russia. The best practices of OECD member states serve as an important guidance and the more civil society gets involved in socio economic decision-making the better it is for the country’s stability.

Aart de Geus (OECD Deputy Secretary General)

On 16 May 2007 the OECD agreed to start the accession process with Russia, which consists in a technical review by 22 OECD committees. Russia’s ambition to join OECD is an expression of its willingness to modernise. Russia should first join the WTO and then the OECD. Recently, Russia has adopted a package of laws in line with the OECD anti-bribery convention, to which all OECD members must adhere.

Answering a question by Anatoly Chubays (CEO, Chairman of the Executive Board of Rusnano, Co-Chairman of the EU-Russia Industrialists’ Round Table), Mr. de Geus indicated that Russia could become a member of OECD by 2012-13. Membership is the completion of a process which requires active cooperation in many areas.

Summary and Conclusion

Wolfgang Schuessel (Former Federal Chancellor of Austria and Chairman of DER) praised the quality of the presentations and discussions during the seminar. The strategic goal of the activities of DER is the integration of Russia into Europe. The EU and Russia are natural partners; in many respects they are much closer to each other than to the USA, Brazil or South Africa. The strategic focus of the United States is shifting from Europe to Asia. The EU-Russia energy partnership should include not only hydro-carbons but also new types of energy. In their cooperation Russia should be guided by a bottom-up approach. Respecting the self-responsibility of citizens leads to a truly democratic system. We must also learn to think in a long-term perspective.

Our next events will be a meeting of DER’s Advisory Board in Salzburg in mid-August and a meeting at the margin of the EU-Russia-Summit in Brussels in early December. At a seminar in autumn DER wishes to discuss issues relevant to the security of greater Europe.

Anatoly Chubays stated that he will inform members of the Russian government (Shuvalov, Kudrin and Nabullina) of the results of this seminar. As to future activities of DER he believes that it is the unique mission of this think tank “to bring together” people and institutions in developing and implementing joint projects. Future meetings organised by DER should include representatives of the Russian regions and also involve the civil societies of Russia and the EU.