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Russia Must Reform Its Domestic, Foreign Policies To Meet Challenges

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  • Russia Must Reform Its Domestic, Foreign Policies To Meet Challenges

    RUSSIA MUST REFORM ITS DOMESTIC, FOREIGN POLICIES TO MEET CHALLENGES

    http://asbarez.com/113202/russia-must-reform-its-domestic-foreign-policies-to-meet-challenges/
    Friday, August 23rd, 2013

    The Moscow Kremlin

    BY HAYK HOVHANNISYAN
    >From the London School of Economics Blog

    Russia's vast energy resources have long given the country substantial
    influence in the international arena. As notes, however, a number of
    current developments present a threat to Russia's economic and global
    position. New energy supply routes and the shale gas extraction 'boom'
    may reduce demand for Russian energy resources; while a slowdown in the
    BRIC economies, allied with negotiations over the Transatlantic Trade
    and Investment Partnership (TTIP) and the Trans-Pacific Partnership
    (TPP), could have profound implications for the country's economy.

    Three major factors are likely to shape the international agenda in
    the coming years: a slowdown in emerging economies; transformation
    of traditional energy markets and supply sources; and two free trade
    'mega-agreements' between the US and its transoceanic trade partners.

    Russia's current political and economic orientation puts it in
    a disadvantageous position in the face of these developments. The
    adverse economic effects of the first two trends are direct and already
    visible, while the indirect isolating consequences of the later will
    be felt in the future.

    Despite a sustained period of high oil prices, Russia has registered
    falling growth rates for six consecutive quarters, with 1.6 and 1.2
    per cent growth in the first two quarters of 2013. It is unlikely
    that the country will reach the forecasted growth target of 2 per
    cent for this year. Down from its peak of 8.5 per cent in 2007,
    this is the largest drop in growth among the BRIC countries (Brazil,
    Russia, India and China) during the same period.

    Looking at the broader perspective of the BRICs, some might hope that
    this deceleration is a cyclical phenomenon. Others, like professor
    Nouriel Roubini of NYU's Stern School of Business, believe that the
    main contributing factors - state capitalism, the end of the commodity
    super-cycle, and a hard landing in China - are structural. The slowdown
    in the BRICs might signal an end to the era of endless increases in
    demand for commodities. Evidence suggests that commodities may have
    already entered a period of sustained price decreases. If this is true,
    the world's most resource-abundant country will pay a heavy toll, as
    commodities account for up to two-thirds of Russia's exports. Almost 30
    per cent of its GDP and half of Federal Budget revenues are generated
    through hydrocarbons.

    European demand for Russian energy resources already fell by 8 per
    cent in 2012. Asia still shows remarkable absorbing capacities, but
    even there Moscow faces significant challenges. China, for example,
    is not only slowing down, but also diversifying its energy sources. It
    has estimated shale gas reserves of 1,275 trillion cubic feet, which
    is more than those of the US and Canada combined. The world's largest
    energy companies are actively tapping into this vast resource. China's
    National Energy Administration is planning to increase the output of
    its shale gas to 2.2 trillion cubic feet by 2020.

    While GazProm has recently missed another deadline for finalising the
    terms of a large gas supply contract to China, the Chinese government
    is continuously building up its supplies from Central Asia and other
    areas. It is constructing the third line of the Turkmenistan-China gas
    pipeline, which will increase the throughput of gas from Kazakhstan,
    Uzbekistan and Turkmenistan to 2 trillion cubic feet per year by 2016.

    In July, the Myanmar-China pipeline, supplying gas from the deepwater
    Shwe project in the Bay of Bengal, also became operational.

    EU energy resources and free trade negotiations

    The Spasskaya clock tower at the Kremlin

    Similar shifts are also noticeable on Russia's western frontiers. The
    EU possesses 75 per cent of the shale gas reserves of the US, and
    is advancing their exploitation, albeit at a much slower pace. While
    political debates impede a full-blown 'shale' revolution inside the EU,
    across the border, in Ukraine, the Dutch energy giant Shell is already
    putting efforts into its 0.7 trillion-cubic-feet-per-year shale gas
    field. To the south, the upcoming Trans-Adriatic pipeline and the
    newly discovered huge gas reserves of the Eastern Mediterranean will
    further diversify Europe's energy supply options.

    In the beginning of August, during his visit to Washington, the Greek
    Prime Minister, Antonis Samaras, announced that Israel, Cyprus and
    Greece will be capable of fully satisfying Europe's demand for natural
    gas through their Mediterranean reserves.

    In his meeting with President Obama, Samaras also promised something
    else. In the first half of 2014, during its Presidency of the Council
    of the European Union, Greece will exert maximum effort to finalize the
    negotiations over the Transatlantic Trade and Investment Partnership
    (TTIP) between the EU and the US. These two parties account for
    almost half of global output, and the new free trade zone is intended
    to provide a new boost for their slowly recovering economies. It
    is expected that the national incomes of the two countries will
    increase by 86 billion euros and 65 billion euros, and bilateral
    exports by 186 billion euros and 159 billion euros, for the EU and
    the US respectively. While some have celebrated this partnership as an
    'economic NATO', Karel De Gucht, the European Commissioner for Trade,
    has vowed that the two largest economies of the world will not withdraw
    from the rest of the world.

    NATO or not, this is an important development from which Russia is
    unlikely to benefit. One of the core ideas of the agreement is to
    synchronize and remove regulatory barriers between the US and the EU.

    This can bring significant benefits not only for domestic companies
    in the two economies, but also up to 100 billion euros in gains to
    those in other countries. One mechanism is that uniform manufacturing
    standards can create huge savings for firms in non-TTIP countries
    exporting to both European and American markets (i.e. Kia and Toyota
    are supposed to benefit from a common standard on seatbelts as much
    as Ford and Renault). With its commodity-dominated exports, Russia's
    stake in these gains is uncertain.

    Likewise, on the other side of the world, officials from twelve Pacific
    countries - Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico,
    New Zealand, Peru, Singapore, the US and Vietnam - are preparing for
    the 19th round of Trans-Pacific Partnership (TPP) negotiations that
    will take place in Bandar Seri Begawan at the end of August. These
    countries account for 40 per cent of world GDP, and it is estimated
    that TPP, the largest free trade agreement ever agreed, can boost
    their aggregate annual output by another $300 billion.

    Russia and the changing global economic landscape

    It is clear that to retain its global influence, the Kremlin has
    to remodel Russia's role through economic diversification and more
    amicable foreign political discourse. No signs of the latter are
    visible at this moment. The level of misunderstandings between Moscow
    and Washington reached a point where, on August 7th, the US President
    had to cancel the upcoming summit with Russia's President Vladimir
    Putin. While foreign policy might be a matter of top-down resolve,
    which either exists or not, economic modernization takes more than
    that.

    Innovation became a buzzword in former President Medvedev's
    administration when he launched the state-guided Skolkovo project
    in 2009, a Silicon Valley to-be based near Moscow. But creativity
    and entrepreneurship are usually freedom-loving species. Four years
    and almost three billion government-invested dollars later, the
    projectresembles a huge construction site in a dubious condition.

    There are few private investors, the market of venture financing is
    rudimentary, not to mention the red tape and corruption allegations.

    Olga Uskova, the president of Cognitive Technologies, a major Russian
    software developer, predicts that by 2014 Skolkovo will become an
    accomplished construction project, but without innovations. On a wider
    scale, the unfavorable investment climate has caused a massive capital
    flight of $360bn in the last five years, or around 4 per cent of GDP
    annually. Recently, the Russian Ministry of Economy has revised its
    capital outflow estimates for 2013 from zero to $30 billion.

    Although Russia's decade of hydrocarbon-fuelled rapid growth might be
    over, its energy and currency reserves are vast, and money in Moscow
    will not run out quickly. But nevertheless, the Kremlin's capacity for
    political and economic pressure on the energy-dependent countries,
    stretching from East Asia, to the South Caucasus, to Western Europe
    and beyond, will gradually decline. Staying on the sidelines of the
    two massive American-led free trade zones will not help.

    Possessing a huge territory, abundant natural resources, a highly
    educated population, and an extremely rich cultural heritage, Russia is
    performing far below its potential. In Fyodor Tyutchev's famous words,
    "you cannot grasp Russia with your mind... you can only believe in
    it". One wonders whether the great 19th century poet would have the
    same view, had he lived in our time. Hopefully Russia's enlightened,
    well-travelled and well-informed new generation will revive their
    belief in the country, at the same time making it more understandable
    for themselves and the rest of the world.

    Hayk Hovhannisyan is a graduate of the LSE's MPA program, with a
    degree in International Development. He has six years of military and
    public service experience in Armenia. During his studies in London he
    has worked on projects for Thomson Reuters and The Boston Consulting
    Group. His research interests are geopolitics and the economics of
    Eastern Europe and ex-Soviet countries.



    From: Emil Lazarian | Ararat NewsPress
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