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Alexey Likhachev: The sanctions have had almost no influence for exports to Europe

26.10.15

European business is doing everything to stay on the Russian market, and is trying to compensate the reduction of cooperation caused by the sanctions.

The First Deputy Minister of Economic Development Alexey Likhachev was told about it to "Rossijskaja gazeta". And he very much surprised, having declared that the sanctions have had almost no influence for our exports to Europe.

It appeared that we also have directions of breakthrough. Exports of high-tech products came to the growth. And the great potential is demonstrated by non-raw exports to China - it grew by 20 percent.

Alexey Evgenyevich, is it really that we have the greatest difficulties in trade not in the European direction?

Alexey Likhachev: you know, not all is so simple. We really have falling of trade with the European Union in dollar expression for 4-5 percent more sharply, than the general: minus 38 percent commodity turnover, and minus 35 - our export and minus 45 - our import. But I think that it is connected with the happened weakening of euro to dollar exchange rate. And the commodity structure and specific weight of physical volumes of mutual trade with Europe almost have not being changed. Actually, the sanctions have not directly influenced on commodity turnover, at least precisely on export.

That is no irreversible changes have occurred?

Alexey Likhachev: There are serious changes, such as those related to our responses - the restriction of the supply of agricultural products from the European Union. And here, perhaps, the leading European suppliers will not be able to restore their presence in the Russian market in the long term prospective even after cancellation of countermeasures any more.

I mean fruit and vegetable, dairy, meat products, berries. Naturally, there is the most active replacement of this production by deliveries from the neighbouring countries, from Latin America, from the Arab countries, Turkey including.

But in general, I want to tell once again that restrictive measures of a number of the countries concerning Russia by their influence on commodity turnover are more likely at the end of the first ten factors. And on the first place are currency fluctuations, changes in price in the world markets, corporate decisions.

And what the picture appears according to messages of sales representatives from the countries who inflicted sanctions against Russia?

Alexey Likhachev: The picture consists of two plots. The first one are our continuous contacts with the European business, signals that the taken measures cause very sensitive inconveniences, bring notable losses. About it we know first-hand.

That is the European business diligently calls us to return to the track of development of trade and economic relations in a positive manner, supporting projects. European business, in a good sense, hard-bitten, and it does not hesitate to intensify contacts with Russian business, bringing to him us, officials.

Are the contacts with the European business only amplified? It would have to be on the contrary.

Alexey Likhachev: It turns out so that when weakening the intergovernmental agenda with many countries, the business has acted as the initiator of a number of new formats, even bigger number of contacts in order to solve the problems.

We consider such position of the business absolutely reasonable and correct. We attentively listen to signals; we conduct dialogue and participate in the relevant activities - in Moscow, in regions, at various international venues.

The second plot is after all the companies both Russian, and foreign find new forms of work. Nobody is going to leave Russia seriously. Even if some signals of leaving of this or that company are available, most likely, it is simply a result of corporate restructuring, change of a control system or structure of property. But in general the vast majority of the European companies working with us are unambiguously connecting their future with expansion of their presence on the Russian market.

"Made in Russia": China has begun to enjoy

With what the increasing interest in China is connected?

Alexey Likhachev: I think, first of all it is connected with unused opportunities, and in both the directions, and for Russia on the enormous Chinese market, and also the interest of Chinese in the Russian technologies, investments to the power sphere, work at the Russian regions is very high. Therefore regional contacts are actively developed.

Our non-raw export to China following the results of last year in physical volumes grew by 5 percent, and this year following the results of the first seven months - already for 20 percent, and the share of China in our non-raw export continues to grow. Of course, it means that the potential of relationship in the trade and economic sphere is farthest from the top level though China is the absolute leader in our commodity turnover long ago.

Among the saved-up investments the sums are not so large - about 8 billion dollars of the Chinese investments work today in Russia and about 1-1,2 billion of Russian investments - in China.

It is not in any comparison with the European direction.

Alexey Likhachev: It is an official estimation. The expert ones can be slightly higher, but anyway, we are still far from the same European investments which we estimate at 300 billion dollars. And plus, of course, huge capacity of the Chinese market, consumer and industrial. We even have not approached closely to its saturation yet.

For example, with the food. In People's Republic of China the population considers the Russian foodstuff as very respectable.

Are our brands known there?

Alexey Likhachev: Yes, they are known. And "Made in Russia" for the Chinese consumer is adequate at the price, a qualitative, high-eco-friendly product.

But after all Chinese consider us as a raw materials source, at the same time we want that they will invest to our non-raw projects. How to be in this situation?

Alexey Likhachev: Each country has red lines for which it isn't necessary to come, and has green zones. Common projects are always realized at crossing of green zones.

Undoubtedly, we are interested in involvement of the Chinese party to energy projects within the conditions accepted for them. A lot of examples of that are available. And the Chinese party is very interested in attraction of the Russian technologies. And we talk and about projects in the field of aircraft industry - coproduction of the widebody plane, the heavy helicopter. A number of projects in shipbuilding, a machine-building complex, - mutual interest too arises here under certain specific conditions. And of course, our traditional directions connected with development of peaceful atom, space technologies, GLONASS system.

Active development of relations with China is believed to be a kind of a false manoeuvre, a response to challenges in the West.

Alexey Likhachev: It is not true. Firstly, all this started long before the spring of 2014, if you mean the sanctions. The key decisions to start a dialogue with China within the Eurasian Economic Union were made much earlier.

As long ago as in 2014, we launched an early dispute prevention system, the Customs Union and PRC signed an agreement, and a number of bilateral industry platforms were in place then. The Commission preparing regular meetings of the Russian and Chinese governments headed by Van Yang and Dmitry Rogozin started active cooperation long before 2014. In fact, all vice prime ministers have joined the engaging dialogue with PRC lately.

However, sometimes our entrepreneurs are a bit concerned about the huge economic phenomenon presented by the Chinese economy and industry. And the solution is not to be isolated from these contacts but to search mutually acceptable projects given mutual political interests.

The Second Russian/Chinese EXPO in Kharbin has just closed. Has this event stirred the interest you expected?

Alexey Likhachev: The interest to the event can be felt both in Russia and in China. The event attracted many participants with regions actively joining in the exposition. Last year we expected to see 50 to 60 large Russian companies but 100 companies visited the event and there were much more, over 300, Chinese companies.

The regional focus is strong this year. Thus, 24 Russia's regions and 24 China's provinces were represented at the forum. The governors of six Russian regions attended the event. The first day of EXPO was impressive when Dmitry Rogozin and Van Yang held meetings with the governors. The investment potential of 18 Russia's regions was presented.

EXPO is not only about contracts concluded. Many companies and regions strive to present their capabilities. They are committed to signing the first contracts to become an initial step towards negotiations and therefore, implementation of joint projects both in China and in Russia.

Ukraine: on-site bargaining

Apparently, early next year Russia will introduce new duties on Ukrainian goods due to the enactment of the free trade zone agreement between Ukraine and the EU. Russia has a well balanced position here. As far as I understand, the Russian party is willing to grant concessions but a compromise seems very unlikely. What is the stumbling point?

Alexey Likhachev: Negotiations have been conducted for over a year. The next expert round took place in early October. Three ministers will meet in November again.

The structure of these negotiations is fairly interesting and can explain the gist. As you know, Russia is represented by the Minister of Economic Development, the EU is represented by the European Commissioner for Trade, while Ukraine has delegated its Minister of Foreign Affairs which means a lot.

I see two factors as the stumbling point. The first is the clear decision of the EU and Ukraine to implement the economic part of the association agreement effective from the 1st of January whatever it takes. The second point is unwillingness of European and primarily Ukrainian experts to move towards development of legally binding trilateral documents mitigating the risks that arise from the agreement between Ukraine and the EU.

It might be an intergovernmental agreement or a package of industry-wide but legally biding arrangements between customs or phytosanitary authorities handling our concerns. But during negotiations, our colleagues always insist that they cannot enter into legally binding agreements.

And what are the benefits of the negotiations then?

Alexey Likhachev: I also find it very weird. We are involved in the negotiations for reasons other than adopting press releases.

The previous European Commission members shared that opinion when they launched the negotiations a year ago. The initial idea was to end up with legally binding arrangements.

And now, when we have almost come to an end, the Ukrainian and European parties turn out to have no authority to enter into such agreements. It is what the experts have claimed.

So, the stumbling point is not a specific issue on the negotiation agenda but the overall reluctance to enter into an agreement, is it so?

Alexey Likhachev: Yes, it is a point, too. When we discuss industry-specific issues, we often see understanding of European experts but it runs into overall reluctance and unwillingness to accept any legal obligations.

For instance, we also propose to extend the CIS technical regulations and standards in Ukraine without postponing the enactment of European technical regulations. The Ukrainian business in this case would be able to harmonise European standards within a feasible timeframe and we could supply to the Ukrainian market the goods manufactured based on the Eurasian standards and technical regulations.

Agreeing to do this, our European partners also insist that we cannot take some commitments here. Although that does not prevent Ukraine from integrating in the European family, upgrade, and rebuild the sites using European standards and regulations.

We have worded general and detailed proposals and communicated them to our partners. During the last session, we heard that they were willing to start discussion in more detail to frame a conclusive document. We hope they will keep their promises.

What will happen at the beginning of the next year if an agreement cannot be reached? Will that be a shock to you?

Alexey Likhachev: There is a number of aspects to consider. The first one is loss of possibility to deliver products to Ukraine and the need in additional certification or even modifications of our products.

Another thing is related to purely Ukrainian problems. Given the recession in Ukraine, it would be wrong to believe that six months, a year, or year and a half is enough for major Ukrainian businesses to fully modify their products to meet the Ukrainian standards. They will undoubtedly have to increase product deliveries to the Eurasian Economic Union. And they will be willing to deliver at distress prices to survive.

We have concerns about the reliability of certificates of origin for goods issued in Ukraine. Furthermore, there are many issues related to customs administration, sanitary and veterinary control, energy, and protection of the rights of Russian investors.

We will have to introduce customs duties in line with the most favoured nation treatment. They will be the duties we impose on most other countries, also in Europe. And, as we have mentioned many times before, Ukraine will be listed among the countries with limited farming import to Russia.

In view of the above, do you expect the sale of Russian assets in Ukraine and the need in government support of our companies that operate in Ukraine?

Alexey Likhachev: I believe that support, if any, will be limited to a number of companies. Russian owners know about all risks and are prepared to any developments. Many of them are transferring their assets from Ukraine. It is not the best time now to have business there.

What will be the turnover with Ukraine by end of the year if everything we are discussing now takes place?

Alexey Likhachev: The most intensive year for turnover with Ukraine was 2011 when it reached USD 50.6 billion. It was USD 39.6 billion in 2013 and USD 27.9 billion in 2014. So far, based on the 8-month performance, we can see a steady decline in goods turnover with Ukraine by 56%. If this trend persists, the turnover will be USD 12 billion or USD 14 billion by end of the year and will drop to USD 10 billion in a year. Ukraine will leave its position as the fifth trade partner and move down to the thirtieth or fortieth place.

What leads in WTO?

A WTO Ministers Conference will be held in December. It will put an end to a long round of negotiations on global trade rules. Has Russia defined its position? What do you expect from the conference?

Alexey Likhachev: We are developing a consolidated position on specific items. It is important for the World Trade Organisation to develop and remain the only legitimate decision-making platform for global trade regulation. We do not find it reasonable to shift key items to regional agreements.

And it is happening now, isn’t it?

Alexey Likhachev: Yes, It is. And it was not our party that initiated it. It is important to develop uniform rules for world trade.

It is essential to keep the commercial dispute resolution in Geneva. And surely make WTO a more friendly platform for new members. We were negotiating that for 18 years and the negotiations with Kazakhstan which could become a WTO member with our pro-active support took about the same time. And we want the procedure for Belarus accession and recognition of the Eurasian Economic Union as a WTO member to be faster than it was for Russia and Kazakhstan.

Will Russian representatives speak at the WTO conference in an association?

Alexey Likhachev: We will certainly look for allies. Our minister will take floor as the representative of a major trade nation.

Furthermore, we have initiated a number of integrations, including commercial ones, and are expanding our agenda as part of BRICS, establishing communication between the Eurasian Union and ASEAN, MERCUSOR(Customs Union of the countries in Latin America, commented by the editor), and SA Customs Union.

Is it possible to cooperate with the EU on WTO-related matters?

Alexey Likhachev: Yes, of course. Unless our colleagues in the EU have political red lines in this respect.

We have been informed of the possibility of mutual WTO claim recalls by Russia and EU. Is it still possible?

Alexey Likhachev: Related consultations are ongoing. They have recently been reviewed by experts in Geneva. Alexey Ulyukaev, Minister of Economic Development, discussed these matters in Istanbul with Cecilia Malmström, European Commissioner for Trade, among TOP 20 economies. Experts are discussing alternatives so far.

Is it still kept as a bargaining chip?

Alexey Likhachev: We are ready to start this settlement on mutually acceptable conditions.

Plus 2%.

Mr. Likhachev, what are expected foreign trade results in Russia this year?

Alexey Likhachev: Speaking about trade statistics in US dollars, we can see a 34% decline in turnover over the seven months, namely a 40% drop in import and 30% drop in export. But there are positive trends in export to many countries.

The picture differs in volume. Export grew by 4.2% with a 2% increase in energy and 7% increase in non-energy export, and we observe a 7.8% growth in export of hi-tech products.

The growth rates for energy supplies abroad are quite moderate at 1.9% which is primarily explained by the reduction of natural gas purchases by Ukraine by over three times and contraction of black coal import demand in China.

And what is the forecast in terms of volume?

Alexey Likhachev: It is not entirely correct to discuss turnover in terms of volume. Export remains a concern here. But we expect a 2% export growth despite external challenges.

Mr. Likhachev, what is the trade progress within the Eurasian Economic Union?

Alexey Likhachev: Cost indicators in US dollars are declining, too, but at slower rates than overall, by 25%. And it is important to avoid the statistics trap here, too. The thing is, 80% settlements with Belarus are in national currency. And we certainly have a distorted picture when we automatically convert our trade turnover in US dollars.

And in terms of volume?

Alexey Likhachev: We observe a volume growth with all major Eurasian partners and even FX increase in the supplies of Russian products to Armenia and Kyrgyzstan.

There were a lot of mutual claims with regard to asynchronous devaluations within the Eurasian Union. Did if affect our relationships?

Alexey Likhachev: We have more risks related to goods flow in near-border regions when the shuttle traders are active.

Especially, with long and open borders with Belarus and Kazakhstan. And certainly heads of Russia's regions equally raise the matter of near-border areas or Kazakhstan depending on the currency which currently benefits people most.

The only solution is a currency-related union. Until then, we can only coordinate macroeconomic, FX policies, but will still encounter these issues from time to time.

Is it a perspective of another 10-15 years?

Alexey Likhachev: We certainly do not mean a year or two. This most challenging project depends on two factors.

The first is political will. The second is huge regulatory and organisational work to be done if this decision is made. We will have to minimise all risks learning from EU negative experience, too.

Reminded of the recent situation in Greece, we understand that the Greek recession did not start a year or two, or even three years ago. The European economic model had been contributing to the situation for a long time. And we need insurance as we understand the differences in economy development and different economic models within the Eurasian Union.

Igor Zubkov

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