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Minister Elvira Nabiullina Speaks at the Conference Priorities and Prospects of Regional Economic Integration Involving Russia in the Former Soviet Union, European and Asia-Pacific Region

17.11.11

On November 17, 2011, Minister Elvira Nabiullina gave the report on Global Challenges for the Russia’s Integration Agenda in the Russian Academy of Foreign Trade at the plenary session of the conference Priorities and Prospects of Regional Economic Integration Involving Russia in the Former Soviet Union, European and Asia-Pacific Region.

 

Theses of the speech of Minister Elvira Nabiullina

Global Challenges for the Russia’s Integration Agenda at the conference Priorities and Prospects of Regional Economic Integration Involving Russia in the Former Soviet Union, European and Asia-Pacific Region

Moscow, November 17, 2011

 

The world is actively integrating in different forms. If we analyze the way we look at the global picture of the regional economic integration, it is easy to see that many developed and developing economies chose the regional free trade agreements as their priorities, while some countries, primarily BRICS, were focused on a multilateral trade liberalization and accession to the WTO. For example, since the mid-1990s, the APEC economies have entered into a total of 70 agreements on free trade zones with more than half of them concluded in the 2000s.

Besides, the today's agreements establish the trade regimes that fall beyond the scope of multilateral rules. In addition to regional consolidation and formation of “continental” blocks, a growing number of agreements (more than half over the past 3 years) are made between countries from different continents.

As of today, there are several families of integration agreements in the world – agreements entered into by the European Union (pulling of the Middle East and North Africa), and the agreements concluded by the USA (“tightening” of the American Continent and pulling of the East Asian countries).

The Customs Union (CU) and Common Economic Space on this map are a block with economically and geographically advantageous location between the traditional production and consumption centers (Europe) and the main centers of the promising global growth (the APR).

Our own integration projects and accession to the WTO provide an opportunity for us to actively participate in forming of a global integration picture.

It is clear that the market of the current CU member states is not so large for the Russian goods to consider it as an alternative to the EU or Asia-Pacific markets. As to human, resource and innovation potential, the CIS countries may be too small for a significant expansion of the Russian goods to their markets and technological cooperation to increase marketability of such goods.

In this context, creation of the Common Economic Space for Russia, Kazakhstan and Belarus should be considered as an important step towards a deeper involvement of Russia in the global supply chains and deeper integration with our major partners, i.e. the European Union and the Asia-Pacific Region.

Why do we need the integration? This is an expansion of the sales markets, as there are sectors with investments into major projects justified only in case of large markets, such as the aircraft industry. Therefore, the potential borders of sales markets, given that their extension is behind the integration, are a factor of the Russia's investment appeal.

At the same time, it facilitates the imbedding into the global value chains. Not all the sectors demonstrate the signs of efficient subsistence economy today, when we “hold” the entire value chain in Russia – from raw materials to finished products. It is often the case, when integration into the global supply chains is more efficient by imbedding in the link, where we are competitive and have the competencies. Here, the regional integration reduces the transaction costs for us.

Another benefit is a competition of jurisdictions. Integration is an institutional challenge, i.e. creation of institutional competitors for itself that should “spur” us to be better than our integration partners.

But the main thing, in my opinion, is that participation in integration groupings allows being a player on the world economic arena and collaborator rather than a passive recipient of the game rules.

When we talk about the Russia’s integration agenda, we agree that Russia, Kazakhstan and Belarus took great efforts to make a step forward on the way to the Customs Union and Common Economic Space over the past three years.

The agreement on Common Economic Space with Ukraine was signed as far back as 2003; in 2006, it was decided that all three countries will move on, and only in 2008–2009 more than 40 international treaties, which formed the basis of the Customs Union of Russia, Belarus and Kazakhstan were adopted at the highest level.

On January 01, 2010, the unified customs tariff and uniform commodity nomenclature of foreign trade activities were adopted in Russia, Belarus and Kazakhstan, regulation of foreign trade activities was delegated to the Customs Union Commission. In July, 2010 a unified Customs Code came into force.

On April 01, 2011, the vehicle control at the Russia-Belarus border was cancelled; since June 01, 2011 the customs and vehicle control was moved to the outer boundary from the Russia-Kazakhstan border. The common customs space and the single customs territory were formed in a very short time (I have mentioned the important integration milestones we observed every six months). And now we have every right to say that the Customs Union of Russia, Belarus and Kazakhstan is completely formed.

We obtained considerable results of the Customs Union operation, especially in the economic field: the volume of mutual trade of the three countries has increased.

The leading edge conditions for business have been established in the CU member states. Entrepreneurs have a chance to choose in what CU member state they want to work in, where to pass through the customs clearance procedures and where to pay taxes. At the same time, business community got access to the common market of the three countries. It is important that the game rules for business players have become more stable and attractive, as they were laid down on the basis of the EU experience and subject to the rules of the World Trade Organization.

The Russian, Belorussian and Kazakh economies have become more attractive for the third party investors from other countries.

Given the unstable global economic climate, the regional customs union is a guaranteed market for goods and services for each participating country that enables setting-off the global decline in demand on the world markets.

It is important for us to avoid a trap here, as the switching of trade to the CU goods should not lead to reduction in its competitiveness on the world markets. Besides, the faster we can take advantage of each other to improve the competitiveness and accelerate the export growth, the stronger the long-term integration effect will be.

Here again, this leads to the fact that cost-effectiveness of the Customs Union depends on moving towards a deeper integration between the countries in the shortest possible time, standing to the benefit from both additional trade within the bloc and removal of barriers for further development of all production factors.

The numerous studies on the Customs Union consequences, mostly in Europe but including the other blocks as well, show that the real integration effects are observed not so much as a result of increased mutual trade in goods, as the deeper integration and enjoyment of mutual advantages of countries in the economic union. This fact was predictable from the outset, and in this context the formation of the Common Economic Space was initiated almost simultaneously with the establishment of the Customs Union.

In July, 2011, the Russian Federation completed ratification of agreements that form the CES’s legal base. In June of the same year, the Republic of Kazakhstan completed ratification of these agreements as well, while the Republic of Belarus ratified them as early as December, 2010. This fact enables enactment of all the agreements that were signed by the parties in November–December, 2010 within the CES on January 01, 2012.

It is of crucial importance that the CES will be based on the agreed actions in key institutional areas such as macroeconomics, competition rules, technical regulations and agricultural subsidies, transport, and tariffs of natural monopolies.

It stands to reason that a common visa and immigration policy should be pursued to eliminate the frontier control at the inner boundary. The elimination of migration, frontier and other barriers, or so-called “labor quotas” provides the opportunity to choose where to live, graduate or work without any restrictions.

It is of prime importance that an additional momentum will be given to liberalization of business on the market with the common standards and requirements for goods and services, which should be generally harmonized with the European ones. This factor is essential as we are all adopting the current technical regulations, and the agreed policy will allow us to avoid a technological incompatibility of products. In addition, each company of the three countries in every CES member state will actually enjoy all the benefits of local producers, including access to government orders and contracts.

To gain a foothold on such an open market, business communities will have to work on their efficiency, cut costs, and invest in modernization. Here, businessmen just need the two basic documents – the Customs Code and the Confidential Agreement on the Customs Union and the Common Economic Space.

I am pleased to note that the Academy has won a public tender announced by the Secretariat of the Customs Union Commission, on codifying the laws of the Customs Union and the Common Economic Space in a single contract, which could become the basis for establishment of the Eurasian Economic Union in the future.

As a result, even now we observe a significantly deepened integration on the basis of the newly created Customs Union, and if there are more than 20 Customs Unions in the world, then, in terms of a deeper economic integration, the CES should take the same position in the long term as the leading global integration associations such as the EU.

What do we have in the end? The total market of Russia, Kazakhstan and Belarus today is about USD 500 bln of retail sales, over USD 1 tln of industrial products, and approximately USD 100 bln of agricultural products. The consumer markets of new quality are built.

Here, even taking into account the fact that Russia constitutes the main part, we should not underestimate a potential for the overall growth together with our neighbors: it is a chance for us to increase the supply of ferrous and non-ferrous metals and accelerate the growth of the building materials industry. As to the market size, Russia is the most attractive country for development of existing and establishment of new production facilities of companies with foreign participation in their equities to arrange supplies to the markets of the three countries.

At the same time, we realize that we have the prospects, together with Kazakhstan, for development of the ferrous and non-ferrous metallurgy, transport engineering, cooperation in the nuclear and aerospace sectors. As for Belarus, it is cooperative ties in the automotive, aircraft, shipbuilding, defense and space sectors, microelectronics, telecommunications and a number of other industries. At that, we have the agreed upon common rules for provision of industrial subsidies, established common regulatory framework, procedure for dispute settlement and investigations, as well as provide for liability of the parties. It means that we do our best for the competition within the CES to be fair.

Given the development of mutual trade in the common customs territory and signing an agreement on access to the services of natural monopolies, new transportation markets are built, equal access to rail infrastructure will be provided, domestic rates in each country will be unified, procedures are simplified, transportation of goods through Kazakhstan to/from the CIS countries, China and the Asia-Pacific Region and through Belarus to/from the EU is becoming more secure.

Our efforts on establishment of the Customs Union and the Common Economic Space resulted into the built large-scale market, in which the basic guidelines of macroeconomic and monetary policy will be agreed, and a predictable (for Russia) situation on the borders with China and the EU, i.e. the external borders of the Common Economic Space.

The comparison with other integration associations shows that the size of the CES’s economy on a global scale is not so great – 2.6% of the world GDP (3.4% if calculated by PPP), 2.4% of the world population, and 4% of the world export. As to the size of economy, it is comparable with the ASEAN and slightly smaller than the MERCOSUR.

At the same time, in total the CES represents 9% of proven global oil reserves and 25% of natural gas reserves. The CES is a key player in the world markets of industrial raw materials with an 11% share of the global raw materials export (including energy) and a 14% of global energy exports. As for the CES in the CIS, the turnover exceeds 80%, and the mutual trade of the CIS countries accounts for 70%. The CES holds a unique place in the CIS and the entire Eurasian Economic Space as regards the labor force skills, the income level and quality of the consumer market.

The CES today is an important association that allows turning strengthened economic positions in negotiations to advantage of the Russian business.

The key question is whether Russia has a real economic motivation for such integration. The answer is rather complicated and not obvious for many people, as numerous discussions with experts prove.

First of all, we want to move towards economic diversification by increasing the sales of the own manufactured goods that remain still uncompetitive in the world markets. In this case, the common customs tariff for some items can help, with more favorable terms for products, the partner countries on the domestic market of the CU-member states.

We may observe the effect of switching Kazakhstan and Belarus from the third country goods to the Russian products. It is quite a topical subject for Kazakhstan that raised duties on household appliances and a number of engineering goods, but the estimations show that the corresponding effects are moderate as the trade diversion is expected indeed and may account for 3–5% of our turnover. But we should bear in mind that Kazakhstan will try to enjoy these benefits, which were previously unavailable under zero or low duties, to establish its own production facilities focused on the domestic market (the domestic market of the three countries now).

It is also important that the creation of the Common Economic Space will help strengthen the positions of Russian companies not only in Kazakhstan and Belarus, but in the corresponding segments of the global market.

The creation of the Common Economic Space is aimed at the maximal use of mutual cooperation and mutual benefits to accelerate the economic growth.

The major consequences fall to the institutional field and are associated with the competition introduced therein (competition between the customs of countries for a more efficient customs clearance, competition of investment generation terms, including special economic zones, competition for location of plants focused on the CU market, competition of tax systems, etc.).

The CES establishment is an important challenge for business and the Russian authorities. Elimination of restrictions will inevitably lead to the increased market and institutional competition. Belarus and Kazakhstan are more efficient by a number of business conditions, including the customs procedures, registration of companies (5 and 19 days, respectively, versus 30 days in Russia) and property (15 and 40 days versus 43 days in Russia), not to mention the receipt of building permits (151, 219 and 540 days). Accordingly, we will have to remove the business barriers and simplify the administrative procedures more actively to attract investments in Russia. Competition of tax systems is also under way and relates to procedures of charging and tax rates of VAT and excises.

Needless to say that Russia dominates in the CES from the economic point of view, while the Belarusian and Kazakh markets joined the CES will not fundamentally change the competitive situation between the countries. However, in some sectors, primarily in the natural monopolies, we can expect the reduced administrative barriers for services and access to the Russia's infrastructure (under the agreements entered). In these sectors, the CES establishment will forcedly improve the administrative conditions and competition, spurring more efficient operation of the Russian natural monopolies. In this context, we build a more competitive environment within the whole economic space with the same principles and rules by establishing the Common Economic Space.

This fact will strengthen the internal competition and spur modernization of enterprises, primarily due to lowered price competitiveness of Russian products as compared to the similar products from Belarus and Kazakhstan. Here we talk about the markets of agricultural equipment (tractors, harvesters) and trucks, where the Belarusian manufacturers are highly competitive, and the markets of a number of non-ferrous metals in the primary forms (refined copper, zinc, lead), where Kazakhstan has a number of important competitive advantages (available and cheap own raw material resources, low costs for environmental protection, which is of special importance for manufacture of lead, zinc, etc.).

The Russian companies, along with the simplified trade between the countries, can use resources of the participating countries for business development. In addition to the Russia's potential, the capital of Kazakhstan, the skilled labor force of Belarus will enable placing the countries in a more intensive trajectory of development. Thus, the competitive advantages of Kazakhstan, the drive to processing development opens up opportunities for the mining industry expansion with participation of Russian companies.

The neighborhood of Belarus with the European Union can be used to build the production facilities with participation of the Russian capital focused on the EU markets amid the declining competitiveness of the Eastern Europe. We need to take steps toward establishment of the Eurasian Economic Union. It is an economically motivated movement towards a more rapid growth and strengthened economic power of the integration association.

The basis we formed today is not just a set of agreements; it is the basis for the economic union and should be supported by formation of the necessary supranational authorities in the near future. First of all, we talk about modernization of the Customs Union Commission. As you know, the heads of the CU member states approved a draft Declaration on Eurasian Economic Integration and a draft Treaty on Eurasian Economic Commission on October 19, 2011 in Saint-Petersburg.

The problems that the CU and CES member states face should be handled by a professional, single and effective body. The structure of a new authority will include the Commission Council and the Board of Commission with representatives of the three countries, who will act as independent, international officials, and decide on a purely professional basis rather than national preferences. We hope that this new body will help further unveil the full potential of this integrated body with the role to be enhanced in the future.

The Common Economic Space of Russia, Kazakhstan and Belarus is a contract for an indefinite period of time. The benefits therefrom, for example, for the European Union, are estimated by various sources at 10–30% of the total GDP in 50 years of integration. Given that our economy is not so diversified and we don’t have a mutual trade structure as in the European Union, this means that we have to apply greater efforts to accelerate of the common growth.

The Eurasian Economic Union is a high level of integration. It is an association capable of conducting an equal dialogue with integration associations, such as the European Union, the regional structures such as the APEC, or the key players such as the USA, China, etc. At that, the Eurasian Economic Union can actually serve as an efficient “link” between Europe and the dynamic Asia-Pacific Region.

Today, we need to join our potential to be competitive in the industrial and technological race, competition for investors, creation of new jobs and advanced production facilities, and ensure sustainability of global development.

Establishment of the integration association is in the economic and the long-term political interests of our country, the interests in forming the belt of friendly stable nations near the Russian frontier.

The Union is built on the open principles, i.e. we are ready to expand the integration, but, given the different examples, primarily Greece in the EU, we should take into account the different levels of development of the possible new members. It’s necessary to strike the balance between the striving to expansion and potential risks related thereto. In any event, the new members should be ready to be bound by compliance with the common rules and standards. No need to say that the transitional period is likely to occur as well.

The next potential integration direction is the EU. The EU countries will remain the principal trade partners of Russia and the main suppliers of the direct foreign investment in the economy in the long term. The European technology transfer, the development of technological alliances between the Russian and European companies, and tapping of the European markets will be strong incentives to increase competitiveness of domestic producers.

Given operation within the civilizational framework, as well as common past and future with Europe, Russia is considering the partnership with the European Union as an unbiased strategic choice. This is facilitated by such factors as geographic proximity, long history of political, economic and cultural ties, interdependence and complementarity of the economies and infrastructure, and a well-developed contractual legal framework for cooperation.

If employing the right approach, the strengthened relations with the European Union may considerably improve competitiveness of the Russian economy, accelerate modernization and help Russia take a well-deserved position in the international division of labor.

Back in 2003, Russia and the EU agreed to form the Common Economic Space (CES) and coordinate the economic rules without any supranational structures. In 2005, in the course of further negotiations on these proposals, Russia and the EU adopted the “Roadmap” for the CES to cooperate in the mutually interested priority fields that was generally related to the two tools of the CES establishment, i.e. approximation of laws, including regulatory systems, and trade facilitation. The trade liberalization issues are not included in this document. It was agreed to consider them later as the process of Russia’s accession to the WTO wasn’t completed. The accession to the WTO gives the green light to an extensive discussion of a preferential agreement with the EU.

It is very important that today Russia, Belarus and Kazakhstan forming a “Great Three” may offer the promising subjects for further dialogue with the European Union, separate countries and regional groupings. Nowadays, the consultations on the free trade zone are held with the European Free Trade Association (EFTA), and there are plans to start negotiations of the Customs Union on creating the free trade zone with the EU.

Integration in the former Soviet Union does not prevent us from development of the Common Economic Space with the EU, work out the Russian proposals on establishment of a well-balanced economic community from Lisbon to Vladivostok, on a free trade zone, formation of a coherent policy in industrial, technological, energy, education and scientific sectors, as well as more advanced forms of integration. Other CIS countries integrating in the former Soviet Union face no obstacles for the European choice and cooperation with the EU.

In addition to direct economic benefits, the participation in the Eurasian Economic Union will allow each of its members to integrate into Europe more quickly and with stronger positions.

I'd like to hope that in the long term the two largest integration associations of our continent – the European Union and the emerging Eurasian Economic Union – will be able to extend the principles of free trade and compliance of management systems to be firmly established in their interaction, within the whole space – from the Atlantic Ocean to the Pacific Ocean – through the dialogue with regional organizations, including the NAFTA, APEC, ASEAN, etc.

Today, the Asia-Pacific Region occupies an important place in the Russian foreign economic priorities. The region took the leading positions in the world economy in many respects. The GDP growth rates in most countries of the region are rather stable and exceed the average global rates. Being a global manufacturing center, the APR is becoming a consumer demand generator in the modern context. At least three powers of the region such as China, Japan and India are on the way to the global power centers (or have already become them). At the same time, the APR is much like a living organism that evolves and changes, where the development of some states leads to economic growth of the others.

Russia needs investments in construction of oil refineries and gaschemistry plants, new generating facilities and transport infrastructure. The Chinese, Japanese and South Korean companies are ready to develop specific projects in energy, transportation and other sectors. Thailand and Singapore are interested in investing in the agro-industrial sector. The Republic of Korea actively cooperates with the Russian manufacturers of medical equipment. India is ready to cooperate in the pharmaceutical and IT industries.

An important filed of interaction with the Asia-Pacific Region is the attraction of companies from the APR countries to participate in modernization of the Russian economy, including through localization of a high-tech segment of their production activities in the Russian Federation. The transport engineering, machine-tool construction, medical equipment, pharmaceuticals and electronics are defined as the “pilot” localization directions.

Russian cooperation with the APR partners is complemented by cooperation in a multilateral format. First of all, we are talking about the two most significant and authoritative structures of the multilateral economic cooperation in the region – the APEC and ASEAN Forums.

In 2012, Russia takes a chair in the APEC that, from the point of our integration agenda, could not have come at a better time. The main topics of discussion in the APEC are trade and investment liberalization.

For us it means that in the coming year we should, due to our chairmanship in the APEC, come to a consensus on some key issues for Russia, i.e. what the general directions of approximation of the various country and regional approaches to technical regulations and phytosanitary measures are, what promising architecture of the food markets and transport corridors in the Asia-Pacific Region is, and how to develop an innovative cooperation to pave the way for our future integration agreements in the Asia-Pacific Region.

For 15 years now, Russia has been a full-fledged partner in the dialogue with the Association of South East Asian Nations. Today, the ASEAN with its 580-mln population, the GDP of USD 1.5 tln, a foreign trade turnover of USD 1.7 tln and a stable economic growth, is one of the largest regional organizations.

At present, the agreement of the draft roadmap of trade and investment cooperation between Russia and the ASEAN countries jointly developed with colleagues from the ASEAN is on the final stages. The primary focus therein is on cooperation in transport, energy, telecommunications, space, agricultural and industrial production sectors.

Given the promising outlook for the economic growth of the EU, the USA, the key economies of the Asia-Pacific Region, development of relations with the APEC economies is a key priority for Russia. If we want to use the economic growth in the Asia-Pacific Region as a driver for the Russian economic growth, we should implement several integration projects in the coming decades, i.e. a number of free trade agreements with several countries, primarily with New Zealand and Vietnam, move towards the ASEAN integration, and join one of the motion vectors to the APR’s free trade zone.

In this format we will be able to build and position our Eurasian Economic Union as an independent integration core with the global integration picture forming around thereof in addition to the EU and integration processes in the Asia-Pacific Region.

In this context, the Russia’s integration agenda is multidirectional due to our national objectives, the need to use all the benefits of the international trade and global investments.

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