Examination of Witnesses (Questions 60
- 79)
THURSDAY 11 OCTOBER 2007
Professor Julian Cooper and Professor Phil Hanson
Q60 Lord Crickhowell:
One follow-up question again on this demographic issue, the report
of the Trilateral Commission I have got in front of me puts some
pretty startling figures on it here. It talks about a decline
in the working population of about 18 million over the next 20
years, with the economic growth figures we are talking about creating
a demand for an additional seven million in the workforce by 2015
alone, which is pretty soon. I am not an economist so what I really
want your comment on is what are the consequences? If those stark
figures are right, and we have already heard that productivity
is not actually rising, what happens?
Professor Cooper: I think this is a major policy
challenge. There is some discussion now in Russia on this issue.
One line of discussion is that Russia must pursue a positive in
migration policy, preferably of Russians. The problem there is
that many of the Russians who lived in the rest of the former
USSR who want to move back to Russia have already moved back to
Russia, or they are in countries where the standard of living
may be rising even more rapidly than in Russia and so there is
no incentive to go back to Russia. Of course, there is an underlying
strain of anxiety in this discussion because the obvious place
to get labour from is China, and there is some concern about large-scale
Chinese in migration. There is quite a bit of unofficial in migration
anyway from China and the Far East and there are some quite difficult
policy issues around this. There are various categories of workers
in Russia, for example there was a very interesting discussion
the other day that in Britain and many Western European countries
many disabled or partially disabled people work but in Russia
very few do, and it is reckoned there are about two or three million
non able-bodied people there who are not employed and the moment
who could be employed in the labour force, with some very minor,
not very costly policy changes, so there are some labour reserves
in the Russian economy which still could be drawn in to ease the
situation. I think in the longer term it just means that Russia
has to invest more in labour-saving technology, especially in
manufacturing industry, which on the whole is still very labour
intensive.
Professor Hanson: If I could just add something
on that, this does raise the whole question of how much investment
there is and could be and should be in the Russian economy. There
is no iron law that says because your labour force is going down
you will get poorer, it is certainly not as simple as that. Obviously
the relationship between dependents and working-age people is
crucial. One thing one would expect to see to counter a declining
workforce is simply an increase in the growth of investment and
an increase in the growth of capital stock and possibly substitution
not only of capital but also energy for labour. The Russians do
have emerging problem now of domestic energy shortages, which
sounds weird given the reserves and so on, but it is beginning
to be a problem. There has this year been quite a sharp increase
in fixed investment, but a lot of that increase is by state-controlled
companies and one has to be a bit sceptical about how effective
that would be.
Chairman: Lord Swinfen, I think we have
to some extent taken up the issue of financial questions but I
wonder whether you would like to pursue it in any way.
Q61 Lord Swinfen:
I was just wondering what you thought of Russia's present domestic
and international financial position and how do you see it developing?
Professor Hanson: If I could say a few words
first. At the moment, Russia has foreign exchange reserves equivalent
to about two years' imports, which is pretty lavish, and it has
continued to run a current account balance of payments surplus
for some time. All the projections, including by the Russian Government
itself, are for that current account surplus to go down, and possibly
to disappear by about 2010-2012. The growth rate of imports is
very high and in volume terms much higher than the growth rate
of exports, so one would expect that to happen. There is lots
of room for it to happen however without it being necessarily
damaging. In particular the growth of foreign investment coming
into Russia, including foreign direct investment particularly,
may well tend to offset that, so you will have a declining, possibly
disappearing, current account surplus offset by a net inflow of
capital.
Professor Cooper: The other issue is that Russia
has foreign currency reserves of $425 billion and a stabilisation
fund of another $140 billion, so the reserves are very, very substantial.
Foreign debt in government has been reduced substantially, in
fact Russia's foreign debt level now is about 4% of GDP, which
many countries of the world are very envious of, but private sector
debt, as Phil has said earlier, has been growing very, very rapidly.
One of the worries now about the credit crisis is this very rapid
accumulation of private company and banking debt with the outside
world, and so that could create some problems, but at the moment
I think the situation is manageable for the next two or three
years. I certainly do not foresee any crisis in relation to the
finances or another banking crisis for Russia in this period ahead.
Q62 Lord Swinfen:
What is the proportion of private debt to GDP?
Professor Hanson: Private external is about
40% of GDP. The overall foreign debt—private plus public—is
still quite modest by EU standards, well below 60%.
Professor Cooper: Russia's debt situation, it
seems to me, is manageable.
Q63 Lord Tomlinson:
I would like to turn to the prospects for the Russian energy sector.
You referred earlier to the dependency of Russia on energy exports.
How easy or otherwise do you believe it will be for Russia to
diversify the economy in order to reduce that dependency? Also,
to what extent do you think Russia is prepared to either continue
or expand its use of energy as a political weapon, or do you think
they are primarily concerned with maximising economic advantage
from the energy sector?
Professor Hanson: Well, I have to say I am not
completely convinced by this notion of a very deliberate strategic
long-range manipulation of energy supply as an instrument of foreign
policy. I am not saying it does not happen at all but I am not
sure—
Q64 Lord Tomlinson:
It certainly happened with the Ukraine and Georgia, with near
neighbours, when they did not appear to be fully in tune with
the political wishes of Russia.
Professor Hanson: That is fair but it is also
the case that Gazprom—and it is mainly Gazprom we are talking
about in this context of prices for gas—has been pushing,
for its own obvious fairly straightforward reasons, to have higher
domestic prices for gas, and it has been promised that by the
Government although it is not legislated yet. It would like to
have the prices for Belarus and the Ukraine and so on going up
to the prices it gets in Western Europe. I do not think one needs
necessarily to bring in foreign policy manipulation. I agree that
in those particular cases it probably did play a part but it is
not the whole story. The Russian authorities, by which I mean
the presidential administration plus the government (the government
is technocrats and the presidential administration is the real
source of political power) have consistently been concerned to
try and see that the economy diversifies, but it seems—and
Julian has made more study of this than I have—as though
what they are putting their money on is the relics of the old
military-industrial complex being rejuvenated and recentralised,
if anything, in terms of ultimate control but opened up to various
forms of cooperation with Western partners. You get Boeing's joint
venture with VSMPO-Avisma and Finnmechanica having a stake in
Sukhoi and so on. There are some quite pragmatic methods but essentially
state-driven technological improvement through that partly defence-related
sector. That is what they are aiming at; whether it is going to
be successful is another matter.
Professor Cooper: Everyone tends to focus on
energy with Russia and probably less attention to the fact that
Russia is very rich in many other commodities, including timber,
but the problem for Russia is that those commodities are not processed
to a very high level domestically. They tend to export the raw
materials and minerals in fairly unprocessed form. Timber is mainly
exported just as trees with the branches chopped off to Scandinavia.
I have done an analysis of the competitiveness in terms of what
economists call "revealed comparative advantage" and
the most competitive good of all that Russia exports indeed is
trees with branches chopped off, unprocessed timber. Of course
shortly after I published that the Russians imposed an export
duty on trees with their branches chopped off, much to the anger
of the Finns and Swedes because their furniture industries were
doing very nicely out of this timber. Russia's furniture is not
competitive at all, so this offers—and there is a growing
realisation and even Mr Putin and Mr Ivanov recently have been
saying the answer for us to is to move up the value chain for
these minerals and materials and commodities that we produce and
produce domestically higher value goods and then export them—the
easiest way for Russia to diversify rather than trying to jump
into high-technology areas like electronics and information technology,
where Russia at the moment is extremely backward by international
standards. There are possibilities for Russia to diversify successfully
in the coming period. Another problem is that at the moment with
the diversification efforts that are underway the state is constantly
intervening and taking a leading role. It seems to me if you are
going to have successful diversification it has to be left to
the private business sector to find the right solutions.
Q65 Lord Tomlinson:
If I may just come back very briefly. I listened very carefully
to what Professor Hanson said and I think it was a fairly balanced
view, but it seemed to me that the implication of what you were
saying was that Russia will have a greater than ever dependence
on energy exports if the proposals that you were hypothesising
come into effect. Is that the case and is there a sufficient domestic
demand in the other sectors, if they really do not diversify,
for them to survive?
Professor Hanson: In terms of domestic demand
and domestic production outside the natural resource sector, there
has been one striking recent study by the Bank of Finland which
shows if you take Russian imports from the EU of 25 through to
2006, and look at how they have grown product group by product
group, and you look at domestic production in the same product
groups, those imports are outpacing the growth of domestic production
so the demand is growing, it is being fed at the margin more by
imports than by domestic production. A lot of Russian producers
slot themselves into a low-quality part of the product range.
An odd thing is quite often surveys of Russian producers say that
they do not experience competition from imports, which seems to
belie the statistical evidence. What that probably means is that
they have settled for some low-quality niche in the market and
they are doing okay in that but they are not moving up the scale.
Q66 Lord Tomlinson:
So the whole of the balance of payments advantage that Russia
has got at the moment is totally dependent on energy experts?
Professor Hanson: Energy and metals; metals
are not insignificant. Could I tie up one loose end there. I think
they have got real problems in increasing those export supplies
in volume terms, and one of the things that would make a difference
to that would be raising domestic prices so you get more energy
saving domestically, releasing more for export. At the moment
that is still some way off.
Professor Cooper: Just one point on why Russia
is still producing these relatively low-quality goods. Russia
is experiencing a problem that Britain experienced in the 1950s
and early 1960s where they had the Commonwealth and Commonwealth
preferences, which kept alive a lot of rather backward British
industry. Russia has the equivalent in the Commonwealth and Independent
States (CIS). Russia can just about produce about 15,000 tractors
a year (in Soviet times it produced 200,000 tractors or more a
year) and over half of those are exported to the poorer CIS member
countries, and so the CIS, to some extent, is keeping alive backward
industries and activities in Russia, and with this move by Putin
to more commercial relations, I think there is a growing realisation
in Moscow that CIS is not entirely positive for Russia's economic
development.
Q67 Lord Crickhowell:
Can I go back to the energy issue and the issue that Professor
Hanson just began to touch on in his last answer. We have the
paradox, do we not, that Russia has vast reserves, particularly
of gas, but it is finding it extremely difficult to produce and
transport enough to meet its own demand, let alone export demand,
and that is partly because of the appalling inefficiency of Gazprom
which seems to be spending much of its time doing other things
than concentrate on energy and the market prices internally, which
encourages maximum waste and inefficiency in the internal market.
Am I right in that summary and, if so, where do we go from here?
Is there any hope that they will use Gazprom, which they are increasingly
using as the instrument, and can they get the investment (which
they have rather done a lot of to discourage recently) from the
international oil companies which might make a difference?
Professor Hanson: If you look at the existing
Government energy strategy which is on the relevant Russian Ministry's
website, it gives very, very low expected rates of growth of oil
and gas output up to 2020. If you take it from the actual figure
for 2005 to the projected figure for 2020, it is less than 1%
per annum for both oil and gas production. That strategy is due
to be revised next year, but one of the things they are at present
relying to some extent on is a very big expansion of nuclear power.
That is to say that more electricity will be generated by nuclear
power. That involves a nuclear power building programme which
I think is probably not achievable within the timeframe that they
have got for it, which is by 2020. They also want to bring in
more coal-fired power stations. Complicating all of this, the
doubts that have been raised about Gazprom are entirely convincing,
what Gazprom has been doing is investing outside its core area.
Amongst other things, it has been buying a lot of the newly divested
electricity generating companies so that the centralised, hitherto
state-controlled electricity system is unbundling, selling off
its production assets, and Gazprom is wading in and buying a lot
of them, which is not what Anatoly Chubais, the father of this
electricity reform programme, actually intended, so the monopoly
problem is going to be still there.
Q68 Lord Chidgey:
Just a quick one on the question of the politicisation of energy
supply, particularly to the West. Can you give us any guidance
on how much the previous centralised policy-making rigidity in
the Russian energy sector is changing? Certainly briefings that
we have had (I have had anyway) talk about the concept that Russia
has 400 years of gas supplies to meet the EU's demand but which
did not recognise that things might change over time in terms
of our dependency or otherwise on such supplies. That was quite
startling. The mind-set was "we have got on current analysis
400 years' supply and therefore forever you are dependent on what
we deign to give you." That cannot be right. What sort of
flexibility is coming into the minds of the central powers, do
you think
Professor Hanson: Specifically in the energy
sector I think you are right—at least this is my impression—that
a lot of the policy-makers and top managers dealing with that
sector think they have got a very strong position: "The world
will continue to come to us. We have got such large unproven reserves
that everybody in the world will want to come to Russia."
There is some foundation for that. International companies are
interested in getting whatever foothold they can in the Russian
market, knowing that those reserves are there, but the practice
that seems to be evolving is to exclude the large fields, not
only in oil and gas but in metals as well, so-called strategic
assets, in which a foreign owner would not normally, without special
provision, be allowed to have a controlling stake and de facto
it seems more likely they would not be allowed as much as a blocking
stake, which in Russian corporate law is a 25% plus one share.
They are saying, "The world will come to us," and they
are creating a situation in which a lot of the major companies,
given what they have been experiencing, are not going to be very
encouraged.
Q69 Lord Chidgey:
So they are not really recognising that international market forces
tend to have a play in this?
Professor Hanson: I think that is right.
Q70 Lord Lea of Crondall:
One's impression, and I would be interested in your comments,
is that President Putin has got quite a good grip of energy strategy,
and indeed Kyoto and all of that, because Russia is obviously
going to benefit enormously from the EU Emissions Trading Scheme.
Would you comment on how far this huge transfer to a low relative
per capita CO2 emitter is part of Russia's calculations? They
are a win/win situation because it does not matter to them if
Siberia gets a bit warmer, does it, he is up there advocating
Kyoto because he knows financially he is in a win/win situation.
Would you comment on that?
Professor Hanson: I would not claim any special
knowledge on the Kyoto front as far as Russia is concerned. The
impression I have is that it is not something that looms large
in their policy-making. There are individual Russian scholars
who say, "Look, we have all this forest, it could create
a huge carbon sink and the world should be supporting us because
of that, and because our polluting heavy industry has gone down
so much, we stand to gain," et cetera, but I do not see the
top policy-makers actually saying very much about this or appearing
to pay all that much attention to it, to be honest.
Professor Cooper: If you look at the Ministry
of the Economy's forecasts for the next 20 years or so, the rate
of saving of energy in relation to GDP is not very impressive,
and the only alternative energy source that Russia shows interest
in is nuclear power, I do not see much interest in any other alternative
form of energy.
Q71 Lord Anderson of Swansea:
Hydroelectric?
Professor Cooper: And of course hydroelectric,
yes.
Lord Lea of Crondall: It is energy saving but
the point is they are in a very strong negotiating position internationally,
where there will be tradeoffs with other policies presumably.
That was my point.
Q72 Baroness Symons of Vernham Dean:
Lord Chairman, I would like to go back to the question of whether
Russia is prepared to use its energy exports as a political weapon.
I was very interested. You were quite dismissive about that point
in saying that you were not convinced about that manipulation.
It has got a very firm hold on the imaginations of a lot of Western
governments. You would expect the press to be as sensationalist
as they want to be over that as anything else, but it certainly
does have a resonance in the thinking of Western governments.
It is one of the reasons cited in the importance of getting Turkey
into the EU, that there are alternative routes, it is one of the
reasons everybody wants to find routes from the Caspian that do
not go through Russian territory. Are you saying all this is fanciful
and based on over-febrile imaginations, or can you explain why
this has such a firm hold on Western European governments' psyche
if it is all such a misplaced notion?
Professor Hanson: I seem to have painted myself
into a corner having dismissed this. What I would say is this:
I think the particular disruptions of supply that we have seen
were badly managed in themselves and the public relations about
them was badly managed on the Russian side and sent all the wrong
signals and had something to do with the arrogance of Moscow vis-a"-vis
Kiev in particular. Primarily they were knock-on effects from
dealings between Russia and other CIS countries, they were not
aimed at Western Europe, and there is a situation, I think, of
mutually assured energy dependence. They depend on the revenue.
This oil and gas is bringing about half of the revenue into the
Russian federal budget. It is 60% of their total export earnings.
They depend on this revenue to a remarkable extent. The one respect
in which they are in a stronger bargaining position than we are
is that they are a unitary actor, more or less, and the European
Union, sadly, is not, although perhaps it is trying to be. I see
the real problem for Europe as being the weak prospects for Russia
being able to increase its supplies to us as much as we would
want. I think we need to diversify. We do not have to appeal to
the question of what the motivations of the Russian policy-makers
are. We need to diversify because they probably cannot supply
increasing amounts over the next few years, and that is sufficient
reason in itself. They are hoping in part to continue to get cheap
gas from Central Asia and re-sell it to us at a much higher price,
and the Central Asian states have a quite clear interest, it seems
to me, in having alternative routes. In some cases that might
be routes to China rather than westward routes, the proposed Nabucco
pipeline for example. There is quite a strong interest, in my
view, or there should be a strong interest in Western Europe,
in co-ordinating our policies, in particular pushing through as
far as possible the Competition Directorate's unbundling policies—and
the real problems are in France, Germany and Italy rather than
elsewhere—primarily because Russia's capacity to supply
steadily increasing amounts is in doubt. I think its interest
in doing so is pretty hard to avoid.
Professor Cooper: I am in complete agreement
with all that and particularly that there are other reasons why
we should diversify, not just the fear that Russia may suddenly
cut off supplies. It is the case that Russia has not targeted
any Western European country directly for cutting off energy.
It has been the Ukraine, Belarus and CIS countries, and I think
there is an issue there. Russia still does not accept Ukraine,
Belarus and all the other CIS countries as fully independent sovereign
countries, and somehow you can treat them in a different way than
you treat real sovereign independent countries like even Estonia,
Latvia and Lithuania. I think the treatment of those countries
is in fact different to the treatment of Belarus and the Ukraine.
I think they accept they are European countries and must be treated
in a different manner and that you do not cut off energy to them
in that way. It is a learning process. although there was a slight
return just the other day with the Ukraine, about bad debts in
that case, and I was surprised that Gazprom acted so quickly in
that case, reviving all these fears in that way again, until that
point it seemed to me there were some signs that Russia was beginning
to learn the lesson that you do not threaten supplies to Western
Europe. I thought that was a slightly backward zigzag, as it were,
from what it seemed to me an emerging understanding in Moscow
of the correct way to behave, particularly with regard to the
European Union and energy supplies.
Q73 Lord Anderson of Swansea:
There is serious evidence that Russia is seeking to gain control
of the lines of route of energy pipelines evidenced by their deal
with Kazakhstan Western pipeline and the attempts of Russia to
undermine the Nabucco project. Are we to read that primarily in
that (a) their economic interests they are seeking to ensure that
they have their own cut of whatever supply comes through their
territory, or (b) is it part of a more worrying trend of seeking
to gain control over resources? One additional point, I notice
from today's press that the Ukrainians are hailing a great new
breakthrough when five states have agreed a new Caspian project
which apparently analysts are saying is non-viable. It may be
non-viable economically but is it justified politically to avoid
total dependence on routes through Russia?
Professor Hanson: The Russian interest so far
as Central Asia is concerned is economic but it is also more than
economic; there is a strong feeling in the Russian policy establishment
that "this is our neck of the woods and nobody else should
be interfering in this." They regard projects like the Nabucco
pipeline as in some way an attack on their sovereignty almost.
It is hard to over-estimate this degree of paranoia. Sometimes
I think it is laid on a bit thick for public effect but the sense
that we are out to get them all the time is constantly there.
It obviously has quite a lot of public resonance. I think it also
is something which is genuinely felt. From my experience of talking
to Russians in the foreign policy area, they really do have this
feeling that we messed them around in the 1990s when they were
weak and now they are strong, at the very least, they should be
able to do what they want within the CIS.
Q74 Lord Anderson of Swansea:
How worried should we be about that?
Professor Hanson: I think we should be worried
about it, but I do think one hopeful sign is that the Central
Asian states have got quite a strong economic interest in getting
their oil and gas out to the West on their own terms rather than
having to go through Russia and being trapped by a monopsony purchaser
into selling at a very low price, so there is that interest in
developing these lines. Somewhat to my surprise, I was told the
other day by a well-informed Russian source that both Turkmenistan
and Kazakhstan are quite open to the development of this Nabucco
pipeline. I said, "Surely Russia is in a position to block
the trans-Caspian pipeline that would add Central Asian gas to
the supplies in that project?" and he said, "No, we
can make a fuss but we can't actually stop it." If that is
true, then it is a very powerful incentive to link up with supplies
though Azerbaijan, Georgia and Turkey, et cetera.
Q75 Lord Anderson of Swansea:
Are the Kazakh reserves sufficient to supply both that new deal
they have with Russia and a possible Western project?
Professor Hanson: I am honestly not sure on
the case of Kazakh reserves but there is a big, big question mark
over Turkmen reserves and a question mark about Uzbek reserves
as well.
Professor Cooper: I get a sense of some concern
in Moscow now about the possible evolution of Central Asia in
the coming period, because the new Turkmen leader is clearly more
independent than Turkmenbashi, the late President Niyazov whom
he replaced and showing a real interest in developing good relations
with China and the United States as well as Russia. Turkmenistan
is vital for the Russian equation because, of course, gas supply
to the Ukraine is from cheap gas from Turkmenistan, and Turkmenistan
is showing signs they are going to put the price up very sharply.
The other source of worry, particularly after the CIS leaders'
meeting just the other day, is that Kazakhstan shows increasing
signs of independence from Moscow. Nazarbayev is talking about
creating a trading area in Central Asia without Russia and that
has caused alarm signals in Moscow, and a feeling that maybe in
a post-Putin era, where that close relationship between Putin
and Nazarbayev might be broken and he maybe will not be able to
establish the same relationship with his successor, that Kazakhstan
could become an increasingly independent actor in this situation,
and not necessarily to the advantage of Moscow.
Q76 Lord Crickhowell:
We have already touched on foreign investment to a certain extent
in energy. The flight of capital has come to an end and moved
into reverse recently. What is Russia's attitude to foreign investment,
particularly in relation to their technological and manufacturing
sector where their existing skills are so apparently lacking and
where there is such a need for investment?
Professor Hanson: I think this is quite nuanced,
or it should be. As I said earlier, there is quite a lot of business
that goes on in a fairly normal way if it is beneath the political
radar, so that in areas like confectionary, or beer, or tobacco,
shopping malls, retail networks, I do not think the Kremlin gives
a hoot who is providing those, and Western firms are piling in
in quite a big way. To an interesting extent, to move to a somewhat
more sensitive area, there is quite a lot of development towards
greater Western development and Western role in the banking sector
which some of the Russian leadership had pinpointed as being a
so-called "strategic" sector. In their deal with the
US last November on the terms of Russian accession to the World
Trade Organisation, they secured an agreement that they could
reassert controls on foreign investment in the banking sector
if that foreign involvement went above 50%. It is highly unlikely
to get to 50%; it is about 20% now in terms of assets, but if
you look at where the big deals were last year of inward investment,
they were in fact in the services sector largely. Then you have
got industries covered by the strategic enterprise/strategic industry
law that has been passed, which is a long list of things which
are mainly defence-related. It is really saying in effect, "You
may go along with private enterprise defence contractors but we
do not think they are a good thing and they are going to be state-controlled,"
but they still allow within that for minority participation by
Western partners. They are aware that they need the technology
and they need the finance, and so for example you have the state
taking over this huge titanium producer VSMPO-Avisma and then
around the same time a deal being struck with Boeing to create
a joint venture with the same company. It is kind of state-controlled
but with loopholes for Western participation, as in the other
area in the energy sector where Gazprom cannot deal with the Shtokman
offshore gas field on its own. It knows that it needs both foreign
capital and foreign technology and, having initially said that
it would do it with Western contractors but not Western partners,
it then backtracked and has now bought Total in on that, and may
well bring in others. So it is an attempt to control in the so-called
strategic areas just how much the Western participation is. I
think it is dubious how far that can work but that is what they
are trying to do
Professor Cooper: A very interesting case in
point now is the motor industry. Everyone knows that the motor
vehicle industry in Russia is extremely backward and we have the
great big Volga Lada car plant churning out up to almost a million
cars a year. It is a very, very backward. They are basically still
modernised Fiats dating back to the 1960s and 1970s. That plant
was taken over by the state. The state arms export agency took
over the Volga car plant, supposedly to modernise it and make
a national champion for the Russian car industry. Meanwhile, the
Minister of the Economy, Mr Gref, invited foreign producers to
come in and build assembly plants and now it looks that about
10 to 12 projects are going to be signed up. Of course, all the
leading world car producers are going to have assembly plants
in Russia, assembling up to 200,000 or so cars and very soon the
motor industry in Russia will be almost entirely in foreign hands.
And now the state-owners of the Volga car plant are talking about
the possibility that they may invite a foreign partner maybe in
to take over the factory entirely because they have realised that
they simply have not got the skills to modernise it. Therefore,
the motor industry, I think, within five years' time or so in
Russia could be effectively almost entirely foreign-owned, and
the question then is: how prepared will the Russians be to allow
other sectors to go the same way? There is still this concern
about the strategic industries, but up until recently some in
the leadership were talking about the motor industry as being
a strategic industry and we do not hear that anymore, so this
is flexible and when Russia realises they are having very real
problems in doing it themselves domestically without foreign assistance,
then the lesson is learnt that it has to be opened up to foreigners,
so I think it may be an interesting period in the coming years
where the rules could change quite a bit and that should become
more welcoming possibly into areas which at the moment they are
frightened to do that. I think the aircraft industry is going
to be a very interesting test case because I sense that the Russians
are beginning to realise now that they lack the technological
capability to produce viable, competitive and modern civil aircraft.
Q77 Lord Chidgey:
I want to link the last comments that Professor Cooper made regarding
the manufacturing industry with the defence industry which we
have had a bit of a discussion on by comparison, for example,
with the United States and also with ourselves and, to a degree,
France where the defence manufacturing sector underpins employment,
the skills base and is a huge part of our industrial economy in
all three countries. How does it figure with Russia? Now that
there is this political decision to modernise and expand the Russian
armed forces, as we understand it, with all the caveats you mentioned
earlier, the lack of skills base, lack of technology and so forth,
what influence is this going to have?
Professor Cooper: The Russian defence industry,
I have studied very closely and have done for many years. It is
an extremely interesting picture because, on the one hand, they
have one or two very successful companies which are modernising
and introducing new technology and those are the companies which
have been exporting successfully to India and China mainly and
one or two other countries as well, so there are aircraft factories
in Russia which are able to produce reasonably modern, competitive
aircraft now and the aircraft they are selling to China and India
incorporate an increasing proportion of foreign components. The
avionics are French and Israeli and many other systems now are
foreign and not Russian domestically produced. The Russian armed
forces still adhere to a strict position of no weapons supplied
to the Russian domestic armed forces can incorporate foreign components
and, therefore, the very, very few aircraft being supplied to
the Russian Air Force now, the Sukhoi-34, are actually probably
inferior to those Russia is exporting to India and China because
they are not allowed to have foreign avionics. The sensitive area
here that is causing more and more worry in Moscow is electronics.
The Russian electronics industry is virtually dead. Russia is
unable to produce modern, advanced components and chips and so
on, so more and more weapon systems, like radar and air defence
systems, in Russia are incorporating their own proportion of imported
electronic components and this is causing serious worry in the
military leadership in Russia at the moment. I think there is
a major problem here. My own view increasingly is that if Russia
is going to modernise her armed forces in the coming period and
the rate of renewable equipment is still extraordinarily low,
notwithstanding money being poured in, the problem is that as
the money is poured in, costs are rising even more rapidly, so
any extra money going to re-equip the armed forces is being inflated
away and with very little benefit in terms of actual end-product
weapons being seen by the armed forces. This was seen, in our
view, as being a failure of Mr Ivanov, the Defence Minister, and
one of the reasons why he was replaced by someone who was an expert
on finance and business, I think, was partly to get to grips with
the economic situation in the armed forces and the defence industry
and the rising costs of armaments. My feeling is that increasingly
Russia is not going to be able to re-equip her armed forces in
a respectable way over the next decade without increasing foreign
involvement.
Q78 Lord Chidgey:
And the impact on the manufacturing industry overall is?
Professor Cooper: The defence industry actually
has still today in Russia some of the highest technology in the
country, so it is extremely important. Mr Ivanov sees the defence
industry as a locomotive of the industrial renewal of Russia and
my own view is that that is an incorrect perception, that it cannot
be. In fact, the defence industry in Russia, in my view, is actually
one of the biggest problems facing the Russian economy at the
moment.
Q79 Lord Hannay of Chiswick:
I mentioned to you outside that I would like to address questions
not on the list that you were given, inspired also very much by
the interesting testimony you both given about how difficult it
is to be clear how much of Russian economic policy is really state-centred
and state-controlled and how much of it really is responding to
fairly normal private sector pressures and influences. The question
is: does this lead one to suppose that the EU's relationship with
Russia and its main Member States' relationship with Russia at
state level is crucially important to the development of economic
relations between Europe and Russia or is it something in which
you could almost have a rather cool political relationship, but
a very intensifying commercial and economic relationship?
Professor Cooper: In a sense, this follows on
from what we have been saying. In my view, there is a great deal
of economic activity in Russia which is in a sense below that
kind of state priority level which actually goes on with fairly
minimum state interference and intervention. My belief is that
British and other West European businesspeople can in fact operate
there quite successfully almost regardless of the relations at
the top between the EU and Moscow or London and Moscow and so
on. There is a lot British business going on with Russia at the
moment, notwithstanding all the strains and tensions over the
Litvenyenko affair and all the other problems. I think a great
deal of business is still going on and I do not see any reason
why that should not continue in the future, so I think to some
extent it can be decoupled, but if you start talking about the
oil industry or the gas industry and maybe a little bit more beyond
that, then that is where the problems are because it is political
if the state is involved, so those relations, I think, are inevitably
going to be affected, but otherwise I think there is quite a lot
of scope for decoupling.
Professor Hanson: I agree with that, yes.
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