Examination of Witnesses (Questions 120
- 134)
THURSDAY 18 OCTOBER 2007
Miss Katinka Barysch
Q120 Lord Hamilton of Epsom:
Putin may think that Russia is a great power but it certainly
has not got a great power economy. It is extremely narrowly based.
How long can these growth rates go on? There is certain evidence
coming through that the renationalisation of the energy sector
is leading now to very poor records on new exploration and that
sort of thing. What is going to happen to inward investment going
into Russia in the future? How do you see all this mapping out?
Miss Barysch: At the moment the party is certainly
still going on. Russia is growing by 7% a year and has attracted—
Q121 Lord Hamilton of Epsom:
That is mainly the rising oil price rather than more oil and gas.
Miss Barysch: Absolutely, it is an oil-dependent
economy, but as long as the oil price keeps high, or even rising,
the Russian economy seems to be doing very well. They have to
be congratulated on their very sensible and responsible macroeconomic
management. That could have gone very wrong, if you get that amount
of cash flowing into your economy, and to be as responsible as
the Russian Government has been in saving a lot of that money,
putting it to one side, putting it into funds and working on many
responsible proposals on how to spend that money, that is all
good. However, now they have the cash sitting here, they have
the programmes in place for what they want to do with it—education,
infrastructure, modernising their defence forces and what have
you—what they do not have is the administration to spend
that money. They are sitting on the cash and yet they cannot give
it to the local administrations and the agencies because it will
be lost or stolen, so that is the biggest problem they have at
the moment because that means that the infrastructure is getting
increasingly out-of-date and the economy is not diversified.
Q122 Lord Lea of Crondall:
Is not the Russian economy in some respects part of the European
economy now? You wander round St Petersburg—I happened to
be there on holiday—and there are euros in the shops and
all the usual chains. Although it is a very different place I
am talking just about consumers. Forget Christendom or wherever
it is, we are talking about consumers here and there are euros
and they have got the reserves in euros and da-di-da-di-da and
all the usual people who you would expect to be selling cars in
Winchester seem to be selling cars there, so in a sense would
you say the European Union is there but not there as such, but
it is becoming part of the European economy?
Miss Barysch: I would very much like to attribute
your experience to our success in EU/Russia relations, but I am
afraid it is just good old globalisation, because if you look
at the big supermarkets in Russia they are Turkish and Coca-Cola
is as ubiquitous as European soft drinks. So I think it is just
a sign of the opening up of the Russian economy. It is quite an
open economy and fast-moving consumer goods companies are making
an absolute killing in the Russian economy because there is so
much money flowing around. European companies are taking good
advantage of that but it is not a specifically European phenomenon.
We have more economic co-operation programmes in place with them
than any other group of countries, but obviously the opening that
we are trying to achieve in Russia benefits everybody else as
well because they can do business more easily in the Russian market.
Chairman: I am going to move on to the
next question and you have got an interest in that one as well.
Lord Boyce?
Q123 Lord Boyce:
I think you have already given an indication of the premium that
Russia puts on its energy resources and obviously it seeks an
economic value of the energy resources. Do you think that it needs
to diversify? Does it think it needs to diversify? It is all good
at the moment and it is helping its growth and so on, but is it
capable of diversifying. Do you think part of the value it puts
on its energy supplies is that it wants to retain it as a weapon
as well, which some people have speculated they might want to
do, as opposed to just drawing maximum economic benefit from it?
Miss Barysch: Let me start on the first part
on diversification. For years Russian politicians have said consistently
that they want to help diversification because they are aware
of the fact that basing an economy the size of Russia with 140-odd
million people on just one or two natural resources is very dangerous
because global prices tend to fluctuate, the macroeconomic administration
is very difficult, and it does not create jobs. Only 1% perhaps
of the Russian population works in oil and gas. You need to have
that diversification but in order for that to happen and to be
sustained, you need a business environment that encourages investment,
innovation and competition. Russia has a very difficult business
environment in that respect, where you do not have the rule of
law, where you do not have an independent court system, where
you have state inference, which can be quite pervasive. At the
moment you have state interference mainly in those sectors that
are regarded as strategic—energy, some metals, defence and
transport—and relative liberalism in the other sectors,
so you do have some business dynamism in Russia but, as I said,
this is more a consumer play rather than a production play. The
manufacturing sector in Russia is not very well developed and
as long as the business environment stays as difficult as it is,
the outlook is decidedly mixed. On energy as a strategic sector
or even a political weapon, yes, obviously there has been a re-think.
When Putin first came to power he was talking about breaking up
Gazprom, but that is completely off the table now because they
have realised that state control over these energy resources is
their strongest means of power, not only vis-a"-vis domestic
companies and businessmen and oligarchs but also vis-a"-vis
their neighbours, partly as a means of pressure on countries that
are going in a direction they do not like, partly because the
pipeline monopoly they effectively have allows them to channel
Central Asian and Caspian energy resources through their territory,
but that they will ever use it as a weapon against the West, I
am not entirely sure. They make a lot of angry noises sometimes—that
whole debate about reciprocity—but there is no precedent
where Russian has used its energy resources as a political weapon
against the West.
Q124 Lord Boyce:
You already mentioned earlier on the fact that the dialogue tends
to be between Russia and individual nations and not Russia/EU.
Is there any hope of the EU ever developing a policy for the EU
on energy towards Russia whilst individual countries are scrabbling
to make sure they maintain their relationship with Russia?
Miss Barysch: I do believe it is possible if
we make progress on internal energy market integration so that
our interests converge.
Q125 Lord Lea of Crondall:
Does the huge importance of energy hold the key to this new kid
on the block called sovereign investment companies? The EU has
a difficulty with sovereign investment companies because on the
face of it, that is not allowed in European competition law the
way it is structured in Russia. However, Germany seems to get
along with them all right and France seems to get along with them
all right. Do you think these sovereign investment companies will
present a problem for EU/Russia economic relationships?
Miss Barysch: When the EU put out its new energy
liberalisation package, there were some clauses in there that
said perhaps foreign-owned investment vehicles and energy companies
would not be allowed to buy European pipelines unless European
companies in turn are allowed to invest in their home markets.
This is a mixture of reciprocity and a debate about sovereign
wealth funds. I think the Europeans need to have a lot more debate
about how to make that operational. Russia obviously was very
upset about that. I do not think we particularly need to be lectured
by Russia on energy market liberalisation because I do not think
they have much to say about the topic, so we should not be afraid
of that. We do need to have a more coherent debate because what
we are trying to do at the moment mixes up two things. We either
say that no company that supplies energy should be allowed to
own pipelines—and I would fully support that—it is
called ownership unbundling and if it applies to Gaz de France
it also applies to Gazprom, but there is a different issue then
here where we say maybe we could allow Gazprom pipelines, if they
open up their energy market in turn. That is reciprocity and the
two things should not be mixed.
Chairman: Lord Anderson?
Lord Anderson of Swansea: I think my
question has been largely covered in terms of the differentiation
in Russia between the investment sector and the retail sector.
Chairman: I am happy with that if you
are happy with that. Let us move on then to question nine and
Lord Chidgey.
Q126 Lord Chidgey:
It is a rather extensive question and I will therefore try to
keep the question somewhat succinct. In the questions which you
have had in advance we talk about what is happening in the manufacturing
sector, services, small and medium-sized businesses and agriculture.
I would like to home in on the manufacturing sector and particularly
the defence sector. Other colleagues may wish to add to these
points later. We have heard in previous evidence that the defence
sector in Russia is rather strange. It certainly has the same
impact on the overall industrial economy, as it does in the major
powers such as the USA, Britain, France, in terms of the dependence
for the development of the skills base on the defence industry
to flow through into the manufacturing and industrial sector.
The difference seems to be that the electronics industry in Russia
has basically collapsed, we understand, and that of course is
the driving force for manufacturing development and research in
the Western world. So much so in Russia, we understand that the
exports to China and India, for example, are dependent on avionics
and electronics imported from other countries such as Israel,
but because of Russian defence policy those state-of-the-art electronics
are not available to the Russian domestic products in their own
defence force. That seems to be a rather strange situation. I
wonder if you would like to expand on that particular view for
me.
Miss Barysch: I wish I could but I am not a
defence expert, so I think I have to pass on it.
Q127 Chairman:
If you could give us an overview of the sort of sectors that were
outlined. Have you got a broad view of manufacturing, if you cannot
get into the specifics of that particular sector?
Miss Barysch: As I said, going back to the question
of diversification, Russia is already showing signs of what used
to be called the "Dutch disease" because its currency
is strengthening and its very large balance of payments' surplus
that it gains from oil and gas exports is shrinking fast because
imports are growing so fast. Russia is more and more using its
oil earnings just to buy things abroad rather than producing them
itself. As I said, it is a very difficult macroeconomic management
question which so far they have mastered reasonably well. They
have a lot of money coming in through the oil and gas sales and
this normally pushes up inflation, but what the central bank does
is it buys all the dollars, puts them in international reserves,
but you will still get a real appreciation of the currency over
time. The competitive boost that they got from the 1998 devaluation
is now gone, so now they need to increase productivity, which
is the only way they will be able to compete in manufacturing
in world markets. That, as I said, would need investment, innovation
and competition, which is where it all falls down. They have that
mixture of a rising currency and automatic loss of competitiveness
on the one hand and then they do not have the domestic driving
forces that would allow them to compensate for that loss of competitively.
Q128 Chairman:
In the meanwhile what is happening to the skills base?
Miss Barysch: Russia's education system is half
reformed. Because it is a juggernaut it is very difficult to turn
around. What happened is that part of the education system has
simply been privatised. You do have business schools where they
produce very good graduates that are adequate for the market economy,
but there are not enough of them, so they definitely need more
investment in the education system and they need to urgently reform
the rather rigid higher education system that they have.
Q129 Lord Chidgey:
On this section here we are talking about agriculture and how
can Russia feed itself. I am not quite sure how this links into
the EU, by the way, bearing in mind our own agricultural policies
and the CAP and so forth, but are there any implications for Russia
in the difficulties that it may have in feeding its population
of a closer relationship with the EU or are they totally independent
of each other?
Miss Barysch: Russian agriculture has improved
over recent years because they made some important reforms such
as liberalising the agricultural land market, which went so far
and then got stuck. They made it easier for farms to get credit;
they introduced some market forces into the agricultural market,
and the market responded very well; and there is a relatively
vibrant food processing industry in Russia, so agriculture is
not the disaster it was a few years ago. It is growing rather
slowly at the moment because, as I said, the reforms were started
but then they got stuck. Russia certainly does not face any food
shortages. A few years ago for the first time in I do not know
how long it became a grain exporter again. Now the Government
wants to use some of the money it has saved from the oil earnings
to subsidise the agricultural sector to a greater extent, which
is why its WTO bid is stuck, by the way. The agricultural sector
is actually doing reasonably well.
Chairman: I think it follows on from
this and we have part-covered it but the next question is Lord
Boyce.
Q130 Lord Boyce:
We have indeed, my Lord Chairman, and it is about economic reform.
As you have been implying in your answers, the impression is that
economic reform has stagnated for the reasons you have given.
Perhaps you would like to say something about what might get it
going again. A crash in the oil price would obviously have some
effect but are there any other factors that could cause them to
get a grip or, as you have implied, must they get their legal
system sorted out before they really can shake this out?
Miss Barysch: I believe that administration
is most definitely one of the biggest problems that Russia is
facing. During his first term, Putin did a lot of very good and
sensible reforms but they tended to be the easy ones, the top-down
ones: you liberalise, you cut taxes, you do all the things that
you do not need a big administrative apparatus for implementation.
They did all these things, they were successful, and the tax system
has improved immeasurably in Russia but, in order to do the more
difficult things that they need to do now, which have to do with
local services for example, with improving education and health
care and so forth, they would need to have a more efficient professional
state administration, and there obviously you have the political
obstacles to that. Despite the fact that this is not necessarily
a democracy in the Western sense, for Putin and his successor
it is very important to be popular and to have popular support.
The public sector is large and growing fast. Russia now has many
more bureaucrats than the entire Soviet Union had at the time
of its collapse. This is where Russia creates jobs and if you
start antagonising these people by saying, "I am really not
going to allow you to take bribes any more; I really will insist
you stick to all the rules and regulations we have put in place,"
I do not think that will be very popular.
Q131 Lord Hamilton of Epsom:
Do you agree that there is a better functioning capitalist system
in Communist China than there is in Russia?
Miss Barysch: That is a very wide-ranging question.
Let me try and answer it in this way: if you look at surveys of
international companies that do business in both markets, they
tend to say that Russia has in some ways a more difficult business
environment than China has but their profits are much, much higher
in Russia, which is why they all want to be there.
Q132 Lord Hamilton of Epsom:
Because there is tonnes of money sloshing around.
Miss Barysch: And because there is less competition,
but I would like to leave it at that because I do not feel in
a position to compare Russia and China in the two minutes that
we have left!
Q133 Chairman:
If I can bring you to the very last question, we are now in the
run-up period now to the election: have you any thoughts that
you would like to share with us in this pre-electoral period?
Miss Barysch: First of all, I would be somewhat
reluctant to call it an election, it is a changeover or handover
of power. When people now say that Russia cannot reform or Russia
cannot do this or that because it is an election period, I do
not think that holds quite true because they do not face the same
sort of electoral pressures that you would see in Western democracies.
The standard assumption seems to be that Putin chooses his successor,
whoever that might be; that this successor will then be confirmed
in a free, but not necessarily fair, election; Putin will continue
to somehow wield power from behind the scenes, and that little
else will change. We will still have a managed or sovereign democracy;
we will have a mixture of capitalism and state interference; and
we will have a foreign policy where Russia tries to dominate its
neighbourhood and oscillate between co-operation and confrontation
with the West, so that Putinism continues without Putin. I am
a little more sceptical because this is a system of power that
is closely tied up with wealth. If you move a little bit from
your power position to somewhere else a couple of billion dollars
might move with you. Since this is the case in a system that has
no established institutions for handing over power and it has
no property rights, I would expect there to be a few hiccoughs
as people try to secure their gains and their positions. I am
also somewhat sceptical about the idea that you can plant somebody
in the Kremlin and run things from behind the scenes, because
I am under the impression that authority comes with sitting on
the throne in Russia. It will be the new President who would do
all the media and make the decisions and sign the decrees and
go to the G8 meetings, and I am somewhat sceptical that you can
run Russia from behind the scenes, so I would expect a little
more political instability during the changeover period than most
other people seem to expect. What strikes me is that on the one
hand we say we do not like the Russian system because it is not
democratic; on the other hand, we all seem to take an awful lot
of comfort from the fact that nothing will change when Putin eventually
leaves, but I am not sure that that will hold true.
Chairman: I am going to give the last
word to our Chairman who has joined us. Lord Roper?
Q134 Lord Roper:
I wonder if I could just ask one supplementary. You have obviously
concentrated on the more interesting election, the presidential
election; is there anything worth saying about the Dumas election,
which we will be getting to first?
Miss Barysch: United Russia will have a majority
in the Duma. The only question is whether that will be a simple
majority or a constitutional majority. Apart from that it will
probably remain a rubber-stamp Parliament.
Chairman: Can I say, Miss Barysch, that
you have certainly served the Committee well this morning. You
seemed to doubt, when I was saying hello to you before we started,
whether you would have enough to keep us going for an hour. You
have kept us going for well over an hour and could have kept us
going for much longer. Thank you very much indeed. We are very
grateful to you. You will get the transcript, as I said at the
beginning, and we look forward to receiving it back with any annotations
that you care to make to it.
| 
