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Why drag Asian investors to the Far East?

Why drag Asian investors to the Far East?

Pavel Kadochnikov

Vice-Rector of the Russian Academy of Foreign Trade

Pavel Kadochnikov, Vice Rector of the Russian Academy of Foreign Trade:

- The situation in the global economy is tense today. The forecasts of its development have been going down in the last year. According to the IMF, in 2014 the world economy will grow by only 3,8%, the World Bank gives a figure of 4,1%, and this gives rise to strong concerns. At some point, there was even talk about the possibility of deglobalization, that is, a decrease in the volume of international trade. Since the 2008 crisis, the world has already become less predictable, and the growth rate of international trade has declined from 7% to a modest 4%.

As the recent events in the world show, particularly in the relations between Russia and Western countries, politics is now the main driver and the determining background of economic conditions. The main issue for Russia remains the normalization of the situation in Ukraine. If the reason for the imposition of sanctions, namely the armed conflict in Ukraine, does not disappear, then the parties will continue to walk along the escalation ladder, which resulted in the outflow of capital and speculative manipulation of the ruble exchange rate.

I want to touch on the trade side of the legitimacy of mutual sanctions. At its core, even sanctions against individuals or banks are already damaging trade. Because it becomes more expensive for persons and structures who fall under them to conclude transactions and obtain financing, which means that their business conditions are deteriorating, which is exactly what contradicts the WTO rules. This, of course, can become a pretext for a legal action under international law.

However, in practice, none of the parties to the WTO considers it necessary to sue. This is because neither a positive nor a negative decision on such a claim bodes well for the applicant. Imagine if the United States filed a lawsuit against Russia, or even vice versa, for the sanctions that are already in force today, and if the decision turns out to be positive - that is, the court recognizes the legitimacy of the sanctions, then no one needs a precedent. After all, both sides also have much more “insane” partners in developing countries, on which sanctions will also have to be imposed. If the decision is negative, the sanctions will have to be lifted, which means that all parties will need to change their policies.

That is why both Russia and the West will not dispute each other’s actions in the legal field in the hope that the situation in Ukraine will normalize over the course of several years, which will continue the proceedings. I stress that today both sides are waiting for the situation to normalize, so sooner or later it will happen. And then we will return to the integration agenda, which was a little forgotten in the last year.

Globalization of Russia

How can we in this situation maintain our role in the global economy, maintain our growth? According to our estimates, the growth of the economy should be in Russia 5-6%, while it would be good, finally, to deviate from the raw method of stimulating it. And here the Asian vector plays an important role.

The statistics of the 2014 year tell us clearly about the real economic turn of Russia towards Asia. If imports and exports with the EU are declining, just as trade in the CIS is declining, and more or less the situation remains within the Customs Union, then the growth of trade with the APR is too noticeable. The first countries partners in this direction are, of course, China and Korea. And this is considering that for Russia integration in the Asia-Pacific region is still only in the third place or in the third integration ring.

Among these rings, the first can be called historical. This is the post-Soviet space. Now it accounts for all 10% -15% of the total trade turnover of Russia. As such, there is no free trade in the CIS. There is only a draft of the Customs Union, around which we are trying to build a similar economic zone.

The second ring is the European Union. At the moment, this is the main trading partner, despite all that is happening in our relationship. For many reasons, this was and will be for a long time. If in the 2000s many people doubted whether Russia needed a free trade zone with Europe, today, in anticipation of a weaker degree of mutual complaints, all the heads are openly talking about the need to build interblock relations with it and strive for free trade. While this is a very complex topic. In the mutual perseverance of defending their own positions, the parties went, perhaps, too far, and it was worth earlier to conduct these negotiations. If they had given at least some fruits, Ukraine would never have been torn due to the fact that one part of it was striving for the European and the other for the Customs Union.

The next round of the agenda is integration with individual countries. Here everything is at different stages. There are a number of promising partners. In particular, in the Asia-Pacific region this is primarily the Republic of Korea. Here, apparently, it is necessary to dive into the integration around ASEAN, which today is the nucleus for economic processes.

Why should we integrate?

The main question is why do we need this integration? Most of the integration in the post-Soviet space is moving for political reasons. This, of course, faster, but you need to look for economic benefits.

Already in the second half of the 20th century, it became clear that the desire to concentrate the extraction, processing and production of all goods necessary for the state in this state itself reduces the competitiveness of these goods. We produce many components for our production, including for export, ourselves. And although this seems to be a positive fact, it actually has a significant minus.

To increase competitiveness, we must take the best of what is produced in the world. And if in your plane 80% of imported parts, it is not bad at all. As a rule, this means that your aircraft is cheaper and uses the best solutions found in the world, which means it is competitive. Making "protons" from Chinese parts also makes sense. This system uses the whole world. We will not be able to expand exports if we do not change our attitude towards imports, if we don’t understand that it is better to buy existing components in other countries that are the best in terms of price-quality ratio. Worldwide, chains of enterprises have already been built, some of which produce raw materials, others create materials for it, thirdly collect them into finished products, fourths fill it all with services, and thus we have a ready-made value in the output, in which several economies.

It is quite difficult to build in these chains from scratch, but there is a model for such an embedding, and it has been worked out well enough. For these purposes, countries, this is clearly seen in the Asia-Pacific region, apply what is called special economic zones, territories of advanced development, in order to drag investors by any means, to drag the links of this chain to their territory, building up their competencies, searching for opportunities Control, expand their participation in international trade.

And I want very much that this whole story with Torahs and zones in the Far East is not lost, but becomes really similar to the model that many countries use. So far, Russia is only taking the first steps here, and its participation in this chain of international trade is very bad today. Although we look quite impressive in terms of the use of our energy resources and our metals in industries around the world, we are better than Saudi Arabia for using imports in our own exports. Even in those sectors in which we traditionally hold in sales leaders, and this is military equipment, the nuclear industry, and space services, we practically all produce ourselves. But as practice shows, it will not continue to allow us to produce competitive goods. Because there are always those who produce some components better, there are places where assembly is cheaper.  

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