Thomas White Global Investing
Russia
Russia Stamp
July 10, 2009
A Postcard from Europe
Russia: Recasting Its Role in the World

Kremlin, Moscow

President Obama visited the Kremlin hoping to expand on Russian-U.S. trade, which currently stands at around $36 billion a year, just around 1% of all U.S. trade.

The majestic Kremlin building in Moscow, which has seen many a leader come and go over the past centuries, is no doubt looking down with an approving nod in the aftermath of the recent U.S.-Russia Business Summit between President Barack Obama and President Dmitry Medvedev. While Obama stoked the fires of free trade between the two former Cold War foes, Putin was flexing Russia’s muscles by seeking membership to the World Trade Organization (WTO) as a customs union with Belarus and Kazakhstan. Alongside, in anticipation of the G8 summit, Russia together with China and India, furiously advocated the need for a new global reserve currency. Russia is back on the world scene, clad in regalia and jostling for supremacy as emerging countries fight for a new world order.

Sitting on some of the world’s largest reserves of oil and gas, Russia is the R in the BRIC acronym; the term used to group together the fast-growing developing economies of Brazil, India, China and Russia. While these vast resources have driven much of Russia’s economic growth over the years, at the same time there is growing alarm over what is perceived as the country’s growing political, economic and military clout.

Russia, as Obama urged at the Moscow summit, must learn to use this power wisely. Its clash with Georgia last year, known as the South Ossetia War, sparked outrage and criticism in the international community. And with Russia controlling the spigot of natural gas in the region, Europe has grown wary, desperately obtaining a stake in the newly announced ambitious Sahara gas pipeline project, which will transfer Nigerian natural gas to the Mediterranean.

Despite Obama’s calls for greater U.S. – Russia trade, the nation itself is one of the world’s most closed economies. It ranked a low 114th in the Global Enabling Trade Index for 2009, just released by the World Economic Forum. And the global recession has also created more than its share of grief. Economic growth in Russia has slowed down significantly to 5.6% in 2008 after a healthy rise of 8.1% in 2007, and the economy is expected to contract further by 7.9% this year. Adding to this, Russia scuttled its chances of entering the WTO when Prime Minister Vladimir Putin said that Russia would only consider joining the organization as a customs union. The decision took the WTO by surprise as only individual countries have joined the organization to date.

Yet there are green shoots that promise that Russia’s impressive resurrection in the last decade was no flash in the pan. The World Bank recently praised the Russian government’s response to the global recession as ‘swift, coordinated and comprehensive,’ the Russian stock market has rebounded from alarming lows touched last year; and a large stimulus package appears to be working enough to ensure a ‘modest recovery’ in 2010. The U.S. and Russia have now laid the framework to reduce their nuclear arsenals, with Obama and Medvedev working together to draft a new arms control agreement that will eventually replace the Strategic Arms Reduction Treaty (Start I). On the world scene, as a permanent member of the Security Council, Russia is slowly reemerging.

And expectations are rising. The Moscow summit has not only resulted in a commitment to enlarge bilateral trade, but also an announcement of at least $1.5 billion in U.S. investment, with several U.S. companies promising to expand their stake in the Russian market over the next few years. To be sure, Russia is eager to realign the world order along with the others in the BRIC. This was evidenced in the first ever Russia-hosted summit in Yekaterinburg on June 16, which concluded with a call for greater representation for developing economies in the world’s financial institutions. With its immense resources, Russia stands to dominate as the global supplier of raw materials. The country now stands as a worthy competitor in the fierce race to the top in the BRIC league.

 

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