Ambassador's Statements
"Russia and America’s Shared Economic Future."
Speech by Ambassador John Beyrle.
Higher School of Economics
Moscow, Russia
April 29, 2009
As Prepared for Delivery
It’s an honor to be here with you today, at a time of great hope in Russian-American relations.
The Global Crisis
Let me begin my remarks today by paraphrasing my President at the London G20 Summit earlier this month. I am not here to lecture but to listen and to talk with you about the difficult economic times we all find ourselves in and what it can mean for Russian-American relations.
The global financial crisis began in the United States and perhaps for that reason we in the U.S. feel a special responsibility to address its consequences and to jump start a global recovery. Since his inauguration President Obama has spared no effort and no expense in the effort to stabilize America’s financial system and to stimulate the American economy. It is far too early to say that the worst is behind us but there are hopeful signs that economic activity in America is picking up. That is good news for Russia. This is a global crisis that will require a global solution. But the recovery will have to start in the world’s largest economies, China, Europe and the United States, before it spreads to Russia and other parts of the globe. The United States is still by far and away the world’s largest economy and the hopeful signs in the U.S. that I alluded to a moment ago have helped to stabilize the price of oil and that in turn has helped to stabilize Russia’s economy.
The message from London was two-fold. First, it was a recognition that the world has changed, that the world economy has changed, and that we must all work together to overcome this crisis. The countries present, Russia and the United States included, have all undertaken efforts to stimulate their economies and to maintain employment. They have all taken steps to address problems in their banking systems to ensure that credit flows to businesses and to individuals. In London, our leaders and their G20 counterparts agreed to triple the IMF’s lending capacity, to continue to support developing countries, and to reject the protectionism that could deepen this crisis. This is in marked contrast to government policies during the Great Depression of the 1930s, when countries took steps to save themselves at the expense of others, in the mistaken believe that they could somehow wall themselves off from what was happening elsewhere. It was a mistake then; it would be even more of a mistake today in a global age when our economies and our prosperity are all intertwined.
The other message from London was that we will also have to work together to reform the world’s financial system. Our leaders committed us to a comprehensive reform of a failed regulatory system. They agreed to give the Financial Stability Forum a stronger mandate and a broader membership, including Russia. They also agreed to reform and expand the IMF and World Bank so they are more efficient, effective and representative. As President Obama said, “we must put an end to the bubble-and-bust economy that has stood in the way of sustained growth.” In the United States, as we have already begun this process, with new proposals to increase financial transparency and new requirements for capital requirements for financial institutions. These reforms are necessary but they will come with a price. Tighter restrictions on leverage will likely mean less capital available. This may mean slower growth globally but it can be better, greener and more sustained growth. That is the task before us.
For a very long time, the United States has been the engine of the world’s economy. That had already begun to change with the rise of China, India, Brazil and Russia. That change will accelerate as a result of this crisis. This is not change we fear but rather welcome, provided that other countries understand that with leadership comes responsibility.
Russia’s Moment of Economic Opportunity
How does Russia play a greater role in the world’s economic affairs? This is primarily a question for Russians to answer, but as someone who has studied Russia all his adult life and strongly believes that Russia can and should be a reliable partner in managing global affairs, I would like to offer a few observations. The first is that, to quote President Obama’s Chief of Staff, Rahm Emanuel, “a crisis is too good an opportunity to waste.” What he meant is that reform is hard and can often only be undertaken during times of crisis. In the United States, for instance, we may very well see fundamental reform of our healthcare system in the next few years, something that would make our economy and our society more productive and more competitive.
What sort of reforms should Russia be considering? Russia’s leaders have already given us the answers. Over the past eight years, Russia’s economy has recovered strongly from the depths of the 1990s. Russia today has a trillion dollar plus economy, the ninth largest in the world. Growth had been strong until the global downturn, averaging around 7 percent a year. Real incomes during this time doubled, the number of poor fell and the middle class may now be as much as 25 percent of the population. These are the sorts of accomplishments on which long-term prosperity is built but, as the crisis has shown, they are not enough. Russia’s goals, to become the fifth largest economy in the world by 2020 and to raise living standards to the current level in Europe, are achievable. But they will not be built on the basis of commodity exports and cheap foreign capital. It will require a different set of policies, the set of policies President Medvedev outlined in his speech at the Krasnoyarsk Economic Forum in February of last year, before his election, and that he has recently reaffirmed his commitment to in public statements such as the need for Russia to create “favorable conditions for economic revival,” above all in the development of market institutions and the removal of barriers to commercial activity. Last year, President Medvedev called his program the four “I”s: institutions, infrastructure, innovation and investment -- to which he has subsequently added a fifth – intellect. But regardless of what the program is called or how many “I”s it has, the goal is reforming and modernizing Russia’s economy.
A recent World Bank study concluded that much of the wealth in modern capitalist economies is not a country’s natural resources or even its industrial capacity but instead the web of institutions and laws that allow individuals the economic freedom to maximize their economic potential. Russia’s reform program includes just such a focus on Russia’s institutions and especially on the need for better respect for the rule of law – overcoming what Medvedev called “legal nihilism” and its attendant evil, official corruption. Medvedev, Prime Minister Putin, and other government officials’ calls for an independent judiciary, for reduced bureaucracy, for greater economic freedom, for equality of opportunity and above all for an end to official corruption and the raiding of private property has been a welcome recognition of what Russia needs to do to create lasting prosperity and to accelerate the development of its middle class. The Russian Government has also highlighted the need for greater investment in Russia’s physical infrastructure, an obstacle to renewed economic growth, and in its people. Russia’s people, its human capital if you will, are this country’s greatest resource and they have been the focus of the government’s anti-crisis efforts, through increased spending on education, heath care and housing. Spending on infrastructure, whether roads or schools, both stimulates an economy in the short run and lays the basis for renewed and better growth over time. Unfortunately, the recession has used up some of the resources with which Russia could address these problems. Fortunately, substantial resources remain thanks to the fiscal prudence of the government in recent years. As President Medvedev recently remarked, “imagine what could have happened if Russia entered the economic crisis with the problems plaguing it only a few years ago.”
Finally, and arguably most important, is the government’s emphasis on diversification. No one really wants to see years of low oil prices that could sap upstream investment and risk a future supply shock to the world economy but Deputy Prime Minister Shuvalov’s point is well taken, Russia needs to diversify its economy away from its current dependence on natural resource extraction and export. That should be the one lesson from this crisis on which all Russians should be able to agree. Nearly ninety percent of Russia’s exports are natural resources, much of that oil and gas, and that dependence made Russia’s economy vulnerable to an external shock, in this case a global recession that has driven down demand for oil and gas and therefore prices as well. Many experts are convinced that demand for oil and gas will remain low for some time, as the world struggles to recover economically. Regardless, now is the moment for Russia to get serious about diversification, to stimulate the growth of small and medium-sized enterprises, the backbone of growth in other market economies and to take other measures to position its economy to benefit as much as possible when recovery comes. The alternative, to wait for commodity prices to rise, would be to waste this opportunity.
How can the U.S. Help?
Let me assure you that the United States wants Russia to succeed, to become richer and more prosperous and to become a true partner. Economic growth is not zero-sum. A more prosperous Russia is also a Russia that contributes more to global prosperity; to U.S. prosperity. How can we help? To President-elect Medvedev’s list of “Is,” I would add still one more – integration. Russia has already benefited enormously from its integration into the global economy. What critics of that integration, who argue that it has exposed Russia to the problems in the United States and other countries, fail to acknowledge is that Russia would not have had eight years of robust economic growth had it not integrated. Foreign capital and investment and technology have all been major drivers of growth and without them, the Russian economy will not grow as strongly when the global economy recovers. The dynamic trading system that has developed globally in recent years and that it is at risk in this downturn has helped to lift millions worldwide out of poverty in the last decade, many of them here in this country, and the answer to this recession is not to abandon that system but to reinforce it and to provide new economic opportunities for families and enterprises of all sizes, everywhere on the planet.
The key question with respect to Russia’s further economic integration is WTO accession. Presidents Obama and Medvedev underscored in London the importance both Russia and the United States attach to Russia’s accession. It has never been closer. After 15 years of negotiations, we believe the end is in sight. The heavy-lifting that remains is Russia’s to do but the United States will do whatever it can to help. WTO accession would also be a positive impetus for Russia’s market reforms. WTO membership requires increased transparency and good governance measures; it requires the very reforms the government seeks to implement. Our former Trade Representative, Ambassador Susan Schwab, referred to this as the “happy secret” of WTO membership. Difficult reforms are undertaken and it is the WTO that gets the blame.
WTO accession would in turn set the stage for Permanent Normal Trade Relations – including the long overdue repeal of the Jackson-Vanik amendment -- and for a U.S.-Russia Bilateral Investment Treaty. With WTO accession, PNTR, and a BIT behind us, I believe the U.S.-Russia economic and commercial relationship will rapidly expand, which is another way that the U.S. can help Russia to grow and develop economically – and vice-versa. Two-way trade now exceeds $26 billion and two-way investment is approaching $20 billion. The United States still trades more with Mexico in a month than we trade with Russia in a year; it can and should be higher between two of the world’s largest economies, between the world’s largest exporter of hydrocarbons and its largest importer. In the United States, we have Russian companies like Alexei Mordashov’s Severstal that have made multi-billion dollar bets on the future of the American economy. And American companies remain committed to the Russian economy, as Microsoft’s recent announcement that it is investing a further $300 million in Russia bears witness.
Conclusion
Students and faculty compete to ask Ambassador Beyrle their questions
We are not out of the woods yet but we know that together we can restore growth to the world economy and perhaps it can be a better, more sustainable growth. It is not 1998 in Russia any more than it is 1929 in the U.S. Russia is a very different place now, after years of robust economic growth and rising incomes. It still has impressive financial reserves and resources with which to weather the economic and fiscal shocks it has experienced and to restore growth to its economy. More importantly, thanks to institutions like the Higher School of Economics, Russia now has the expertise it needs to make the best use of its resources and, after ten years of successful market economics, it has the experience and commitment needed to make market economics work. As for my own country, we have a new and dynamic President -- whom you will soon see up close and personal -- who has already done much to restore economic confidence in America.
Thank you.
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