Thank you for that introduction. And let me commend you for bringing us together to discuss Russia's role in the world today. President Bush believes it's very important that we engage Russia--that we candidly express our views and concerns, as he did last week in rejecting the idea that the U.S. should boycott the G-8 meeting in Russia this summer, as some have suggested.
Importance of Russia to Its Trade Partners Indeed, as you have heard today, there are many issues on the table. And few are as critical, especially over the long term, as full Russian partnership in today's global economy.
I was in Moscow last month for meetings on a variety of trade and investment issues. Energy security was also on the agenda while I was there as energy ministers met to prepare for the G-8 summit.
I heard encouraging things about Russia's economic performance. At the macro-economic level, most business executives from American-based companies were positive in their outlook. Most U.S. companies investing in Russia reported double-digit growth, especially in consumer products and information technology.
But, at the micro-economic, day-to-day level I also heard many concerns about rising state intervention in industry--corruption--weaknesses in the rule of law--and inadequate regulatory transparency.
Still, on balance, guarded optimism would best describe the feeling among most U.S. based companies in Russia. Their instincts, acting on some fairly impressive growth trends in Russia, tell them they have to be in Russia’s emerging markets.
I'm reminded of Winston Churchill's quote about optimists: "A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty." More and more global companies no longer see Russia as simply a potential market of the future. They see it as a significant market of today.
Russia's Place in the World Economy So, where does Russia fit in? What does the Russian market mean to its neighbors--to international companies--and to U.S. businesses? First, Russia's economy matters greatly, especially in energy. Russia is the dominant player in the CIS region, and the major trading partner and supplier for the former Soviet republics.
Russia's economy is also becoming important for Europe. Russia is the EU's fifth-largest trading partner, after the U.S., Switzerland, China and Japan. And the EU is Russia's main partner, accounting for over half of Russia's foreign trade.
And it's no longer just about Europe. Russia's trade with China and its other Asian neighbors is expanding rapidly--in consumer products and other manufactured goods from the Asians, with Russia exporting energy and other raw materials.
Russia, as I am sure you know, is the world's number one energy supplier after OPEC. And it's not afraid to use its vast oil and gas reserves to support domestic and foreign policy objectives.
Russian energy companies are seeking acquisitions in upstream production, refining, and transportation across Europe and the former Soviet republics. Other Russian companies are moving into fuel retailing, mining, and manufacturing in other regions, including Asia and the United States.
An example of how aggressive Russian companies are becoming is their entry into international capital markets. Industry analysts say Russia's initial public offerings in 2006 will total between $15 and $25 billion. That's a six-fold increase over 2005.
So, Russia is not as isolated from global markets as its former self. It's highly unlikely that it could ever again be as isolated as the Soviet Union was.
Domestic Recovery: Russia's Entrée to the Global Economy Fueled by surging prices for its top exports--oil and natural gas--Russia is registering its 8th straight year of economic expansion, with GDP growth averaging some 6 percent a year.
Russia's GDP now ranks 12th in the world. Its foreign exchange reserves are over $185 billion--the 5h largest in the world. Its annual trade surplus exceeds $120 billion.
And it's paying off international debt ahead of schedule. As a result, Russian government debt is now rated "investment-grade"" by major rating agencies, including Moody's, Fitch, and Standard & Poor's.
Russia at an Economic Crossroads But after seven years of solid economic results, Russia now faces some major choices.
Domestically, in order to unlock its full economic potential, Russia must make progress on some unfinished business, namely structural reforms. These include: reinvigorating privatization; streamlining government bureaucracy; building the rule of law; and rooting out corruption. The U.S. would welcome the opportunity to work with and support Russia toward these goals. Just last week, I met with the Chief Justice of Russia's Supreme Arbitration Court to discuss the issues of the rule of law, transparency in court rulings, and enforcement of Intellectual Property Rights.
Internationally, Russia has two choices: It can build a dynamic, more outward-looking, knowledge-based economy that's better-integrated with global markets. Or Russia can remain heavily dependent on natural resources and use those earnings to try to prop up unreformed, non-competitive industries.
In recent years, Russian policymakers appear to have opted for the "New Economy" approach. But there are plenty of signs that, among Russian leaders and businesses, the jury hasn't reached a verdict.
For example, Russia's globally competitive industries are pressing for WTO membership, such as information technology and steel. At the same time, less competitive industries are fighting to protect the borders by, for example, raising fears of a tidal wave of low-cost goods from China and elsewhere.
As I mentioned earlier, there is some concern among U.S. companies about growing state intervention in the Russian economy. In a number of industries, not just oil and gas, but also in aviation, automobile manufacturing, and perhaps others, state ownership is increasing; and steps in this direction are evidently being considered, or perhaps floated as "trial balloons," in other areas of manufacturing as well.
The announced intention is to enable Russian industries to reform, consolidate and compete. However, in other countries, the "state approach" has generally produced the opposite result.
State ownership and control have left industries unable to compete in sectors where adaptation and innovation--rather than an abundance of cheap resources--have been key factors in competitiveness.
Based on our own economic experiences--some 225 years' worth-- openness and integration are the better choices for achieving economic progress and better standards of living for citizens--which, after all, are the social objectives for any nation.
WTO and Energy Cooperation Let me now highlight two areas where we believe continuing engagement between the United States and Russia can promote "win-win" outcomes. These are: WTO accession, and global energy markets.
With regard to WTO, the U.S. view is very clear: We want Russia to be a member. Russia is a major economy. Virtually all its trading partners are WTO members who follow the universally accepted "rules of the game." And Russia's own companies would also benefit as they become more active in foreign markets.
U.S. negotiators are currently working to conclude a commercially fair, mutually-beneficial package that would facilitate Russia's entry into this global body.
To reach an agreement, Russia will have to make some tough decisions. It will need to manage domestic pressures in sectors such as agriculture, aerospace and financial services.
Russia also must crack down on rampant piracy of computer software, movies and music. Russia has enacted stricter protections for intellectual property. But it has a long way to go on properly enforcing these laws and meting out serious consequences for pirates and counterfeiters.
If Russia is serious about joining WTO and becoming a knowledge-based economy, it must protect intellectual property. Innovators won't innovate if their ideas and technologies are pirated, as they are now. It's as simple as that.
We believe it is in the interest of the United States and the global economy to have Russia in the rules-based WTO system. And we believe that Russia will find it in its own best interest as well.
Consistent with President Bush's commitment, we will continue to work in good faith with the Russians to move this process forward.
The energy sector is another example of a potential "win-win" situation.
Russia's energy industry is growing, but not at the pace needed to give confidence in Russia's ability to play the major role it could play in helping to meet soaring global demand for fossil fuels.
Russia has proven its ability to generate capital, from its own energy revenues and from global capital markets. What people are questioning about the Russian energy sector is how efficiently this capital will be allocated toward modernizing and expanding this extremely capital-intensive industry.
We believe part of the solution, along with more investment-friendly regulations and tax policies, is allowing a greater role for private capital--Russian and foreign--to leverage the major resources that private companies can bring to the table.
Ultimately, this is also what's needed for the Russian economy to achieve optimal, sustainable growth rates.
As I told my Russian counterparts in Moscow last month, we fully recognize and respect every country's sovereign right to regulate its markets and resources as it sees fit. But everything cannot be home-grown.
U.S. companies can provide capital, technology and experience needed to tap many of Russia's untouched oil and gas fields, especially those involving offshore and arctic technological and environmental challenges never before encountered by Russia's own industry.
And private investment is a two-way street. Today along the U.S. eastern seaboard, American drivers can fill up at a gas station owned by a Russian oil company.
The U.S. and most of Russia's major trading partners agree that moving ahead with reforms--including transparency, greater market access, and improved rule of law--will determine Russia's economic fate.
While we can encourage and counsel Russia in this direction, Russia's choices--and not U.S. policies--will be the driving factor in whether and how quickly this happens.
Conclusion Seeing progress on bringing Russia into the WTO, and on developing its energy sector would show Russia's willingness and commitment to foster deeper economic ties with the rest of the world.
If Russia continues making progress on these and related issues, and openly engaging its trading partners, it will move that much closer to sharing in the long-term economic success of its G-8 partners.
Russia as a diverse market economy fully integrated into global commerce can lead to greater world stability and prosperity. And Russian citizens, perhaps, will be the biggest winners. Clearly, there is an emerging middle-class in Russia today--a healthy sign for any economy.
We will continue working to achieve that goal. President Bush remains committed to engaging Russia. And we hope for progress on a number of fronts between now and when the G-8 meets in St. Petersburg in July.
Thank you very much.
Source: U.S. Department of Commerce
