Speeches

Russia and Europe: new neighbours defining a new neighbourhood

Lecture by President Jean Lemierre at the London School of Economics, Tuesday 22 January 2008.

MR LEMIERRE: Russia and Europe: it is a very difficult topic and I will not try to give you very bland views or a clear lecture in the French way. I have been living in London for too long for that now, and I have been working with Willem too long to be able to do this. I will simply share a few views with you from a viewpoint you need to understand, which is that my job is to try to make the two compatible, when they can be. I shall try to explain to you how I see the situation from the European viewpoint or the London-based viewpoint but also from the Russian viewpoint. If we want to be fair and if we want to prepare for the future, we have to go slightly beyond the headlines, emotions, hard words and get to the bottom of stories and try to understand the real debate and what the perceptions are. Words do matter but perceptions matter even more. I am not sure the economists will acknowledge this but perceptions are very, very important.

Russia and Europe is a paradox, a huge paradox. Why? In the long history of Russia very few know, very few people pay enough interest to Russian history. In the long history of Russia it has probably never been as open to the West as it is now. Russia has never been so open to the West since the fall of the Berlin Wall. It is certainly the case since the Revolution but it was probably the case even before, if some diarists tried to be open to the West. Russia today is certainly more Western-minded than it has ever been. The second point which is striking is that the number of Russians visiting Europe has increased dramatically. The flow of businessmen, tourists, and students is absolutely amazing. By the way, there are many more Russians visiting Europe than Europeans visiting Russia. I would like you to take that point because this is probably part of the difficulty. There is certainly a lack of understanding of Russian culture, Russian history, and what we see today is a very slow attempt to fill the gap. If I may add one comment, visiting St Petersburg is not really visiting Russia. St Petersburg is a nice place in Russia but if you do not go to Yekaterinburg, to Rostov, to Krasnodar, to Kazan – I am not speaking about Vladivostok or Chelyabinsk – you will not understand Russia. Very few people have made the effort to understand Russia.

At the same time as Russia is open to the West, we see a growing tension. Words are said to matter. I will tell you a story which is very interesting, to me at least. I always use simple words to describe what should happen in Russia’s market economy: Russia should promote a market economy, a market-based economy, and market-based principles. Not long ago a highly distinguished journalist – I hope he is not here – came to see me and said, “I do not understand what you say. Why do you speak about a market economy? Why don’t you speak about capitalism?” I was very surprised. “Capitalism” is a very aggressive word. It means “We have defeated you and you will stick to our values, capitalistic values.” That is a danger in the same way as words from the Cold War that we hear in many speeches in Russia. We have never been in such a paradox; it is very striking these days.
I would now like to turn to perceptions. There is a difficulty between Europe and Russia, and probably the West and Russia, the West including the United States and Canada; it is that we do not understand and we do not read the Nineties in the same way. Here, the Nineties was a time of opening up, of a liberal economy, of democracy. All of this stopped in 1998 with the financial crisis but we look at the Nineties as the beginning of a new time, a positive time. That is the Western story. If you read what was written at the time of the death of former President Yeltsin, he is a hero. If you go to Russia, it is the opposite. The Nineties are years of poverty, of a decrease in life expectancy, people are poor, people die; it is a time of humiliation, political humiliation, economic humiliation; it is a time when many Russians think that a small group of people have cheated the country, a small group of people, some oligarchs and Western banks and Western advisors. Let us be clear about this. That difference, that gap in perception, creates a real difficulty. We see it in the EBRD day after day.

This is the source of tensions, and one easy source of tension is that Russia has challenged some decisions taken at the beginning of the Nineties, especially privatisations and the selling off of assets. This has created an obvious tension and the debate is simple. We in London say this is about sanctity of contract; in Moscow they say this is about legitimacy of contract. Of course, you open a terrible debate when you go there and it is very difficult to rebalance. We have certainly seen a period of rebalancing of what was done in the Nineties and it does create a real difficulty. You know this and you see it day after day, and certainly last year there were many cases where you could have seen this.
Europe has diverse views on this. The perception about the change is different in different parts of Europe. In London the view is probably that the Nineties were good. When I go to Germany and when I speak in my country, the view is not the same. The perception across Europe about what happened in the Nineties is certainly not the same. It has a lot to do with politics and it has a lot to do with the economy. I will probably come back to this in my conclusion, but there is clearly an experience of the Nineties in Russia that is a challenge to the overall model which was implemented quite harshly. Transition is first of all about destruction, but they have not forgotten.

We did a survey of the region, including in Russia. We interviewed 30,000 people, asking them a question about how they see the past. They say, “Before 1991 it was not great but not bad.” They say, “Don’t speak to us about the Nineties, never. That was really bad.” I think we must understand and acknowledge this point if we want to improve understanding between Europe and Russia. The perception is certainly not the same.

The second gap in perception, the extraordinary situation we know day after day, is the different perceptions of business people and of those in the political sphere. Business people are positive. They are investing, and you see a growing flow of investments, and they invest not only in oil and gas but in many other activities. FDI has picked up quite a lot and we now see a lot of investment by Russia, which was not the case a few years ago. From the business viewpoint, the situation is positive and many people will tell you that they do good business in Russia. The rule of law must be improved, yes; corruption is still high, yes; but business can be developed in a sound way. Of course, there is a debate about the strategic sector and the non-strategic sector but it has a lot to do with the way we share the upside. Certainly, the way we share the upside has changed over time but this is well understood by the business community and they welcome it.

At the same time, Russian investors increasingly use the Western world, especially the financial centre of London. Many IPOs were done here last year, they are tapping the international capital markets more and more in a very efficient way, and I hope it will continue to be like this.

In the political sphere you have a different debate. You have the debate you know about, and I will not go into the debate between the UK and Russia about many questions. You have the debate about pipelines, you have the debate about neighbouring countries, you have the debate about Kosovo, you have the debate about Georgia and you have the debate about freedom of the press in Russia. There is also a gap in the perceptions of various groups in Europe and in Russia. This creates a very complicated picture. At the same time, it is clear that this picture has been made more complicated because the two parts of Europe have a strong reason to behave well and they have an increasing interdependence.

What are the individual points? First, energy. I think the main link between the eastern part of Europe or Russia and Europe is energy. Europe imports 25 per cent of its gas from Russia. If you look at some countries, this percentage is even higher. If you look at Germany or central Europe it is even higher than 25 per cent. We should not forget that. What does 25 per cent mean? Russia has become a superpower from the point of view of gas. People are very worried about this, they ask questions about whether Russia is a reliable partner, whether they are going to increase the prices, whether they are going to squeeze countries. The incidents with Ukraine and Belarus have created some concerns, if not panic at that time in some countries. There is a growing need and a growing unease about energy.
We should look at the opposite side: Russia exports 60 per cent of its gas to Europe, so it is a big market, and they need Europe. The seller needs a buyer. That is obvious. At the same time, we should not react too harshly. The buyer can adapt what he does, as can the seller. Yes, Russia can say “I am going to sell more gas to China tomorrow.” Okay, a big blow to Europe but, at the same time, it is balanced. Europe can adapt. We have seen this before, especially in the Seventies. The key element of the European economies is their adaptability and their capacity to react to a challenge. So yes, when you sell gas you may think you are strong but at the same 4 time, Europe can diversify its sources of energy, it can shift to a different source of energy – nuclear energy is certainly one, renewables, whatever it is. It is not a given fact that Europe will import 25 per cent of its gas from one source and one country. If you look at this in the medium term, this energy debate, which is crucial for the relationship between Europe and Russia, must be looked at as a positive challenge for the two and not an antagonistic one.

The second reason why the two parts of Europe must speak to each other more is diversification. Diversification is a simple word to capture the fact that Russia will not and must not have an economy based on oil and gas and raw materials, but must diversify its structure. This is a crucial question for Russia. The Russians know that very few economies in the world have been able to succeed based merely on gas, oil and raw materials – probably the UK, probably Canada and the US, maybe Norway but beyond that there are not many positive cases, and it is clear that they want to be in the first group rather than the second. This is the main driving challenge.
Diversification of the economy means rebuilding an economy based on industry and on services and being part of the global economy, competing in the global economy. This is the profound view of the Russian leaders but it is also the profound aspiration of the people. When we ask them what they want, this is what they want: they want to go back to the history they had, and they have a history of industry.

All of this is about investing, skills, access to the market, knowledge, know-how and it is a lot. Russia needs to acquire this. Maybe Russia has more money today but Russia needs skills, access to the market, knowledge, management knowledge, and technological knowledge. So there is a common challenge there.

Why is it so important? I see this not only as a crucial challenge for Russia – that is certainly the point made by the Russian leaders – but it is very important for Europe because the stability of the eastern part of Europe, the stability of the supply of energy, is a key question. Nobody should underestimate the complexity of Russia. It is a huge country, with nine time zones. It takes longer to go from Moscow to Vladivostok than it takes to go from here to many cities in the US. It is a huge country, a complex country, in which, by the way, the population will decline if nothing is done, if there is no reaction to the decline in the population. The best studies tend to say the population of Russia will decrease by a third, 50 million, by 2050, which is a sharp decline. This is a big concern for the Russian leader.
All of this must be based on a different kind of economy which is diversified, industrially based, service-based, with skills. That is the key role of the EBRD. The key challenge we have is to do this: to bring in investors, to promote standards and corporate governance, to fight against corruption, to make sure that there is a sound benchmark in the economy, to structure the micro-economy in a sound way and to gradually build a sounder economy. Diversification is a positive challenge for the two sides of Europe. At the same time it is an opportunity. It is a market: they buy equipment, they buy skills, and it is a growing market in itself. When you see the number of automotive companies investing in Russia today you realise that the market is growing, and very sharply. This is certainly a key element in the dialogue between the two parts of the region.

There is a third reason why we should cooperate more, and that is the regional challenge. The future of Belarus, the future of Ukraine, the future of Moldova to a large extent, the frozen conflict of Transnystria, the future of Kosovo and the Balkans, the future of the Caucasus and Georgia are common challenges, and it is clear that these challenges are very important for western Europe and they are important for Russia too. These are questions on which the dialogue must be improved to try to reach a positive conclusion or at least to manage this in a positive way, even if some solutions are difficult to find at the moment.

Then you have the question of how to do this, because it is not easy. I would insist, because this is the point of view I have from the EBRD, on the role of multilateral institutions. EBRD has been promoting a dialogue between these two parts of Europe for 16 years now and we were created to do this. The conditions are about governance, corporate governance, standards, and quality. That is a key element on which we need to work together: how to promote quality on the two sides. You will understand that this first point is enhanced by the reverse situation. Russia today has accumulated some money; there are a few large companies in some sectors. They have accumulated money for the state and it is well managed from the macroeconomic point of view, and Russia is asking for reciprocity today: investing in the West. This is part of a growing story and you see many, many attempts for investment in western Europe. You will also see tension and conflict and it is not well understood what can be done. The fact that all the partners respect high standards, corporate governance and quality, and understand the rules of the game, the rule of law, and play the same way in the global economy is a key element.

The second forum on which I would like to insist is, from our viewpoint, the key importance of Russia joining the WTO. It is clear that, being part of the global economy, being a G8 country, and not being part of the WTO is not right and the sooner Russia can join the WTO in a competitive way – and Russia must be ready for this – will be positive. It will certainly be a key driving element for the Russian economy and the relationship with Europe. You have the same type of dialogue with a forum like the OECD. It is very interesting to see that Russia wishes to develop a dialogue within the OECD. The OECD is about policy-making, standards, references, benchmarking and also peer pressure and criticism. This is a positive approach and I hope that the dialogue within the OECD will be developed soon.
Having said that, I would like to share with you two points to explain to you, despite difficulties, despite questions on the democratic road Russia may follow at a difficult time, which is the time of the elections – presidential elections, parliamentary elections – in some weeks now, why I am confident about the fact that the relationship must improve beyond the challenges. There are two key forces in Russia which are playing very strongly in the medium term for an improvement. The first one is, over the last 15 years and despite the 1998 crisis, the amazing growth of the private sector. Entrepreneurship is developing; SMEs, medium-sized companies are growing; large companies are growing. It is not only about oligarchs; it is also about sound industrial companies doing business, being willing now to buy assets in foreign countries, and they have a challenge there. The private sector is, without any doubt, growing in Russia. At the same time I am sure many people here think that Russia also has a strong view about the role of the state. Yes, that is clear. The state plays a role in Russia but what we have to ensure over time through this dialogue is that the state respects the market-based rules of competition, does not interfere in these processes and leaves the private sector to grow in the normal way and brings the input the state must bring.

By the way, there is a debate in Moscow about state capitalism. I see in many academic reports and writings – not by Willem – that the same debate is taking place in the West, especially at a time of financial crisis, on the role of the state, what it should do. The role of regulation and controls is certainly growing and I am sure that many of you are working on this. There is a big debate in Russia about the role of the state. That is true. What we have to ensure is that reformers who want to develop the private sector are supported. We are seeing that these days.

The second element which is even more important for us is the middle class. When the EBRD was created 16 years ago there was a long debate about how to promote the market economy, how to promote democracy, and the bottom line was always the middle class. The best way to change the situation, to move to the rule of law, is the middle class. The question is, do we see this? The answer to the question from the survey we did is yes, we are beginning to see this. We are beginning to see a low-income middle-class. It is not large, and please forget the view of the oligarchs, forget the big cars and yachts and so on, and look at the reality of Russia. There is a low-income middle class picking up.

This middle class is not yet made up of entrepreneurs. They are mainly managers, young managers. Most of them trained in the West but not all of them. More and more train in Russia. When you listen to what they say and when you look at the answers they give, they are beginning to speak like a middle class. They are beginning to have the questions, the hopes and the expectations of a middle class. What do they want today? Maybe they do not talk so much about democracy, which I regret. They speak about access to cheap, good-quality western products. What does this mean? Food and packaging, hotels – not too expensive – the capacity to travel – not too expensive – and housing. Housing is a big problem in Russia. They want access to housing. They are beginning to express the clear needs of the middle class. When we look at the activities of the banking sector in Russia or of various companies, we begin to see that this is the growing market today, and this is very well understood by many companies. We are beginning to see this middle class picking up. By the way, they would like to travel more to the West. I go back to my initial remark. There is an appetite for this, an appetite for travelling, and an appetite for knowledge and for engaging. So the two very positive signals we see are certainly the private sector and the beginning of a middle class.
I would like to stop there. I am sure there are many questions. I have not tried to give figures, which I am sure is very disappointing for Willem. He likes figures, just so he can criticise them if I pick up the wrong ones – I know him; we have been working together – but more to share with you trends, questions. The bottom line is that Russia is increasingly becoming part of the global economy. There are forces for this and it is not easy. It raises a lot of questions, political questions, economical questions and cultural questions, but the two parts of the continent have to live together and will live together. If we are able to engage in a positive way, whatever we do, that will create a lot of value. That is the fate of the two parts of Europe. This is part of the job of EBRD and I think it is moving forward in a positive way. Even if we see tensions today, I think we should be honest, wait for the end of the electoral process, and look forward to what is going to happen after the elections and appointments of the new President, new Prime Minister and new government, and hopefully this agenda of cooperation, based on the same values, market-based, is going to be very positive for each of us.

Thank you for listening, and I am sure you have questions and criticisms.

THE CHAIRMAN: Thank you very much. I forsook some of my ceremonial duties by not mentioning at the beginning that this lecture is part of the LSE European Institute’s Future of Europe lecture series in association with FT Business, which is a specialist publishing arm of the Financial Times, whom we thank profoundly and somewhat belatedly but nonetheless very emphatically at this point.

Questions: I will collect three or four questions at a time and then put them to Mr Lemierre. I must say, I was very struck by this turning of the tables and giving us the Russian perspective both of their own recent history and the rest. That is something that we should attempt from time to time, to look at an issue from the other man’s point of view. It really changes one’s perception, especially of the decade of the Nineties and the heroes and villains of the period. Questions, please?

QUESTION: The question I have is, does the Russian political class view the EBRD as a neutral party or as an arm of the West?

QUESTION: Mr Lemierre, I know it is not in your area but could you make a comparison with China, the way that China interacts both economically and politically with the outside world, and the way Russia does?

QUESTION: If I understood you right, you said that we should look beyond the elections that are coming up, beyond the result. Are you basically saying that there could be a democracy or there could be rule of law, economic law, without real democracy?

MR LEMIERRE: I will take the last question first because it is a nice answer to the point about China. I will take the two together. I have spoken a lot about perception and I will continue to do this. In Moscow there is the strong view that we use double standards and that we are not asking China to deliver the same as we have asked Russia to deliver. That is your question. Can you have rule of law without democracy? I am not a specialist on China but I know the view of China from Moscow and that is part of the debate.

I think there is a profound misunderstanding about why we are asking Russia to do a lot of things – and I am not going to mention human rights and so on. You understand the double standard question. This is a very sensitive question and a very important one. Maybe I should have said this upfront. It is perhaps because the relationship is not the same. It is probably because in the medium term the relationship with Russia is going to be much, much closer because we are part of the same continent. Of course, we may have different expectations because we are closer, because we want to do something together. Distance is a killer. I do believe that Russia will be one day what we call a democracy, and I do believe that the role of the private sector, the role the emerging middle class will play will have its impact. One of the best political specialists at the EBRD, Alan Rousso, is certainly here and Willem knows him well. If you ask him he will say “I have no doubt.” It will take time but that will be achieved because Russia is moving this way. The steps may be difficult.

On the rule of law viewpoint we see progress. We should take a business approach. Business people will tell you no, it is not perfect, there are a lot of things to be done but we see progress. I have been at the EBRD now for seven and a half years and, believe me, what we saw on rule of law in Russia in 2000 is not what we see today in the business we do. Their understanding of these questions has totally changed, and the question about China is the one you mentioned.

How are we perceived by political leaders? It is difficult to answer on their behalf. Perhaps it is easier for me to explain how we would like to be perceived and you will tell me if we are perceived like this. We pay attention to a very few important points I did not mention in my remarks. The first one is yes, we support foreign investors but we increasingly support Russian investors. We started ten years ago with SMEs but today we support a lot of medium-sized companies. We have equity stakes in regional banks, private-sector banks. This is highly welcomed. They are Russian banks. We are taking part in the consolidation of the banking sector in Russia, which is an issue. We support steel companies, Russian steel companies. We support agribusiness companies. We support a lot of domestic companies. This is key for the structure of the industrial sector. Last year we invested probably 90 per cent of our investments with Russian investors.

So we are certainly perceived on both sides. Yes, we are an agent bringing in foreign investment and knowledge but we are also an agent to improve the corporate governance standards of Russian companies and to help them to get access to the global capital markets.

The third element is that the activities we have in Russia are moving from Moscow and St Petersburg to the regions. EBRD has become a much more regional bank than we were before and we have a lot of investments on the new border of Russia, which is in the regions, where the potential is huge. This has a lot to do with diversification of the economy and social stability, long-term social stability of the country. We are being asked by the Russian leaders to do this. When we work with Toyota we are very well perceived because we help Toyota bring high standards in Russia. When we work with Severstal, we are helping them to improve their standards and to become a global company, but when we work in the regions we do the same and to a large extent we restart the story region after region, which is exactly what we need to do.

So are we neutral? We do not want to be neutral. We want to bring quality.

I will end my remarks with two figures. Russia today – you must know this by heart – must have a volume of reserve of close to $400 billion. Every year EBRD invests in Russia $3.5 billion. So you could say it is nothing but it is very well understood that through this $3.5 billion we bring quality. I could tell you a lot of numbers about these types of wishes and these types of discussions. Are we neutral? No. We simply say we want to promote entrepreneurship, the private sector, in Russia.

QUESTION: Just a quick question, Mr Lemierre. You said that Russia should diversify in order to overcome its so-called resource curse. As you know, the Russian government has just adopted a three-year sliding budget and it plans to use up most of the Stabilisation Fund. It will mainly be spent on social welfare, military spending, and unfortunately not so much on the development of small and medium-sized enterprises. What do you think the implications of such a sliding budget might be?

QUESTION: From your perspective, do you see Russia moving more towards engaging in multilateral relations with the rest of Europe or do you see them still engaging in bilateral relations, both in terms of trading and in terms of foreign policy?

QUESTION: I have a question about diversification. The Russian government at the moment has adopted the policy of creating several large state corporations in various areas, aviation construction, nanotechnology and so on. Could you comment on that policy as part of diversification?

QUESTION: I have a question on Russia’s sensitivity to global macroeconomic factors, first of all the current credit crunch. Do you see or foresee any impacts, particularly on some of the small to medium-sized banks that you mentioned earlier? Do you see any problems relating to that? Secondly, in terms of diversification, have you actually tried to quantify if at this point in time Russia is any less sensitive to the oil price than it was, say, five years ago?

QUESTION: I wonder if I can ask you to elaborate on two particular areas which are more long-term? Firstly, obviously, in the population context, what Russia’s view of immigration is and secondly, what you think the prospects are for private public partnerships on infrastructure projects going forward?

MR LEMIERRE: On diversification, you have asked many questions on the same theme so I will try to capture what you have said in a few remarks. First – and I say this under the control of the former Chief Economist of the EBRD – the macroeconomic management of Russia is quite sound and we should pay tribute to those in Moscow who are able to manage the reserve fund in a strict way. When you know that Russia has one big problem, which is inflation, which is normal in the situation of this country, you can see how important it is to have people like Deputy Prime Minister Kudrin, who is very good at managing this safely. I think they do more than reasonably well. So my first point is that we are very positive about the fact that the money in the Stabilisation Fund is not spent too quickly for macroeconomic reasons.

The second point is, what are the main needs of Russia today? If they want to grow a stronger private sector, they have two main needs and there are two aspirations of the people. The two needs, the two bottlenecks, are probably no longer about the banking sector, even if there are questions – and I will come back to this. The two bottlenecks are infrastructure and electricity or power. This may come as a surprise to most of you but Russia is a country in which production of electricity is limited and there are electricity cuts, which is a big social problem because you die if there is no heat in Siberia in the winter. This is a very serious question. So there are two bottlenecks: infrastructure and power, and they need to put a lot of money into those.

What have they decided to do? It is not so much to use the Stabilisation Fund. That may be the economic debate we need to have. They are moving more towards a private sector approach. With infrastructure, you have the key wish – this is my answer to the question on the PPPs. It is clear that today we are working on some PPPs in Russia. The best example is the Western high-speed diameter around St Petersburg, which is a big bottleneck, but we took the initiative a few weeks ago. We have taken an equity stake in a subsidiary of the Russian railway to promote transport by container. You know that the rate of containerisation of transport in Russia is very low. This is crucial for them. So you see a wish to go and tap the private sector, the skills and the money, to do this type of job. Concessions and PPPs are going to increase. This is a clear policy. Why? Because they know that they need so much that the money coming from oil and gas is not enough. They need to use private sector money and skills.

In power you have exactly the same. Probably the largest reform going on in Russia today is the reform of the electricity sector. A decision was made in 2001/2002 to keep the grid in the public sector and to sell the generation plants to the private sector, and this is what is being done. Some of them are being bought by Gazprom, some of them are being bought by private sector interests in Russia or foreign investors. You have much interest from foreign companies like Ener and so on. So you have a strong private sector mobilisation to try and address the two bottlenecks.

You say that with this money they do not pay attention to development. A Russian government bank was created last year using part of the money from oil and gas revenues to finance infrastructure and to finance some SME projects.
I will take another example. They have allocated some money from the budget for the development of venture capital funds. They have launched a programme of venture capital funds. May I remind you that all of our countries in Europe 40 years ago had public sector money to do this. This is not a new story.

The key question is how it is done. The question is not so much that the money comes from the budget or the Stabilisation Fund to do this. It is that the money is managed according to market-based rules. This is very important, that there is no distortion. That is what we try to support. We have joined one of these venture capital funds at the request of the Russian government to make sure that the money is used according to market-based principles and of course, we pay a lot of attention to this. I go back to the economic history of our countries in which you will see quite the same. As I say, many countries wish they had had EBRD to do this 40 years ago. That is exactly the job we are trying to do.

The bilateral/multilateral concept: I think the answer is not so much in Moscow but in Europe. The question is, is Europe going to have a multilateral relationship and continue to speak in many voices, or does Europe want to speak with one voice? I am not so sure this is a question for Moscow; it is more a question for Europe. I must say that in many sectors it is not so easy. The one in which it is very difficult is energy. When I am in London energy security can be achieved by the market through a multiplicity of short-term contracts. When I am in some countries on the continent I have the impression that security can be achieved by long-term contracts at fixed prices. It is a European question. There is a debate in Europe about this. There is a debate between Europe and Russia about this. Again, let us be clear: there is a seller and there is a buyer.

Most of the questions you have raised are in the hands of the Europeans. I believe, because I am profoundly European, that some degree of coordination would be good in many cases, but the debate on this is finally a European debate.

About the credit crunch. First, I normally watch television to see what Professor Buiter says on the question and I am sure he has been on today. I think Russia is in a very specific situation. First, in the summer we saw tensions and there were tensions: liquidity tensions in the banking sector. We know this well; we had a lot of stakes in many banks in Russia and we have seen tension. This was brought under control by the Central Bank. They did the job but it shows that there is some fragility behind this.

Do I think Russia can be immune from any western movement in the financial sector? I do not believe so. I do not believe in the decoupling theory. Either you have a global world where everybody is challenged by these types of movements, or you do not have. You cannot say a country is part of the global economy and not see that there is of course an impact. What is going to be tested everywhere, not only in Russia, is the quality of banking supervision and the quality of risk management. At the end of the day, this is what we are going to say. We in the EBRD pay a lot of attention to the sustainability of private sector banks because, of course, by definition they are rather new, they have a rather low capital and we have to be very careful when we are working with them to make sure it works well.
Of course, there is always a question about the impact of this financial tension in the world on a country like Russia. Is Russia immune because of diversification? I would not say so today. This is what is wished and what should be achieved but it is clear that today oil and gas and raw materials play a very important role in the Russian economy and unfortunately we may see some Dutch disease. I am sorry, Willem, but you know what I mean. It is a very strong reminder that diversification is even more important than before, that a country like Russia can only grow if there is a diversified economy, which is more balanced and not dependent on a few products and on a few political attitudes but is much more diversified.

May I address a point I made a few minutes ago? There are two aspirations in Russia. When you ask people what they want, when you ask the middle classes what they want, they want three things. They want a job, they want better education and they want health. I would say that the first two are aspirations. That is what they want. The last one is a fear. Health is certainly one of the key questions which have to be addressed for the people, for the transition process to have a positive impact. We see this in Russia but we see it in all the countries in eastern Europe. When you ask people what life was like before 1991, they say life was not bad. Everybody had a job, everybody had an income – a low one. It was quite boring, no opportunities but okay, education was quite good, and they had a decent possibility of access to hospitals. Today they say the world is totally different. It is a world of opportunities. It is great. You can go to university and have a good car and make money. They are slightly shocked about this. They say this is great. It is a world of opportunities. It is a world for young people but it is very insecure and very unsafe. What is going to happen tomorrow? Are we going to lose our jobs? On top of this, part of the problem is that we think that education is still a problem. The education system is not well adapted to the needs of the new society. It is about management, it is about law, it is about what we speak about but it is also about health. The main comment they make about health is that it is not acceptable to have to pay a bribe to go to hospital. In a profound sense that is the perception of corruption. When you see this, you see all the efforts and the need to diversify the economy, to create jobs everywhere, not only where there is gas and oil but everywhere in the country, to improve the situation, to improve the training and to improve the health system. These are probably the main challenges we take from what people say.
Immigration is a very sensitive question in Russia, as we know. It has a declining population. There are a lot of foreign workers in Russia, especially from Tajikistan and Kyrgyzstan, and from the Caucasus. They work mainly in construction; we see a lot of them everywhere in Russia. One of the key questions for the future is certainly the question of immigration, what is going to happen in a vast natural resource-rich country with a declining population.
I must say – and I go back to the health agenda – probably one key challenge is to stop the decline in the population. When you listen to the speeches, most of the speeches in Moscow of President Putin begin with demography, the decline in the population and the need to act to stop this, and one way is to increase life expectancy. Do you know that life expectancy for men in Russia today is 56 or 57? It is very low. It is much higher for women. Probably vodka is part of the story, and road accidents and AIDS. We know that the main disease is tuberculosis. There is a taboo. Nobody speaks about this. This is a real challenge to change this.

QUESTION: What is your view on accounting standards and corporate governance in Russia in comparison with the western world?

QUESTION: What is your view on the current relations between London and Moscow? Do you think the British Council should change its approach in Moscow?

QUESTION: What do you see as the major risks that Russia will not move closer to the West but will move away from the West?

QUESTION: How would you comment on last week’s trade agreement made in Bulgaria by President Putin from the European and the Russian perspective?

QUESTION: How easy is it to open a company in Russia?

MR LEMIERRE: It is very simple. Corporate governance I would say was a totally unknown concept 15 years ago. Eight years ago it was barely understood. I remember a presentation in 2000 or 2001 in London by a large Russian company. The CEO came with a slide showing the organisation of the company, and he had put in green all the positions he had filled with western managers just to show “I am good” and he said “I’m going to make all of these totally green.” You would not see this any longer today. The way the understanding of this question has improved is absolutely amazing. Today you see many Russian companies for which corporate governance, from my viewpoint, is certainly equivalent – I will not compare to any specific company but equivalent to any company you can find. I must say that the wish to tap internal markets through IPOs has gone up a lot. You have to achieve certain standards to be able to sustain them to succeed.

The question is not there. The question is what is coming behind? You have seen many companies for which you have to do the job again, and that is what we try to do case by case. I remember in 2000 I had to explain to some political leaders in Russia what it means to have audited accounts. They said, “Yes, that is very smart. That is a mistake we have made. We never audited the statistics of the Gosplan.” Today nobody would explain this. It is understood. Independent directors on the board: it is understood. Risk management is understood. There is probably still some progress to be made on disclosure but you have to go step by step and I must say, the more Russian companies are involved in the global capital market, the better it is.

I will answer that in a different way. If we – and when I say “we” it is mainly the private sector investors and market people – are tough, if we question companies, that will improve the whole system, because companies which get access to capital increases, resources to grow their business will be the benchmark and I must say it works reasonably well. In London, in Moscow, you will allow the neutrality of an international organisation not to interfere in a debate which is part of what I have mentioned, which is one of the paradoxes. You see a growing relationship, a growing interdependence and at the same time tensions, harsh words and actions. It is clear that it does exist, it is part of the story. I must say that we do not see this being over especially on business activities, investment activities. This question must be dealt with by governments and be kept under control.

On the question about whether Russia will go the western way, I think it is a good question. This is a key question mark for the future. Russia has two main possibilities. The one I like, which is moving the Russian way but towards Europe, is more integration into the global economy, shared values and practices. I think this is the wish of reformers in Russia and I think it is the wish of large companies in Russia. This is what they want to do but it is clear that Russia has a different way to move forward, which is a more Russian way, looking a different way at western Europe, trying to have a more stand-alone approach. I am not sure this is their wish, especially when you speak with Russian business people. This is not what they want to do but that story will be built together. I am not so sure that this type of choice will be just in the hands of Russia. It is also in our hands.

I would like to insist on a point I made previously, which is the debate about reciprocity. It is clear that Russian companies in the private sector want to invest in the West, and they are beginning to. From time to time we see harsh reactions. For example, Centrica. You see a reaction. We need to speak more about this. I am used to doing this. The understanding of why we do not want it is not very clear and it needs a lot of discussion. It has a lot to do with the perception we may have about what they have in mind, what these companies want to do. When I see the large banks going to China, Singapore, Qatar, to raise funds for the reasons you know, you can see that this debate is going to take place with Russian money, and the more western standards are respected, the more the rule of law is understood, the more corporate governance is respected, the better it is, I have no doubt, if we play this way.
I did not pick up the question which was asked before about aviation. This is a very good example. Aviation is part of the strategic sector in Russia. Russia had and has very bright engineers in aviation. At the same time, the aviation industry has collapsed. Russia has decided to buy Airbus and Boeing and to renew the fleet of Aeroflot and other companies. They wished to go back to a more positive view and develop aeroplanes and they have decided to build a regional jet. They have asked Sukhoi, which is a state-owned company, but you must understand the process. It is exactly what I have tried to explain to you. The design is by Sukhoi, it is built in Sukhoi, in a plant in the Far East, but in partnership with Boeing, Alenia and Snecma. There is a real partnership, and you put the two together and you have an engine, you have a design, you have construction capacity, you have engineering capacity and you have a plane which is a regional jet for which they have a huge market. So even in a strategic sector you see how it works, which is to create a partnership, to build something and to recreate an industry.

The Bulgarian deals are very interesting. You have mentioned gas and trade. I would have mentioned also nuclear, with the restart of Belene. This is part of what is happening in central Europe. I have spoken about Europe but if you look at the Russian question, Europe is not united for one key reason many people have forgotten, which is that the network of gas pipelines of the central European countries is not linked to the West but to the east. Everybody had forgotten this a few years ago. What has happened is that all the leaders in western Europe have asked western countries to invest money in building a bridge with the western network to get access to the Algerian gas or LNG. The answer is quite slow. After this period countries in central Europe have to look at their own situation and try to see what they can do to secure the future. You have seen this in Hungary and you see it in Bulgaria, and it is clear that Bulgaria has always had a very good relationship with Russia.

Bulgaria has, both from the Russian viewpoint and from the Bulgarian viewpoint, a clear role to play in the Western Balkans, the route to Greece and the southern market for gas, and Bulgaria has negotiated a deal on this. If you look at it from the European viewpoint, it also has to do with the fact that there is no link with the West. Of course, it has crucial importance for the Western Balkans, not only in gas but also in electricity, and that is the story of Belene. You will see Bulgaria becoming a very important hub for energy for the south east of Europe. Of course, you also have negotiations in Belgrade about Niš and they are probably very close to deciding the Kosovo story. There are negotiations there, and behind this you have the other story I did not mention, which is the debate about the pipelines, the Blue Stream pipeline, the southern pipeline and the Nabuko pipeline. It is what I meant before: Russia is a key partner in this. It is part of the debate. I understand that a country like Bulgaria cannot say “We do not care about this.” Yes, Russia is needed by them and they have negotiations and they are trying to get the best possible agreement.

THE CHAIRMAN: Very good. Are there any other questions? Then it remains for me to thank you, the audience, and especially President Jean Lemierre for a fascinating presentation and a very good discussion. I would again thank FT Business for supporting this enterprise. I hope to see you again at future events. Thank you, Mr Lemierre.