Oct 17, 2014

Oleg Sienko, CEO: "Russia must continue integrating with the BRICS countries"

Structural problems and Western sanctions have put the Russian economy in a tough spot. Russia must continue integrating with the BRICS countries – particularly by creating a common financial system and a single currency – to avoid stagnation, guarantee access to critical technologies, and ultimately become one of the world’s technological powerhouses. Oleg Sienko, CEO of UralVagonZavod Research and Production Corporation, discusses this topic in an interview with BRICS Business Magazine.

In late September, the World Bank published three medium-term scenarios for Russia’s economic development, the best of which predicts low GDP growth in coming years. Among other things, the Bank’s experts point out that further economic growth acceleration will not be possible simply by maintaining the current fiscal stimulus policy. Do you agree with their findings? How would you assess the current situation in Russian economy?

It is far from simple. It is already obvious that the sanctions have caused serious problems. It is difficult to argue with the World Bank experts – there will be no major growth, especially in brick and mortar sectors of the economy.

However, it is equally obvious that the country will need to take steps to stimulate the economy today – regardless of budgetary limitations. Other countries have managed to find their way out of similar crises by injecting money into the economy.

In my opinion, there is another aspect that is important in this case. If we want to get out of the crisis quickly, the government must be much more proactive than they have been. Slow decisions mean that efforts to combat the crisis have to be doubled.

How is the government’s slowness manifested?

There are key economic sectors that need immediate support. We ourselves created some of these problems – we have been adopting laws left and right, such as the government procurement act, and now we are valiantly trying to overcome them. For some reason, nobody seems to care about this kind of policy inconsistency, even though it is quite a critical point. But it does not stop there. Government help should not be limited to simply injecting money into the economy; it should also focus on protecting and preserving the domestic market. So far, it has been just the opposite. When Russia joined the WTO, nearly everyone gained access to the Russian market.

Could you cite any specific examples?

Take the automotive industry. The 50% localization target, which is built into agreements with overseas automotive corporations and governs industrial assembly, is still as unattainable as ever. Russian metallurgical companies manufacture auto body sheets, but they are not used, or at least not to the extent that they could be. By not producing the parts domestically, we fail to stimulate other sectors of our economy, such as the mining industry, metallurgy, the construction sector, and the list continues down the chain. This should be given more thought.

Are you calling for restricting access to these markets?

Take India, for instance. This country has been a WTO member since 1995, but I dare you to try to import cotton products there. You will end up paying a customs duty of between 50% and 100%. Try importing a car to Cyprus, an EU member country – you will have to pay a 100% duty. There are endless examples of this kind.

This does not even include the infamous anti-Russian sanctions, which run contrary to all rules of global commerce, and our WTO membership has no influence on them. This just goes to show that these things were implemented with one goal in mind – to open up our markets.

Before the sanctions were introduced, UralVagonZavod was proactively involved in a number of joint projects with its Western partners. These included the development and manufacturing of new railway locomotives, together with US-based Caterpillar, and a joint project with Bombardier of Canada to build the rolling stock for metro trains. What is the current status of these projects?

Unfortunately, all of these projects have been put on hold for the time being. Obviously, companies based in countries that have introduced sanctions against us cannot continue to work with us. But this presents a problem not just for us, in that we have to delay the release of new products, but also for those Western companies – they put a lot of effort into building the technologies required for these projects. However, all of this pales in comparison to the potential damage the West could suffer if Russia decided to introduce real sanctions in response. Given such an eventuality, Europe would feel the impact first. They would not be able to make up for the huge volumes of raw materials that they receive from Russia. Forests cannot be grown overnight. It is equally unlikely that oil or gas would begin to flow in abundance.

However, even if that does not come to pass, the qualitative changes in the relations between Russia and the West, and those between the so-called ‘developed’ and ‘developing countries’ have been a long time coming. It is particularly vital for the emerging markets to move away from dependence on the Western financial system and the dollar hegemony. Apart from resolving obvious security issues, this would enable our countries to tackle other development goals in a much more efficient manner. 

An alternative to the dollar

You have championed a rapprochement between the BRICS countries, including the creation of a common currency. Why is it so important? And most importantly, how feasible is it?

It is entirely feasible. The BRICS countries account for one-half of the planet’s population, and have already made an important step toward creating an independent financial mechanism of their own. I am referring to the recent agreement to create a BRICS Development Bank and a currency pool to counterbalance such institutions as the IMF. The next logical step would be to create a common currency for the BRICS countries. In my opinion, such a step would enable us to move away from the dependency on Western financial centers and the US dollar as the main international transaction and reserve currency. This is the most realistic step, which could herald economic improvement in all the BRICS countries, Russia included.

In your opinion what mechanism would be required to create such a currency?

They would have to select a ‘BRICS currency’ for all transactions between the BRICS countries and peg it to the euro to make the conversion easier, then create monetary and transaction centers and their own payment system.

I am sure that many countries in Latin America, Southeast Asia, and Africa would subsequently transition to this currency as they are getting increasingly tired of the hegemony of the dollar and euro – the only two currencies in which things are bought and in which investments are made. Mind you, people are fully aware that these investments are the function of a printing press, and not a product of a real economy. If this happens in the next three years, this new global payment system would include at least 70% of all countries, in terms of global population, which would get us off the US dollar once and for all.

How would a common BRICS currency be different from the dollar or the euro?

The difference would be that the BRICS currency would be backed by real assets and resources – including human, natural resources, and raw materials – which our countries are rich in. In all likelihood, once these measures are introduced the world will be split into two camps: the ‘progressive’ camp, which would include BRICS countries and the emerging markets aligned with them, and the ‘pessimists,’ which would include the United States, Europe, and the countries associated with them.

That is why creating our own currency is a vital step. The earlier it happens the greater the advances we will make in our economic development and the better our chances to build a powerful and independent alliance to counterbalance the United States.

Crisis as an opportunity

In this regard, what do you think about Russia’s recent pivot to the East, a step largely spurred on by the sanctions? Specifically toward China, whose meteoric rise presents a cause for concern for some of Russia’s elite.

I think it is a very positive move. We have always maintained friendly relations with China. Even though we have faced political problems at certain points in our history, we have always managed to overcome them. What is important is that China is a huge market with a colossal demand for resources. If the wealth of the average Chinese citizen increased by as little as $100, it would result in an explosive growth of demand for everything from consumer goods to construction materials, and ultimately raw materials. Meanwhile, wages continue to grow in China, so the fact that Russia’s political and economic vectors are turning eastward is a step in the right direction. China signifies great opportunities for us.

Would Russia’s role in this alliance be reduced to shipments of raw materials?

Of course not. We have a number of areas of common interest such as space exploration and military and technological cooperation. We have technologies that are sought after in China, and they will continue to be sought after in the future. When it comes to nuclear power, space exploration, mechanical engineering, and especially our military and technical abilities, we give more than we receive from China. We have common projects building equipment that could be sold not just in our markets, but in developing countries as well. Because there are certain areas where the Chinese are stronger and there are other areas where we are stronger, the marriage of our respective technical abilities will enable us to advance further. 

Finally, I want to stress once again that a rapprochement with China is a step toward creating a single economic and financial space for the BRICS countries, which will become a powerful incentive in fostering our development. The current crisis may, and should, provide an impetus for Russia to transform itself. The Chinese word for crisis is composed of two characters – ‘danger’ and ‘opportunity.’ We should not be fearful of the current situation; instead, we should seek new opportunities to accelerate development. And these opportunities do exist.

So could you summarize the key steps that Russia and the BRICS countries should take to offset the consequences of the sanctions and, more importantly, to bring their economies to a new technological level?

As I said before, the first move would be to create a common currency. The second would be refitting our technological base in combination with our partners. Not all critical technologies are available from the nations that introduced sanctions against us. Furthermore, there are countries in the West that have adopted a more sober outlook; they have the technologies we need, but they do not possess raw materials of their own. We need to negotiate and find ways to reach out and explore opportunities for mutually beneficial exchange.

Obviously, we need to build technologies ourselves. Russia boasts a great tradition in this area and is already well underway to create new ones. For instance, we are the leading producer of nuclear-powered icebreakers and arctic oil platforms. We are also engaged in shelf development in the Arctic. We need to activate our brains.

Finally, the third step deals with infrastructure, and perhaps this is the most important area. Infrastructure would spur other industries into action because it is the foundation on which everything is built – from a nail to the most complex piece of equipment. To make this happen, we need to adopt a new way of thinking and start tackling these issues. We need to do it right away, and not procrastinate as old habits dictate.

BRICS Magazine (c)