Denis V. Kadochnikov Senior Research Fellow

1. Russia, European Union and the Baltic Sea Region: Before and After the CrisisGdansk, July 2nd, 2009 Denis V. Kadochnikov Senior Research Fellow International Centre for Social and Economic Research – Leontief Centre (St. Petersburg, Russia)

2. Structure of the Presentation • Economic dynamics in Russia during the last decade • Russia’s trade with the World, EU and BSR • Russia – BSR economic cooperation and integration • Post-crisis realities for Russia and Russia’s North-West • Possible scenarios of Russia’s development

3. Major Drivers of Economic Growth in Russia 1998 2001 2004 2006 2008 Ruble Devaluation and Imports Substitution High Oil and Gas Prices Capital Inflow and Domestic Fiscal and Monetary Expansion

4. Russia’s Net Capital Outflow / Inflow

5. Russia’s External Debt

6. Russia’s Share in the World Trade

7. Russia’s Exports and Imports as % of GDP

8. Russia’s Exports Composition

9. Russia’s Imports Composition

10. Russia’s Exports Partners

11. Russia’s Imports Partners

12. Merchandise Exports to Russia as % of Total Exports

13. Merchandise Imports from Russia as % of Total Imports

14. (Based on a survey conducted by Leontief Centre in 2008) Source of Imports of equipment, machinery and raw materials Training ground Not a Market for Exports other than Commodities Exports, as there is large and underexploited Russian market View of Baltic Sea Region by the North-West Businesses

15. (Based on a survey conducted by Leontief Centre in 2008) Key purpose of appearance of foreign companies / foreign investors in St. Petersburg is gaining the access to local and Russian market. Exploration of external markets in the future is not excluded however. View of the North-West of Russia by Foreign Businesses

16. Interaction of companies working in St. Petersburg with businesses of the Baltic Sea Region is usually limited to: Purchase of raw materials and equipment, Transit of cargo through their territories. Russia — Baltic Sea RegionBusiness Interaction

17. Russia — Baltic Sea RegionBusiness Interaction • The target of exploring Baltic markets is not perceived as a priority by Russia-based companies. • Respondents rather note interest of investors from Baltic States to St. Petersburg and Russia.

18. Major investing countries, except Germany, are located outside the Baltic Sea Region. The largest sector of FDI is consumer services sector, focused on the Russian consumer market Foreign Investments in the North-West of Russia

19. Russian companies now operate world-wide and no longer focus on the CIS and the former Soviet Republics in the BSR. Russian companies, specializing within the resource-based sector, cooperate with relevant partners no matter where they are around the world. They act as part of a global specialised networks not restricted to any kind of regional imperative. Russian Investments Abroad

20. Russian Investments Abroad Resource-based industries continue to dominate outward investments, although financial, telecom and retail trade companies are also venturing abroad. The volume of Russian FDI in Baltic Sea Region is relatively low and concentrated in sectors such as energy, transportation, industry and trade.

21. Russian FDI in the BSR is very much strategically motivated by Russian interests in obtaining access to the EU and other international markets. Examples: Sea-port of Sillamae in Estonia, co-owned by a Russian company; Oil pipeline from Russia via Belarus to the Latvian harbour of Ventspils, also co-owned by a Russian company; Nord Stream Pipeline project connecting Russia and Germany. Russian Investments in the Baltic Sea Region

22. World Bank report “Global Development Finance 2009: Charting a Global Recovery” Global and Russian Economy Prospects

23. New Economic Realities for Russia Lower commodities prices and negative net capital flows Deteriorated external financing conditions and higher interest rates Federal and subfederal budget deficits Smaller state and CB reserves Greater economic, social and political uncertainty Greater state role in the economy Greater Social and Political Pressures

24. New Realities forRussia's North-West Weaker demand for exports from the North-West Lower transit trade Lower tourism figures

25. Major Challenges to Russia-EU Economic Cooperation • Protectionism on both sides • Investments restrictions and barriers • Political and economic instability in neighboring countries • Problems of transit trade

26. Possible Development Scenarios and Strategies Scenarios / Strategies of Russia’s Development formulated by SIGMA group / Institute of Modern Development (Moscow): • Inertia • Rentier • Mobilization • Modernization

27. Inertia Scenario • No radical socio-economic reforms • Political stability as a priority • Problems are addressed as they appear • No strategic actions • Maintaining status quo Obstacles: Lack of resources in the short run; stagnation in the long run.

28. Rentier Scenario • Accumulation of oil and gas revenues in the state budget and further redistribution to finance social programs • Paternalism as the state policy • State-directed investment programs Obstacles: Falling budget revenues due to lower profits (or losses) of oil and gas companies in the short run; Recession and social instability in the long run.

29. Mobilization Scenario • Mobilization of state resources to support and modernize selected priority industries • State corporations domination in the priority industries • Innovations support in the priority industries Obstacles: Inefficiency of state ownership and state planning, growing bureaucracy, rent seeking.

30. Modernization Scenario • Institutional reforms • Improving business climate • Focus on the efficiency of budget expenditures Obstacles: Results will be felt in the long-run; social and political support may be hard to secure.

31. Thank you! Denis V. Kadochnikov dkadochnikov @ yahoo.com International Centre for Social and Economic Research – Leontief Centre (St. Petersburg) www.leontief.net