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Russia will force the G-20 to work for them

February 2013

© RIA Novosti, Grigoriy Sysoev

First and foremost, Russia is intending on using its chairman status in the G-20 for resolving its own economic development problems, perfecting its financial regulating mechanisms and even for battling against corruption. It is a well-known fact that a prophet is not recognized in his home country; therefore Russian authorities are planning on using international practices, recommendations from the top expert centers in the world and obligatory G-20 decisions for giving their own decisions on accelerating reforms geared towards faster domestic economic growth more weight.

Russia officially became the G-20 chairman on December 1st, 2012, taking over the reigns from Mexico. the results of Russia’s time at the helm were summed up at the summit in Saint Petersburg on September 5th-6th.

A top umbrella for the G-20

The group of 20 (G-20) was created in 1999 as a collective for the heads of finance ministries and central banks in 19 of the largest (in economic terms) countries from all the continents plus the European Union. This was seen as a reflex to the currency crisis at the end of the 1990’s. Representatives from countries accounting for roughly 90% of world GDP and controlling 80% of world trade tried to coordinate national financial regulating policies in order to avoid a repeat crisis.

Work in the organization took a step up at the end of 2008 when during the heat of the financial crisis the first meeting for world leaders took place for G-20 countries. ‘World leaders were incredibly lucky that by 2008 the mechanism for coordinating financial regulating policies had already existed almost ten years’ – states Sergei Storchak, the Russian Deputy Minister of Finance and one of the two Russian representatives in the G-20, confidently.

© RIA Novosti, Ramil Sitdikov

Sergei Storchak,
Russian Deputy Minister of Finance

‘Contacts had been set up, task forces had been created, people had learned how to coordinate with one another, listen to each other and come to an agreement on the most touchy and hot topic – money. They learned how to share and compromise’

Coordination mechanisms were in place. It’s a whole other matter that up until 2008 the global economy was developing pretty comfortably. the ‘group of 20’ did not have to work on making tough, quick and coordinated decisions which were needed during the tough financial crisis. Suddenly it became necessary to create a regulatory arbitrage mechanism for correcting the situation during which finance ministries from various countries were not coordinated amongst themselves.

These potent political issues were successfully discussed during top-level meetings in 2008. Mr. Storchak claims that it turned out that by having ‘umbrella’ leaders many unresolvable problems started to work themselves out much quicker and efficiently.

Development money

The main problems which G-20 will try to resolve in the near future, including during Russia’s chairman term, are finding new investment sources and the sovereign loans problem. ‘Financial sources which can replace bank loans are needed. Due to excessive lending and big problems with balances of banks loan resources have become practically inaccessible for companies. It is possible that the share market could once again become an alternative source of long-term investment resources for production. Regulators need to figure out why this instrument started to freeze up’ – said Mr. Storchak during one of his interviews.

Russia is intending on analyzing the effectiveness of the steps taken by G-20 on making the sovereign loan market more transparent. Also, the Russians are going to try to solve the issue regarding state borrowers’ liability for its own loan stability like is the case in those countries with long-reaching traditions of ‘civilized borrowing’. ‘So that sovereigns wouldn’t lose their mind when they gain wider access to loan markets’ – clarified Mr. Storchak.

President Vladimir Putin noted that one Russia’s priorities during its chairman term is to reshape the currency system. But Storchak believes that this matter involves not only changing the International Monetary Fund’s (IMF) role or reconsidering reserve currency’s function. At the IMF the proportion of votes for industrially-developed countries and emerging markets should be readjusted based on their new weight in the world economy.

Self-initiated reforms

Russia views G-20’s main potential as an expert and analytic center guiding the organization. We are intending on using the research conducted there and recommendations crafted by the Group purely in a utilitarian manner – for solving our own money and financial regulation problems. ‘the most evident and main purpose for our membership in G-20 is that it allows us to take financial regulatory measures within our country which are in line with the best world practices’ – says Mr. Storchak.

The Deputy Chairman of the Bank of Russia, Sergei Shvetsov, has the same opinion regarding the matter. ‘G-20, first and foremost, for Russia is a bank of ideas’ which has accumulated a lot of experience (both positive and negative). Decisions and recommendations made by G-20 have incredible value. Representatives from the leading financial centers across the world take part in developing them, but Russia also takes part in making such decisions. Shvetsov is sure that the obligation to perform G-20 adopted documents serves as an accelerator for internal Russian reforms.

‘I would not say that a mechanism for implementing G-20 decisions has already taken shape, but not one country has a way to slip away from performing the obligations to agreed to perform’ – argues the president of the Russian Union of Industrialists and Entrepreneurs, Aleksandr Shokhin. He cites the battle against protectionism (which was declared one of G-20’s priorities during its first meeting in 2008) as an example. After this meeting, during the next month 19 countries took protectionist measures. In Seoul (2010) the unacceptable nature of currency wars was discussed. Now, in 2013 everyone is awaiting a new wave of wars.

Foreign trade production process

The battle against protectionist measures has yet to bring concrete results, admits Gabriela Ramos, the General Secretary in the Organization for Economic Cooperation, its representative in G-20. But she hopes that a serious breakthrough will happen in this area (truth be told, not during Russia’s chair term, but at the upcoming 2014 summit in Brisbane, Australia). She believes that markets should be open for export since international production cooperation is acquiring more and more significance. ‘Today it is difficult to say where goods are products – production chains are spread across the whole world’ – notes the representative from the Organization of Economic Cooperation. Therefore, any foreign trade barriers hinder real production growth.

© RIA Novosti, Ekaterina Chesnokova

Aleksandr Shokhin,
President of the Russian Union of Industrialists and Entrepreneurs

‘It is necessary to address the issue of gaining free access to not only raw materials and sales markets, but to technology too. Innovative technology has remained closed for other countries for a long time now. For example, gas extraction from oil-shale was closed to many countries for awhile, along with technology for working on developed oil and gas deposits’

Under the G-20 framework it is possible that an absolutely new format (differing from the one in the WTO) for discussing world trade procedures may be found. This must be done through having an approach to trade like towards a participant in the global chain for shaping added value, says the head of the G-20 Expert Council, Sergei Drobyshevsky: ‘Trade today is not just commodity exchange between different countries – it is an important internal production process’.

‘It is necessary to find solutions in order to make the low-efficient financial sector work harder on overcoming the consequences of the global crisis while stimulating economic growth. This relates to loans and their interest rates. How can one get back to the pre-crisis level of trust in investment loans? We need to create roughly another 50 million jobs in order to reach the pre-crisis level’ – said Mrs. Ramos, outlining the task ahead.

Financial liberalization under strict control

Aasim Hussain, Deputy Director of the European Department of the IMF, outlined a task facing the G-20: ‘the previous strategy of complete capital market liberalization should not be our goal. Liberalization of monetary flows is a good thing, but it is vital to strengthen the global economic system by means of building defense mechanisms, political cooperation and coordination. All of this will allow us to reduce volatility on financial markets’.

‘The crisis showed that it is necessary to create a global system for assisting those countries which were most impacted by the crisis based on the mechanisms used for revitalizing Greece. ‘It is necessary to build a defense system which will not allow countries to slip into such a situation. An increase of IMF resources by more than 1 trillion dollars will help build the foundations for an international currency and financial system’ – said Mr. Hussain, emphasizing the importance of this issue.

Dmitry Pankin, head of the Federal Service on Russian Financial Markets agrees with his colleagues by saying that implementing the decisions made during the summits in real legal practice for the country participants is a big problem. ‘Should countries just get a slap on the wrist or should there be a mechanism for strictly controlling performance of the decisions made? Such a mechanism is shaping up in the financial sphere since there are regulators who have ‘black’ lists with violator countries and all these countries’ banks are limited in terms of opening correspondent accounts and loans to companies from these countries will be held to higher reserve demands. On other G-20 topics there is no such clear sanction mechanism in place’ – states Mr. Pankin. This mechanism should appear as G-20 crystallizes into a clear international organization.

This process is not particularly simple Mr. Pankin pointed out that coordination between G-20, ‘the group of eight and the IMF is not going over very smoothly since everything overlaps and is a bit of whack’. For example, many currency system and financial regulation issues which G-20 made decisions upon were not received warmly by IMF representatives since they believe that these issues are within their competence.

Many people worldwide have high expectations regarding understanding the role and essence of G-20, but the legitimacy of this organization does not boil down to the fact that it accounts for 80% of the world economy. According the leading economist and coordinator of the international partnerships and policy group at the World Bank, Jeff Chelsky, it depends on its ability to take into consideration the interests of a wide group of countries (including African ones) when making decisions.

He points out that international economic cooperation is one of the most difficult and complicated forms of coordination between governments. the mechanism for coming to a consensus is over estimated by many. All countries have not only different interests, but they have fundamentally different mechanisms for making decisions and implementing such decisions. Due to this it is very difficult to shape a common agenda.

Drobyshevsky is confident that before 2008 the system for distributing financial resources was relatively clear, investment flows were pretty well-known and developed countries were viewed as the main investment source in developing countries, but now, quite to the contrary, countries with developing economies have large financial resources, while developed countries are de-leveraging and decreasing their own financial capabilities. G-20 decisions should be geared towards correcting the commonly-accepted views on investment flows and on the role these flows play in the economic growth of various economic centers worldwide.

Experts worldwide are counting on the fact that Russia, as a new player and independent chairman in the G-20 club, may be the country whose term will lead to serious breakthroughs.

Andrei Susarov,
correspondent for the information agency ‘Finmarket’
exclusively for Russian Survey

© RIA Novosti, Ruslan Krivobok

Kseniya Yudaeva:
‘the effectiveness of prohibitive measures in the financial sphere is dubious’

Regulation in the financial sphere should be geared not only towards preventing a crisis, but also it should be focused on stimulating economic growth, declared head of the Expert Management of the Russian President, representative of the Russian Federation in the G-20, Kseniya Yudaeva, at the ‘G-20 Answers to the Global Challenges’ round table.

‘Russia suggested that we focus on policies stimulating economic growth not only in the short-term, but in the mid-term. This envisages supporting investment and conducting performs. Our priorities are investments and creating jobs’

The next priority is market transparency and trust for economic growth. Lack of the latter is one of the main problems which led to volatility on financial and raw material markets and put the brakes on investments and economic growth.

And finally, effective regulation for economic growth. G-20 has viewed financial regulation not only as an instrument for preventing a crisis, but as a force for stimulating economic growth.

Finances are the key part, but not the whole scope of G-20’s work.

We are also hoping on achieving serious results in other areas. Based on the new statistical database for added value chains one can address the issue of partially reshaping our understanding of trade and investment policies as policies on developing global production chains for creating value. Also, one can reconsider our understanding of trade barriers (including non-traditional ones) which hinder the normal functioning of such chains.

Work on exchanging environmental practices in the energy resource extraction sphere on the shelf will continue in the energy sector.

The new question which Russia is addressing is investment process regulation systems. We are hoping that we will emerge with a new system for exchanging best practices in this field.

There is a pretty large agenda on developing human capital. Russian priorities in this field pertain to financial exclusiveness (the unavailability of banking services for poorer classes which thereby exacerbates their poverty and deprives them of the opportunity of breaking this cycle – RS), funding infrastructure projects and supporting education.

There is a quite significant agenda on employment issues. We decided to take a look at the job creation process. We will hold a joint meeting between finance and labor ministers for the first time. Keeping in mind Russia’s labor distribution amongst departments we are also inviting the Ministry of Economic Development and Trade to take part in this discussion.

Additionally, Russia is working on implementing the G-20 plan on the fight against corruption. For this project it is particularly important to involve business and society in this process.

The group of 20 has made suggestions on the need to draft an international agreement on taxation for companies working in different jurisdictions since tax optimization has gotten a bit too large. We believe that this is one of the main issues, but it’s not key. the topic of ‘de-offshoring’ has not been named correctly since it envisages attempts to forbid everything. Prohibitive measures are not the central idea. the most important thing is improving jurisdictions’ ability to compete.

The effectiveness of prohibitive measures, at least in the financial sphere, is dubious.We have a ton of prohibitive measures on capital outflow, but it still remains large’.