US Department of State
[Burns] Keynote Speech "Russia's Economy and Prospects for U.S.-Russian Economic Relations"
William J. Burns, U.S. Ambassador to Russia
U.S.-Russia Business Council (USRBC) Annual Meeting, October 23, 2007
Thank you for that kind introduction. And thank you for this opportunity to speak to a group for which I have enormous respect, about a subject which matters enormously to the future of Russia and relations between our two countries. This year marks the 200th anniversary of our formal diplomatic ties, and it is a natural moment to take a step back, and reflect on where we've been, and where we're going.
That is not exactly an easy thing to do these days. In our broader relationship, mutual frustration often obscures mutual interest. Russians think that Americans tend to take Russia for granted, and are too quick to lecture, and too prone to double standards. Americans think that Russians tend to assume the worst about American motives, and are too consumed with the centralization of power, and too quick to see enemies at the gate.
In our thinking about today's Russia, both Russians and those of us who care about Russia and recognize its importance in the world, tend naturally to focus on the "who" questions: Who is going to succeed President Putin? Who is going to occupy what positions after the Duma and Presidential elections? Who is going to prevail over whom?
While the answers to those questions obviously matter greatly, for all sorts of reasons, it seems to me that it is the answers to the "what" questions that will shape Russia's future beyond the 2008 transition, and determine whether Russia will grow and prosper, or whether its current excesses will eat up its successes. What is Russia going to do with its hard-won stability? What is to be done? What is Russia going to do with the moment of energy-driven economic opportunity that lies before it? What is it going to do with the chance to diversify beyond oil and gas? What is it going to do to anchor its economic progress in the rule of law and the modern institutions needed to sustain it? What is it going to do with its reborn role in the world? Only Russians can answer those questions, but how they do so will have profound implications for the rest of us.
In considering those questions, in looking at Russia's economic future and the prospects for our trade and investment relationship, I am very mindful of my own limitations, and of the value of a little humility in trying to understand a society as big and complicated as Russia. I know that sometimes seems like an unnatural act for Americans. But even as close a friend and admirer of the United States as Winston Churchill once observed that "the thing I like most about Americans is that they almost always do the right thing in the end . they just almost always like to exhaust all the alternatives first." We don't have all the answers, but we do have a powerful interest in Russia's continued economic resurgence; in its integration into the global economy; in its diversification; and in the investments in its physical, human, and institutional infrastructure that will both ensure its long-term prosperity and create opportunities for foreign partners.
Let me talk first about Russia's moment of economic opportunity, then about some of the crucial "what" questions which lie ahead, and about the growing number of ways in which U.S.-Russian business and economic ties matter to both of us.
I'll start with the usual diplomat's restatement of the glaringly obvious. Russia today is not the country I left more than a decade ago, after my last tour in Moscow, a country that was flat on its back economically. Nor is it even the country I returned to as Ambassador more than two years ago. Russia today has a trillion dollar plus economy, the ninth largest in the world, bigger than India's or Brazil's. In the first six months of 2007, net private capital inflow into Russia was over $67 billion, more than during the entire first decade after the collapse of the Soviet Union. With a budget discipline that those of us from Washington can only envy, Russia has built up a stabilization fund of over $110 billion, part of more than $430 billion in hard currency reserves, the third largest in the world.
Unlike the Soviet Union, Russians are connected to the world today in powerful ways, and young Russians wake up every day with choices their parents could only dream of. Russia is among the top ten countries in the world in total number of Internet users, also ahead of India and Brazil. Russians, some 14 million of them last year alone, are traveling abroad more often and more widely.
While the gap between rich and poor is still much too big, the number of Russians living beneath the poverty line has been cut in half over the past decade. Most boats are rising economically across Russia, and real incomes have more than doubled in the Putin era. Most interestingly, a middle class is beginning to emerge, perhaps as much as a quarter of the population. It is not yet the tax-paying, politically-engaged, self-aware middle class that has developed over time in other countries. But this well-educated, well-travelled, property-owning class is the beginning of the core constituency for modern market and democratic institutions, a growing group of people with a real stake in how their tax money is spent, how decisions are made, how their property is protected, and how the rule of law can protect their equities and those of their children.
In ways that go well beyond economic progress, Russian pride is reborn. Sochi will host the Winter Olympics in 2014, which is a huge achievement. Russian athletes are riding a wave of recent success, at the expense of English football, and even American basketball. When the Los Angeles Clippers came to play CSKA a year ago, the Clippers lost by twenty points. When the U.S. Davis Cup tennis team came to Moscow a month later, they too lost to Russia. I thought that was very diplomatic of both of them. And when Condi Rice watched a group of wonderful young Russian figure skaters in Moscow last weekend, it was obvious that their talent will be a source of accomplishment for Russia for many years to come.
So that's the good news. The not so good news is something that Russians themselves need to face up to, and for which, as I said before, Americans do not pretend to have all the answers. Having said that, it doesn't do anyone any good to gloss over the problems that Russia faces today. Corruption is among the worst of these dilemmas. It has a corrosive effect on the rule of law, crippling law enforcement and judicial independence. Bureaucratism the growing power and size of the state bureaucracy and the sluggishness and opacity of its procedures is a dead weight on sustained, sensible economic development. State control of most of the electronic media, and pressures against freedom of expression and civil society, are troubling, and work against Russia's own interests. And demographic decline is a serious impediment to Russia's revival.
That is why the "what" questions that I mentioned before loom so large over the 2008 transition and the years just beyond it. If Russia takes advantage of the moment of opportunity opened up by high energy prices and recent economic success, if it translates that into sound long-term decisions and solid institutions, a great deal is possible, and all of us will benefit. If it does not if hard choices are avoided, power is hoarded, and time and money are wasted the missed opportunities will be a great loss for Russia and its remarkably talented people, as well as for the rest of us. History has a very unsentimental way of opening up moments of opportunity and then bringing down the curtain, and wise leaders and wise societies understand that.
Let me highlight very briefly five of those "what" questions, and how the growth of American business and economic ties can help in answering each of them successfully. First, what is Russia going to do to integrate more fully into the global economy? As all of you know far better than I do, this is not an academic question. The faster Russia enters the World Trade Organization and other key institutions, on the same terms and according to the same standards that apply to everyone else, the faster its industries will become more competitive, and the faster its economy will diversify. Russia is now on the last leg of what has been a very long journey with the WTO, and completion of multilateral accession talks is finally in sight. Following conclusion of our bilateral WTO agreement last year, which was in many ways the biggest single achievement in our economic relationship in the past decade, the United States has been working very hard with Russia to accelerate multilateral talks and complete accession. Russia has more work to do, in its own self-interest, to bring domestic laws and regulations into compliance with WTO requirements on protection of intellectual property and other issues. For our part, the U.S. will spare no effort to support Russian accession. The role of American business, of all of you, is crucial in making the case for WTO, and for removal of the Jackson-Vanik amendment, whose continued application would prevent all of you from taking advantage of the new and more favorable terms of trade that will come with Russian entry into the WTO.
Another dimension of integration is making U.S.-Russian trade and investment a genuine two-way street. I know there are questions on both sides about the accessibility of the other's market, with Russia in the midst of completing strategic sectors legislation and defining its rules of the road, and the United States updating its CFIUS procedures on certain foreign investments. The truth is that it's in both of our interests to clarify these measures quickly. And the further truth is that the American market remains one of the most open in the world. We have never turned down a Russian investment under CFIUS, and the revised procedures are meant to facilitate and streamline the process, not complicate it. Ours is an economy that thrives on its openness and connections to the rest of the world; in 2006 alone, new foreign direct investment into the U.S. totaled $161 billion the highest single-year figure since 2000. Russia's share of that is growing, with the $2 billion acquisition of Oregon Steel last year an especially impressive example. Much more is possible, downstream in the energy sector as well as in other areas.
In the meantime, American investment in Russia is expanding rapidly, up more than 50% last year alone. It's a phenomenon that is spreading well beyond Moscow and St. Petersburg, and that I have seen vividly on some 40 trips around the country over the last couple years, from Kaliningrad in the west to Chukotka, 11 time zones to the east and 30 miles across the Bering Strait from Alaska. The more American investment and business activity spreads, the more it helps Russia in the huge, historic task of developing Siberia and the Far East, as well as other parts of the country, and the more Russian business benefits from cutting edge business practices and technology.
A second, related question is: what is Russia going to do to diversify its economy beyond oil and gas? While it is true that high energy prices have been the main driver of Russian economic growth in recent years, the potential to diversify beyond hydrocarbons is substantial if the current moment of possibility is approached with vision and urgency. Even today, oil and gas exports amount to less than 20% of Russian GDP, compared to about 35% for Saudi Arabia, 30% for Venezuela, and 20% for Norway. When people think about Russia's economic future, they tend to think of what's in the ground, but the truth is it's what's up here, it's the tremendous potential of Russia's resourceful, creative and well-educated people, that sets this society apart from other countries which happen to be rich in natural resources.
Tapping that potential and building an innovative, knowledge-based economy will require great and sustained effort, in which the roles of the private sector and foreign partnerships will be crucial. Boeing's success in Russia is one powerful example. Impressive as the sale of more than three dozen 787 Dreamliners to Russia last year was, it is only part of a long-term, mutually-beneficial partnership. Boeing's Moscow design center, with its 1400 highly-skilled Russian engineers, is a vivid reminder of what Russia has to offer at the high end of the technology sector. And so is Sukhoy's development of its very promising "Superjet," a regional jet project in which Boeing and other partners play a valuable supporting role.
There are many other examples, across a range of sectors. International Paper's new joint venture will help Russia diversify beyond timber exports, a natural strength in a country which has on its territory 25% of the world's forests, and develop its wood and paper product exports. Dow Chemical's expanding operations in Russia will add value in petro-chemicals and other related sectors, an obvious opportunity for a country which today is the world's largest producer of oil and gas, but which has significant untapped potential in the processing industries that flow from that natural strength.
At the same time, American involvement in the energy, auto, consumer products and services sectors of the Russian economy is growing, in ways that benefit both of us. The partnership between Lukoil and Conoco-Phillips is a quiet but extremely impressive success story, paying dividends not only in terms of Russia's domestic energy development, but also in opening up new downstream opportunities and investments around the world. Russia has become one of the world's fastest growing markets for automobiles and consumer products. Companies ranging from General Motors and Ford, to Coca Cola and Proctor & Gamble, are helping to fuel Russia's economic resurgence and creating jobs across this huge country with more than 100,000 jobs in Russia today connected to American businesses and investments. American banks and insurance companies have much to offer, and much to gain, as the Russian economy modernizes. And the expansion of the economy is also multiplying opportunities in the hotel and travel industries, with the attractive hotel in which we're meeting today just one of the latest examples.
Let me turn to a third critical question: what is Russia going to do to improve its physical infrastructure? The Russian government's ambitious new spending plans reflect an awareness of the obvious importance of this issue, because the fact is that without such massive infrastructure investment, without rapid expansion and upgrading of Russia's roads, railroads, airports and seaports, modernization and diversification of the economy of this sprawling country will simply not happen. The same is true in power generation sectors. Here too the Russian leadership is taking significant steps forward, with reforms needed to improve electricity generation and distribution in place, and plans underway to rationalize rates, promote privatization, and attract private capital.
Affordable housing is another very large infrastructure challenge, especially as the middle class expands. There is much to be learned from the American experience over the last half-century or more both from our successes as well as our mistakes in promoting affordable housing, developing efficient construction techniques, and building mortgage markets. American experts look forward to participating, along with other specialists from around the world, in a seminar on affordable housing that the Russian government is planning to host in the coming months.
A fourth question revolves upon a different kind of infrastructure challenge, the most important part of any society's infrastructure: what is Russia going to do to protect and develop its human capital? Anyone who has spent any time in Russia, or who has studied Russia's history, cannot fail to be impressed not only by what the remarkable people of this country have endured over the years, but what they have contributed to human civilization. In the last century alone whether it's Pasternak in literature, or Shostakovich in music, or Chumakov helping to conquer polio, or Gagarin and the scientists behind him who launched Sputnik almost exactly 50 years ago and pioneered the exploration of space Russians have demonstrated creativity and scientific potential as impressive as those of any other human beings on the earth. But how do you develop that potential, how do you protect Russia's greatest resource its talented people without investing aggressively in the education and health care systems?
In large part, such far-sighted investment is the responsibility of the Russian government, which for the first time in two decades has the resources to devote to it. That is especially true in health care, where demographic decline could cripple sustained economic growth, and cause a stark drop in Russia's labor force. It is also true in education, where a proud tradition, especially in science and mathematics, needs urgently to be preserved. But the private sector has a crucial role to play, and foreign partners can do a lot. ALCOA's scholarship program in Samara is just one example, and the new MGIMO-University of Texas partnership, as well as the other U.S.-Russian university partnerships that our two Ministers of Education announced yesterday, show what governments can do to encourage this process. The efforts to combat HIV-AIDS and other infectious diseases of the Global Business Coalition, which is meeting in Moscow this week in cooperation with the USRBC, are another important example of what business can do to help deal with one of Russia's and the world's most urgent health crises.
It's becoming more and more obvious, in today's knowledge-driven world, that the measure of economic potential and the wealth of nations is more and more about human resources. As a recent World Bank study puts it: "Human capital and the value of institutions (as measured by the rule of law) constitute the largest share of wealth in virtually all countries."
That leads me to a fifth and final question, about still another kind of infrastructure challenge: what is Russia going to do to build modern economic and political institutions, to create the institutional infrastructure essential to sustaining its current prosperity and growth? Without such institutions, without the rule of law to protect property, without checks and balances to hold officials accountable at all levels, without stable and predictable regulatory and investment regimes, it's impossible over the long term to attract capital and know-how, or to ensure a healthy economy, or to realize the full potential of Russia's people and resources. How do you fight mounting problems like corruption, without an independent media and an independent judiciary to shine a light on abuses and deter them? How do you lessen the weight of a bloated bureaucracy without sustained administrative reform and greater transparency? These are not abstract questions of political or economic values, nor are they about preachiness or lecturing from Americans, for which I know Russians manage to contain their enthusiasm these days. They are questions for Russians themselves, first and foremost, and they cut right to the heart of whether or not Russia is going to realize its full potential as an economy and a society.
I know very well that building such institutions is not easy. It takes time, and there will be setbacks. American history is full of them. The Great Depression, for example, revealed massive vulnerabilities in our economic system and social and political institutions. It took the leadership of Franklin Roosevelt to address those massive problems but the genius of Roosevelt was less about personality and more about institutions. He understood that American institutions needed to be adapted and modernized, to rescue us from the Depression and avoid such traumas in the future. He strengthened a system of checks and balances which has generally served us well, and which limited his own room for maneuver during his Presidency, such as when his attempt to expand and "stuff" the Supreme Court in the mid-1930s was blocked by other branches of government. What Americans remember most about Franklin Roosevelt is not how many terms he served, which were not limited by the Constitution at the time, but his enduring legacy of leadership and the institutions he left behind.
It seems to me that it is the answers to those five "what" questions, as much as anything else, that will shape Russia's economic future, and the future of our economic relationship, over the next generation. Each of them is interconnected: integration into the global economy will spur diversification; diversification won't succeed without urgent attention to physical, human and institutional infrastructure; and today's problems, like corruption and bureaucratism, will eat away at Russia's potential without a sustained and serious effort against them. None of those challenges are easy, but Russia has before it a moment when it can deal successfully with all of them. It's entirely possible that Russia could become, as some predict, the fifth largest economy in the world within the next couple decades. It's entirely possible that Russia could diversify beyond hydrocarbons, and make its mark in other sectors, especially high technology. It's also possible to miss the moment, or fail to take full advantage of it. The choice is Russia's. For our part, for the United States and for American business, it remains profoundly in our interest for Russia to succeed economically, and I expect that trade and investment between Russia and the United States is going to continue to grow rapidly.
I mentioned at the outset that this year marks the 200th anniversary of U.S.-Russian diplomatic relations. Our relationship certainly began on a very high note two centuries ago. The first American ambassador to Russia was John Quincy Adams, who later became Secretary of State and eventually the sixth President of the United States. So I stand before you today as a living example of how far standards have slipped since then. But one thing that has not changed over the first two hundred years of our history together is the reality that we matter to one another, and to the future of global order, in a way that few other relationships do. As we begin our third century together, what also seems clear is that our economic ties are becoming a more and more important part of our relationship. Their growth will benefit both of us, for generations to come.
Thank you.