Russia’s global influence to a great extent depends on its role in the international division of labor. The country has mostly been a producer and supplier of raw materials – they account for nearly 80 percent of its exports. At the same time, Russia mostly imports high added value products (machinery, equipment, and consumer goods), and the balance of its export services and technologies has been steadily negative. Crude oil and gas (55 percent), metals (around 19 percent), and timber (around 5 percent) have been the main export commodities. The need to do away with the economy’s dependence on the export of natural resources has been a recurring theme in the president’s annual state of the union addresses, as well as in the government’s economic development programs.

What is wrong with specializing in the export of natural resources (mostly oil and gas)? Many analysts insist that the prevalence of raw materials amongst a nation’s exports can be used as a lever for exercising its global influence. Since the demand for oil and gas in the developed nations (the biggest importers of these commodities) is expected to grow, and Russia has the world’s biggest gas and oil reserves among non-OPEC member countries, it can become a stable supplier of oil and gas to the Western nations and China. This would facilitate Russia building a stronger economic relationship with the developed nations.

How justified is this strategy? First, the world is unlikely to face shortages of the main natural resources in the future, while the development of alternative energy technologies (such as fuel cells using hydrogen) could significantly change the demand for these commodities. Also, the currently favorable situation with oil and gas exports is due to market rigs and contingencies (irregular oil supplies from Iraq, Nigeria and Venezuela); it does not reflect shortages of energy resources. The unprecedented increase in global natural resource prices over the past five years is economically unfounded – they may remain at the same high level for some time, but Russia should not set its hopes on that.

Europe – the most diversified market in the world, with a high level of competition – remains the main consumer of exported commodities. The European Union – which accounts for nearly 98 percent of Russia’s exports of crude oil and gas to countries beyond the CIS – has declared the diversification of the sources of its oil and gas supply imports as a goal of its energy policy. In particular, the EU seeks to reduce its dependence on oil and gas imports from Russia (on account of the EU expansion, this year Russian oil supplies will make up 33 percent of Europe’s net oil imports, and gas supplies will stand at more than 50 percent).

Second, according to the existing foreign trade model, Russia’s domestic consumer demand is largely satisfied by added value created abroad. Dependence on the imports of high-quality equipment, technologies and consumer goods poses a threat to Russia’s economic security, and keeps it technologically undeveloped. This sort of specialization in foreign trade may eventually turn Russia into a second-rate economy, and Russians risk losing potential jobs for, as mentioned above, the bulk of added value (and, therefore, jobs) continues to be created abroad.

Is it possible for Russia to radically alter its role in the world economy? If the answer is yes, it will not be easy. The products of the Russian manufacturing sectors can most effectively compete in third-world countries. The demand for Russian weapons and military hardware is limited. The ongoing brain drain from the country seriously undermines the base for developing Russia’s hi-tech sectors. In terms of the key criteria determining a nation’s competitiveness (such as labor productivity and the efficient utilization of resources), Russia is lagging behind other emerging markets. The Russian food industry has been inspiring a certain degree of confidence recently, but this is a sector where Russian goods will inevitably face particularly tough protectionist measures abroad. Therefore, Russian food producers will be hard-pressed to find capacious markets outside the country. The situation can be alleviated only through international legal instruments, but Russia is still ‘disfranchised’ in international trade: due to disagreements with the EU, Russia’s accession to the WTO seems to be delayed for an indefinite time.

Incremental changes in expanding the exports from non-resources sectors are possible, though. But this can be achieved only if the state invigorates its structural policy, including by resolutely pursuing structural reform. Combined with Russia’s integration into international legal institutions regulating trade relations, this policy implies the support for competitive high-tech export sectors of the economy and creation of incentives for more efficient use of economic resources. So far, the debates about the industrial policy in Russia have led nowhere (the Cabinet prefers to stimulate economic development exclusively through tax and foreign exchange rates). Structural reform in the energy and transport sectors has virtually stalled. Besides, it has become obvious that the WTO is not particularly keen on seeing Russia in its ranks. The situation may gradually improve, but this will require an understanding of the country’s present whereabouts and will take quite some time. Meanwhile, the export structure has remained unchanged over the past seven or eight years.

DORMANT OPPORTUNITIES

Russia has a natural potential for fundamentally modifying its foreign trade structure since it is the only genuinely Eurasian nation. How realistic are the hopes that Russia’s role will change in the international division of labor? Russia’s geographic location as a transit nation is unique. The shortest transport routes from Europe to Central Asia and the Asia-Pacific region – the world’s key economic regions, with trade volumes between them and Europe steadily growing – extend across Russia.

Russia can be a competitive transit nation. Transit across Russia means the fastest shipments possible, compared with all of the alternative routes. There are also other advantages: Russian transport routes have a solid reserve of throughput capacity, while transit cargoes shipped via Russia cross fewer borders than alternative onshore routes.

Ignoring these potential reserves would be severe short-sightedness. However, this potential has not been tapped to date: currently, Russia’s export of transport services yields only around $3 billion.

How much will Russia benefit from its transit services on the Eurasian route? For many nations, export of transport services is a key source of foreign trade revenues. For example, the Netherlands and Hong Kong receive $20 billion and $13 billion respectively in export revenues from transport services. They have small territories yet they have successfully pursued strategies aimed at promoting the development of transport hubs, effectively serving transport flows linking the world’s major economic centers. They sell services that are comparable to, for instance, exports of oil, gas or metals (taken as separate groups of commodities) from Russia. As a result, the share of transport services is quite substantial in those countries’ national export structure, and they are on the top ten list of the world’s biggest exporters of paid services (Russia ranks 31st).

In December 2003, the Russian Cabinet approved a draft of the country’s new transport strategy. It provides for introducing dramatic changes in Russia’s foreign trade specialization in the coming 10-12 years. As a key element of this strategy, the government has set the goal of implementing the country’s transit potential by developing a network of international transportation routes running across Russia. These include:

– the Trans-Siberian corridor running from Russia’s Far Eastern ports to border crossings and ports in northwest Russia. This route is seen as an alternative to traditional sea routes used for container shipments from Southeast Asia around India and via the Suez Canal to Europe. Even without an upgrade, the Trans-Siberian route can provide for the shipment of up to 150,000 containers a year and yield up to $1 billion annually. In the future, its capacity may reach 300,000 containers with revenues reaching $2.5 billion a year. To bring the Trans-Siberian corridor into accord with modern requirements, line communications facilities will have to be further developed and Far Eastern and Northwestern seaports will have to be upgraded to link them with international services lines;

– the North-South corridor intended for shipments between the Persian Gulf nations, India and Pakistan across the Caspian Sea with Eastern and Central Europe and Scandinavia. Its potential annual capacity is 15-16 million tons of cargo, which could yield Russia more than $2 billion in revenues;

– the Arctic Sea route. Despite the technical difficulties of navigating the Arctic, geographically it is the shortest route linking Europe with the Far East and North America’s west coast. Potentially, in addition to cargo transit, it could carry Russian exported goods that are now supplied to Southeast Asia by the southern sea route via the Suez Canal.

Other transit projects call for opening ferry lines on the Caspian and the Baltic Seas, a corridor for supplies from the U.S. Pacific coast to northern China via Russian Far Eastern ports, and cross-polar flight routes between airports in North America and Southeast Asia.

By implementing the transit potential of the Eurasian routes, Russia would gain an extra $8-9 billion a year in 2007-2008, and $20 billion a year by 2015 (given the projected growth of shipments on the Eurasian routes). It means that transit services can, in fact, turn into a major source of export revenues, second only to oil and gas export revenues. Furthermore, Russia would receive a serious cushion against risks related to the potential deterioration on the world commodity markets. The conditions would be created for dramatically changing the country’s role in the international division of labor by turning it into a Eurasian transit nation. The opportunities for exporting Russian high added value goods to South Asia and the Asia-Pacific region – the fastest growing markets – would substantially expand. The development of the Eurasian transport routes would give an impetus to developing telecommunications, increasing manpower and cargo mobility, revitalizing industrial and business activities, and bring other economic benefits.

The international transport corridors program provides for building ports, terminals, railways and motor roads. Nearly 80 percent of the Russian population live in areas close to the international transport corridors, and the program’s implementation would create more than 100,000 new jobs there.

NEW COMPETITIVENESS STRATEGY REQUIRED

How can such a maneuver help modify Russia’s role in the international division of labor? For a country supplying raw materials to the world market, the threat of finding itself in the periphery of the world economy – or even in economic isolation – is much greater than for a country that is economically based on international freight traffic. There are many raw material suppliers to the world market, with new suppliers of oil (Kazakhstan, Brazil, Gambia, and Angola) and gas (Trinidad and Tobago, and Qatar) emerging today. Competition has been increasing in the commodity markets. If Russia builds international transport corridors, it will be able to cancel the negative balance of its export services and generate a steady demand for services produced in Russia – with subsequent growth in jobs, capital inflow, etc.

Until now, however, the Trans-Caucasian nations, above all Georgia, have led the way in this sphere. Lacking generous natural resources, but being favorably located for transit, Georgia has drawn the attention of the major global geopolitical players – the EU and the United States – and is now assigned a key role in the ambitious Eurasian transit projects – TRASECA and the Baku-Tbilisi-Ceyhan oil pipeline. Unfortunately, those routes bypass Russia.

Already today, competition for future Eurasian freight traffic is increasing. The TRASECA project, for example, has been launched on the initiative of 14 countries, together with EU support. Initiated in 1994, this project is aimed at creating a Europe-Caucasus-Asia complex transport corridor that will run along Russia’s southern borders and bypass its transport facilities.

The main rival route is via the Indian Ocean and the Suez Canal. Even though it offers a substantially slower shipping rate, this route has undisputed advantages: it produces no problems associated with trans-shipping, border and customs control. Unless there emerge serious problems around the Suez Canal’s throughput capacity in the near future, the route will be virtually beyond competition for Eurasian shipments. But for cargoes requiring rapid shipment, land routes have no alternative. In this respect, TRASECA is the primary rival to the Russian transit network.

For a number of reasons, Russia presently cannot offer a more competitive route. Two reasons look particularly important. First, the existing transport system needs modernization. Its network of highways and terminals has low efficiency and requires an annual investment of approximately $2 billion; the state will have to provide the funds for capital investment in the core infrastructure, as the rates of return are low while risks are particularly high. To motivate private investors, special legislative instruments (concessions, long lease) and tax regimes, which are now lacking in the Russian legislation, will have to be applied. The present railway management system is so archaic that shipment by rail is four or five times slower than it should be, given its high potential (the nominal cargo shipment speed is high). This situation nullifies all the advantages of shipments across Russia, and provides another argument for the reform of the railway transportation system which would make it a separate responsible sphere of business. This system should be able to adequately serve any cargo carriers – not just those of the Russian Railways Co.’s – on nondiscriminatory terms.

Second, the legal regulation for transit cargoes has to be modified. Border and customs procedures must be facilitated, while controls for ensuring safe shipping must be increased. High cargo safety risks, together with the unpredictable actions of the border and customs authorities, remain the main obstacles to shipments across Russian territory, prompting shippers to give preference to other transport routes.

Russia has much to do in order to improve its image in terms of the freedom of shipment; it should reject the strategy of monopoly on transport flows and replace it with a competitive strategy. It should make its transport services market attractive. Certainly, it is inadmissible to take advantage of control over transit in order to attain geopolitical goals. It was not accidental that when launching the TRASECA project in the mid-1990s, the EU officials openly stated that the project’s goal was to create a serious alternative to Russia’s transport monopoly, which had emerged in Soviet times, and strip Russia of the possibility to block supplies to Europe (as it happened, for example, when borders with Azerbaijan and Georgia were shut in the wink of the 1994-1996 Chechen war). Any speculation on Russia’s geopolitical intentions will harm its prospects for creating a Eurasian transit corridor.

The benefit of Russia becoming a full-fledged Eurasian economic power is obvious. Therefore, the idea of a Eurasian transit corridor running through Russia deserves the special attention of the government. Remaining idle on this subject would mean missing an opportunity for promoting Russia’s economic development in an extremely promising sphere of international economic specialization.