Impressions of the Saint-Petersburg International Economic Forum

I am currently in St. Petersburg where I have attended the St. Petersburg International Economic Forum. Before saying anything further I wish to thank Peter Lavelle of RT TV for very kindly and very generously arranging my invitation to the Forum.

At the Forum I attended three roundtables:

(1) On the InfoWars brilliantly hosted and moderated by Peter Lavelle. I was a participant in this roundtable an edited version of which RT will broadcast and which will be shown in full on RT’s YouTube channel. Since I participated in this roundtable I feel it would be inappropriate for me to say more about it now save (1) that I am very grateful to Peter Lavelle for inviting me (2) that the discussion was outstanding and I would strongly urge everyone to see it either on RT or on YouTube and (3) that I was lucky enough to be befriended by other members of the panel including Pepe Escobar, John Laughland and Ben Aris who I have long known from their writings but whom I never expected to meet. I intend to save any further comments about this roundtable until others have had a chance to see it on RT and YouTube.

(2) On investment strategies in Russia on the part of sovereign wealth funds. The roundtable was hosted and moderated by Alexei Kudrin. Ding Xuedong, Chairman and Chief Executive of China Investment Corporation participated.

(3) On incentives to stimulate domestic Russian capital flows into the Russian economy. Elvira Nabiullina the Governor of the Central Bank was a participant.

I also attended the Forum’s plenary with Putin himself where he gave a lengthy speech, which was followed by an interview that was broadcast on television.

Here are my initial observations of the Forum (save for the roundtable with Peter Lavelle):

On China and Russia

This overshadowed the entire Forum. The Chinese were present in force with the Chinese Vice President and the Chairman of China Investment Corporation (China’s sovereign wealth fund) both present.

I know of no case where two countries have reached bilateral economic agreements on such a scale and of such scope. The Chinese Vice President described it as a “general strategic partnership”. As I have explained elsewhere, China and Russia will not enter into a formal alliance since that is in the interests of neither. De facto allies is however what they are. In reality the level of economic, foreign policy and security cooperation (and coordination) between them is far greater scale than was the case in the 1950s when they were formally allies but in reality in a very uneasy relationship with each other.

This is a major geopolitical shift. Others have noticed and the Forum was buzzing about it. An Indian businessman at the plenary spoke of his anxiety that India should not to be left out. Putin confirmed that he will be meeting Modi shortly.

As to what has brought China and Russia together, the short answer is naked mutual self-interest. Despite ritual pieties about the importance of free trade Ding Xuedong made it abundantly clear that China’s trade policies remain fully mercantilist with China planning massive investments in Russia’s natural resources and extractive industries (including metals) to meet its own needs with refining and processing however happening in Russia. Personally I find this straightforwardly self-interested approach reassuring. I distrust interstate relationships that purport to be based on ideology or sentiment. In my opinion those underpinned my mutual self-interest are always more healthy and tend to be more equal and long lasting.

Ukraine

Putin’s comments have once again been grossly over analysed. In reality he said nothing new or that he has not said before.

Contrary to what some say Putin has never demanded that the Presidential election on Sunday should be postponed. Nor has he ever said that he would not recognise the outcome. On the contrary as a practical man he has always made it clear that he will deal with whoever comes (almost certainly Poroshenko). Similarly as a realistic and practical man he has accepted the reality of Yanukovitch’s fall even though as he pointedly reminded everyone according to the Ukrainian constitution Yanukovitch is still the Ukraine’s legitimate President.

The mistake people always make is that they confuse Putin’s acceptance of the reality of the Ukraine’s Presidential election with the entirely separate question of its legitimacy. As Putin pointed out since Yanukovitch remains according to the Ukraine’s constitution the Ukraine’s legitimate President the election that is taking place in the Ukraine on Sunday is illegitimate under the terms of the Ukraine’s constitution.

The reality as Putin knows is that as with the Donbas referendum the question of whether the Ukraine’s Presidential election is legitimate or not will be decided not in Moscow or by other outsiders but in the Ukraine itself.

The overemphasis on Putin’s attitude to the election (which derives from a wholly mistaken idea that he has sought to prevent it) has detracted from Putin’s other comments about the Ukraine.

1. Putin made it utterly clear that he considers the crisis in the Ukraine to be entirely the fault of western policy and in particular of the aggressive expansion of the western sphere of influence in a way that pays no regard to Russia’s legitimate economic and security interests or to the feelings of a large section of the Ukraine’s people in the south eastern Ukraine, first and foremost in the Donbas;

2. That the objective of Russian policy ever since the outset of this crisis is talks between the Ukrainian parties to achieve substantive constitutional change;

3. That for these talks to succeed Kiev must bring the “anti-terrorist operation” to an end.

Sanctions

Putin made a comment I personally found especially interesting on a point I had actually discussed the previous day immediately after Peter Lavelle’s roundtable with John Laughland.

Briefly, I am far from sure of the legality of the sanctions the EU has imposed. Unlike the sanctions on Iran, the sanctions the EU has imposed on certain Russian individuals and companies have not been authorised by the UN Security Council. I am not at all clear on what legal basis or authority the EU has imposed them.

I was very interested to see Putin make the same point and urge the private individuals and companies the EU has sanctioned to challenge the sanctions in court.

In the autumn the European Court of Justice ruled illegal the sanctions the EU had imposed on various Iranian individuals and companies that had no discernable link to Iran’s nuclear programme. Putin pointedly said that none of the individual Russian businessmen and companies the EU has sanctioned had any role in formulating Russian policy towards the Ukraine or the Crimea. On the face of it they would therefore appear to have the same argument in their favour that the sanctioned Iranian business people and companies did. In the case of Kiselev, the head of Rossia Sevodnia, he arguably also has a claim that the sanctions imposed on him are an unwarranted restriction on his right as a journalist to express himself freely pursuant to Article 10 of the European Convention of Human Rights.

There is also the question of the entire legal basis upon which the EU is purporting to impose sanctions. In contrast to all other sanctions regimes in which the EU has engaged (including those against Iran) the sanctions against Russia and against Russian individuals and companies have not been authorised by the UN Security Council. Whilst I accept (though I do not know) that the EU may have power under the treaties to order member states to deny visas to given individuals I am wholly unaware of any power the EU possesses to order asset freezes as against individuals or companies who are not subject to sanctions imposed by the UN Security Council and who have not been found guilty of any criminal offence. An asset freeze is in effect a form of confiscation of property and thus a type of punishment so on the face of it the asset freezes the EU has imposed on Russian individuals and companies who are not the subject of sanctions ordered by the Security Council and who have not been found guilty of any criminal offence in any court of law look like a violation of the fundamental legal principle that there can be no punishment without law.

When I discussed the question the previous day with John Laughland he told me that he has obtained a written opinion from a prominent French jurist who advises that the EU’s sanctions are indeed illegal. He has generously offered to send it to me. There may be confidentiality issues involved however which may limit my ability to discuss it in a public forum such as this.

I should say that sanctions imposed by the US are an entirely different matter. I have little doubt of their legality unless they violate WTO rules, which they may do but about which I know little.

The economy

Both Kudrin and Nabiullina made clear that the key to Russia’s future economic development is unlocking domestic investment. I have discussed this at length in many places.

First to Kudrin. He has made various criticisms of Putin and of the policies of the Russian government in the recent past and he often comes across as a committed, even fanatical, free market fundamentalist. At this Forum however he came across instead as a fully committed and onside team player. The roundtable he chaired was all about using long term investment from sovereign wealth funds (including and above all Russia’s) to develop strategic sectors of the Russian economy (especially infrastructure) where immediate short term profits are not to be made.

Nabiullina once again explained the central bank’s anti-inflation strategy, which I have discussed previously before. Once again she made clear that reducing inflation is in the central bank’s view the key to unlocking domestic investment. A few further points:

1. Nabiullina confirmed that the central bank’s medium to long term inflation target is 4%. She actually made it clear that the central bank would act to raise inflation if it fell below this level. According to her 4% inflation is pitched at the right level to make long term lending attractive whilst allowing space for the economy to breathe.

2. Inflation fell steadily throughout 2013. Since the start of the year there has however been another inflation spurt, which has obliged the central bank to tighten monetary policy even more. The reason for this was the decline in the exchange rate caused initially by the US Federal Reserve’s monetary tightening and later by the Ukrainian crisis.

Though Nabiullina picked her words very carefully I gained the distinct impression that the central bank in the end decided to use the Federal Reserve’s monetary tightening and the Ukrainian crisis as an excuse to let the rouble fall. Given that inflation in Russia has been consistently higher than in the countries Russia trades with it would not be possible to maintain the level of the rouble without a loss of competitiveness. The central bank appears to have decided to accept a shot term hit in its anti-inflation policy as a price worth paying for a rouble correction that would make the economy more competitive whilst strengthening the budget and the trade balance. Nabiullina seemed confident that any ground lost on the inflation front would be made up quickly over the balance of the year. She predicted an eventual yearly inflation rate of no more than 6% this year with 5% next year. She also explained the high capital outflow in the first quarter as being caused by the fall in the rouble’s value (rather than vice versa) and said that with the stabilisation in the rouble’s value in April capital outflow had fallen drastically that month to just $4.2 billion.

3. Nabiullina and Alexander Afanasiev, the head of the Moscow Exchange also gave a detailed account of various technical steps being taken to clean up the Russian financial services industry to make it more effective and capable of discharging its role to provide the economy with investment. Both were under no illusions of the complexities involved but both seemed to have a clear idea of what they wanted and needed to do.

I was impressed by Nabiullina. She is physically small and intense but she is very clear and authoritative and has all the facts at her fingertips. When two bankers (both American educated as they proudly told us) challenged her that regulation was bad and unnecessary and that the only role for government was to subordinate everything to the market she had no difficulty swatting them away like flies.

Putin

This was the first occasion I have been in the same room as Putin and seen him in action and he made an astonishing impression.

Putin is not a natural orator and doesn’t pretend to be. I struggled to remain focused through his long introductory speech. When he finishes with a peroration it falls flat. When interviewed however it is an entirely different matter. Television simply does not do justice the confidence and humour he brings. At a time when western leaders have never been more filled with self-importance they must find his intelligence and mockery infuriating. If Putin is like that in private he must be fun to work with, which doubtless explains the intense loyalty of his team.

One example of his sheer virtuosity will have to suffice. For me the single funniest moment amongst many came in the part of the interview that dealt with Edward Snowden. Putin first mocked the Americans for scaring off all the countries in the whole world from enabling Snowden to travel to them. He ridiculed the Americans for forcing down aeroplanes with Presidents on board. He cynically (but rightly) pointed out that if the Americans had no behaved in this way and Snowden had been allowed to travel to these countries the Americans could have caught him and he would now be in an American jail. Putin then said that this meant that Snowden was forced to claim asylum in Russia. He then bragged that, “Russia never hands over a human rights activist”. After this provoked a roar of applause he finished by pretended to correct himself by saying that it is Snowden himself who claims he is a human rights activist.

The audience (made up of businesspeople who are not Putin’s natural constituency) loved it. So did the Chinese Vice President. He burst into a smile as he said in his concluding remarks that what Putin had said would be favourably noticed in China.

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