The transformation of international trade has significantly picked up pace as of late. Sanctions and protectionism (and its rather aggressive variant used by the United States) prompt states to create alternative institutions and integration alliances based on the principles of liberalism, equality and openness.
Acting together is the only way for states to withstand such a disturbance of the balance in the global trade system and satisfy their interests.
Integration initiatives emerged a long time ago and are now developing successfully: the global geopolitical space is permeated with a network of regional integration groups. The number of such groups is growing, and their trade ties are becoming deeper.
Compared to Europe, the Asia Pacific, Latin America and other regions, the post-Soviet space has far less experience of the type of integration known as “international economic integration.”
The situation is certainly changing. The founding of the Eurasian Economic Union (EAEU) and its work towards concluding free trade agreements have introduced adjustments to existing trade relations. However, since the EAEU was founded in 2015, only one full-fledged free trade agreement was signed with Vietnam.
The EAEU and MERCOSUR: Institutional Grounds for an Alliance
The agreements concluded with Vietnam, China and Iran suggest that the basis for a new stage in moving into Eastern markets has been formed.
The EAEU’s trade cooperation with MERCOSUR, the world’s third largest and third most influential trade bloc, could become a very profitable strategic alliance. The market potential of Latin American countries is tremendous, and it is unused today.
If mutually beneficial terms of cooperation are achieved, such an economic alliance could have every chance of becoming a mega-bloc and, most importantly, the embodiment of a new model that is based on best and more advanced practices.
The EAEU’s trade and economic dialogue with a Latin American partner could occupy a unique place in the structure of global economic cooperation as a whole. It would make it possible to overcome certain limitations in inter-country economic cooperation and use regional “economies of scale.”
Together with regional integration alliances, this structure could serve as the missing link in the “South–South” cooperation line and resolve the so-called “gaps” in the cooperation balance. The problem of the global economy we are now part of stems from the sharp transition from bilateral economic integration to mega projects. Countries do not have enough time to find their bearings and amend their national legislation, and this often slows down the dialogue on establishing global institutions.
The Advantages of Cooperation between the EAEU and MERCOSUR
An integration dialogue between MERCOSUR and the EAEU would allow the EAEU to solve the task posited to all its member countries, one that is similar to MERCOSUR’s own strategic goal of finding its rightful place in the so-called “sixth technological order” where leading positions will be held by countries that actively use the “ten emerging technologies”.
In this regard, the specific features of MERCOSUR, whose member countries have historically never received large-scale technology transfer (as happened, for instance, in the United States) and consequently formed a “secondary” model of innovative development that is mostly associative and fragmentary and has large areas of stagnation, are of particular interest in terms of building business ties with EAEU companies.
The advantages are mutual.
The Eurasian Economic Union started developing contacts with Latin American countries back in 2012. The first arrangements on cooperation were achieved with Chile, an associate member of MERCOSUR.
Later, the Commission signed a memorandum on cooperation with Peru, also an associate member of MERCOSUR.
In late 2018, the Eurasian Economic Commission (EEC) and MERCOSUR signed a memorandum on cooperation in trade and economy on the side-lines of the MERCOSUR summit in Montevideo (Uruguay).
Promising Areas of Cooperation
The FTZ+ trade agreement format would appear to be the most suitable institutional basis for deeper economic collaboration between the EAEU and MERCOSUR. Such an agreement would involve in-depth integration, emphasizing reduced non-tariff barriers, an improved regime for trade in services and investments, measures to increase trade, regulatory alignment and standardization, and, most importantly, identifying promising areas of cooperation and creating special conditions for individual projects
Without dwelling on such obvious contractual components as zero duties, customs cooperation, technical barriers in trade and sanitary and phytosanitary measures, etc., issues are proposed for consideration that may be debatable as far as the readiness of the parties to implement them is concerned, yet at the same time constitute particularly advantageous areas for mutual development.
Both the MERCOSUR and EAEU countries are interested in developing the following areas: marine research; bioeconomics research; renewable energy sources; etc.
Given the common interest in developing the above-stated areas, the strategic tasks of tapping the markets of MERCOSUR for EAEU businesses may be implemented by building similar institutional mechanisms.
The issue of technology transfer (TT) and innovations becomes ever more pressing, both on the bilateral level and on the level of global trade relations. With increasing frequency, this item is being put on the agenda of global forums such as the United Nations (UNCTAD), the World Trade Organization (WTO) and the World Intellectual Property Organization (WIPO).
MERCOSUR countries are also actively working in this area. Initially, the general policy on technology transfer was based on the South Korean model, with innovations introduced in major companies.
The trade aspects of e-commerce should clearly become a fundamental issue. The greatly increasing data flow in the cost and supply chain and the rapidly growing digitization of global trade that now involves millions of customers make this issue a priority.
Vectors of Collaboration between the Leading Countries in the EAEU and MERCOSUR
The research activities of individual MERCOSUR countries, for example Brazil (the organization’s economic leader), creates opportunities for implementing joint investment projects (for instance, in the mining industry).
“Joint manufacturing of machine tools in Russia is another promising cooperation project that in which Russia is greatly interested.”
However, some experts note that the positive dynamics in the export of technological solutions is very weak due to the outdated contractual framework for cooperation between countries. The present scale of the presence of EAEU companies and the pace at which joint projects in innovations are developing are linked to the low level of state support for exports, unstable partnerships that in many cases stem from the absence of a long-term legal basis, and inconsistencies between collaboration plans and programmes and real results.
Summing up, we can confidently state that the integration cooperation between the EAEU and MERCOSUR could become an example of a radically new cooperation format based on a FTZ+ trade agreement. The advantage of such cooperation will lie, among other things, in a “technological step forward compared to territorial and exclusive regionalism.”
It is apparent that the integration of integrations requires the creation of a contractual framework for the emerging trade and economic alliance. Such a framework could develop a network of promising joint projects buttressed by independent institutional platforms for each strategic area, which will create a micro-level foundation and thus boost the macro-level potential of the integration alliance.
Fitting such collaboration formats into the traditional order of the functioning of FTZs might shift the emphasis from trade liberalization to building a foundation for integration and cooperation.
A “pin-pointed” search for possible production collaborations and bilateral investment initiatives could become an effective way for pooling the parties’ efforts. The basis for deepening existing projects and launching new ones is already in place: major Russian companies are working actively in joint projects being carried out in individual Latin American countries and the Caribbean: Rostec, Rosneft, INTER RAO UES, Power Machines, KAMAZ, Russian Helicopters and VEB.
Ultimately, the performance results of such an intercontinental trade and economic project will depend on how effectively the strategic bilateral projects that are intended to ensure cooperation synergy and liberalize mutual trade are coordinated.
First published in our partner RIAC
Russia’s ‘Growth-Stability’ Dichotomy
Russian economic growth has underperformed the global average almost every year since the 2008-09 financial crisis. But it’s far from a homogenous pattern: in fact, since 2017, there has been a pronounced trend toward increasing divergence across the main sectors of the Russian economy. This has been significantly accentuated by the Covid crisis. The sectors exhibiting the highest growth appear to be those that benefit from Russia’s relative macroeconomic stability and are less sensitive to the country’s lack of growth momentum. This rising differentiation in growth across sectors has important implications for investment strategies, as we expect growth in sectors such as IT, agriculture and financials to continue to outperform the rest of the economy.
Since the 2008-09 financial crisis, Russia’s economic growth has underperformed the world’s average almost every year, with notable gaps observed versus the rest of EM and the CEE region throughout the past decade. The sluggish growth performance was partly attributable to the structural deficiencies, external factors, but also in no small degree to the macroeconomic policies that favoured the maintenance of macroeconomic stability over attaining high growth rates. The priority accorded to securing macroeconomic stability was in particular embodied in the operation of the fiscal rule within the fiscal policy framework, as well as inflation-targeting in the monetary sphere.
Indeed, the growth-stability dichotomy in Russia’s economy is a feature that has persisted for an extended period due to the frequency and intensity of crises erupting over the course of the past decade. After a period of attaining high growth rates in 2006-07, the paradigm of Russia’s economic policy shifted towards prioritizing macroeconomic stability after the global financial crisis of 2008-09. The geopolitical perturbations of 2014 and the most recent Covid crisis have served to reinforce this policy focus. While Russia has certainly had its periods of strong growth in the past several decades, the intensity of the external headwinds over the past 12-13 years has tilted the balance between pro-growth and pro-stability policies in favour of the latter.
Another dimension to the “growth-stability” dichotomy in Russia is the significant emphasis placed in economic policy on securing high levels of reserves. The lack of conversion of these sizeable reserves accumulated by Russia into boosting economic growth has been due to a number of factors. One was the lack of institutional capacity to ensure an efficient spending of fiscal reserves on large-scale infrastructure projects. This in turn was compounded by the pre-cautionary motives associated with concerns regarding the effects of economic crises (2008-2009 crisis) and geopolitical shocks (2014 crisis episode). As a result, Russia stands out across EMs as an economy with among the lowest fiscal deficits and government debt levels, while at the same time exhibiting a combination of high reserves but low economic growth. This pattern contrasts with the one observed in some other emerging economies during crisis periods, at which time greater efforts were made by EMs to boost growth at the expense of higher deficits and debt levels.
During the Covid crisis this pattern was yet again replicated as Russia exhibited greater caution in unleashing anti-crisis measures compared to many developed and emerging economies.
But while Russia’s overall economic growth has been rather modest in recent years — particularly since 2014 — there has been a rising asymmetry in the growth across Russia’s sectors. Over 2012-16, the divergence in growth across sectors was stable or gradually declining (except in 2015-16, when the economy was hit by the drop in oil prices and sanctions). However, the divergence began to grow markedly in 2017, and was later on significantly magnified by the Covid crisis.
Indeed, the Covid crisis generated notable differentiation across sectors as some were disproportionately affected by the pandemic and quarantine measures (tourism, travel), while others were given a major boost (telecommunications, IT and computer services). Russia’s macroeconomic policy, including sectoral taxation patterns, may have contributed to the differentiation patterns observed throughout the economy. Apart from Russia-specific factors, global sectoral factors may have also contributed to the patterns observed in Russia — in particular the rising dichotomy between manufacturing and extraction industries on the one hand and the services sector on the other.
As a result, sectors such as financials and IT have been increasingly diverging from the lacklustre performance in the transportation, construction and public sectors. The oil and gas and agricultural sectors have occupied the middle ground, broadly reflecting industry-specific and global factors. Overall, services such as finance and IT exhibited improved growth performance in 2016-19 compared to the 2011-15 period, while extraction of raw materials and transportation were among the sectors with deteriorating growth dynamics.
One of the best performers in recent periods has been the financial sector, which benefited from the organic growth in the sector via increasing financial penetration, as well as the significant expansion in the array of services offered to the population. Most importantly, however, the high real interest rates sustained by the CBR to maintain macroeconomic stability resulted in the greater attractiveness of investment in financial instruments than capital investment. The high real rates incentivized investment in financial instruments at the expense of the real sector.
The above observations concerning sectoral growth patterns suggest that greater differentiation across Russia’s sectors may be warranted in devising top-down investment strategies. If the current prioritization of macroeconomic stability were to persist, sectors such as IT, agriculture would be well positioned from a top-down perspective. Finally, it is important to note that the outperformers from the services sector that benefit from Russia’s growth-stability dichotomy also exhibit relatively good scores in the ESG ratings, most notably compared to the natural resource sectors. As investors increasingly focus on ESG issues, the longer-term implications for sectoral growth performance may prove significant.
From our partner RIAC
Virtual-Reality Leaderships Await Digital-Guillotines
When national leadership starts acting more as if Virtual-Reality based illusionary leadership games, it calls immediate testing to ensure digital future of the virtualized economies of the nation. Just as billion mile highways need cars, trillion-node digital highways need smart digitized enterprises. Just as highways and transportation need qualified Ministries dedicated to control national mobility, similarly digital platforms economies need virtualization; layers of platforms, hyper-interactive, live in action, motion and execution, floating on global digital arenas and creating mini-micro-mega trade opportunities and serving the common good of the world. Futurism demands futuristic literacy.
If there are some 200 nations outside a miniscule number, most nations along with their ministries and government departments already crushed under the weight of their own bureaucracies. Translated into simple language; when a single piece of urgent and serious business-trade query enters any government office building, decked with thousands desks and many thousands of filing cabinets, expecting quick response within a few days, if lucky may get some broken answer in many months. Those who slowly circumnavigate the world, require no proof on this, those educated exclusively on social media allowed screaming in denial. There are many such office buildings, each with many floors, in each city, in each nation. Some billion people occupy such global bureaucracies, strangling their own nations and stealing their own future from their next generations. Visible in open daylight, the barren landscapes, untapped resources, wasted talents lingering as wasted over a century. Today, against tidal waves of almost free technologies and digitalization, we need quick do or die solutions.
The cruelty of incompetence fermenting on mahogany furniture in dark offices now needs digital-guillotines.
The Paper-Processing-Age created Bureaucracies, Rubber-stamps glorified and corner offices mesmerized the fermentation process of incompetency and guaranteed permanence of seniority as gold standard. Like a tsunami, “digitization” is now bureaucracy free, office-free and tantrum free, only measured precisely in right columns with right amounts and ‘true’ numbers to evaporate filing cabinets and desks. Productivity, performance and profitability are what have been missing the last few decades bringing nations to their knees. The future of governments now measured by meritocracy will rule and manage future economies; the rest will stay hidden in the fog of confusion.
Over a century ago, H.G. Wells wrote about aircrafts and Jules Verne, the submarines. Now, we live in a time where digitally floating enterprises and virtually accessible national economies must thrive. Now, is the turn of our times to optimize our ‘mental powers’ functioning way above automation, performing our intellectualism over mechanical robotization and achieve superior commercialization while considering diversity, tolerance and common good? Now is the time to claim our rights, design our economies and better sustainable lifestyles. A brighter future waits.
Nevertheless, within the coming years, elimination of bureaucracies, digitization of enterprises and virtualization of economies will quadruple performance on a national basis for most nations; unfortunately, getting this thinking may take another decade for many other nations. Observe their starving children.
As a crude and only available measurement, amongst the 190 nations of the world, there are only top 20 nations where *GDP Per-Capita-PPP is about USD$50,000 and more. Everyone else is lower, as an example, a sample of 50 nations, where their per capita is USD$5000 or $13.00 per day. Now observe their governments, their Ministries, Institutions, Trade Associations, Chambers and various government agencies are deeply stuck in the last century, robbing their own future. Disconnected with global age, now clearly visible all across their front line teams points to continued financial calamites. Any 10% to 90% elimination of bureaucratic ponderings, indecisive floor-by-floor rubber stamp approval dances will quadruple their national performances. Nation-by-nation, strangulations due to the lack of decisive skills now make bureaucracies the most backward frontier left in critical need of upskilling and reskilling realignments, to stand up to global standards of productivity. Therefore, across the board, national economies must qualify at specified speed and accuracy with due diligence to attract FDI, collaborations and alliances to survive in global-age. Local political parties scared of their own re-elections will never tackle such issues. Immediate testing of any frontline management team of any top departments will expose the gravity.
The biggest tragedy is that all of these nations have unlimited talents, great minds and great skills potential, but crushed by bureaucracies, in darkness mode, where sun never rises, where digitization is feared for fears of exposing competency levels. The Covidians of the new post-vaccinated world with new thinking now have a real chance to ride out the storms, bring mega changes, and create highly efficient economic models. No country without national mobilization of hidden talents of entrepreneurialism on digital platforms of upskilling to foster exportability and outbound exposure will survive. This is what Silicon Valley did; study slowly to deeply appreciate the process.
Upskilling as a mandatory testing requirement drowning in crypto-economies and fictionalized as success ignoring tent cities, nation’s biggest losses hidden in the untapped entrepreneurialism of the national citizenry. Study more on Google, how business education actually destroyed businesses across Western economies.
Rules of economic revolutions:
Do not fix, just break it, and start on a new page.
Do not fire, upskill them, bring a brighter future closer.
Do not fumble, upskill yourself, become a lifelong learner.
Do not fail, there is no plan B, economic damage now commonplace.
Do not runaway, take a stand; there is no other way out.
Do not deny the bright future to your next generations.
There are some 100 national elections scheduled within the next 500 days… national leadership must demonstrate their literacy to read futurism. Identify their local teams with the right expertise to address national challenges, urgently respond with right answers, and develop clear narrative to address realities. Expothonis tabling a new agenda, in a global debate series with global experts on such bold issues to advance the discussions on such mega-change processes.
The strategy: The Covidians, survivors of bankruptcies, body bags have little or no tolerance for bureaucracies and with free rains of technology have no patience for paper-based-sluggish and dysfunctional economies. Citizens will vote for real and pragmatic truth. National leadership must face the music and learn to tango: Eliminate bureaucracies, virtualized economies and carve straight paths for climate control protocols.
Is this a perfect storm in the making or a new sunrise of the early spring?
The rest is easy
Suez Canal Shutdown revealed the importance of the Middle Corridor
On March 23 of 2021, a container ship called the “Ever Given” ran aground in Suez Canal, one of the most important waterways in the world, and blocked other vessels from using it. This human-made waterway is one of the world’s most heavily used shipping lanes, carrying over 12% of world trade. This canal is also responsible for the transportation of 7% of the world’s oil and 30% of daily container shipments. Therefore, the blockage of the canal has considerably affected global trade. According to Lloyd’s List, a London-based shipping news journal, the estimated daily value of cargos passing through the canal is $9.7 billion, with $5.1 billion traveling westward and $4.6 billion traveling to eastward directions. The incident forced some ships to use the alternative route around Africa’s southern tip, which is dangerous and increases the transportation costs and time.
Shipment delays because of the incident in the Suez Canal also negatively affected the already-disrupted global supply chain. Since the start of the pandemic, shipping delays and shortages have considerably strained the global supply chain. As the commodities become increasingly difficult to obtain and produce for the companies, customers face limited options and higher prices. Several big companies such as Nike, Honda, and Samsung have already expressed that supply-chain issueshavesignificantly impeded production volumes. Thus, the blockage of the canal made the supply chain crisis even worse.
Almost a week after the “Ever Given” halted the canal, on March 29, it became possible to free the vessel and the Suez Canal opened for business again; tugboats managed to refloat the stuck vessel away from the canal’s sandy bank. During the blockage, at least 367 vessels were left waiting for the canal to be unblocked. However, it remains unclear when the traffic in the canal will return to normal, as it will take a couple of days to clear the backlog of ships. Some experts have estimated that it could take more than 10 days.
Despite the fact that the canal was freed, it has raised questions on the risks of the world’s overreliance on this route. The economic damage of the blockade of the Suez Canal proved the fragility of global transportation architecture. This in turn brought up the issue of the development of alternative land or maritime transport routes. Hence, after the incident, Russia and Iran have called for the need to find alternative shipping routes, especially recalling potentials of the Northern Sea Route (NSR) and International North-South Transport Corridor (INST).By explaining the reasons for considering the NSR, on its official social media account Russian state company Rosatomflot declared that rapid melting of the Arctic and the existence of powerful Russian icebreakers improve the accessibility of the North Sea, which could become an alternative to the Suez Canal. Iranian officials, on other hand, called for the activation of the INSTC as a reliable and “low risk” alternative.
The other alternative route that has the potential to become one of the mainland routes for the transportation of goods between Asia and Europe is the Trans-Caspian East-West-Middle Corridor Initiative, shortly called “The Middle Corridor”. This corridor is considered as one of the most important routes in reviving the ancient Silk Road. The Middle Corridor begins in Turkey, passes through the territories of Azerbaijan and Georgia, crosses the Caspian Sea, reaches Central Asia, and extends to China through the Turkmenistan-Uzbekistan-Kyrgyzstan or Kazakhstan routes.
The formation and development of the Middle Corridor began after the November of2013, when as a part of the II International Transport and Logistics Business Forum “New Silk Road” in Astana, the leaders of JSC “National Company” of Kazakhstan, CJSC “Azerbaijan Railways” and JSC “Georgian Railway” signed the agreement on the establishment of Coordination Committee for the development of the Trans-Caspian International Transport Route. In December 2016, the participants of the Coordinating Committee decided to establish the International Association”Trans-Caspian International Transport Route”, which started its activities in the following year. The main goal of this project is to increase the volume of freight transportation between East Asia, Central Asia, the Caspian and Black Sea basins and European countries by creating alternative or complement to the traditional land routes that go through the territory of Russia.
Middle Corridor has several advantages in comparison to traditional transportation routes. Compared with the Trans-Siberian Railway, which is also called the “Northern Corridor”, it is 2 thousand km shorter and has more favorable climate conditions. Compared with the traditional sea route, it shortens the travel time of goods between Europe and China by about three times, making it only 15 days. In 2015, the first pilot shipment took place and a container train, which started its trip from Western China reached Baku through Kazakhstan and the Caspian Sea in 6 days. Besides, the Middle Corridor creates great opportunities for cargo transportation within Asia and to Africa. Using this corridor, cargos from east and south-east Asia could be easily transported to the Middle East, North Africa and the Mediterranean regions using port infrastructures of participating states.
The Middle Corridor initiative is also supported by Afghanistan and Tajikistan as this route creates new transportation opportunities for them. By integrating the “Lapis Lazuli” corridor, an international transit route that links Afghanistan to Turkey, to the Middle Corridor, these countries could easily transport their goods in all directions in Asia. Integration of these corridors is also advantageous for the participating countries of the Middle Corridor. The agreement on the establishment of the Lapis Lazuli corridor was signed by Georgia, Afghanistan, Turkmenistan, Azerbaijan and Turkey in November 2017, which added a new artery to the Middle Corridor in the southern direction.
Along with the mentioned advantages, the Middle Corridor also holds precedence in comparison to other proposed alternatives, which have obvious shortcomings. In the case of NSR, most of the year it is covered in snow and for transportation of goods through this road ships of special nature and capabilities are required. So, the competition of NSR with the Suez Canal could only be of seasonal nature. The INSTR on the other hand, despite its advantages, cannot become the direct competitor to the Suez Canal as it serves for the connection of the Indian Ocean and the Persian Gulf with Northern Europe, not for the connection of east and south-east Asia like the Suez Canal. It could compete with the Suez Canal only if it is integrated into the Middle Corridor. Hence, the advantages of the Middle Corridor and shortcomings of other alternatives reveal the importance of the Middle Corridor and make it the best alternative for the transportation route that goes through the Suez Canal.
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