International Trade Committee on Feb. 20th, 2007

[Piers Cumberlege]

That diaspora has, I would say, two very distinct components. One component is the people who have left Russia behind them, and that's quite a large component. A lot of people have left not really purely as economic refugees, but very much as people who had suffered under the old regime and simply don't want to have anything more to do with Russia. They've built their lives here and are distancing themselves quite substantially.

There are clearly other Russian and former Soviet or CIS diaspora people who are very engaged and still work with Russia. We have members in our association who are active, and we encourage that.

For example, I used to sit on the board of the Canada–India Business Council. From there, I saw a much more energetic diaspora in terms of the economic relationship between Canada and India. It's not as energetic between Russia and Canada within the diaspora.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

And from the EDC's perspective?

[Luc Dupont]

Our experience is similar with the diaspora. Essentially, our approach is a little bit more focused on sectors, the size of companies, and the regional focus here in Canada, so that we can do some outreach with whoever is interested in cultivating and developing transactions. Our approach would not, in the case of Russia, emphasize the diaspora in particular. We would emphasize the SMEs more, or the large to medium-sized companies in our engagement.

As for the issue of corruption, the only comment I would add is that there are a lot of outreach programs being made to explain the market and to explain sectors. If there are concerns of that nature, companies that want to target Russia as a market to sell their products might be interested in following some of these seminars or activities that are organized to explain the reality of how to do business in Russia and to contextualize the perception of corruption in relation to either past experience or....

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

I understand. There probably is an agreement that there has been a substantive improvement made. In the early nineties, people were initially very excited. They wanted to do business, and Russia was open for business. You indicated some of the difficulties earlier on, and they have left a very bad taste. That obviously started to percolate amongst the business community and the networks, so that perception still exists to a certain degree.

In light of the fact that your surveys indicate that it's not a number one concern, it's still a concern that I hear about when I meet with people. A lot of work still needs to be done on that front. That still seems to be a major obstacle, especially for SMEs.

[Luc Dupont]

But as successful business transactions happen and are in accordance with our standards, I think it will create a trickle effect. There is a grassroots war to be fought to change the perception of the market and to give guidance to companies in regard to which sectors and which types of companies to focus on in Russia to avoid any of these problems.

[The Vice-Chair, Liberal, Lui Temelkovski]

Thank you.

We will have to move on to Monsieur Cardin.

[Serge Cardin, Bloc, Sherbrooke, QC]

Potential cooperation between Canada and Russia may even be necessary, as regards the High North.

Do you think that management of the High North, the Arctic, which concerns both Russia and Canada, could be a potential cause of disputes, or should it instead be a source of solid ties under bilateral agreements?

[Piers Cumberlege]

It's clearly a source of solid ties. There's a very strong perception in Russia that Canada and Russia are the countries of the High North and that there's a heritage, a cultural and social environment that binds us because of our geographical position.

There are also a lot of active relationships based on this bipolarity of the High North. Here in Canada, reciprocal visits are taking place virtually every month on this subject. Discussions are currently underway to build relationships in polar transportation so that we can in fact transport foodstuffs more effectively from Russia to North America, to Churchill in particular. Major projects are underway that take into account the leverage effect of this contiguous geography.

[Serge Cardin, Bloc, Sherbrooke, QC]

That brings something to mind. Pardon me if I laugh about it. Someone once said that, in a large organization, greenhouse gases were the result of a socialist organization that wanted to scare people. Ultimately, that could be it, because, if we had more, that might melt the ice and permit transportation between the two countries. However, let's disregard that comment.

Earlier you said that, with regard to the WTO, that would probably make it so that certain rights would disappear. That would be measures that Russia would of course have to apply.

We know that protectionism is virtually natural for all countries. It's a virtually natural reflex. If you could measure Russia's protectionism, how would you compare it to that of the United States, if you give the United States a score of 100? On that scale, would it be 50%, 150%? I'm asking the question in order to see where the agreements or transactions with Russia can head at some point.

[Piers Cumberlege]

It's very specific in Russia. It's not a comprehensive protectionist attitude. It's applicable to certain industries that the Russians absolutely want to protect.

For example, the Russians had an excellent aeronautics industry 50 years ago. In the past 20 years, that industry has really fallen into a disastrous situation. However, the Russians are very proud of their aeronautics technology, and they want to protect that industry. It's very clear, it's explicit, it's visible: they want to protect it. Consequently, there is a form of protection that's very specific to that industry.

Young industries are often protected in all countries. Here's how the Russians are: they look at a young industry, they say to themselves that they have to protect it a little, and, after a while, they think you have to tell the child that he has to go out into the world.

Russia won't try to protect their industries forever. I don't think that's the case. However, some industries are strategically important to them. For example, there's a whole national emotion related to the aerospace complex. That's why I said that the 2008 deadline is in fact quite important because there are things that can't be done before a presidential election.

[The Vice-Chair, Liberal, Lui Temelkovski]

Mr. Cardin, we'll move on to make sure we have time to discuss the motion as well.

Mr. Epp.

[Ken Epp, Conservative, Edmonton—Sherwood Park, AB]

Thank you very much, Mr. Chairman.

Thank you. I found this presentation rather fascinating. It seems to me an overwhelming fact that it's a win-win situation to improve business relationships and trade with Russia.

One thing that an investor or a business person considers is the security of financial transactions. I wonder whether you could bring us up to speed a little bit on where Russia stands vis-à-vis the security of its banks, the regulations that pertain to it. In Canada of course we have OSFI to regulate all of the financial institutions. Our bank sector is very well regulated and very reliable. Where are we on that picture in Russia?

[Luc Dupont]

I would say that the banking sector in Russia is still relatively small. It's considered to be, I would say, under market. From a regulatory point of view, they've made some progress. I believe some foreign financial institutions are making investments in the banking sector right now. That should contribute to raising the operating level of the banks.

In terms of specifics, I would need to get back to you to give you a more detailed answer in terms of the quality of the regulatory environment for the banks. I can just say that from our perspective, we are satisfied enough to take some exposure with some of the commercial banks in Russia.

[Piers Cumberlege]

A lot has been done since the financial crisis of 1998, but there's still a lot more to do. Russia has a large number of “pocket banks”. There's a need for consolidation in the sector. There is a need, frankly, for better leadership from the Central Bank. That leadership has not been bold. If we compare, for example, what Nigeria has done in the last 18 months in restructuring its banking sector, Russia is nowhere near that. It may lead on railroads, but it's way behind on banks.

As for the security of financial transactions for investors, there, I think, things are relatively good. You choose your bank carefully, and you work with that bank. I think there's a relatively good record there. There's not a big track record of funds being completely diverted nowadays. In the mid-nineties, there was a much more patchy record.

Another thing that I think is important to highlight is that Russia is contributing strongly to the process of trying to reduce money laundering and is very much engaged with OECD and other agencies in trying to help reduce money laundering. There was a time when capital flight out of Russia was a major source of money laundering around the world. That's been reduced significantly.

[Ken Epp, Conservative, Edmonton—Sherwood Park, AB]

Okay. I have another question, vis-à-vis the exports of Canadian products to Russia, and I suppose also, to some degree, the export of services to Russia. When one of our exporters sells materials to Russia, how do they get paid? Do they involve a bank there that's native to Russia or do they work with one of the international banks?

[Luc Dupont]

In the recent past, some companies have insisted, when selling to Russia, on getting cash in advance. Right now companies are moving towards benefiting from credit terms, through letters of credit issued by a Russian bank and confirmed by a Canadian bank.

[Ken Epp, Conservative, Edmonton—Sherwood Park, AB]

What is the record of Canadian suppliers' not having been paid? Is there a significant number of them?

[Luc Dupont]

I can only say that, in relation to the EDC portfolio, our claims have been fairly small in Russia.

[Ken Epp, Conservative, Edmonton—Sherwood Park, AB]

Okay, good.

Thank you, Mr. Chair.

[The Vice-Chair, Liberal, Lui Temelkovski]

Thank you very much.

We'll move for the final question to Mr. Julian.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

I'd like to come back to the issue of corruption, because I find your comments very interesting.

I want to cite Transparency International. Their 2006 study has Russia at 121 in the world, well behind most third world countries and countries like Iran and Syria, which traditionally get very poor marks.

Is it your sense, really, that things are changing and improving in Russia since that 2006 study, and that this is not reflected in the Transparency International rankings? Or do you think Russia came up from an even worse position previously?

[Piers Cumberlege]

When I responded to your earlier question, I said that I felt petty corruption had reduced significantly in Russia. I cited the example of customs, where I think there's been a lot of cleaning up.

I think that where you get a concentration of political and economic power in any country, you tend to get a concentration of the potential for corruption on a fairly grand scale. I would say that may be what Transparency International is indicating.

I think nowadays there is less impediment, at an operating business scale, than there used to be. But I suspect that if you wanted to win a contract to build a huge oil refinery, there might well be people coming to you and saying, “I can help you with that.”

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Would this perception be the biggest barrier in Russia that both of you see in terms of exporters?

[Luc Dupont]

From our perspective, I just want to stress that EDC will look at the specifics of a transaction that is brought to our consideration. The level of economic activity taking place in Russia goes far beyond the immediate Canadian level of business activity. We would look at the specific transaction, do an assessment, including extensive due diligence, and if there were elements of corruption associated with it, we would not support the transaction.

The greatest barrier, I think, might be the lack of knowledge of how to do business in Russia and how to target companies in Russia to meet the international requirements in this area. For example, as I've mentioned, companies that are internationalized, that are dependent on foreign sources of financing—EBRD financing, commercial bank financing—stand a good chance of having to meet, a priori, these international standards.

I think that would be a good point to understand: some companies in Russia meet these international standards, because they have to if they want to be part of the global players. That doesn't mean there aren't others that also exist elsewhere, but if you tried to segment sectors and tried to target companies, you would find some companies that are, I would say, respectful of international standards in the field of ethics and corporate and social responsibility.

[The Vice-Chair, Liberal, Lui Temelkovski]

Mr. Cumberlege, a short response.