Evidence of meeting #48 for International Trade in the 39th Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was report.
A recording is available from Parliament.
Liberal
The Vice-Chair Liberal Lui Temelkovski
Order. Sorry for the delay. That's what happens when you meet constituents in the visitor's welcome centre unexpectedly.
Pursuant to Standing Order 108(2), for our study of Canada's trade policy we have two witnesses today, Mr. Dupont and Mr. Cumberlege—just like “Temelkovski”—from Export Development Canada and from the Canada Eurasia Russia Business Association, respectively.
Conservative
Conservative
Ted Menzies Conservative Macleod, AB
We certainly don't want to take away from our witnesses today—I'm quite looking forward to their comments—but I do have a motion that I would like to table at the end of the meeting, perhaps the last 15 minutes, if we have time.
Liberal
The Vice-Chair Liberal Lui Temelkovski
Okay. I'm sure we'll find the time.
Is that the motion from February 1?
Conservative
Liberal
The Vice-Chair Liberal Lui Temelkovski
Yes, we have it on the agenda. Thank you.
We will start with Mr. Dupont.
Luc Dupont Director, Strategy and Operations International Business Development Group, Export Development Canada
Thank you, Mr. Chair.
Today I'd like to give you a brief overview of the approach of Export Development Canada, EDC, to Russia, which is one of our priority markets.
In 2006, EDC achieved operating volume of $15.2 billion in all so-called emerging countries. Of that amount, EDC's volume in Russia was $756 million, in support of some 80 exporters and investors, for a total of 138 transactions. That encouraging performance reflects the openness and vitality of Russia's economy, which has achieved average annual growth of 7% in recent years. This new prosperity in Russia has enabled the country to accelerate repayment of its public debt, which has improved its credit rating, while fostering the emergence of a population that is better off and has increased purchasing power and new consumer aspirations.
These factors explain why this market, in addition to energy resources, affords new business opportunities for Canadian businesses.
In recognition of the market potential in Russia, EDC has announced the establishment of a foreign representation in Moscow based at the Canadian embassy. A formal opening is scheduled for spring of 2007.
This presence in Moscow is intended to allow EDC not only to enhance its responsiveness to emerging opportunities, but to develop proactively opportunities through business representation, origination, and facilitation by targeting strategic Russian prospects who are engaged in ambitious capital expenditure programs or who could call upon Canadian expertise or equipment to assist in the modernization of their productive capacity.
By adopting such an approach, EDC can develop and deepen its relationships in the market to favourably position Canadian interests in procurement or investment opportunities that we can in turn support through the full range of our services. In doing so, EDC actively works in collaboration with financial institutions from Canada, Russia, and internationally.
In addition, EDC works closely with its portfolio partners, the Department of Foreign Affairs and International Trade, the Canadian Commercial Corporation, as well as other government departments and agencies. Russia is a market that is attracting greater interest on the part of SMEs seeking to capitalize on the new opportunities that are emerging.
As northern and resource-rich countries, Canada and Russia have a lot in common beyond hockey. Both have a need for efficient transportation and telecommunications infrastructures. Agriculture is important to the sustainability of many communities. Extractive industries both in mining and oil and gas are major sources of earnings. In fact Canada and Russia are the only two net energy exporters from the G-8.
Both countries are seeking to reposition themselves with an integrative trade. For Russia this means that the new wealth of the country is expected to be channelled in other sectors, such as manufacturing, to allow the country to diversify its economy. Unfortunately, Canada's offerings are not the only ones that are of interest to Russia.
Canada is uniquely positioned to cater to the needs of Russia in these aforementioned sectors, and EDC is committed to accompanying Canadian businesses in their successful endeavours. To illustrate how EDC can create value, let me draw upon the experience of a transaction that is in the process of being structured in Russia, but that is largely inspired by transactions we have recently concluded in the agricultural sector in Kazakhstan.
We have been approached by a foreign buyer to identify potential suppliers for agricultural machinery. This is a sector of significant opportunities to many Canadian companies given the great similarity of agricultural conditions between Canada and Russia. Farms in Russia and the CIS have a great need to be modernized. Working with a Canadian exporter, we have pre-qualified the buyer and developed an acceptable financial structure to allow us to facilitate the purchase of equipment from Canada through a local bank that lent the funds to the end buyer.
Through this approach the Canadian company was able to receive payment on shipment, the buyer benefited from medium-term financing from his bank, and had access to a new supplier. Indications so far are that this company has now developed a pipeline of sustained business with this buyer, which is opening doors for him in Kazakhstan but also in Russia. This company's focus was previously only on the North American market. Because of this positive experience, it is now receptive to the ideas of entering new markets with a risk management of services.
EDC knowledge of both Canadian business capability and emerging market requirements can be leveraged to assist Canada in developing long-term trade investment relationships with Russia and elsewhere that are beneficial to our country's prosperity.
This completes my brief exposé. I would be pleased to answer questions.
Thank you, Mr. Chair.
Piers Cumberlege National Board Director, Canada Eurasia Russia Business Association
I am here wearing the hat of vice-chair of the Canada Eurasia Russia Business Association.
This association represents companies and business stakeholders from western Canada, Ontario and Quebec, as well as those currently present in Moscow, all members of a business association that serves to represent the interests of its members to their counterparts in Russia and other countries of the former Soviet Union. The major concentration is in Moscow, Russia, where our counterpart is an association of Russian entrepreneurs and industrialists.
Let me begin, if I may, by just setting a quick picture, which is really a broad overview of where Russia is today. For many of you, this will be familiar. I speak as someone who has spent most of the last 18 years engaging in Russia in one way or another, living there and living here, but working with Russia.
Since Putin's accession in January 2000, Russia has steered a remarkable course of economic and political stability. The chaotic and volatile Yeltsin period, which saw the country come close to bankruptcy and to fragmentation, now seems a long time ago. Many of us find it difficult to understand how close to civil war Russia was in the mid-1990s. It very nearly broke down. We look at a country today that is a united country.
Now we are faced with an economic powerhouse. Admittedly it's fundamentally dependent on oil and gas revenues. It's increasingly seeking to leverage its economic power to reacquire the political authority that it lost with the collapse of the Soviet Union. A number of key themes have emerged.
On the domestic front, some positives are the breakup of the railroads. Its privatization of the railways is a step far ahead of anything achieved by India or China or what might be considered to be similar types of economies. Russia has gone way ahead in terms of a privatization process, so there have been some very strongly positive reforming activities.
There is a focus on developing key strategic industries: telecommunications and aerospace. For some of those, it's a question of the rebirth, the renaissance, particularly in the case of the aerospace industry, which was critically hit by the collapse of the Soviet Union.
There has been a huge investment in building a mid-range industrial base. Since the 1998 financial crisis, which devalued the ruble significantly, local products have become increasingly competitive. The ruble now is sitting at 26 to the U.S. dollar. It was sitting at about 30 to the U.S. dollar in 2000. There has been virtually no movement. Indeed there has been appreciation in the ruble or depreciation in the U.S. dollar, but the ruble has remained stable, buoyed by a combination of a very strong balance sheet of natural resources, but also particularly by major domestic industries that have built up over the period of the last six to seven years.
Agrifoods, services, consumer businesses, construction—all of these have been pulled through by increasing middle-class prosperity. Also, and this is very positive, there has been a search for greater economic equity and poverty alleviation across the country. Let us not forget that in a population of 145 million, there is still something in the region of 35 million people at the poverty line.
However, this is accompanied by some bad news. There is a concentration of power in the Kremlin. There had started to be quite a broad delegation of power around the country, which is now firmly concentrated back in the Kremlin. There is economic nationalism, which is really both a means of redressing the excesses of the Yeltsin period, and an unfortunate way of concentrating economic benefit in the Kremlin inner circle. There is almost total state control of the press.
We have the prospect of a presidential election in 2008, which will leave essentially the same group in power. Who will stand, and who will officially run? We won't know until very shortly before the election, but it will be more of the same. There is not really going to be an open-fought election in 2008.
On the international front, Russia has transferred its imperial ambitions from exporting dogma—the dogma of communism to obtain global political power—to becoming a critical link in a number of global commodity markets: oil and gas, nickel, and steel. In some respects, the tank diplomacy of the 1950s and 1960s has been replaced by the pipeline diplomacy that we have seen applied so effectively in the Ukraine, and that hangs as a threat over some of western Europe.
Canada's position in this new balance is particularly interesting and presents excellent opportunities. Our own natural resources base provides competition or partnership opportunities. Our proximity to, but independence of, the United States offers an interesting conduit. Our ambiguous relationship with China is similar to that of Russia, and we offer the Russians interesting reciprocal partnership opportunities as a means of counterbalancing the strength of the Chinese dragon.
Enough of the macro: let me move more to a micro perspective.
Canadian business in Russia has doubled since 2004, from $415 million to over $800 million a year. Those are the officially recorded statistics of direct trade from Canada to Russia. An enormous amount of trade passes through third countries, whether it be in terms of subcontracts supplied to contractors in the oil and gas sector who are actually technically offshore, out of Russia, or whether it be in aircraft that may be registered outside the country but the buyer, and the cash for the purchase, actually comes from Russia. I would be quite confident in saying that the figure is probably double that officially recorded statistic. The growth is about the same, but I would say that it has gone from $800 billion to probably $1.5 billion.
Canadian business operating in Russia is no longer just in the oil and gas sector or just in Moscow. It is not just in oil and gas, but it's also in the minerals and mining sector. It has moved out substantially. We now have around Russia a number of metropolitan centres with big consumer businesses and consumer demand, and a lot of Canadian business is moving outside Moscow to those centres.
We see that there also is strongly growing investment. At the moment, Canadian investment in Russia is in the order, approximately, of an estimated $450 million to $500 million. Two projects alone are being negotiated at the moment, each of them significantly over $1 billion, by Canadian companies. It will make a quantum shift in Canada's footprint in Russia if those projects do come through, and we have some confidence that they are moving in the right direction to perhaps start being implemented within the next two to three years. That's going to be a very significant increase in the Canadian position in Russia and the weight Canada will have in Russia. It's still well below western European countries like France and Germany, but it's a very big increase.
Canadian businesses dealing with Russia face a number of challenges. There are historic perceptions, many of which were formed during the early nineties, the rather chaotic period in Russia. And alas, I'm afraid that for too many people in Canada, “Russia” is still a two-syllable word that rhymes with “mafia”.
There are perceptions of the risk of government intervention, and those are perhaps justified, and there has been an increase in that in the last two to three years, I would say. Things were looking good, but increasingly, the government is looking carefully at anything it might consider to be a strategic industry.
Other challenges are actually rather closer to home. The St. Petersburg consulate is being closed. It will be closed at the end of March. It is a pity that we see that happening now, at a time when major Russian corporations are actually moving their headquarters to St. Petersburg, reflecting the economic and political importance of the city. Gazprom, for example, the largest company in Russia, and one of the largest companies in the world, is moving its headquarters out of Moscow to St. Petersburg, precisely at a time when Canada is withdrawing from St. Petersburg. It also so happens that Gazprom is the counterparty in one of those negotiations for the $1 billion-plus investment.
In this context, we at CERBA have been trying to encourage and develop relationships between Russia and Canada on a business-to-business level. There are a number of regular missions in each direction in the forestry sector and in the mining sector. And we have next week, in Montreal, a group of Russian bankers coming from the financial sector. They have been late coming to the party, just as Canada's financial sector, with the notable exception of EDC, has been late going to the party in Russia. But the Russians are now coming, looking for links with Canadian financial services institutions.
We have, at the end of March, the Canada-Russia Intergovernmental Economic Commission. We have, at the same time, the Canada-Russia Business Council, which will see some 150 to 200 of the most senior Russian business people coming together with the most senior Canadian business people engaged in Russia. This is a process of rapprochement and a process of increasing the business-to-business ties, very important at a time when we are trying to wean off the government-to-government relationships that typically characterized old Russia.
Overall, CERBA is very definitely optimistic. We give our members cautious advice about how to manage some of the issues and challenges that they perceive are facing them, but overall, we feel very strongly encouraged by what we see as business opportunities in Russia. And our members, simply by measuring the growth in membership, suggest to us that there are more and more Canadian companies engaging in Russia and looking for the support of the Canadian government to continue to do so.
Thank you.
Liberal
The Vice-Chair Liberal Lui Temelkovski
We will start our seven-minute round of questions and answers with Navdeep Bains.
February 20th, 2007 / 11:30 a.m.
Liberal
Navdeep Bains Liberal Mississauga—Brampton South, ON
Thank you very much, Chair.
I'd like to thank you for your presentation. As you are aware, we're here today to discuss trade policy, specifically on emerging markets, and that's the intention of the meetings we're conducting here in the committee: to look at opportunity that exists outside the traditional markets we trade with—the United States and Japan and so forth. So we appreciate the insight you bring on the Russian economy.
We received briefing notes, and we understand that Russia is the ninth-largest economy in the world. One of the impressive components of Russia, in terms of its being an emerging market, is that it has strong growth projections, above 6% and close to 7%, on a going-forward basis. It's achieved that in the past as well.
Unfortunately, the trade between Canada and Russia is not there. We haven't reached the potential we'd like to.
In your remarks, Mr. Cumberlege, you referred to your disapproval of the closure of the consulate. I'd like to touch upon that a bit, because it's a very important concern that I've raised in the past in committee and now continue to raise. It doesn't make sense, when we talk about improving our role internationally—improving our trade relations internationally, diversifying our trade, making sure we have people on the ground, making sure we're in a position to attract additional business and investment—that we'd be making cuts to consulates and reducing our presence.
You indicate in your remarks that St. Petersburg is becoming a major business hub. You give an example of a major oil company that's moving its headquarters there. Can you comment a bit more on that in terms of the impact you see, or the lost opportunity that exists from the closure of that consulate?
National Board Director, Canada Eurasia Russia Business Association
Surely.
St. Petersburg is the source of most of the political class that is currently ruling Russia. Mr. Putin himself comes from St. Petersburg, and a number of the strongest decision-makers in Russian politics come from St. Petersburg. Increasingly, big Russian business is being populated likewise, with leaders from St. Petersburg. It happens to be a process that has been very visible over the last three to four years.
St. Petersburg is becoming more and more not only an economic and a cultural centre—it's been a cultural and heritage centre for a long time—but now a centre of political decision-making. Any serious politician has to have a St. Petersburg link in Russia. And in business terms, companies are seeing that they have to pay their due to that St. Petersburg plan by establishing a strong presence there.
Gazprom's moving its headquarters there is a very clear sign. What we're also seeing is other companies—not as large as Gazprom, but every bit as significant—that are moving large numbers of headquarter functions there. We're seeing procurement decisions being made in St. Petersburg. Where once they would have been made either out in western Siberia or in Moscow, we're now seeing those procurement decisions actually being made in St. Petersburg.
In a consulate there are a number of functions. One is to keep a finger on the political pulse of the area where the consulate is based; another is to actively support commercial activity in that same area. We at CERBA believe very strongly that both are going to become increasingly important in St. Petersburg.
Now, we're not in a position to question decisions that have been made by the government, but on the other hand, we are in a position to say that we believe it's very important that Canadian business continue to receive support of some form or other in St. Petersburg to continue work that has been done excellently by the consulate and the commercial side.
There may be an opportunity to find some way for our own association to continue to provide that support, if that's something the government is prepared to consider. Similar things have been done in the past in China. Looking at opportunities to at least make sure that the history of strong Canadian business activity there—which, incidentally, is increasing, with other Canadian companies investing in manufacturing plants in the St. Petersburg area.... There is another investment of about $54 million being made by a Canadian company in a plant in the St. Petersburg area later this year.
So there's a lot going on, and we think it's very important that this be recognized. Russia is not Moscow. Russia is much broader than that. And St. Petersburg is exceptionally important.
Liberal
Navdeep Bains Liberal Mississauga—Brampton South, ON
I appreciate that assessment. I think it brings to light the concerns that I and other members on this committee have expressed in the past. You've highlighted some of those areas, such as the growth potential that exists in business and investment, and the fact that we have to look not at Moscow on its own but in other areas that are now emerging within Russia and are very important for trade going forward.
Based on your experiences—and I'll speak to some of the concerns above and beyond the closure of the consulate—are you aware of any other closures of any consulate offices or lack of presence in St. Petersburg, or are there more resources that countries are placing in that region?
National Board Director, Canada Eurasia Russia Business Association
I'm not aware of any other closures. Anecdotally—and I do say anecdotally—I have heard that Germany is increasing its presence there. I've heard that the U.K. is putting one grade higher in their presence there.
The U.S. presence there is being represented in two forms. There has been a consular presence, but particularly the American Chamber of Commerce, AmCham, has been very active in St. Petersburg. They certainly are continuing and I would expect them not to be diminishing the activity.
I apologize, but I'm afraid I can't point to specific examples other than anecdotal.
Liberal
Navdeep Bains Liberal Mississauga—Brampton South, ON
All right. But it is peculiar that, based on your assessment, other countries are increasing their presence, want to participate, want to take advantage of the economic growth, and unfortunately Canada seems to be headed in the opposite direction. I think it's something that does boggle the mind.
National Board Director, Canada Eurasia Russia Business Association
If I may, one of those two $1-billion projects is St. Petersburg-based—Canadian capital, Canadian-owned—and actually St. Petersburg-based.
Liberal
Bloc
Serge Cardin Bloc Sherbrooke, QC
Thank you, Mr. Chair.
Good morning, gentlemen, and welcome to the committee.
Mr. Cumberlege, I'd like to know your association's perception. Earlier you touched on certain social realities—you spoke about the mafia as such—and the confidence that Canadian entrepreneurs have in Russia.
How convinced are they right now that they can do business there?
National Board Director, Canada Eurasia Russia Business Association
They reengaged after the major exodus in 1998, when many withdrew from the market. Since that reengagement, I would say that those who are actively involved in Russia right now have fairly high confidence. I mentioned the mafia because that's a word that is so often associated with Russia. However, in Russia, as in any country in the world, the mafia is essentially involved in prostitution, alcohol, drugs and gambling. Around the world, you find organized crime in those areas. The other sectors of the economy aren't affected, and the mafia isn't omnipresent. It is entirely possible for businesses to act in Russia without needing protection, and I believe that Canadian entrepreneurs currently engaged in Russia aren't faced with demands or needs to coexist with the mafia, unless they are operating in the sectors I just named. I believe that the time when there was a lot of activity and when virtually all economic sectors were affected by a criminal potential is long since passed. That was really during the years 1993, 1994, 1995 and 1996. Now that's no longer the case.
Bloc
Serge Cardin Bloc Sherbrooke, QC
People have appeared here and criticized, to a certain extent, the absence of Canadian government programs and support for businesses overseas.
How do you perceive the situation with regard to Russia? Will the Canadian government do whatever it can for Canadian entrepreneurs?
National Board Director, Canada Eurasia Russia Business Association
That goes back to the discussion we just had on the consulate and its closing. In fact, I find that a lot of support comes from the provincial level. In Alberta and Quebec, for example, the provincial governments are providing quite concrete support for business relations between the companies of their province and Russia. At the federal level, I said there would be a major gathering of business people on March 26, and of government on March 27. The federal government is providing a lot of support for that event, both financially and politically.
In that way, I believe it's trying to facilitate the transformation of a relationship that, during the Soviet period, was necessarily intergovernmental. That increasingly has to become a relationship between business people. That's what the Russian side wants, and we're trying to use what has already happened between the United States and Russia as a model. Now business relations and political relations are virtually separate, instead of being completely interwoven. That offers certain advantages. It's a bit slower here; we're five or six years behind our American colleagues, but these business relations are starting to develop. I'd say it's the role of a business association such as ours to adopt an even stronger position in favour of assisting the companies so that they contribute to the association and so that the association contributes to the development of business with Russia.
That said, we'll always need support from both the federal and provincial governments. We are very grateful for the support we receive.
Bloc
Serge Cardin Bloc Sherbrooke, QC
We know that Russia doesn't belong to the WTO. What do both of you think about that situation with regard to the potential for economic relations between Canada and Russia? Could good bilateral agreements with Russia be preferable to Russia's presence in the WTO? The day that Russia becomes a member of the WTO, what impact will that have on the relations we currently have with Russia and those that we could develop in future?
Director, Strategy and Operations International Business Development Group, Export Development Canada
I believe that Russia's talks for the purpose of joining the WTO are advancing. With regard to trade liberalization, it would definitely be an advantage for Russia to be a member of the WTO. For the moment, we at Export Development Canada are observing these developments with a great deal of interest. Not only will that make for easier trade flows between Canada and Russia, but Russia can then become a hub facilitating trade. For the moment, we're waiting to see how the situation will evolve.