December 8th, 2012

Author: Maria Monica Wihardja, CSIS, Jakarta

Indonesia can play a crucial role at next year’s G20 summit in St Petersburg — partly because it faces many of the same challenges as the host country.

Russia and Indonesia both depend heavily on the export of raw commodities. Both countries were former borrowers of the IMF, paid off their debts, and are now lenders. Russia is currently one of the fastest growing large economies in Europe, while Indonesia is one of the fastest growing economies in Asia. Russia also has the third-largest currency and gold reserves in the world. Both Indonesia and Russia are, therefore, very rich with respect to natural resources and, to some extent, capital.

But Russia and Indonesia both suffer from infrastructure bottlenecks. Both countries have made strong commitments on infrastructure development and connectivity. The Russian government has launched a massive program of state-funded investment in order to support economic and social development in the Far East, a long-neglected domestic region with some of the world’s largest deposits of oil and natural gas. Russia aspires to have a regionally integrated transportation system linking the Far East with Europe. Russia having acceded to the WTO, local industries now have an incentive to create greater infrastructure in order to boost their competitiveness. Like Indonesia, Russia also has institutional and regulatory barriers, which are the main impediments to infrastructure development.

Russia also has a growing strategic interest in the Asia Pacific. In the last decade, Russia has actively engaged with its neighbours through multilateral cooperation and economic integration. This is evident in Russia’s cross-border projects with its Asian counterparts. For example, it has expressed an interest in linking its Trans-Siberian Railway — a network of railways connecting Moscow with the Russian Far East and the Sea of Japan — with branches to China and North Korea through the Inter-Korean Railway. Last year, at the Ulan-Ude summit, Russia also agreed to explore development of a gas pipeline through North Korea that would supply Russian gas to South Korea. This cross-border development reinforces Russia’s geopolitical position in the Asia Pacific.

Some issues that are important to both Indonesia and Russiaare within the institutional capacity of the G20. These could have a significant impact on global economic recovery and growth, and Indonesia should work toward their inclusion on the G20 agenda.

First is the financial agenda. Both Russia and Indonesia are emerging countries without deep financial markets and both recognise that financial reforms might have an adverse effect on them. They must voice their concerns and play an active role in the formulation of new regulatory reforms. Meanwhile, both countries can push for financial inclusion and infrastructure financing and connectivity. Russia is pushing for IMF governance reforms and wants a greater say for emerging countries. Indonesia should support this.

Second is infrastructure investment. During the Russian presidency, Indonesia will have a good chance to push for the inclusion of infrastructure investment on the agenda, although some European G20 countries may reject this initiative due to their high levels of debt. As Russia’s investment in infrastructure aims to connect East and West, it could have a significant impact on global connectivity and trade logistics.  Infrastructure investment must be seen not only in the context of development but also the Framework of Sustainable, Strong and Balanced Growth.

Third is energy and food security. Russia’s power to influence global energy security is huge. Russia is the world’s largest gas exporter, and appears to have been the world’s largest oil producer for some time. Moreover, even though Russia is not a member of OPEC, it influences international crude-oil prices. It has extensive power over oil and gas supply, and can play a role in global energy-price stability. Russia is also the third-largest wheat exporter, and is the major exporter of many other grain products. Russia’s contribution to establishing a stable global food supply could be significant, and it is important that Russia remains open with regard to exporting food products. Russia could be a natural leader on these two issues.

Fourth is development. Indonesia should make sure that Russia continues to promote the G20 development agenda. As the co-chair for the post-2015 development agenda, Indonesia must also make sure this agenda is in line with the development framework. Although Russia may no longer be called a developing country, as its GDP per capita is over US$20,000, it still faces a lot of development issues. Russia’s development challenges are not so different from those of Indonesia — both face a weak regulatory framework, insufficient infrastructure and corruption. Indonesia should also ensure that income disparity is addressed; Russia and Indonesia are the two countries with the highest increase in their Gini coefficient between 2006 and 2011.

Fifth is international trade. It is hoped that, now it is a WTO member, Russia will be the new gateway linking Europe with Asia. Russia will benefit from the expected increase in trade among G20 countries. However, this may not be the case if attacks or increased protectionism occur on the part of other countries.

Sixth is the troika system, which requires the G20 president to set the agenda together with the immediate past and future presidents, in order to promote continuity. Indonesia should support the revival of this system by ensuring that it works together with Mexico and Australia. Continuity of the G20 agenda and the monitoring of past commitments are vital for the legitimacy and credibility of the G20.

It is important that Indonesia brings these issues to next year’s G20 summit. Unlike potentially divisive geopolitical issues, such as the Syrian conflict, the above-mentioned issues may be of interest to all G20 countries. In this sense, Indonesia can play a role in working toward a more positive and productive G20.

Maria Monica Wihardja is a researcher at the Centre for Strategic and International Studies, Jakarta, and a lecturer at the Department of Economics, University of Indonesia. She is also Associate Editor at the East Asia Forum Indonesia desk.

http://www.eastasiaforum.org/2012/12/08/indonesia-and-russias-presidency-of-the-g20/