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Interview of the Minister Alexey Ulyukaev to CNBC

03.04.14

Geoff Cutmore: Minister, there’s some anger in the Russian press about the fact that JP Morgan has blocked an embassy payment. Can I ask you, what would your message be to JP Morgan?

Alexey Ulyukaev: Well, I’m not very much involved in particular that, that point. But anyway, I do not think that’s it good, good way of doing business anyway. Because we know very much the company and we have a long and successful credit story with that. And it’s so easy with some small, small, nonpredictable doing to change the general performance. I don’t think that’s the way the company have to do the deals.

Geoff Cutmore: Do companies that are engaged in the American sanctions programme, do they risk missing out on future business here in Russia? Will JP Morgan get frozen out of future Russian IPOs as a result of the actions it’s now taking?

Alexey Ulyukaev: I do not think we have to react in some symmetrical, symmetrical way. Generally, our message to the businesses which are now in Russian investment and general business situation or which has some plans about that, that we will not you know press the companies about something they was doing by some political pressure or anyway. Our response is to make more comfortable general situation for the businesses. We are very much interested in attracting them to participate in our investment programmes here, so we will not I don’t think we have to press them. We will try to make more comfortable.

Geoff Cutmore: So companies shouldn’t fear that they’re going to get squeezed out or frozen out of business opportunities in Russia as a result of some tit for tat exchange?

Alexey Ulyukaev: No, no, I do not think so. I do not think that we have frozen any kind of relationships. Vice-versa, we will try to explain ourselves, explain the macroeconomic and political situation, and say welcome, and please invest, and please make cooperation deals with Russian companies.

Geoff Cutmore: What, why are you being so restrained? (Minister: Pardon?) Why are you being so restrained in not responding aggressively to these actions?

Alexey Ulyukaev: First, because I do believe that economic background, economic ties will make a better political situation also. You see, the slogan for the G8 meeting which had to take place in Sochi and probably now it’s moving from here and moving from the 8 to 7 was the sustainable growth in more secure world. So it’s very much linked, the growth, the investment rate and stability and security in the world. And in that unstable situation our response had to be more economic ties, more economic transparency, economic sustainability, and economic cooperation.

Geoff Cutmore: We have already seen forecasts I think of FDI outflow of $100 billion. The central bank governor talked about growth below 1 percent. It seems that the damage from the political fallout in Ukraine is going to be very punishing for the Russian economy.

Alexey Ulyukaev: You see, it’s a little more sophisticated. Because what does it mean the capital outflow? It covers different economic situations. It covers the households that make their assets from ruble to (unclear) currency, the dollar or Euro. It covers the company. It covers the refinancing debt. You see, the general obligation of Russian companies for this year it’s something more than $80 billion. And now it’s difficult for them to refinance the debt. So they have to pay not only the interest rate but the general amount of the debt. So all these things create the situation with the capital outflow. And of course it influence very much the economy situation. So to get your currency from Russia to abroad you have to buy currency from the central bank. It’s (unclear) of ruble, ruble amount here. It creates of course the (unclear) situation for economic growth. In our general estimation is very roughly something about $40 billion of capital outflow, it means 1 percent of GDP growth. So the our estimation for the first quarter of the year, something around $60 billion capital outflow and our general forecast for this year, 2014, is something about $100 billion. The $100 billion outflow means less than 1 percent economic growth, something between 0.5 and 1 percent of growth. What is the cost of that? But of course it’s not only concerned with the, this Ukrainian, Crimea crisis. It has some other roots, some other background. Because last year we also have 62 billion without anything like, like Ukraine or Crimea. So there is problems with the final economic recovery, the situation with the general investment climate in the country, cost of production among other things. And so now we have two tracks linked together, and so the fundamental, and plus this political situation.

Geoff Cutmore: It’s been a disaster though, hasn’t it? This Ukraine story, this intervention has been a disaster for the economy. It’s going to set back the reform programme, it’s going to slow down the engagement with the rest of the world. It’s going to prevent foreign companies from investing more in Russia. The economy has been the political casualty of the government’s ambitions in Ukraine.

Alexey Ulyukaev: You know it’s very easy, very easy explanation. Of course we will continue the reforms and probably we will be more concentrated on that. Well for instance, we have this our road maps for better condition for businesses. We’re just going to accelerate the fulfilment of that road maps. We’re just going to make better conditions for businesses in terms of market access and in terms of access to infrastructure and others.

Geoff Cutmore: But I read the paper this morning. Stockman is slowing down its investment program. Ford in its joint venture is laying off people because of the fall in the ruble and concerns about demand. In spite of you saying you’re going to speed up the reform process, capital is leaving.

Alexey Ulyukaev: Your example is from different parts of economic reality. Because the problem with Ford and other producers is dependent itself on components. This is reaction for the devaluation (unclear) late 2013 and beginning of this year. But now you see we have some correction of the change rate now, the ruble becoming stronger against euro and dollar and other currencies. It was some kind of overshooting of exchange rate, devaluation. So now it’s too early to make some final decision about that. I do think that the situation with the components for (unclear) will change, and they will re-start their programs. That is the first status. Of course there is some other point. It doesn’t mean if there is any sanction. The point is the situation and stability. The investors have to estimate the risks of this sanction. And so they prefer you know to standby, just sit comfortably and wait, what will happen after. And that means some kind of, some kind of investment break. And for that reasons, once again, we’re trying to make easier for them to make a decision about investment first. Second, we have to accelerate internal investments because of course direct foreign investment is an important part of the story, but local, domestic investors of course means much more. And unfortunately, beginning of the year, has slowed down in investments. We have minus 5 percent of investments January, February of this year compared to first two months of previous year. We are going to accelerate the conditions for banks for make credits to investments. For that reasons we are going to increase the capital of the banks, plus to make more easier refinancing from the central bank credits. And we are going to concentrate on the infrastructure projects financed from the national welfare fund. We selected seven infrastructure projects, and we are going to start refinancing that this year in terms of work.

Geoff Cutmore: Can I ask you, the diplomatic process has been slow to come to some resolution. At this point, we can’t tell whether this crisis gets worse or gets better. That puts you in a very difficult situation, doesn’t it?

Alexey Ulyukaev: Of course, situation is abnormal, I would say. And it create a lot of difficulties in a way. But it’s challenge. We have some how to (unclear) a new way of working. You see even before I said currently that our problem is mostly domestic problem, we have quite high rate of saving, about 30 percent of GDP, but quite low rate of investment, 20 percent, this gap, 10, 30 minus 20, is room for increasing of investment. Local, domestic investments. And so that’s important. Why they domestic investors do not want to invest in that situation. So partly because of the costs of production, so labour costs and infrastructure costs, electricity, railway, gas, costs of transportation. So for that reasons we are trying to manage that costs. Plus transaction costs, (unclear), and other things. And that is our challenge for us.

Geoff Cutmore: Obviously the flow of capital out of Russia is not a good story for growing the economy. Is there any prospect that you might freeze the flow of money out of Russia or put some bans of oligarchs moving their money out the country?

Alexey Ulyukaev: No, not at all. It’s absolutely impossible. Absolutely. We very much believe in free movement of not only goods and services but capital as well. Beginning from 2006 we have absolutely free capital account moving. And no administrative and no economic barriers for that. And that is our principal position. In 2008, 2009, then we have $130 billion outflow, we have nothing to do with the restrictions of the capital movement. And of course, this time, we will do the same. No restrictions.

Geoff: So no restrictions on capital?

Alexey Ulyukaev: No restrictions.

Geoff Cutmore: And no restrictions on JP Morgan, Goldman Sachs, Merrill Lynch, or Bank of America Merrill Lynch? Any of these companies that are engaged in the sanctions program?

Alexey Ulyukaev: No because we do understand that’s not their game.

Geoff Cutmore: Not their game?

Alexey Ulyukaev: Not their game, no.

Geoff Cutmore: Whose game?

Alexey Ulyukaev: Well, political. This is quite political story.

Geoff Cutmore: And there’s nothing that you want to do to take action against them?

Alexey Ulyukaev: It is not their choice.

Geoff Cutmore: You don’t see any need to punish them for what they’re doing?

Alexey Ulyukaev: Uh, well as far as it comes to me, no.

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