We are a Eurasian country
In his interview to RV Alexey Ulyukaev, Minister of Economic Development of the Russian Federation, discusses partners and allies, advantages and disadvantages of free trade zones, ruble, dollar and yuan, as well as why a “peace agreement” with the business is necessary now.
It would be wonderful to discuss something positive…
…Not with me, I’m afraid.
And I cannot help asking if the current situation makes you look back nostalgically at the crisis of 2008. It seems the things were easier and simpler then.
They were neither easier, nor simple. Yet they involved much more technology. In 2008 we were in the mainstream of the global economy and faced the risks connected with our openness and our dependency on the world oil prices and the dynamics of the exchange quotations. Hence the problems with our prices on the world markets, the emergence of margin calls, the budget was shocked by fall of the oil prices to $30 – 40 per barrel. Yet thanks to the instruments that we had prepared, such as international reserves, the reserves of the Central Bank, we managed to mitigate that situation. Things did not normalize, but the critical stage was passed rather quickly. In 2009 both the world oil prices got better and we could borrow at the international markets again. Today things are different. Our economy and the world economy move along different paths. Our growth rates are lower than the world average growth rates. They are approximately equal to the European ones and stand at 0.8 percent. The dynamics of our economy is hardly different from those of Brazil and South Africa. It is better than those of Argentina and many other countries. Yet we are still lagging behind India, Vietnam, China and Indonesia in terms of development. Besides, we are strongly influenced by the geopolitical factor the dynamic of which is hard to predict.
While preparing the forecast and the budget, we assumed that sanctions would be lifted in 2015. We made a simple assumption and took the current legal framework as a basis. That is, the European Council has adopted a decision, so formally it exists, although it may not remain in force in the future. However, in theory this decision may be prolonged. So in any estimation one should take into account how the sanctions may work in 2015, 2016, 2017. Yet this is a matter of medium term planning.
In other words, a large share of factors that can hardly be predicted and the possibility of much longer influence of these factors shape a completely different reality. Indeed, the means and instruments that we prepared and used in the past are no longer equally effective. The reserves, for one. In 2008 – 2009 we supported companies and households who had a negative position, that is, a larger currency position as compared to currency holdings. Basically, we used international reserves to support private borrowers.
Now things are different. We have spent lots of money, but we have bought almost nothing for it. We have not reversed the exchange rate trend, and the ruble continued to go down. Neither have we created a better positive situation for businesses and households. This means that now we need different instruments, we need to shift to floating exchange rate in order to apply technologies that would enable us to keep the reserves. This is what we are doing.
As you have just mentioned the difficulties in forecasting, a curious idea can be traced between the lines of the baseline scenario offered by the Central Bank. If sanctions last till 2017, the economy will adapt: Asian markets will open, imports will be substituted and internal borrowing options will be found, our exports will become more competitive, and the growth will renew. So could the current situation be a blessing in disguise? Has a window of opportunity opened?
Every coin has two sides. If we talk of the positive side, in case of devaluation of ruble domestic manufacturers can reduce their expenses in foreign currency terms. They get an opportunity to win the competition with the imported goods. We see that the dynamics of import is about to reach a plateau. Yes, you are winning the competition with certain countries. If this is reasonably supplemented by government support, for instance, with regard to non-primary exports, investment projects aimed at import substitution, considerable potential and impact will be achieved. The problem is that we are prone to engage in crusades like ‘Let us substitute imports everywhere!’ Somewhere it does work, and somewhere it does not. It is an instrument and should be treated as such, that is, critically and rationally. To my mind, what we should do is to support our banking system. The banks should have sufficient capital and be able to provide loans to ultimate borrowers.
This end of the year has seen a series of summits and international meetings. You particularly have attended APEC, and before that ASEAN Ministerial Forum. What do your counterparts say?
First of all, the majority of my counterparts agree that sanctions should be lifted as soon as possible, as they have negative effect on everyone. We discussed mostly specific things. For APEC it was establishing a free trade zone in the Asia Pacific where trade has always driven growth. In other words, our discussions were more of applied nature.
Taking the issue of the free trade zone in the APR further, do you believe that a Transatlantic trade alliance that would unite the Americas and Europe in a single free market, and a Transpacific trade pact linking Asia with the Americas have any prospects? Indeed, these issues were discussed at the APEC summit.
Yes, they were discussed and rather actively. You see, there are many international economic integration fora. We are also working on this. We have established a free trade zone within the CIS, the Eurasian Economic Union is developing, we are also working on bilateral free trade zones, and the Russian-Vietnamese one is already on the way. They are in no way an alternative to WTO, but rather complement it. I am afraid our American colleagues view the Transatlantic and Transpacific partnership as nothing but an alternative to WTO, as something instead of it rather than something in addition to it. We believe that this is wrong.
Indeed, we have supported China’s proposal on a free trade zone in the APR, because it is intended for everyone, it is non-discriminatory. Any APR country may become a full member of this organization and take part in the elaboration of its policy instruments. On the contrast, our American colleagues say, ‘We need these ten countries and don’t need the rest’. This is a completely different thing. This is bloc mentality fraught with serious problems for the global trade.
But the world has been objectively changing, in terms of economy. BRICS countries overtook the G7 in terms of GDP (expressed in purchasing power parity). There emerged a new ‘G7’, that is, seven developing economies, Russia, China, India, Brazil, Indonesia, Mexico, Turkey who set the same record. Expressing GDP in PPP is different from the conventional method, but even with this reservation one cannot overlook that there are big changes in the team of ‘global leaders’.
The world is changing, indeed. Asia Pacific has changed almost before our very eyes. One virtually experiences cultural shock while looking at China. Deng Xiaoping started his reforms in 1978 — basically, it is a life of one generation — but in these years the country and the world have changed completely. China is not the only example. There are also Indonesia, South Korea... At the moment, we work a lot with the APR countries, including in the ASEAN framework. Infrastructure, exports and innovations have grown enormously there.
Are the changes in the top twenty economies a sustainable trend?
To a great extent, it is, and many countries illustrate that. It was so often said that the growth in China was about to end, but it is still there, although different in kind. I remember — I worked at the Central Bank then — at a meeting of central bank governors I told the governor of the People’s Bank of China, ‘We have the same target, 7 percent annual growth. The difference is that we are to go up to reach that point, and you are to go down”. At that time China had a growth of 10.5 percent, and fearing that their economy may ‘overheat’, the Central Committee of the Communist Party of China decided to check it. Now they reached a growth of 7.3 percent. At the APEC Summit, China’s President Xi Jinping said they would be quite comfortable even with their growth rate below 7 percent.
As of the end of 2014, China’s economy overtook those of the US. What consequences would such shift in global leadership have? Does the US feel jealous?
Indeed, it does, it feels very jealous. I refer to finance, advanced technologies and many other things, where this can be seen. There is growing demand for yuan. Central banks conclude large swap lines, trade and investment agreements in yuan with Beijing.
Brazil and China have switched half of their trade turnover to yuan. Similar proposals were voiced in Russia, too.
We are to go a long way before we reach half, but we have made a very big step towards it. We are starting to sell oil and gas for yuan. This November Gazprom and Rosneft and China’s CNPC and other companies signed relevant agreements in Beijing.
Moscow has been strengthening its economic ties with Beijing. More than half of the Russian people view PRC as the friendliest country. Would it be justified to think — with all the imaginable curtseys to our European partners — that the U-turn over the Atlantic has been done?
If I am not mistaken, it was Alexander III who said that Russia has only two reliable allies, its Army and its Navy. Each country, and China is no exception, has certain national interests to pursue. At some point we sang, ‘The Russian and the Chinese are brothers forever’. No, not forever. China is a partner and an ally. For some time we had certain fear of China, but we are overcoming it and admit China to many extraction and mining projects. China, on its part, provides Russia with opportunities for investment. Much is to be done in this respect, but one should always remember that national interests are of key importance.
As for the U-turn, I don’t like this language. A U-turn implies that we have to give up something, while in fact we want to work in all directions. Our previous situation was lacking balance, as our trade with Europe exceeded $400 billion, while our trade with China, Japan, Korea and the ten ASEAN countries stood at $170 billion. That was wrong. We should stand on both feet, both European and Asian. Indeed, we are a Eurasian country.
What opportunities do the developing markets open to Russia?
There are important niches for us to occupy. There is an enormous potential in the field of nuclear energy. I refer not only to the construction of nuclear power plants, but also to supplying equipment and ensuring safety and security. Much can be done in such areas as thermal and geothermal power generation, state-of-the-art ‘green’ power technologies. In addition, cooperation has been developing. Russia and China implement many joint projects, for example a project to develop a wide-body aircraft, for which we have advanced aviation technologies, primarily engine-building, and China has powerful investment resource and an extensive market. Wide-body aircraft and heavy helicopters could be marketed in both our two countries, and in the third countries.
Today, much is said of the prospect of the expansion of the Eurasian Union. In 2015, Ufa is to host the BRICS Summit and the SCO Summit at the same time...
This is a circumstantial solution. Each summit has its own agenda.
Nevertheless, SCO and BRICS and the ‘new G7’ — if not a union, may there emerge a closer partnership?
Some steps have already been made. Yet this should be taken without agitation, this process should not be rushed, and mutual interests should be respected. Those latter do not involve ensuring alternative to anything. We do not integrate in order to ‘make friends against anyone’, but rather develop important and useful projects. For example, the Silk Road implies extensive infrastructure that can tie together entire Russia, Central Asia, China, and Indochina, including Indonesia. It is a most powerful driver of global growth and the growth in the mentioned countries. Implementing such projects would serve as a backbone on which all integration efforts should be built. So, it is not a matter of establishing a formal community, but a matter of resolving the tasks that are important for everyone.
Let us go back, if we may, to Russian realities. You believe that the ruble is oversold: the oil price has reduced by 30 percent, and the ruble exchange rate, by as much as 40 – 50 percent...
More or less.
Yet the ruble started plunging as far back as in January, before any sanctions were imposed, although the oil prices had exceeded one hundred US dollars until mid June. What is it all about, speculator’s nose for changes or an objective economic downturn?
You see, the currency exchange rate depends on the balance of payment, which comprises two parts: capital account and current account. The dynamics of the exchange rate in February and early March resulted directly from the capital account. Nothing was wrong, the trade balance was positive, but the capital account started reducing rapidly due to the expectation of sanctions. The households responded accordingly and started to accumulate foreign currency holdings. Things related to capital account can happen very quickly.
What started in June, was already a different story, it involved fundamental things such as the situation at the oil market, economic development in different regions, in the European region, in emerging markets where the growth rate reduced. In addition, the Libyan and the Iranian factors changed the offer and demand drastically. Oil influenced our trade balance greatly. We had expected that. Yet in our case the two factors, I mean those of the capital and the current account, combined, which caused the dynamic exchange rate changes that turned out larger than the dynamics in the oil market.
Japanese Prime Minister Shinzo Abe made weakening of the yen the main aim of his economic strategy. As a result the yen has plunged 26 percent vs. the US dollar, and now the Japanese report that their companies’ income has increased. A Nobel Prize in Economy Joseph Eugene Stiglitz applauded the Abenomics, as the Japanese were not afraid of turning on their money printing machine and allowed 2 percent inflation.
They haven’t merely allowed it, they rather, strived to it and fought for every 0.1 percent. The country had lived with a zero inflation for twenty years. We got used to perceiving inflation as harm. Indeed, it is when its rate is high. A low inflation, on the contrary, is normal. It is believed that an inflation rate of 2 – 2.5 percent a year is necessary for supporting business activity. In other words, in case of disinflation the prices for assets reduce, and business activity becomes pointless, as it will have a negative result. Hence the zero growth in Japan for almost twenty years. However, this prescription works in a limited number of cases. It is valid for the economies with non-primary exports. China’s long story of undervalued yuan is exactly about this. The exchange rate of yuan provides extensive export opportunities.
Our exports are mainly primary and are less influenced by these exchange rates. For us, the exchange rates are important in terms of export substitution. Therefore it would be wrong to assume that after the ruble plunges all the industries will thrive. To do this, we need to have large unused capacities: production facilities, productive forces and unemployment. We have as little as 5.3 – 5.4 percent of unemployed population and as much as 72 percent of our production facilities are in use. What we need is investment. Investment is to a great extent connected with imported technologies and equipment that become more expensive as the exchange rate falls. So one should be very cautious and alert, rather than expect that devaluation will solve all our problems. It won’t.
What is a fair ruble exchange rate, in your opinion?
I would rather talk about an equilibrium exchange rate, that is, a rate that would enable us to have a current account surplus making up for a deficit of capital account. A deficit of the capital account results from the debts of our companies and the need to repay it promptly in the near future. In 2014, we are to repay about $90 billion. Therefore, we need about the same current account surplus. As for the exchange rate, it should be about 42 – 43 rubles for a dollar. Relatively speaking, this can be considered as an equilibrium exchange rate.
Last autumn you published a poetry collection titled Vitamin Deficiency. That was also a diagnosis that you made to the economy during our interview. This year you have issued a book with a far more harsh title, Painful Transformation of the World Economy. You also have described our economy in equally pessimistic terms, calling it ‘detonating and explosive’. Could you give the title of the next book instead of a forecast?
I can hardly discuss a book now...
Could you make a forecast then?
We have already discussed the risks and opportunities arising from the current macroeconomic developments. To mitigate these risks, we should additionally capitalize our banking system, making rational use of the resources of the Russian National Wealth Fund, and remove infrastructural obstacles to economic growth. We need to finally make peace with our businesses and create relatively comfortable environment for them. At a recent Government meeting we have discussed amendments to the Tax Code and the fees that were to be applied to small businesses, 22 kinds worth up to 600 thousand rubles in a quarter of a year... Thank God we could reverse that proposal and bring the number of the fees from 22 down to 4 or 5... So we could manage to mitigate the negative effects. But, as the famous joke has it, ‘we have found the spoons, but the bad feelings are still there’. What would people think after such exercises of ours?
The main thing we should do is to conclude a peace agreement with our business and work with it. The rest will go with it, we will be able to compete with imported goods and services and reverse the situation.