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Alexey Ulyukaev: We destroy nothing. More likely it is a cooling down

09.12.15

Alexey Ulyukaev is certain that the economic decline is over but he estimates the economic situation as negative. There is nothing positive in a decline if it is not be followed by a sustainable growth. But we cannot expect it, perhaps, in the next 5-10 years. On the contrary he supposes the influence of economical wars with Ukraine, the EU and Turkey caused by foreign-policy conflicts will not last long: a business partnership is the first what will be restored after the "economic winter".

- Alexey Valentinovich, there are some rumours about your leaving the cabinet. Are they true?

- Right from the first day, 24 June 2013, when I started to perform my current responsibilities I was going to leave (Laughs). I am like Robinson Cruso: every day I make a dap on the tree. For example, today [December, 4] it is the 839-th day as far as I know.

- What can make you put your last dap on the tree?

- Maybe when I can see that the signs of growth restoration will become actual growth.

- You are the Minister of Economic Development. Development of any kind provides extension of opportunities of citizens and businesses. But now opportunities continue to shrink, foreign trade, economic, scientific and technological relations are restricting. No doubts, it is an external reason for you because it is not the policy line of the Ministry. But what do you think about consequences of this policy and how do you see your tasks in this situation?

- Foreign trade relations are based on a trade balance: the more developed trade relations a country has the greater its trade balance is and vice versa. If to measure it quantitatively, in the cost equivalent, market conditions have the most influence on it: our trade turnover with Europe in this year decreased by 38% in comparison with 2014. What is the reason: our relations breaking or prices for oil and gas change?

- Both factors.

- Firstly, in any situation we should consider different factors. But if we evaluate the components in per cent we will see that the main influence was caused by the global demand parameters change and, consequently, change of our export: change of prices for our metals, oil and gas.  Concerning the political component, here you mean sanctions and counter-sanctions, I suppose. The influence of this component is significantly less.

And secondly, nevertheless I think that we destroy nothing. And we are not destroyed as well. More likely it is not a "freezing" but a "cooling down". If something is destroyed, it will be very hard to restore it in future but it will be easier to bring back the suspended issues. I suppose, the return compensating motion has started now. For instance, a year and a half ago the intergovernmental commissions practically did not operate effectively. Now they have meeting, gatherings and they are speaking on current issues. For a long time businesses could not enter the capital market but now they can do it. Investors do not have only abstract motivations but also actual preoccupation: now mainly there are allocations only on the corporate debt market and also on the capital market. These interconnections are developing and it is a very important aspect. Every pendulum is characterized by inertia causing its backward motion and now it follows this direction. Could we do something to make this motion more efficient? Perhaps, we can, so it means that we do not use it completely.

Of course there are several circumstances very closely connected to politics. They are Turkey and Ukraine. In case with Ukraine we refer to the agreement of Ukraine with the EU [association agreement] and our possible reaction to it. Their delay of implementation [the part of the agreement for the free trade zone] is currently over. In this case I think that here the process itself is more important than its result. In this process we and our European colleagues have better understanding of our cooperation development direction. And now it is more important than our chance to find an acceptable solution till the 1-st of January.

- By "the process" do you mean the fact that the opinion of Russia about Ukraine and the EU association is taken into account or the steps for cooperation extension?

This process is aimed to restoration of our relations with the EU. Again we returned to the practice of intergovernmental commissions and work groups where we discuss joint investment projects. In January we have a joint commission with France, in February - with Belgium, and we recently had commissions with Austria, Spain, Slovakia and Greece. All this proves the dialogue resumption. And our agenda includes attempts of returning to reloading the project of partnership and cooperation with Europe we formerly had.  Now we desire to extend it. In summer we addressed the European Commission Chairman [Jean-Claude] Junker our view about this agreement realization. Then the formal letter from the Eurasian Economic Commission was sent. In October Junker responded that they kept working on it and forming a mandate. This is very important.

- Is it still in the form of discussion? About what projects is it?

- It is still the discussion. But the working on projects is also carried out. For instance, the "Nord Stream-2" is a very large-scale and complex solution which we integrate into the European regulatory practice.

- You are talking about activation of the cooperation. How do you estimate, in what conditions the European investments will return to Russia?

- They already started to return now. Corporate debt acquisition outlines investments because the debt is allocated in order to acquire a source of investment projects. The order of these amounts is hundreds of millions but not billions euro yet. So there are proofs of the return of the capital to the market. Look, what situation we had with our share index in September-November. Now we have a kind of political shock caused by Turkey and it cools down the situation  a bit. But investments are returning and I am absolutely sure that this process will continue. It is a rather careful process but it continues.

- And what options exist in relations with Ukraine after the 1-st of January.

- On the one hand now on the stake is our obligation to maintain preferential trade scheme with Ukraine with zero rates and on the other hand there is the Ukraine's obligation to maintain the range of technical regulations of the CIS countries free-trade zone. If Ukraine adopts other state standards and restricts its obligations for Russia it will be a just measure to maintain the equilibrium to apply the common mode of most favoured nation basis (so that to increase special taxes from the zero level supposed for the preferential mode to the common level we have with countries which are not members of the CIS free-trade zone. - "Vedomosti"). Our average tariff now is a little lower that 6%.

The result of this measure at the present time will not be as tangible as it could be two years ago since our trade turnover decreased by three times. It was about $40 billion in 2013, $27-28 billion in 2014 and $13-14 billion this year. It is important that we restore understanding with the EU on issues of technical regulation of sanitary and phytosanitary norms and this understanding can cover larger scope than rather around Ukraine. All these issues are included in the agenda and are worked on.

"What if you travel to Antalya and will never return?"

- According to the narrative Russia will be in dissension with Turkey forever but you are talking about a cooling down. What is the actual situation? Is it a dissension or just a cooling down? And what consequences will it have for economy, exchange inflation and investments?

- The situation with Turkey is completely different: it is an aggressive action and a response to it. The President in his message to the Federal Assembly has separated the Turkish population from the top leaders, mere precisely, from some of the top leaders. I think we will act according to this logical scheme. It means that, firstly, business relations should be less damaged and, secondly, these relations are the primary subject for restoration. The Turkish investors who have operations in Russia will continue their operations. Currently the Ministry of Labour proposed an effective mechanism of employment quotas maintaining for these companies. And in areas where actual risks for people's security exist the introduced measures will be more long-lasting.

- And what about the Mutual Investments Fund?

- With my colleague in the past, the Minister [of Economic Affairs of Turkey, Nikhat] Zeybekchi, he is on the sidelines now (I did not have a chance to meet the new Minister) I discussed three projects. These projects are a project of the preferential mode of services trade and investments, a project of the Mutual Investments Fund establishment and a five-year-inter-state agreement of trade, economic, scientific and technological cooperation. At the present time we ceased these negotiations. But concerning the investment fund we did not have a significant backup.

- The President said that Turkey "won't get away only with tomatoes". Did he mean an opportunity of economic sanctions extension or, perhaps, a military council?

- I am afraid I am not a good commentator of the President's statements. I won't even try to comment on this one.

- But if it is about economic sanctions extension?

- No. I don't think so. Again, if we consider it logically, it is not only an introduction of an economic embargo [of import] as it was with Europe and the USA. It is another matter. In this situation our country and our people can encounter real risks. Thus, I suppose, where greater risks are there is an increased probability of sanctions remaining.

- What do you mean by those risks?

- That a person having a tourist trip to Antalya would never return home.

- Is there such a risk?

- Why not?

- I would say that it is the same as anywhere else.

- But I would say the opposite. Turkey does not have a transparent border and there are dozens of thousands of armed men (the army which takes part in military operations). With the absence of the border probably these people can be very close to a tourist staying in Turkey. It is an evident risk. The war is right there and right now. And Turkey endorses a very special notion about these war participants.

- It is not the first day of war there. It is weird that this risk was not taken into account, for example, a month ago, is it?

- This question cannot be addressed to me. Once again, there exists the risk for people staying on the territory of Turkey because it is a dangerous situation there. And the risk that the dangers can be brought here is a very significant factor. In my opinion, new visa requirements we are introducing will be valid for a long time. On the contrary, the "tomatoes" embargo cannot be a source of risk, so those measures can be cancelled first of all.

- You mentioned that supply shortages could be possible now?

- We have one month before those measures introduction. I hope that importers and relevant organizations as the Ministry of Agriculture or the Federal Veterinary and Phytosanitary Monitoring Service will work out and minimize this risk.

- In any case the change of suppliers can lead to increasing of prices. It is again a very negative influence on the economy and the uncertainty for investors.

- Indeed, it is a very negative influence on economy. And, indeed, it can lead to increasing of prices. And, indeed, it can frighten some participants of business activities. We cannot give the precise values because we need to evaluate motivation of those participants [for the calculation]. At the moment I start from the fact that it is very unlikely that those values will be very significant for the macroeconomics. A short wave of commodity inflation increasing is possible. But it won't be very high, about deciles of one per cent. Anyway, this inflation will be reduced within a 12-month-period.

"Since we need to eat"

- You said that we have already reached the bottom of crisis. But when can we expect the motion from the zero point?

- For last several months they keep on accusing me about my optimism saying that it is my profession to comfort and say it is ok. But in fact I never say it is ok. I say about problems but from another point of view different from the point of view of analysts.

- If we return to your promise willingly remain a Robinson Crusoe until the steady growth of economy. When will the steady growth take place? Maybe, in 10 years?

- Yes, why not? And now analysts are starting to realize it. It is not a "fallen down? - perform push-ups" situation: now we have a new economic reality. And when I say that from June the economy decline stopped it does not mean that we consider the situation in the economy as positive. The situation is in fact very negative. The decline has stopped and we don't expect a further decrease and even will demonstrate a slight growth. This growth will be only statistical, mainly determined by the base effect. And there is no optimism about it. It is not a problem about the deeper decline. We won't have a deeper decline. Unfortunately, the problem is our very limited potential to get somehow significant economic growth indices. Formally the results of this year will be even better than our forecast, namely, better than 3.9% [decline]. Very probably, it will be 3.7% [decline]. It is a reason for optimism, is not it?

- I do not see a big difference.

- Right. I am also sure that we will have a small growth in 2016. According to the forecast it is 0.7%. It is not a reason for optimism. But it allows changing our attitude to this growth structure. We assumed that firstly the customer demand will be restored and then it will be followed by investment demand. But in fact there are contrary results. It is a very interesting phenomenon. And for me (I hope I won't maleficate) it is a source of some optimism. Because the customer growth is caused by the growth of income and the growth of expenses what leads to the business financial base narrowing. While the investment growth provides an opportunity for stable development. We have to pass through the stage of the investment growth. And that event of investing evaluation changes was a very unexpected.

- Do those evaluations presume a growth or still a decline slowing down?

- The decline slowing down, of course. In our forecast it stands 9.9% [decline] but this index will likely be less than 7%. And again, not the index value 7% is important. It is still a very negative situation. The positive aspect is possible investment potential in the third quarter of the year.

- Can you give an explanation? Since it is not reasonable to increase investments not having a growth of demand.

- There is an explanation: it depends on different sectors. The greatest value of investments was in fuel and energy sector. There formed a good financial result. Yet I cannot give my evaluation of investing motivation stability. But anyway the fact of investors' activity is a very good reason for optimism.

We formerly described it this way: the customer demand is restored a little, so the stocks will be restored since stocks amount decreased dramatically since 2012. It signified that businesses produced less and sold products from their warehouses. The restoration of stocks is always the first sign of the improvement. And the fact of investments appearance is a very big unexpected advantage.

- The long-term forecasts of different expert organizations presume that the growth value in Russia will be equal to 1.5-2% for the next, maybe, fifteen years. Do you agree with these evaluations?

- I agree that for the next, maybe, five years - until 2020 - in case we do not carry out substantial reformation of the structure and institutions our growth indices will be lower than global about 1.5-2%. The Russia's value in the global GDP will decrease correspondingly.

What can be consequences of this habit to stagnate? For instance, according to Gaidar Institute for Economic Policy evaluation production sector "gets used to stay on the bottom and estimates this situation as normal".

- In this case a factor of adaptation exists. And such a property of our economy as self-adjustment is quite well demonstrated. But, indeed, it means a loss of dynamism, the economic dynamics. This is why here we have a vast space for transformations.

- Will you please give an example? For instance, there is an idea of a reforms center establishment proposed by German Gref.

- Reforms and a reforms center are two absolutely different issues. I think that we don't need to establish a new reforms center - we have already a lot of them. If a ministry being a reforms center itself does not work effectively, a minister should be replaced. But it is excessive to establish some additional institution.

– Do you have request for reforms?

– But who must have request?

– In nation. The freedom of reform leading is must have.

– But I think that request must be from business principally.

– And is business had not it by your own valuating?

– I think that exist but it is not formulated and more on the level of feeling. The problem is in the point that the law of today benefits prefer to future benefits and acting very promptly, the request of business is more short-term. It often summarized to cheap funding and demand guarantee. But it can make by different ways. Will it useful to focus government demand on limited circuit of economic entity? No. It is not going to happen. It is clearly that when we talk about import phase-out, that isn’t to say closing. Import phase-out and export are the same. We should to change import production in such a manner, that the analogue will be better in price and quality. And test it by releasing to the external market. Then it is the right import phase-out. Of course, there is request for cost saving.  It is necessary that cost-to-income ratio will be less. It gives growth capacity. And shall be right expectations – balance of risk and financial return ratio. What is let to reduce expenses? This is the right policy of labor market, right policy of tariff setting, tax system.  But risks are the right work of courts, fiscal and macroeconomic stability.

– Policy elite also have preference of current benefits to future. Finally, key choose make elite and while common points between current interests and long-term interests of country are not found, how can exist any reforms?

– Exactly so. We always talk about human capital development. But human capital formed by generations. Today you develop education, but you will reap the benefit through 30-40 years. It is long. So we often act on the principle of: put in potatoes, and unearth in the morning because you want to eat.  That is we do in many ways, in the same way with a budget. Because we neeed it today.

"Life is unfair"

– President said in a message that some development institutes become “dump for bad debts”. We understood that the question is about Vnesheconombank...

– I understand like that.

– What variants of VEB saving now are considered? What variant is more preferable for economy and for development of institute? How soon will be the decision about VEB life? Should it for example, tomorrow or should it strain in time?

– It depends from what we want to receive totally. It can be tomorrow, and it can be stretch or receive gradual.  If we want that the organization which called “state development corporation “Vneshekonombank” is only exist, then we cannot make a decision tomorrow. Next year VEB will need 200 billion RUB, for obligations, and we will find these 200 billion RUB. But through several months we will gather again and will discuss this situation. If we want that it will be working development institute, we need to improve conditions. There are about 1 trillion RUB of bed debts. No other way besides help from budget does not exist. May be differently present this question, differently call it but completely will be the budget.

– Does have the budget 1 trillion RUB for VEB?

– This is question of allowable budgetary deficit evaluation.

– President [in a message] limited the deficit 3% of GDP.

– He did not say about 2015 year.

– Minister of Finance said that the budget help of VEB does not lead to the growth of deficit.

– There are series of different adventive offers which were discussed. But there is no way except budget.  It can make pastry, can make immediately, with money, money substitute, but it is necessary to make expenditure and increase deficit.  It can do this year or the next year. It will be better at this year.  And it will be better to make with substitute i.e. with obligations of federal loan.

– But is it fair – to save VEB using budget funds?

– Unfair. Do you have other variants? Life is unfair.

– Maybe, liquidate, if the institute is so ineffective?

– From my point of view, better is liquidate instead of screw around -  like, part of debt we can change in other debt, after that we can discuss this problem again. But if we will consider closing suppose, that it is necessary to make principal decision.  Principal decision is recapitalization, which will lead to clean VEB from bad assets, form its financial model otherwise and clear VEB from additional functions unusual for it. And then it is necessary to make decision which let make into similar situation in a future. Otherwise we create moral hazard – guys, now we are clearing all, but through a year and a half you can come again for 1,5 trillion RUB, and its just will stand by.   For non-admission it is necessary to make alterations to the law about public corporation.

– What construction of VEB as development institute is optimal?

– From my point of view, “Chinese wall” is to be carried out – VEB should have two different balances. If consider special projects to VEB, any one of them should be place source of funding at once. If VEB raises project which is not compensated commercially,  it will be necessary to bring under budget source. No other is there. But in other half – besides “Chinese wall” – rules of simple business should act. I think that VEB in commercial part should be regulated by Bank of Russia in full measure. Besides, there is state management company, in the frameworks of VEB, which managing with retirement assets. And this institute also should be regulated by Central Bank in full measure. Equities and assets of VEB should be observed.

– Russia has other development institutes, but development is absent. Small and medium business corporation is made for work with it, but it is closed.

– May be it is not because of corporation creation but because of our wish in creating stabilized conditions for small and medium business and constant considering it as fiscal source which is not appear. 

"They must conform that we want to collect 30 billions RUB"

– Are you agree with opinion of Sberbank head Herman Gref that banking sector of Russia is in crisis?

– Not granted. I think that there is no crisis in bank sector and bank system feels better that economy totally.  Last year we took measures for consolidation of fundamental base, relaxation in the requirements under regulating and surveillance, reduction of dividend payments. And the best factor that there is no crisis in bank system is Sberbank stock values:  its returned on record high in practice. From the point of funding view – balance of Central Bank is compressed, demand for refunding is decreased, bank deposits of citizens and companies are big, and reserve capital is present, citizens and companies are trust to the bank system, reorganization is going not bad. I think that crisis can searched in other places.

– Crisis now in cargo traffic. Did you calculate economic damage from “Platon” system? Contribution in inflation, for example?

– Contribution in inflation from “Platon” is minimal. The issue is about other: we change conditions for very wide range of business again. There are not only carriers: there are shippers, sales network – all together. And they must conform that that we want to collect 30 billion RUB for Road fund.  It is incommensurable. Every time we endeavor to obtain small win, change the system of economic relations. And moreover in time of economic stagnation. There was  a decision that we should stop all these practices with new quasi taxation payments and duties for three years. We decided – and after that begin to correct it again. There was a decision that we enter but in a minimum level [with tariff] less than rouble [for kilometer], as we offered and collect 10 billion RUB.

– But how much is it, how much are they plan to give to the RTITS – operator of “Platon”. There are no entrances in Road fund. There would be succeed such "special tax to Rotenberg".

– For ensuring that this system works. If you believe that you have a good system, let get right, test it and after that introduce. System need to upgrade. 

– Are there considered alternative ways of “Platon” to add Road fund – through excise duties for example?

– As far as I am concerned, no.

Vedomosti
Olga Kuvshinova, Alexandra Prokopenko

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