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Alexey Ulyukaev: Period of low raw material prices will be very long

14.01.16

Good morning, dear friends!

I would like, first, to wish everyone a happy New Year and Merry Christmas! Wish you all the best!

And really, some words about a long-term strategy. Does it have a right to exist? There are a lot of journalists near the entrance and nobody of them asked me about 2030? They ask about tomorrow, about oil, first quarter, ruble and dollar.

Long-term strategizing is a thankless job. There are many risks, many dangers, but there is also nice angle. It was John Maynard Keynes who said very well about the risks "in the long run we are all dead". It's about no use of the strategy. Strategy does not help to make current decisions. I think that is the main risk in every strategizing. We do not need a strategy, which will not help to make the right decisions today and avoid wrong decisions today. Conversely, the objective of the strategy is to focus on making the right decisions and avoiding wrong decisions. There is, of course, a nice angle in long-term strategies. It is also expressed by a well-known economist in the famous formula. It is Nasreddin Hodja, who said that in 30 years someone will die: me or the donkey, or the Emir. It's about the irresponsibility of long-term strategizing. These two risks – the inconsistency of a strategy with taking current decisions and the lack of accountability for the strategy – I think these are the main things we must avoid.

And those strategies, including the one that was prepared in 2000 by the first presidency of President Putin, distinguished by the fact that it could link all these things: long-term strategic goals, the correct goal setting was linked to the adoption of a set of important decisions in the area of current economic policy. And decisions are made today, but the consequences are remote. The consequences fall into the horizon until 2030 or beyond. Here is the link. And of course, the responsibility of the team, both the political and the professional one, which develops the strategy and takes part in its implementation, is extremely important.

Second. We live in an era of huge changes. Demographics, science and technologies are tremendously changing. The world has dramatically changed. I cannot explain my children much of what was part of our life recently in technologies, state structure and administration. Modern people just do not understand what it is. These fundamental global changes that are going now can be classified differently. Most forecasters, I think, take them like business as usual. See what forecasts are made by our esteemed world organizations, including those the representatives of which are sitting in this hall: the International Monetary Fund, the World Bank. They each year believe that the global economy will start to accelerate, and during the year then they reduce this forecast. Always they start with the fact that the global economy will be about 4% - 3.7% to 3.8%, then – 3.6-3%, and ultimately less than 3%. And we see it every year. There is an expectation that things will somehow magically normalize and everything will be fine again.

It is also an inherent feature of business, which does not accept important decisions on cost cutting, staff cuts, policy change in wages and bonuses, reduction of other costs, because it believes that sales will recover in a year or two, and you just have to be patient. And they will not recover. And they will have to align costs with the new future. Therefore, the choice between business as usual and the new normal – this is the key thing that we will have to do in the strategy.

I believe that we enter a period of new normality, in the era of powerful constraints for economic growth when these economic drivers, the geographical drivers will simply cease to exist.

High growth has been achieved by the emerging markets due to the fact that they had a very low starting point and very cheap labor force, low starting costs. You get into a trap of average income, average level of per capita income and if you have not found further institutional capacities, you lose these benefits. We see that emerging markets are losing these benefits and growth rates of developed and developing economies are being smoothed. I believe that this is a global trend that will be with us always, and the center will not move, there will be no new driver of growth in Africa or in Latin America, in Antarctica, because there are powerful global constraints - the constraints related to demographics and the environment, first and foremost. I believe the hope that through innovative solutions we will be able to overcome these constraints adequately is illusory. Hence for me is the following consequence: the economic growth based on the spread of consumption standards of the developed economies all over the world - what used to be called the golden billion, these standards apply to 6 - 7 billion is an illusion, it is simply not possible due to constraints.

Consequently, global economic growth is bound to be different. It cannot be consumer based only on consumer behavior; it should be based on more cost cutting, a greater reallocation of savings in favor of innovation or green energy, economies and so on. And it should be a cost cutting based on cost reduction, including those associated with labor. And here is a feedback between the reduction in labor costs and shrinking opportunities on the limits of additional consumer demand. For commodity economies like Russia, this means that the period of low prices for raw materials are very long, and I find it hard to talk about – whether it is a low stage in the global commodity cycle, or simply the new normality from the perspective of Moody's estimates. But I am convinced that this is a very long period of time. I always think that we should not be afraid of how we live now – depending on whether the oil will cost 20 or 15. According to the logic of markets, the lower oil price will fall today, the more likely is the kickback tomorrow. And it's not the biggest risk. The biggest risk that low prices is for a long time - years, decades. This means that there must be taken critical decisions associated with structural changes in the economy.

And also we need to assess, returning to the "Strategy-2030". After all, we have to strategically assume a certain target. The strategy is not an extrapolation of today's trends, and we all commit such a sin. Just look at changing dramatically consensus forecasts. And public analysts, and bankers, energy analysts are constantly changing the consensus forecast depending on what happens this quarter. But what happens in this quarter will build the next quarter. But this wave of changes is damping. The second year, let’s look at the consensus forecast for crude oil: the first quarter of this year fell, the second - fell. The whole year is almost unchanged. So, 2017 – $ 63, 2018 – $ 70. Here's the global consensus forecast for oil.

This extrapolation is not very useful thing. But the goal setting, the definition of those contours which correspond, on the one hand, to fundamental limitations and, on the other hand, create challenges that contribute to the mobilization of some internal forces of the economy, is an extremely useful thing, so we must proceed from goal setting. Goal setting tells us what the challenges exist and what risks are involved. Proper risk assessment in strategizing means the correct formulation of economic policy.

I will give two examples from the point of view of risks. What are the risks of a close time for the Russian economy? There is a risk, and, from my point of view very serious is the change of consumer behavior of the population. The shift from the consumer behavior pattern to the saving one has been already, in fact, on the way, and it has begun explicitly manifested from the second quarter of the last year. We see a fast dynamics of savings. I don't know the latest figures, approximately 15% growth of deposits in banks, despite the fact that the loan dynamics is much lower. Retail turnover in real values is heavily negative, without considering inflation it is slightly above zero. It's a serious thing. This means that the population starts to assess the future prospects differently, in a certain sense it becomes an adept in the "new normality". People start, without knowing it, to live in the "new normality". On the one hand, it's a risk, but, on the other hand, it can be a powerful driver of our development. Because it fits into the global "new normality", i.e. limitations in the principle of consumerism, dynamic growth of consumer demand. This will correspond to the main trends. On the other hand, powerful savings activity creates a resource that, with proper alignment of relevant institutions and tools, will provide the basis for investment growth. I believe that growth based on cost reduction is investment growth. These investments are investments in intellect, investments in resource-saving technologies, and investments in cost reduction. Then we must consider how this savings activity of the population could be channeled in this direction.

This involves another risk – a foreign one, with which we have already faced and continue to face. This is the risk that the global capital markets continue to remain closed to Russian borrowers. On the one hand, it's a risk. On the other hand, it's a challenge that can also be channeled properly. This means that our "blue dream", since 2000, to move to a model based on external borrowing, to a model based on the transformation of domestic savings into domestic accruals becomes a reality. We see reducing Russian companies' debts, obligations, schedules of debts and improving situation from the point of view of the payment account, the capital account of the balance of payments, on the one hand. On the other hand, it also means the necessity of using those or other savings, which we discussed in the previous risk. So for this we should have a powerful system that recycles properly these savings, so there should be the development of the banking system.

We need to increase the capitalization of the banking system. How can it be done in the situation of budgetary constraints and in the situation of low demand for the assets? I believe that we should return to the issue of privatization of our largest banks: Sberbank and VTB. It is very high-quality assets that are attractive throughout the world. Partial privatization and capital allocation in favor of these companies will provide an opportunity to fundamentally change the situation from the point of view of capitalization of the Russian banking sector; it will enable to digest the massive resources that can be mobilized through the implementation of this model savings behavior of the population. I say this to the fact that there is a complex puzzle in which we need to see global trends and risks, our internal trends and risks. And each time laying it out in the frameworks of 2030 strategy must mean for us the conclusion of our current economic policy. I would add in the same example that then we have to talk about the need to identify the securitization of assets in the country, the development of the bond market. For this, there shall be changed the regulatory and supervisory practice of the banking regulator, from the point of view of creating more comfortable conditions of securitization of assets.

It follows a set of practical conclusions. We need to correctly identify the goals, global trends, challenges and risks. And from here we should unwind the film and make the decisions today that will match or at least not contradict those positions. And then it turns out to be long-term strategizing is not an exercise in futility, but it that thing that allows us to make the right decisions and not to take wrong decisions.

Remark:

In Soviet times there was a joke: "We all work for the good of man, and we all know the name of that man". Actually, we all know this man's name it is the name of each of us. Our country in 2030 is a country where we will feel comfortable. I don't know whether you know this child’s feeling – you wake up every morning and think, how cool is that I live in the Soviet Union. There is an element of childhood, an element of correspondence of institutions and organizations with your inner feeling. This is extremely important. What are the important parameters? First, this is a man who lives much longer – 10 years longer than he lives now. And it is an active period of his life, the period, when the man takes active decisions, moves, rests, plays sports, takes part in cultural events and so on. Accordingly, it is a different system of consumption, where the consumption of goods will increase, but not by much, there will significantly increase the consumption of services – especially education – qualification and re-training, sports, culture, and personal development. This is the balance of structures – the balance of behavior, a different behavior, a different worldview. This is the country where no one pays one penny of tax without receiving from the state the service of appropriate quantity and quality. And finally, I think, is the country in which nobody will be interested in the question: how much oil costs today and what the ruble’s rate to the dollar is.

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