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The interview of the Minister Andey Belousov to the newspaper «Vedomosti»

21.06.12

“The situation is indefinite and swampy,” — Andrey Belousov, the Minister of Economic Development of the Russian Federation

Andrey Belousov told “Vedomosti” why he is an opponent of budgetary deficit ballooning

“Vedomosti”, #113 (3,127), June 21, 2012

Eugenia Pismennaya, Maxim Tovkaylo

 

New Minister of Economic Development hasn’t yet customized his office. “I didn’t have time to remove these pompous things,” — he says quietly, pointing at a valuable stone bull figurine and a lyric landscape, still left from German Gref. There are so many demands on the Minister’s time. He needs to get well prepared for a dash into the new quality of the economics, Belousov told “Vedomosti” in his first interview as a Minister.

— Your predecessor German Gref had the reputation of a bright liberal; Elvira Nabiullina clearly adhered to a more conservative politics. But both of them set a high value on government demand stimulation. And they say are a statist (a believer in strong state).

— Are you hinting at a negative trend: from a liberal to a statist?

— We would like to know, what are the creeds of the new Minister of Economic Development.

— I am a liberal. I say this defiantly a bit. I understand that it is not too popular to be a liberal nowadays.

— It is a surprise. And how will your liberalism display itself in the politics?

— Economic policy is always to be time appropriate. In certain cases the interference of the state is necessary; somewhere it even has to be expanded. Today there are three circumstances essentially defining the shapes, character and dynamics of the state interference into the economic life. These are low labor efficiency, bad investment climate and obsolete social system. We are in a unique situation: we need to make a dash in efficiency (I mean labor efficiency) and dramatically change the social sphere. And the problem has to be solved within a rather limited term — in 5—10 years. Usually such objectives are space apart in time and achieved successively. But Russia will have to solve both problems simultaneously. This is our historical fate.

— Why?

— Currently per capita GDP at purchasing power parity is about USD 20,000. Essentially, this level is high, but, according to forecasts, by the beginning of the twenties we will reach the level of USD 30,000. And it is already a level of southern European countries. But people cannot consume like Europeans and work with efficiency that is 2—2.5 times lower than in Europe. If living standards are improving, it means that the productivity level has to comply with them. This objective is documented in the President’s Executive order: a 1.5 increase of the labor efficiency level by the year of 2018. At the same time we are in for dramatic modernization of the social sphere — healthcare, and education. We have been putting this objective off for two decades. But it cannot be put off anymore.

— What is going to be with the pension system?

— All issues should be resolved within the budgetary process before October. Now discussions are in progress, and I wouldn’t like to record out position now. The only thing I can say is that the settlement of the pension issue must not incur the increase of the load on business.

— You said that dramatic modernization of the social sphere has to be carried out. Does it mean that the state will abandon the current paternalist model?

— Paternalism in Russia is a peculiar one. Classical paternalism implies mutual responsibility of the state and the citizens. And paternalism in Russia is rather lop-sided: they expect a patronage from the state, but often are not ready to be responsible before the state. It means that our paternalist model does not work and never worked, if truth be told.

— So what does out model of the social sphere look like?

— Feebly modernized and greatly stiffened system of the Soviet époque. This system is extremely ineffective and demands more and more resources for operation. But there are no resources. We objectively cannot support this huge ineffectively working sockdolager. We are positively short of resources, ergo the efficiency drops even lower. As a result the system degrades even more; good professionals try to go away by hook or by crook. And all that is coiling like a spiral. To break this spiral is our principal objective.

— Do you mean the “money in exchange for reforms” metaphor?

— Yes, I do. This metaphor is very precise. That’s what the formula of the rupture of the spiral is: we have to raise wages of doctors, paramedical personnel and nursing staff, teachers, higher educational institution employees up to a worthy level and simultaneously to launch the reforms.

— When you say “reforms”, do you mean dismissal of inefficient employees?

— Among other things. Inefficiency has to be calculated. We need to make the services of these sectors — principally healthcare and education — tailored to people’s needs. The system has to work not for itself, but for those who use it. This is the foundation of the social sector reforms. Plus pension reform. This is the basic knot. And do not forger that we live and will continue to live in the conditions of hard budget constraints.

— By the way, are you advocating a low level of budgetary deficit?

— I am a point-blank opponent of budgetary deficit ballooning. I think that ideally the budget has to be balanced; the admissible deficit does not exceed one, at most one and a half percent of GDP.

— Add there the modernization of the military system.

— Certainly. Without any irony. So, the reforms have to be carried out into a narrow resource limits. We need to be very precise in identification of priorities and arrangements for their implementation in everyday practice. Absolutely all budget expenses have to comply with the priorities. Up to now our actions have not been so accurate. And no results will be achieved hands down; a decision will not leap out of obscurity like Jack from the box. We are in for meticulous work on forming of a strategic management system. By the way, it was Alexey Kudrin who articulated this task explicitly. He always emphasized that we do not have a strategic management system, although we do have a heap of various strategies, concepts and programs. And behind every program there is all the same: “Give me some money”. So the objective of the Ministry of the Economic Development is to create a functionally operative tool for development and implementation of priorities. There is one more objective — to deal with extremely low efficiency of the state administration. Here is an example. In 2009—2010 the volumes of government assistance to aircraft industry per one aircraft exceeded the value of the issued aircraft. It is fine that the situation is different now. But still there is a question: how much budgetary money we need to make it all work?

 

To find growth sources

— Thus, the first thing your branch has to do is to build an arrangement for priority implementation. Is that all?

— Certainly not. In the coming years the investment climate topic will declare itself quite in a new fashion. We have to take into account that Russia is entering quite a long period of lack of oil recovery growth. Even in the medium-term forecast oil recovery will flatten out at the level of approximately 510 million tons per year. Herewith, the interior consumption of oil and oil products will gradually grow. It means that export of oil will decrease. So the oil export will transform from growth factor to slowdown factor.

— So what shall we do?

— Find other growth sources.

— But there are economists saying that reforms can be exchanged for low growth rate.

— I am a rigorous adherent of high economic growth rate. Reforms are impossible without high growth rate for no other reason than we will not be able to carry them out without money. If the growth is low, the budget will become rated only for discharging of the current liabilities.

— What growth do you deem high?

— In current conditions, 5—6% per year. But if oil ceases being the economic growth driver, a question arises: what other thing may become such driver?

— Indeed, for as much as four years modernization was discussed, and before something about debureaucratisation was said.

— Frankly speaking, I do not know how to translate debureaucratization into GDP growth rate, although there are such specialists. I can translate investments into the growth rates. Increase of investment rate up to the level of 25—27% is an imperative for us. Russia does not have any other development source. To recompense the retardation of export, something else has to grow significantly faster than GDP.

— And what shall it be?

— Investments.

— In what?

— In the Russian economics there are huge undercapitalized sectors, investments to which may bring income. Before our eyes agriculture and construction have become such sectors. And also there are service and processing sectors — and the huge Russian market. And investment sources exist. Gross savings norm in the Russian economics is one of the highest in the world: a little less than 30% of GDP. And the Gross accumulation norm is only 25% of GDP. This hole has to be plugged. And nothing can be invented here apart from the commonplace idea: the entrepreneurial climate has to be improved. There is no other way. If in the coming years we do not dramatically improve the entrepreneurial climate, we will collapse into stagnation with all the disagreeable consequences that come with it.

— Improvement of the entrepreneurial climate has been discussed for 20 years already. It is already a bit embarrassing.

— The principal cause of the fact that this problem is still unresolved is evident. We have improved the quality of our laws quite quickly, but the system does not work in conformity with them. Thus, for example, antitrust laws in Russia are one of the best in the world, but the competition is feeble. There are too many monopolized markets, including local ones. While solving any problems, we strike upon rigid structures that reject new laws.

— How this should be fought?

— There are certain ways. Actually, it is national entrepreneurial initiative declared last December that presents a new model of the approach to entrepreneurial climate improvement. And, in my opinion, it works efficiently. The idea consists of three parts. The customer of the process, i. e. the entrepreneur himself, is involved into the process. Governmental agencies are motivated on real change of the climate. And everything should be set forth in a project form, with concise goals, objectives and actions, and persons responsible. We need what is called “roadmaps”.

— Does it turn out that the № 1 goal of the Ministry of Economic Development is improvement of the investment climate?

— It is hard to say which goal is of primary importance. Everything is interlaced: strategic management system, social sector and state administration reforming, and investment climate improvement. It is comforting that there is tangible progress in investment climate improvement. I took part in the launch of the five first “roadmaps” on national entrepreneurial climate. And at the start there were few believers that we will be able to move that far. The pressure from the side of business turned out to be efficient. And even such conservative structure as the Federal Customs Service in some moment started to work in a very constructive way.

— I suppose, only you, developers, have already felt the effect of the entrepreneurial initiative. But your goal is obviously to make all of us feel it.

— Yes, everything is at the very beginning. Time is required. Although the first initiative referring to the entrepreneurial climate in the regions, that was a little proactively launched in September, has already started to produce an effect, people already have started to feel it. The first step is the hardest.

 

System leakage

— Recently Alexey Kudrin said that the second wave of the crisis that he had forecasted in 2009 had already started. What do you think?

— Currently there is the worst and the most dangerous phase of all that can occur. The situation is very indefinite and swampy. Sometimes it seems that it would be better if the crisis started. Then the crisis measures would be launched and we would start to get out. In the meanwhile, we are observing certain moments that are very alarming. For example, in Europe depositors are moving from southern banks to northern ones. In Germany — the country that is deemed a citadel of the European Union — PMI indices are dropping below 50%. But there are also some vestiges of hope that the situation may turn to the good. The fact that Spanish banks are promised to be given EUR 100 billion, is a little retarded, but positive response to the situation. As for the debt crisis in general, I assume, the situation is reversible so far. We have not passed the point of no return.

— And when may such moment occur?

— When one of the largest European banks crashes. This has not happened so far. But, unfortunately, the situation is not resolved and seems to be far from resolution. For us such indeterminacy is fraught with two moments: capital drain and reduction of oil and raw commodity prices.

— A significant capital drain from Russia is already being recorded.

— The drain has started to slow down. Although, right you are, it had reached quite high values. If you take the drain value from October to March, is exceeds USD 13 billion per month at the average. This is a high rate. But in April the drain dropped to USD 7 billion, and in May it became less than USD 6 billion.

— Probably, our capital has already run away entirely, and that is why its drain rate is dropping?

— There is yet powder in the powder horns (laughs).

— Do you assume that there is a tendency towards cessation of the capital drain?

— We have moved to a new level of system-based support, which is defined by the borders of ruble price range and capital drain. Certainly, if there are no external shocks. Everybody was afraid that the market would transverse the sacral value of the upper border of the bi-currency basket cost — RUR 38.15. But the Central Bank announced: “The border will not be moved, interventions are started,” — and the market stopped before reaching the upper values.

— Why does the capital leave Russia — because of the global financial crisis or because of our political situation?

— The drain has systemic character. Currently they trace primarily the runoff from the developing markets, including ours. And certainly it must not be denied that the political factors have acted their negative part.

— For sure, Russia is a risky country, it cannot be denied.

— Especially when you venture not your own money, but someone else’s ones. And market players, as a rule, manage someone else’s capitals.

— What will happen to the drain in future?

— We have not yet reached the intermediate bottom. If before long oil prices do not drop significantly, we will be at approximately the same level. Certainly there may be small bounces to the one side or the other, but the level will not change.

— Does not the population behavior worry you?

— The population behaves rather calmly. There is no panic, dollarization of savings. There was a small wave when people started to dispose of Euro, exchanging them to US dollars, but ruble assets were scarcely touched by it. Some people dashed to buy real estate, but it was not manifested at the systemic level anyhow. But the drawings at the foreign markets —a component of net capital drain — reduced significantly. Capital export from the nonfinancial sector has increased. This is also a fact. Corporate players behave not that anxiously, — rationally, I would say. Let us see what comes next. We assume that the drain will slow down.

— So Russia will live in the condition of permanent small capital drain?

— A very important moment was that we did not have significant reduction of the current transactions net balance. There were apprehensions that there will be a substantial decrease in this sphere. But in the 1st quarter the import stopped. Almost everything was standing apart from equipment import under contracts that had been signed already. And in consumer and food imports there were negative trends. Now revival is starting, import is beginning to grow again.

 

One must not believe economists

— What is the probability of deterioration of the external conditions, e. g., oil prices decrease to USD 80?

— There are three factors significantly influencing oil price. The first, fundamental one, is supply and demand balance. Oil demand essentially depends on the growth of the Chinese economics. Of diurnal oil production increment by 1 million barrels, 600,000 barrels account for this country. The second factor is dollar rate, because oil is paid in dollars. As soon as dollar weakens, the prices go up. Manufacturers and traders are trying to hedge the risks and possible damages. If you take the first two factors, nothing alarming is going on. Deceleration of the Chinese economics is not fatal — it continues to grow approximately by 8—8.2% per year. Moreover, inflation significantly decrease there, export and investments are growing — these are good news that supports high level of oil prices. There is one more factor: after “Arabian spring” many middle-eastern countries increased their social expenses, and now their budgets are balanced when oil price is about USD 80—90 per barrel. I assume that the probability of oil price decrease below than USD 90 per barrel is significantly lower than 50%. But it exists. If there is flow of negative news overlapping each other, anything may happen. Here we should remember about the third factor that acts a significant part in oil price determination — the speculative factor.

— How do you estimate the situation at the Eurozone?

— Europeans understand their responsibility for the course of events and are building a defensive belt at the level of Spain and France. Bad debt problem is unlikely to spread behind these countries. In the risk zone there are Spain, Portugal and, certainly, Greece. The situation in Greece seems to be dead-ended, whoever wind office in this country. The cause is not only its debt, but also a huge unemployment rate making 20%. These are people who have to be supported by the state. And it confines the government with respect to fiscal consolidation. Economists are inclining to the opinion that the probability of exit of Greece from the Eurozone is lower than the one that the country will stay there. I agree with this opinion, although Americans say that one must not believe economists. They assumed that the collapse of Lehman Brothers would not lead to anything bad: everything would be jugulated, and the financial system would get revitalized. Here’s a fine revitalization!

— So one must not believe you?

— I am not an economist; I am a civil servant (laughs).

— Does not it worry you that GDP is dropping for the second month at a run, and the industrial sector is stagnating?

— In the 1st quarter there was a growth by 0.3%, and in April there was a drop by 0.1% — within the limits of statistical error. And the first May data indicate the growth. As for industrial sector, we had intense growth and deceleration in April. It is quite a conjectural thing, without any drama. In May there was manufacture increase by 0.6% in comparison with April, with account of seasonal factor, according to the Center for Macroeconomic Analysis and Short-Term Forecasting. I assume that the domestic market situation is sustained. The unrest has phantom nature: everybody expects bad news from Europe, and this tension periodically bursts with leaps of currency rate and stock market quotation. But en bloc, I repeat, everything is all right.

— Ruble is weakening. Are not you going to scale up the inflation forecast?

— Weakening of ruble could have incurred the growth of prices of non-grocery goods. It did not happen: weekly dynamics remains at the level of 0.1 percent point, which is within normal limits. But fruit and vegetables are seriously rising in price. Honestly, we have internal discussions referring to this matter. Some colleagues assume that the price is growing with normal rate, but I suppose that the rate is a bit abnormal. Partially it occurs due to the factor of the drought on the South of the country. Besides this circumstance, the inflation remains in acceptable limits — 3.6% in annual terms, which is lower than last year. So far we are staying within 6% on the safe side.

— The government has adopted an ambitious privatization program in which sales plans of fuel and energy complex assets are set forth. On the other side, the President is signing decrees about return of these companies to the list of strategic ones and probable inclusion of Rosneftegaz into their capital. How this should be understood?

— The existence of the decree on return of the companies to a list of strategic ones does not abolish the plans of selling thereof. The President just took this question under his control. It is important to understand that inclusion of large assets both of the fuel and energy complex, and of other branches into privatization program does not mean that the government will dash to sell them, regardless of the business environment. It means only the launch of a rather lengthy procedure of a pre-sale preparation: selection of a consultant, setting forth of general selling conditions, work of the consultant, selection of the way of selling, receipt of offers from buyers. So the procedure is very cumbersome, which enables to make no mistakes. And only in the very end a decision on asset disposition is made.

— However, into the capital of what companies may Rosneftegaz enter?

— This question has to be addressed not to me but to the company — where it wishes to invest its resources. The fact is that fuel and energy complex assets sale was always put into the context of realization of strategic interests. In case of Rosneft these interests are the most convex: the company has licenses for work on the shelf and is one of the largest operators of its exploitation. Certainly, any decisions referring to its privatization will be made with due account of this circumstance. Moreover, I suppose that the logic of decision-making referring to this question will proceed from these considerations.

— Does not it seem to you that the windows for possible sales were available in the beginning of the year, and they will not appear in the near future?

— I do not agree with you. 49% of the United Cereal Company was sold.

— FAS have already challenged the deal…

— A deal is challenged when it is abolished. And it is not abolished and won’t be, I am sure. There is no ground for it.

— Does the plan of selling of 7.5% of Sberbank before the end of the year remain?

— Yes, but everything will depend on the business environment. Sberbank is ready for privatization. It is important to prevent the harsh deflation of the price of its shares, like after the first public offering. We do not need one more “buyback” from the state bank.

— What will new deputy Minister Pavel Korolev do and why did you offer him to join your team?

— Pavel Korolev is a strong manager. He used to work in Skolkovo, Ministry of Transport, he knows the real sector quite well. In the Ministry he will be responsible for the issues of property registration, land relations, etc. He is in for reforming of these spheres with the objective of making them more humane. It is a very difficult task, like everything that refers to mass service provision.

— How will the federal contract system be administered? Will a separate agency for purchasing control be created?

— I believe that the functions of financial control and purchasing content audit will be distributed between existing agencies and there will be no need to create a new structure. Procedure supervision will be retained by FAS. As a whole, the state order control is becoming three dimensional. Probably the accent will be replaced from the procedure to the contents, for it was just the lopsidedness of the state procurement law that incurred discontent with it. From the procedure standpoint everything is all right, and from the content one a company comes, dumps, and then does not complete the order. And the affair ends in the court. For example, Ministry of Economic Development as the composer of the state procurement law already has had about ten cases this year when contracts were terminated; money was not paid, etc., even though our employees are competent people who know what a requirement specification should be like.

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