The Gaidar Forum is an institutional platform for discussing the key challenges facing the world today. The central theme of the 2015 forum is Russia and the World: New Dimensions.
Dmitry Medvedev’s speech at the 6th Gaidar Forum plenary discussion:
Good afternoon, ladies and gentlemen. Once again I heartily welcome everyone to Moscow. You have come to take part in the Gaidar Forum despite this rather difficult time. I would like to thank you once again and note that the forum remains a reputable platform for leading economists, politicians and business people. This is encouraging.
A lot of events have taken place during the past year. The world has really changed, and this is not a figure of speech; it is really the case. Politics has significantly intervened in the economic domain, in the narrow sense of this word. The result is total distrust and the revival of old myths about Russia as being nothing short of a threat to civilised development. Reciprocal economic sanctions were used, as a result of which not only we, but also a number of other states, are sustaining losses. This is felt especially strongly amid the ongoing global crisis that broke out in 2008. So far we have not been able to overcome its effects, the consequences of the 2008 crisis (I spoke about that before and would like to say this again here). Some countries are still unable to pull out of stagnation. According to the International Monetary Fund, the GDP of Eurozone countries has not yet reached the level of the pre-crisis year 2007, and this speaks volumes. Other big countries are stepping up the pace of development while still others, on the contrary, are slowing down. For example, in 2014 Brazil’s GDP dropped to 0.3 percent. This simply shows that the trends are very different.
Russia is not an exception here. Like the rest of the world, we are paying the price of globalisation. In effect, our country today is at a cross-point of several crises that were triggered by three groups of causes.
First, as I said earlier, the effects of the 2008 world crisis. Second, the external political and economic pressure aimed directly at our country. In previous years, we lived and developed with high energy and commodity prices. Our companies and banks had free access to long and relatively cheap money on foreign markets. Now the conditions have drastically changed.
However, external factors, and we understand this as well, have only exacerbated the situation. The third and main group of causes is the internal problems and constraints that have built up in our economy and that we are unable to cope with as quickly as we would like to.
Incidentally, the Russian economy began to slow down even when oil prices were high. Nevertheless, they still allowed us to move ahead. Even now some sectors still show growth, but that growth measures up neither to our capabilities, nor, let’s put this bluntly, to our ambitions quantitatively or qualitatively.
The old energy-and-commodity based model has outlived itself. Everyone understands this. It can ensure neither sustainable growth nor incentives for investment in the goods-and-services economy. It is less and less responsive to technological innovation and most importantly, it does not ensure a steady rise in living standards.
That’s why we should not only provide an objective assessment and a proper response to the changes in our traditional markets, not just cope with the external economic and political pressure, and not merely stabiles the current volatility of the currency rate. The task is generally much far-reaching and more ambitious: it is about changing the very model of our development.
We will not be able to achieve that unless we fulfil several conditions. Today we should identify the factors that may have appeared insignificant in the past.
The new conditions require that we deal with solving structural problems as much as supporting macroeconomic stability. It is crucial to remember the lessons of the 20th century’s greatest crises, that is, the crises of the late 1920s to early 1930s, and the 1970s.
Even the best macroeconomic policy may not be enough if there is a backlog of structural problems, and ours, in fact, have overgrown. Interest rates, the currency exchange rate and inflation are undoubtedly the key and fundamental indicators of the economic situation. Nevertheless, macroeconomic stability in itself is not a sufficient, though indispensable, condition for prosperity.
One of the major reasons is an imbalance between incomes and labour productivity. Incomes must not grow faster than labour productivity over a long time period. It should also be remembered that what affects labour productivity is not only the workers’ professionalism, but also the level of technology and equipment used. Equally important is the availability of personnel training and re-training to meet the demands of the economy. In future, incomes and wages should only grow alongside economic growth and higher labour productivity. But the most vital factor for sustainable economic growth is increased trust, the trust in the famous triangle – between the people, business and the state. Trust is the key element, one of the pillars of modern economy. It can never be replaced with anything else, just as the state will never be able to replace business. As of now, I must admit, we have done little for the society to realise that its success and opportunities are directly dependent on the freedom of enterprise and businesses’ success.
Lack of trust when such a triad of crises is brewing gives rise to a number of fears in the market, which, in turn, aggravates the financial and economic situation. To break this vicious circle, the Government must provide a clear response to the fears, to articulate not just what we are going to do but rather what we shall never do under any circumstances. Let me say a few words about that now.
First, Russia even in the present situation is not going to turn away from the world, to change its policy towards economic mobilisation. We have come a long way from the post-Soviet semi-ruined economy to a major economy of the western type, and it would be a huge mistake to go back to the past (though we are occasionally called to do just that), to give up the role of an active player in the modern global world.
Second, the Government will not abandon the free conversion of the rouble. Of course, in pursuit of short-term interests, the exchange rate could be frozen, which would naturally revive the black currency market, with hard currency being issued to importers by special permission, at the discretion of a particular official and depending on how friendly he is. All of this means only one thing: the sure destruction of the market.
Needless to say, a lot of things are now playing against the rouble: the extremely low oil prices, the sanctions, and the heavily fluctuating exchange rate. This is affecting companies, banks and naturally, ordinary people. Nevertheless, I believe that the policy that the Central Bank is currently pursuing is correct. We are not going to spend our hard currency reserves on short-term, consumption-oriented projects. We have sufficient economic mechanisms to ensure the stability of the rouble. Furthermore, even with a bad market situation, we still have a positive balance of payments, which is the main fundamental factor for ensuring a balanced rate of the national currency.
Third, Russia will honour its international commitments. Or, let’s put it this way, we are not refusing to honour them. Our country is a reliable borrower, a reliable creditor and a reliable supplier. Sanctions come and go, which happened, as I have often said, throughout the 20th century, regardless of what our country was called. So, they come and go, as, incidentally, do their initiators, but business ties, economic interests and the reputation of a state remain. We still have significant reserves, which guarantee payments on state debts, and if necessary, we can help companies pay their foreign debts.
Incidentally, it is also important to demand that [other countries] strictly comply with their debt obligations to Russia. There are plenty of examples to that effect, but here is a very telling example: Our country has granted Kiev a $3 billion loan. This is a state loan that excludes a huge commercial debt to banks. One of the conditions for this loan was that Ukraine’s state debt does not exceed its GDP by more than 60 percent. Today, this condition, this covenant has been broken and so no matter what the Ukrainian authorities might say, we have grounds for calling in the loan, that is, demanding the fulfilment of contractual obligations. We were unable to see any funds in our neighbour’s new budget (and naturally, we are following what is going on) being allocated for meeting their financial obligations to Russia, even though the Kiev authorities made provisions to meet their obligations to other creditors. I would like to bring this to the attention of both the Ukrainian officials and the Russian Finance Ministry.
To put it bluntly, we do not want Ukraine to default. We do not want the Ukrainian economy, which is in a disastrous state as it is, to become even worse. On the contrary, we need an economically viable partner. However, debts should be paid, and this includes state and commercial debts, debts to banks, so we will have to take a decision on this issue soon.
Fourth, we will not limit the freedom on entrepreneurial activity. We already have enough restrictions, which, on the contrary, should be lifted. The Government understands that business needs more freedom than it has now, and the state will be unable to change the economic development model single-handedly, without the business sector. However, when attempts are made to pressure the country from the outside, while there is administrative and, quite often, law enforcement pressure on the inside, there can be only one possible outcome for the economy: it begins to suffocate. Therefore we must simply eliminate domestic restrictions which stifle the business community. This is an absolute imperative. If the business community feels that our promises still remain mere words, then a reverse movement will begin, and nothing will stop the already substantial outflow of capital in the most diverse forms, and nothing will cure this business anemia. The devaluation of words and promises regarding free enterprise is, in principle, worse than the devaluation of the rouble because the latter is certain to come to an end. But the situation with promises is an entirely different story. We realise this, and we will continue our efforts in this direction together with the business community.
Fifth, the Government does not plan to sit and wait for oil prices to rise. The Russian economy is facing entirely different conditions and demands, and we cannot wait them out. Therefore, obvious as this may sound, we need to reduce outlays and improve the quality of goods. Understandably, this is difficult in conditions of a weaker rouble and more expensive imports. But let’s admit honestly: not many companies reduced their outlays and curbed prices when the rouble was strong and exports cheap. We can still see examples when imports account for 20 percent of expenses’ structure, despite the fact that the prices have nearly doubled. In many cases, they are counting on the experience of the past few years. Twelve or 18 months later, just like after the first wave of the 2008 crisis, customers will reappear, and they will start paying money. But the energy and raw materials economy that used to grow richer each year is now history. As my colleagues have told me, this issue has already been discussed at various events. And it is simply impossible to sell such commodities either tomorrow or the day after tomorrow. Therefore we must learn to succeed in conditions of low fuel and energy prices.
We have the potential to do this. We have created a
stable foundation making it possible to shape a new spurt and ensure sustained
and healthy economic growth. First of all, this implies a well-balanced budget
policy making it possible to accomplish two key objectives – to implement vital
social programmes and to support the national economy.
I would like to note that Russia’s sovereign debt remains small, and we have sufficient reserves for a smooth adjustment to the new conditions. The level of unemployment, another highly important factor, is considerably lower than in many European countries.
Finally, we are supported by the highly important socio-political factor, specifically, the consolidation of society and a high level of popular support for the Government (although we should value this, we should understand that it is not infinite), and this allows us to accomplish numerous key objectives.
The above-mentioned factors should form the foundation
of measures aiming to shape a modern economic policy.
What should be noted? First, we are already working to expand import substitution volumes, and we will continue to do this. Import substitution plans for some industries should be approved by the end of the first six-month period. Some measures are already being implemented in the defence industry, the pharmaceutical sector, the machine engineering industry and oil and gas equipment manufacturing.
Import substitution in agriculture is a highly important area of work.
A new version of the state programme has been approved. Additional support will be provided to our meat, milk, vegetable and fruit producers. I should add that our agribusiness has on the whole shown pretty good indicators. Demand for grain in the world today is a more stable trend than demand for energy. Russia is a major grain exporter and can consolidate its positions by increasing investment in the production, processing and transportation of agricultural produce.
Special decisions were taken with regard to the industrial policy, and industry support measures were streamlined. A special investment contract is being introduced, concepts related to the activity of industrial parks are being defined, techno-park infrastructure is being created and an industry development foundation has been established to support industrial enterprises at the pre-bank financing stage. Another industry support instrument is project financing. The Bank of Russia will provide funds to banks to finance large-scale investment projects, but naturally, these sums should be understandable and controllable; they cannot be increased to unreasonable proportions. Provisions have been made for support to large self-financing infrastructure projects from the National Wealth Fund.
The inflow of funds into the real sector of the economy will also be facilitated by the Deposit Insurance Agency. It will receive 1 trillion roubles of federal bonds for additional capitalisation of a number of banks. I have issued instructions and a decision has been taken, and I would like to inform you about that. These funds are not designed for restructuring troubled financial institutions. They have a clearly designated purpose. Only banks that are prepared to expand the crediting of the real economy in priority areas can receive these funds. These will include both banks with state participation and private banks.
To qualify for assistance, a bank must meet a number of substantial conditions: to have its own capital of no less than 25 billion roubles; to ensure a stable increase in its credit portfolio by 12 percent a year over the course of three years in priority economic areas; to limit employee pay rises, compensation to board members and directors, and dividends to shareholders; and to participate in the deposit insurance system. And of course, a credit organisation should meet the requirements set by the Bank of Russia. As far as I know, the Deposit Insurance Agency board has already taken these decisions.
The provision of credits to small and medium-sized businesses should also be covered by the Credit Guarantee Agency with an equity capital of 50 billion roubles.
It is also important to streamline the government procurements mechanism so that it works in the interest of the Russian manufacturer, providing incentives for the manufacturing of modern, high-quality, in-demand equipment. Within the framework of the federal contract system, limitations have been imposed on the import of goods for defence and security needs, as well as on specific types of engineering and light-industry products.
Another point I would like to make is that we will step up support for the non-commodity export sector, working more closely with potential buyers of Russian goods. Only an economy that transcends its geographical boundaries, the borders of its own state, can be successful in the present conditions. And we do have something to offer in the IT sphere, the nuclear power industry, aircraft manufacturing, the aerospace industry and a number of other sectors.
Information technology and mass communication companies are becoming world leaders in terms of capitalisation. Energy giants and finance corporations only come second, after them. Nobody knows how long this situation will last, but this is indeed a global trend today. We also have our own success stories in this domain. They are well known and we are prepared to reproduce them.
Third, we will act within the framework of the National Technology Initiative, which identifies the most promising technological niches. Our goal is not only to make up for lost ground but also to enter the world market with some unique innovation products. Oftentimes, we are in a position to build a new industry from scratch. For example, such proposals are pending in production technology, biotechnology, the use of renewable resources, and composite materials.
It should be recognised that the Russian Government has gained considerable anti-crisis experience, including during the difficult 2008-09 period, which we will naturally use and supplement with pinpointed, targeted action in line with the prevailing situation.
At present, companies with state participation need closer oversight. Generally speaking, they always need watching but all the more so today. Therefore, I believe that it is expedient at this point to bring government officials back to boards of directors and supervisory boards.
We should do this.
We are monitoring the situation in the financial and currency sector, and are following strategic companies, the employment market and the situation in single-industry cities. We have also created a special fund to support their development and create new jobs. Last year, we invested 3 billion roubles, and we plan to allocate another 26 billion roubles to this fund in the next three years.
We have also established financial reserves for this year, including an anti-crisis government fund with over 180 billion roubles. However, I’d like to warn you that these reserves will be used sparingly. Our goal is not to douse the recession with money, which would be useless, as both you and I know. Our goal is to liberate the business initiative, to lower administrative and law enforcement pressure and to make legal protection truly effective. There are many examples of how this is working. I will cite one of them: The Criminal Code article on penalties for hindering legitimate businesses is not applied, which is why we use a more predictable system of regulation that is based on inspections and supervision. The Government will need to amend legislation to amnesty capital, introduce a four-year moratorium on amending taxation terms and a three-year moratorium on inspections and supervision of small businesses that comply with certain requirements, as well as some other measures. We are working on this.
Regarding the monetary and credit policies, we will certainly continue to fight inflation. We have been working jointly with the Bank of Russia to strengthen the stability of the banking sector. But the most important thing we must preserve is the trust of depositors; out actions must not provoke overemotional or irrational market behaviour. This is partly why we have doubled individual deposit insurance to 1.4 million roubles. We are using the National Wealth Fund to support our key financial institutions, the operation of which on foreign market has been restricted. At the same time, we must increase the transparency of our financial institutions, especially those that receive government assistance. And of course, we will need to reduce credit interest rates to a more comfortable level.
A few words about our budgetary policy. As I have said, the main principle is to balance the budget or at least reduce the budget deficit to a minimum. This is also important psychologically, so as to maintain trust in the government.
Practice shows that we were right to introduce the budget rule [which was adopted to bolster sovereign funds and help check state spending]. We did this to preserve macroeconomic stability and to reduce the dependence of our economy on the oil market, where the situation is indeed deteriorating. We have seriously slowed inflation for some time, accumulated the necessary reserves for implementing our investment plans and collected sufficient funds as insurance against the possibility of a recession. It is largely thanks to these efforts that we are now able to support the economy, continue infrastructure projects and, of course, honour our social commitments.
I believe we were right to form the 2015 budget based on the distribution of super-profits from oil exports. It is obvious that we will need to continue using this rule. However, we may have to adjust the procedure for calculating the budget rule in these new conditions to take into account energy price forecasts, including negative ones.
We will also continue to analyse the efficiency of budgetary expenditures to amass resources in the most important spheres.
The Government is also ready to take measures to moderate the potential consequences of the crisis for the people. The priority task is to prevent their impoverishment. To achieve this goal, we must stimulate consumer demand and index pensions and benefits. The Government has approved a pension adjustment to the actual inflation rate from 1 February.
We will also support the employment market. We will launch training and retraining programmes, which will be adjusted to the requirements of the most promising companies, the products of which are in demand.
We need to create conditions in which people are able to earn a living. We must again analyse the system of social benefits to make it more effective and recipient oriented, and possibly approve additional crisis support measures. This primarily concerns families with children, especially young and multi-child families. We should help parents find good jobs and increase the accessibility of preschool and general school education.
Our demographic policy has yielded good results in the past few years. Russia’s population has been growing. We will definitely continue to pursue a balanced policy in this sphere, especially considering the negative population forecasts several years ago.
The main goal is to win people’s trust. Many families have had a second or third child because they expected the Government to help them. We must find a way to help them despite the current difficult situation.
The preschool construction programme should be completed in 2015.
It is proceeding at a lively pace. Accommodation for 750,000 preschoolers has been created in the past two years alone. Another king of state support is the creation of new jobs for social workers and those assisting the elderly. We are facing tremendous shortages of such services, therefore, we will cooperate with the business community, as well as charitable and non-profit socially-orientated organisations to address these shortages. The state is already implementing a number of projects and programmes together with them.
The state should also motivate needing families to earn extra income by creating incentives that would enable them to develop their private land plots and create their own businesses. This process can be facilitated through training programmes and effective job-hunting initiatives by employment agencies. At the same time, these families would continue to receive benefits. Such an approach has become particularly important today, given that even the more financially active population is facing a relative poverty risk.
Jobs are always available in reality, even during economic crisis. Most of the time people simply do not understand this, and, for obvious reasons, they react painfully to layoffs or relocations to other companies. Therefore, the best way to reduce labour market outlays and to achieve positive dynamics, is to inform more people about real-life regional working conditions. At the same time, we need to promote alternative forms of employment, including self-employment, freelance activity, distance employment, online jobs and so forth.
It would be impossible to make the Russian economy more competitive without stronger international ties. Globalisation remains a leading trend, and this project could lead to positive spillover effects for Russia since it is also duplicated by others. Globalisation is entering a new stage, especially as more regional integration associations begin to play a more important role.
In all honesty, we value our relations with Europe, which we have jointly developed over the past decades, and Europe remains our main trading partner. It is my hope that we will normalise these relations in the near future. We are fully committed in ensuring that this ultimately happens.
In reality, however, the modern world necessitates the need for active efforts on every regional market. For example, Asia Pacific countries already make up about 25 percent of the entire Russian foreign-trade turnover, and this region already accounts for over 50 percent of global GDP. Russia, which is also part of the Asia Pacific region, should use the advantages provided by the region’s offerings of modern technologies and innovations. It is worth stressing that this is not directly linked to current sanctions. We simply argue that a different approach would be profitable and useful, and we are ready to play our part.
We will continue to focus on relations, cooperation and co-production arrangements with our neighbours. The Eurasian Economic Union has swung into action since early 2015, just as planned. Armenia has joined the three Customs Union member-countries. An agreement on the accession of Kyrgyzstan will enter into force over the next few months. All of these developments confirm our willingness to create beneficial outcomes with utmost consideration for the interests of all participants involved.
This year, Russia will host BRICS and Shanghai Cooperation Organisation summits. We have already launched effective political cooperation, and we will also need to activate new financial institutions, which would include the New Development Bank (formerly called BRICS Development Bank) and the BRICS joint foreign currency reserves pool of $200 billion. We are also assessing mechanisms for financing advanced projects within the SCO format.
All of these are multilateral joint lending instruments that make it possible to carry out new economic projects.
Russia will also continue to work on the agenda of other international organisations and forums, including the G20. Last year in Brisbane, as we know, some important macroeconomic and financial initiatives were put forward, and many of them began to be discussed during the Russian presidency. So we will also continue this work.
Now, here is what I would like to say in closing. Life is such that years fly by quickly. I am sure that in a year from now we will meet here again at the 2016 Gaidar Forum, and I am certain that in summing up the results of 2015 we will be able to say to each other that there are no insoluble problems. Any crisis is always a set of specific tasks that need working on. Let me remind you that during the Great Depression, Franklin Roosevelt said that “the only thing we have to fear is fear itself.” We have no fear! Thank you.