"We should focus on improving the business climate in the country or we won’t be able to develop. A qualitatively new business climate is indispensable not only for the large companies that were drivers of our development for a very long time but primarily for small and medium-sized businesses."
Zhanna Nemtsova: We are talking with Prime Minister Dmitry Medvedev at the Gaidar Forum. Good afternoon, Mr Medvedev.
Dmitry Medvedev: Good afternoon.
Zhanna Nemtsova: Thank you for agreeing to speak with our television channel.
Yury Tamatsev: And with the entire business community through us. This interview comes at an important time, as the economic situation is now beyond alarming. The business community wants to know what to do.
Zhanna Nemtsova: Speaking about the stagnation at today’s plenary meeting, you said it is caused by domestic factors rather than conditions outside the country. Indeed, we lack drivers of GDP growth. Consumer spending is declining (as large retailers have noted, among others) and state-run companies are scaling back their investment programmes. What is the Government banking on as a solution? Will it place an emphasis on development, incentives for business or lower taxes on businesses?
Dmitry Medvdev: That’s a lot of questions. Thank you once again for inviting me to talk about economic problems after the Gaidar Forum. I tried to express my views in my remarks, but I’ll try to describe them more clearly.
Indeed, our sources of growth for the past decade have been exhausted. And frankly, I’m not sure this is such a bad thing. We used to hope only for the success of our oil companies and extensive development based on rising energy prices, but then we realised that there was a limit to this and now we have reached it. Then there was the crisis in 2008-2009 and growth during the recovery, which usually lasts a bit longer than economists believe but which also has a limit. This limit also has been reached. The global economy is in a fairly difficult position. The European economy is almost in recession and we have our own headaches, which I mentioned several times today.
What should we bank on? I don’t think I’ll be revealing any secrets if I say that we should focus on improving the business climate in the country. We simply don’t have any other source of growth. Of course, we can make financial injections and introduce some new mechanisms, but if we don’t drastically improve the business climate we won’t be able to develop. A qualitatively new business climate is indispensable not only for the large companies that were drivers of our development for a very long time but primarily for small and medium-sized businesses. I’ve quoted this figure today – only 20%, maybe 25%, of GDP in this country is produced by small and medium-sized businesses. The rest comes from elsewhere, including large companies.
Zhanna Nemtsova: What specific measures do you suggest?
Dmitry Medvedev: All of the proposed measures are already being carried out. All we need to do is make sure that these measures reach their targets. We keep talking about the need to make normal loans and normal contracts accessible to small and medium-sized businesses. The Federal Contract System law came in force on January 1 of this year. It is not a cure-all but it has the right approach to providing gilt-edge contracts to small and medium companies. I think if these companies receive government contracts, we’ll see positive results fairly soon.
Or take another issue. We’ve been talking about the lack of normal loans with normal interest rates. Obviously, this issue cannot be resolved in several months, but I still think that the Central Bank has pursued sensible policy on restructuring the banking system in general. This policy and a number of other comprehensive decisions will eventually improve the loan market despite the diminishing consumer demand. Naturally, we don’t know for sure what will happen with consumer demand. This year, 2014, may be no less difficult than the previous one, but there are other forecasts as well. Although today I mostly spoke about the structural problems of the Russian economy and the need for changes in our economic system, we also largely depend on European and global markets. If the situation there improves, our economy will do better as well.
Yury Tamantsev: There is already a joke about 2014: it will be worse than 2013 but better than 2015.
Dmitry Medvedev: I hope this isn’t the case.
Yury Tamantsev: Speaking about the small business issue once again, we would like to draw your attention to the extremely profound contradictions between current Government declarations and real developments. In 2013, premiums increased to 30% for small business owners and nearly doubled for self-employed business persons. This year, widespread cadastral land evaluations and corporate real estate evaluations have been introduced. Small and medium-sized businesses are part of our target audience, and we know their expectations. Do you know what they say, and what they request? They don’t need soft loans and tax holidays. What they need is stability, and they are asking that the rules of the game for this market remain unchanged for at least five years. Can the Prime Minister announce a moratorium on changing the rules of the game live on RBC?
Dmitry Medvedev: No, he cannot. This does not happen, and they should stop telling fairy tales. The rules of the game change all over the world, and they change each year. There should be some fundamental aspects indispensable for business climate that are not subject to change. Let’s put it this way. I was involved in business for over 10 years, and if someone in 1995 told me about the current business conditions, I would have never believed it, and I would have thought that these conditions were almost sterile. At present, we don’t like them. For obvious reasons, we are also discontent with them, and we can expose a lot of problems. But there are some fundamental aspects, including tax rates, which should not be adjusted unless it is absolutely necessary. We, the Government, have proclaimed that we will not tamper with the tax system. Any minor adjustments, if any, should not affect important conditions for conducting economic activity. And we backpedal, if we feel, all of a sudden, that we have overdone something. We did this last year with regard to insurance premiums; let’s remember what was going on. Therefore, we will not adjust fundamental conditions for conducting economic activity. We have a lot of positions, which have proved their worth. Suffice it to mention the flat tax scale. To be honest, if it weren’t for this scale, under-the-table money would still account for the absolute majority of salaries, but this is no longer so. Consequently, there will be changes, but they will not influence substantial conditions for conducting economic activity.
Zhanna Nemtsova: The Government believes that it is possible to create economic growth incentives and to expedite economic growth by investing in infrastructure projects. For instance, the National Wealth Fund assets will be spent on these projects. To the best of my knowledge, you have already signed the relevant document this past November on allocating 150 billion roubles for the construction of the Central Ring Road. What other projects will, in your opinion, receive funding? And how great is their economic effect? Obviously, we will witness some increase during construction, but what will happen next? Have you made any calculations?
Yury Tamantsev: I would like to add a few words. There are some estimates that the implementation of these large-scale infrastructure projects will yield not more than 0.7% annually, that is, until they reach design capacity.
Dmitry Medvedev: You know, various estimates have been compiled. We realise that specific positive results of project implementation can be assessed differently. Here is what I can say: Our country is absolutely unique, and herein lies its problems and advantages. We will simply fail to ensure the country’s unity, unless we invest in infrastructure.
I have thought a lot about possible National Wealth Fund investment. As you know, this fund’s assets are not limitless. As I see it, we can invest in infrastructure. Where exactly? I’m following what our people, including entrepreneurs, write. They ask: “And why invest in the Central Ring Road? Why invest in the Moscow Transit Hub? Why not invest in something else?” The answer is very simple – it’s not because we personally live here but because up to 50% of Russia’s transport passes through this hub. This is how our country is arranged. This may not be a very good arrangement, but the overwhelming majority of the population lives in the European part of the country. This is why we’ll invest in it by all means and will resolve all tasks facing the Moscow Transit Hub probably by 2018.
We’ll also produce some growth as a result. I don’t want to quote any figures at this point. But this does not mean that we won’t develop Siberia and the Far East or won’t spend money from the National Wealth Fund for this purpose. Out of the 450 billion roubles that we plan to spend on infrastructure, a considerable part (about 300 billion) will be spent on the development of our eastern regions – on the Baikal-Amur Railway and the Trans-Siberian Railway that allow us to ship cargoes to countries in East Asia and our own remote areas and to develop production there. There are plenty of good plans for these areas.
Zhanna Nemtsova: One more project was mentioned in this connection. Will the state fund construction of the high-speed Moscow-Kazan railway?
Yury Tamantsev: Our sources in the Government say that because of the high cost of this project (I think one metre costs over a million)…
Dmitry Medvedev: This project is indeed expensive. Different cost estimates have been made, but in the final count it may cost about a trillion roubles. This is huge investment, but we won’t give up on this project. We must still calculate everything and probably wait will the economy is a bit better. In general, I think high-speed rail is very good for our territory because there aren’t always air flights and roads cannot be built everywhere. Trains are a very convenient mode of transport albeit expensive – this is true. So we won’t give up on this project and will come back to it a bit later.
Zhanna Nemtsova: I’d like to mention one more trouble area – inter-budgetary relations and regional debts. In some regions the debt owed to the federal budget is approaching 100% of gross regional products and everyone puts the blame on the May executive orders, in particular, how the salaries of public sector workers were adjusted. How will this problem with the regions be resolved? Will inter-budgetary relations be changed? Will the regions be allowed to increase their tax base? What will be done on this score? Is this a dangerous situation?
Dmitry Medvedev: I don’t consider this situation dangerous, but at any rate it requires attention. I hope everyone understands that implementation of the executive orders signed by the President in May 2012 calls for serious financial mobilisation simply because they involve very important and costly spheres of our country – healthcare, education and the development of the public sector in general. Naturally, a considerable part of these expenses is borne by the regions and this is no surprise. Some regions cope with their expenses whereas others don’t. Still others find it difficult but this doesn’t mean that these expenses cannot be paid. All executive orders must be fulfilled. Their targets must be reached. Those who find it difficult either come to me, the President or the Ministry of Finance, and we are trying to provide some support to them – this is a common and absolutely normal practice. By carrying out these executive orders we are fulfilling major social tasks in education and healthcare. We also understand that implementation of these tasks will eventually yield economic results. So this is not like throwing money down the drain. The state is spending money on tasks that it can resolve right now.
Yes, it would be better if we had more impressive growth, this is true. It would be better if the regions had more sources of revenue. This is what we planned to do initially, but the economic circumstances have taken a different turn. This doesn’t mean that we’ll abandon this road. If need be, regions will receive the required support. They are already receiving it.
Zhanna Nemtsova: Does this support include expanding the tax base?
Dmitry Medvedev: As for expanding the tax base, we are ready to tackle this issue, but it is important to understand that this should not affect the implementation of the national targets. In the 1990s, the balance between federal and regional revenues was about fifty-fifty. It seemed fair but we were unable to resolve many national issues, including such complicated ones as upgrading the armed forces or providing security. Nobody could ignore such issues. Now this ratio is 70 to 30. I’m not saying that it is ideal. Maybe it should be somewhat different, maybe 60 to 40 instead. In any event we must make sure that the implementation of national tasks does not do damage to the regional economies and the other way round.
Yury Tamantsev: It is also important to understand the time lag between the signing and implementation of the May executive orders. Is it possible to suspend them beyond 2018?
Dmitry Medvedev: What do you mean? Are they our bequest to posterity?
Yury Tamantsev: I meant to say whether they could be delayed.
Dmitry Medvedev: Not a single political force – neither the President not the Government – has the luxury to say: we didn’t succeed the first time, but let us try again and we’ll get it done. So, we’ll do our best to carry them out during the terms of the President, the Government and other executive bodies. There is simply no other option.
Zhanna Nemtsova: I have one more question about innovative development. For the time being the share of science-intensive production lines remains negligible. It is also small in the exports structure. What do you think about Russia’s successes in innovative development? Do you think Russia has scored successes here, or has this idea failed?
Dmitry Medvedev: I don’t think the situation is entirely clear. But I’m absolutely certain that we’ve moved forward. I met Rusnano Head Anatoly Chubais recently – he also attended the Gaidar Forum and I asked him: “What have we achieved?” He showed me many projects that are doing quite well and are producing real results. These are top-level innovative projects on nanotechnology and related fields. Some of them are already producing revenue whereas others will get to this point a bit later. But Chubais also said: “We’ve failed to move forward in some areas.”
Why am I bringing up this issue? Because any science-intensive production or innovative activities bear high risks from startup to commercialisation. This is a very complicated process, but we must be sure to increase the share of science-intensive products in overall production as much as possible. I say time and again that this applies to the most diverse spheres, not just to some refined nanotechnology or IT. This also applies to the energy sphere, which we all understand. Even the production and processing of oil and gas may create the foundation for the use of high technology, and they are already doing this. This represents a large amount of serious work in all areas.
Yury Tamantsev: Our viewers are very alarmed by the fact that the Investigative Committee may be returned the right to initiate criminal proceedings on tax offences. We remember what this led to before 2010 and 2011. Could you give your comments? And what will this ultimately lead to?
Dmitry Medvedev: I don't think that everything that has been done in recent years has disappeared or gone elsewhere. The state is adjusting its system of criminal proceedings, that is, pre-trial investigation of crimes, including tax offenses.
As I’ve already said, I think it is very important for decisions made by investigative bodies to be based on competent economic opinions, because this is a very complicated matter. To be completely frank, I must say that tax law is very complicated in this country and the rest of the world. Assistance is required. Importantly, tax crimes are among the most grievous ones, and are committed in practically every country.
I think that the model that has been proposed now is based on compromise. It combines the right of investigative bodies to initiate proceedings on tax crimes with an opportunity to obtain a competent opinion from the tax authorities that should say whether the crime was committed or not.
This is how I think it will work. Suppose investigative bodies hoped they would cope with some case without outside help. But such cases will fall to pieces in court. Given this model, any competent investigator should ask the tax authorities to determine whether a criminal event has taken place or not. I think in this case the model will work and should not do any damage to public relations.
Zhanna Nemtsova: Thank you very much for this interview, it has been great talking with you. I hope this is not the last time.
Dmitry Medvedev: Likewise, thank you very much. I wish success to you, your channel and your audience. Thank you.