Interview with Aleksey Kudrin
Russia Today: Following President Medvedev's State of the Nation address you said a longer presidential term would actually be good for Russia's economy. Why's that?
Aleksey Kudrin:A president has to implement the plan that he was proposing during the election. The duration of all the economic processes and reforms usually lasts for three or four years. If one prepares a reform seriously and implements it carefully and without rush, it takes more than three years to see the results. Therefore, I believe that six years would be a proper term for every president to have an opportunity to prove and to implement his reforms in order to save the country from getting into numerous debates and populist statements every time.
RT: Does that mean that Russia somehow differs from the developed economies and in the United States the four-year terms seems to be working fine?
A.K.:I believe that a four-year term is too short – even for other countries. In many cases it has to do with tradition; in other cases it is more natural for a stable economy within the existing development institutions. During the last four terms of presidency in the U.S., we’ve seen presidents stay in office for eight years, or two terms. As a result, it becomes clear whether a president had managed to achieve things in one area or another. President Clinton completed his term successfully and people even felt sad when he had to leave. The U.S. budget surplus was high and growth was unprecedented. Today the situation is the opposite. Today we see who’s done what. It wasn’t obvious during the first four years.
RT: Speaking of the current situation it seems that the developing economies blame the U.S. for the current chaos on the financial markets. Would you agree with that or do you think they have to share the blame.
A.K.:In this current world financial crisis, the situation is definitely connected with the crisis which started in the U.S. It provoked a crisis in the entire world and in every separate country. But, due to the fact that the developing markets have not yet fully developed, their problems are usually greater. When the U.S. barely sneezes we start coughing. Unfortunately, it’s true. This crisis is causing serious problems for our countries. Today we were discussing this problem at the meeting of the BRIC countries, i.e. Brazil, Russia, India and China. And we felt the influence of this world crisis in all these countries. The U.S. is definitely 99% responsible. The modern financial architecture, including the International Monetary Fund, the Basel Committee which determines requirements for the banking system, and other international institutions, have turned out to be not prepared enough to foresee or to prevent this crisis. Today, we are absolutely sure that the current system of institutions used for crisis settlement, including the IMF, is inadequate. They should change both their functions and their demands to the financial market.
They should also change the share of influence which various countries have in their boards of directors. Russia and China sit on the boards of directors, but their voices there are so insignificant that they can easily be overturned by the votes of three small countries. For example, Belgium, Switzerland and Singapore have more votes than China which is ten times as large and has much more influence on the world economy. This is an example of a disproportion in representation and in the process of decision-making.
RT: What is a specific suggestion that Russia is ready to offer to G20 counterparts?
A.K.: Let’s take the example of a ‘euro zone’. Prior to accepting their single currency, all those countries had worked out demand using the indicators of the financial systems of various countries. What I am talking about is the Maastricht Treaty. All countries of the world should adopt such an agreement with reservations made on some groups of countries. Limits should be established on budget deficit, the size of state debt, the exchange rate policy, and such like. In this case, we stand for having an ‘International Maastricht’. This is one of our proposals. Second, Russia and other countries use the currencies of countries which have so-called reserve currencies for calculations and personal savings. And it’s vitally important for us what policy these countries will pursue. Is anything going to happen to our reserves?
What I mean is that rules should be worked out for countries whose currencies have become reserve currencies. There shouldn’t be any egoistic aspirations on the part of these countries. They should feel their responsibility for countries that have started using those reserve currencies. The third proposal concerns the restructuring and reorganisation of the International Monetary Fund (IMF) and the expansion of our presence in other financial institutions and organisations. Groups of leading professional economists who would help with working out decisions should be created. We need to restructure into a system of transparency and accountability so that sub-prime or high-risk mortgage loans don’t accumulate or be left without attention to create additional sources of crisis. So, the procedure of accountability and supervision over those instruments should be worked out. Global rules for the functioning of the international financial securities markets should be created. They should possibly be mandatory for companies that wish to omit securities for these markets. All this is contained in a plan proposed by Russian President Dmitry Medvedev that he has sent to the leaders of all countries.
RT: Now shifting focus closer to home, to Russia. Speaking at the St Petersburg forum last summer you said that Russian economy really started to show signs of overheating. Has it cooled down since? And perhaps the crisis was not that bad as some believed at least for Russia?
A.K.: There’s always something positive in any crisis. A crisis brings together those fragments of the market that have started contradicting each other. Overheating in several branches of the Russian economy was absolutely obvious and, as a result, the economy has started to cool down. It’s a useful thing because I think that Russians will eventually have cheaper apartments and lower prices in shops. Inflation will start going down for objective reasons. Less money will decrease monetary inflation. Prices also fall when supply exceeds the demand.
RT: If prices are falling does that mean the Russian government could soon do away with targeting inflation?
A.K.: No, that doesn’t contradict the targeting of inflation. On the contrary, it means that we should avoid overheating in future. That’s the problem. So we should continue to target inflation.
RT: Are there still any parts of the Russian economy where the bubble hasn't burst?
A.K.: It’s too early to say that things have settled down. These financial hotspots have just started to cool. At least they are not growing and no new problems are in the making.
The financial crisis led to a sharp rise in economic crimes and numerous stories about somebody spreading a rumour that a certain bank is about to go bankrupt and as its customers rush to withdraw their cash and close their accounts the otherwise healthy bank might start experiencing difficulties indeed. Is the government aware of the situation and what does it plan to do about it?
We’ve registered about three such cases in various regions both in relation to small and large banks. We involved the police and tracked down those who allegedly behind the fraud. So, I think that the sources of such rumours will soon be exposed, and the culprits will be punished. I would like to warn those who engage in dishonest competition that they will be found.
RT: The crisis will obviously lead to major a reshuffle in Russia's banking system. Just a couple of weeks ago Brazil's second and third largest banks announced a merger. Could something like that happen in Russia?
A.K.: First, a merger of several banks has already taken place among the first 30 and 50 banks. For example, VneshEconomBank purchased Svyazbank and Globexbank for next-to-nothing, but took on all their debts. And ASV (Deposit Insurance Agency) bought St. Petersburg’s VEFK bank. Some of the major banks – with the help of the CB – bought some of their smaller rivals. But they are the smallest. They are the backbone financial firms for certain regions. Even though it’s not the biggest banks which have merged, it is a positive process of consolidating the sector. This integration will lead to further growth in the industry.
RT: A few weeks ago Russia's presidential aide Arkady Dvorkovich, said Russia needs to build a financial system that’s independent from the West. Do you think it's possible to build the system like that and how would we go about doing that?
A.K.: First off, I’d like to say that creating an independent system is impossible. What we are talking about is reducing our dependence, especially during such external shocks. So, if we are growing into the world economy and want to have a free flow of capital and develop the rouble into a hard currency, we cannot create an independent economy.
However, what we can do is mitigate the negative impact, and that is what Dvorkovich was talking about. This is why we are strengthening internal stock markets. There will be more firms quoted on the market, and the rules will be more liberal. We expect many companies to come to Russia and offer their stocks in Russia. In this sense, our market will be less dependent. Of course, it will remain interconnected with other markets, but it will be more stable and independent.
RT: You just mentioned the rouble. The CB spends as much as $15 billion a week according to some estimates on supporting the rouble. Obviously, this situation can't go on forever. How do you see it developing?
A.K.: You know this was caused by two factors: falling oil prices, which reduced the inflow of currency to Russia, and capital outflow. We must see now how long these two trends are going to last. Over the next few months, we need to study these trends closely and adjust to them. I think that those who have taken their capital out of Russia shouldn’t have been in such a hurry. Now they are going to find themselves short of cash and they will have to get their capital back, which means having to convert them once again. The Russian rouble is a hard currency, and we have free flow of capital. We are not going to impose any limitations and we are going to retain the quality of our currency. I think the agitation is going to abate and then we’ll have a calm situation.
RT: Speaking of capital flight, how come investors fled Russia almost faster than any other emerging market even though our fundamentals are so strong, and are they essentially looking for some structural reforms as a condition for jumping back in?
A.K.: Well, I wouldn’t say they were in such a hurry to get their money out. It’s just that, unlike China and India, for example, Russia allows free flow of capital. Also, Russia recently saw more speculative capital than other countries because the rouble was strengthening quickly. Russia created the situation whereby the rouble was strengthening quickly and that could have been prevented by spending less oil revenues. That spending led to the strengthening of the national currency and attracted speculators. I think that stricter enforcement of economic policy decreases the inflow of such capital; I think we have learned our lesson and it won’t happen again. I think capital will return soon. The situation is also caused by the lack of liquidity in the global market. As soon as the situation settles, the capital will come back.
RT: Now for the question on everyone's mind – where is our Stabilization Fund and how safe is it?
A.K.: Russia’s Stabilization Fund is now divided in two: the Reserve Fund and National Welfare Fund. They are allocated in foreign currency accounts in CB. The bank does not freeze the funds but allocates them in the most reliable sectors of the global markets. When we hear that $50 billion has flown out of Russia in one month, it means that CB has been selling stocks nominated in dollars. Those stocks are so reliable that even during a crisis, when they are sold in substantial amounts – be it 15 or even 25 billion dollars, their price doesn’t change. Thus, Centrobank compensated for the outflow of capital.
RT: How much has the government spent on fighting the crisis to date?
A.K.: Almost no budget funds have been spent except for deposit auctions. We allocated about 800 billion roubles in bank deposits. At the moment, this figure is decreasing, because CB has been taking up most of the load. CB has also deposited almost 800 billion roubles. Besides, we are going to add an extra 60 billion roubles to the capital of the Mortgage Crediting Agency, an extra 75 billion roubles to VneshEkonomBank to support the economy, and another 200 billion roubles to the Deposit Insurance Agency to ensure the protection of people’s bank savings. These are the expenses so far.
RT: The money has been spent but it seems like the liquidity hasn't trickled down to the sectors of the real economy, many companies are still complaining about the fact that they cannot get any loans. Why is that and when do you see the situation changing?
A.K.: There are several factors which influenced the fact that our handouts. For instance I mean the cash in the form of deposits or reduced CB reservation amounts have failed to reach the real sector in full measure. This is connected with the following: First, there was an outflow of deposits that were being withdrawn by the population. This means the banks had to secure the issue of deposits rather than grant credit to the real sector. This consumed part of the funds. A certain amount of rouble funds was exchanged for dollars and left Russia. So, more roubles were withdrawn from the market. Some amounts were reserved by the banks on their own accounts or in the form of securities so that they might have some quick cash and be able to quickly meet the demands if they needed to. Each bank has to have a reserve fund of this sort. This is why, when a crisis sets in, in a risk-ridden economy, this reserve fund must be at hand and its size should be at least the same as it would be in an ordinary situation. Currently it has seen declines. These are the factors that tied the money and prevented all of it from getting to the real sector. But it is this factor that secured the stability of the banking system during this past month. This has to be reckoned with. Nevertheless, the amount of credit in this country has grown, rather than decrease. The rate of growth of credit was twice as slow as in ordinary months earlier this year. Nevertheless, they did grow. This means that all earlier credit remained or was extended, or new credit was granted to the amount of repaid loans plus interest. Many companies are in a difficult situation; they seem to think that credit will save them. In some cases this is so, but in others the credit is likely to become non-repayable. The banks are very cautious as to whom they lend credit. Some increased their risks, while others have some sound security to offer. This is why this dispute, so to speak, will go on. Many will believe they are short of credit, when it is actually because both the situation and the economic risks have changed.