Russia has “unacceptably high” levels of poverty – Medvedev

“Crisis or no crisis”, Russia’s budget must continue to fund social programs until acceptable standards of living are achieved, President Dmitry Medvedev said during an interview with Russia’s Channel One.

Below is the full transcript of the Dmitry Medvedev’s interview with Director of News Programs at Russia’s Channel One, Kirill Kleimenov.

Q: Mr President, I am happy to welcome you to our new news studio, at Channel One’s news centre. Usually, it is the journalists who visit the President, but today you are coming to us. Perhaps this is the beginning of a new tradition.

Medvedev: Perhaps. In any case, I am happy to be here. It is interesting for me to be here at the studio, which appears very modern and convenient to work in, so I hope we will have a good talk.

Q: It has been about a year since the terms “global crisis” or “global financial crisis” began appearing regularly throughout the world. The difficult times are not yet behind us, but if reputable economists are right, Russia has been able to avoid the worst possible scenarios that were predicted earlier. I would like to know, first of all, do you agree with this view? And if so, why do you believe that we have gotten through this period with fewer losses than initially predicted?

Medvedev: I’ll answer your question by dividing my response into two parts. As far as Russia’s forecasts for worst possible scenarios are concerned, I must admit that we sunk below our lowest expectations. In other words, the real damage to our economy was far greater than anything predicted by ourselves, the World Bank, and other expert organisations. In the beginning, there was talk of seeing the economy drop by 3 or 3.5 percent. But this year, we are expecting to see the GDP decline by about 7.5 percent. This figure is very serious, and I want to emphasise again that our forecasts had been far less severe.

But as far as how people are feeling and the social effects of the crisis, I believe that the opposite is the case. We were ultimately able to make fairly good use of anti-crisis measures to avoid the worst possible scenarios in terms of unemployment and direct financial consequences from the crisis, as well as effects on the work of the banking system and the non-financial sector. Thus, the negative consequences in this area turned out to be less dramatic than what we had predicted.

Q: Without talking about economic theories or large numbers, what is your current assessment of the non-financial sector, the industrial sector and agriculture?

Medvedev: Both the industrial sector and the agricultural sector are going through hard times. This does not mean that everything was ideal before the crisis, either. But indeed, the crisis has exacerbated problems in certain sectors of industry, as well as specific problems in agriculture. Still, as far as the industrial sector is concerned, the key problems are related to individual plants and corporations that dominate the economies of entire cities, resulting in single-company towns. They found themselves in the most serious situations, because when such corporations or single-company towns offer only one particular product, often intended for export, which is no longer in demand or whose prices have dropped, this often leads to intensified social problems and an increase in unemployment. And in essence, we were forced to take direct control and responsibility for the situation at some companies, which is not very good.

We must try to take measures that will have a large-scale effect, rather than ones aimed at individual cases. But nevertheless, in some circumstances this kind of direct support was unavoidable, so we supported strategic corporations, single-company towns, and the most sensitive sectors of the economy, which ultimately make major contributions to our budget revenues. These efforts will be continued.

As far as agriculture is concerned, the situation is somewhat different. In contrast to industry, which fell by nearly 14 per cent in our nation during the first six months of this year, our agriculture has not been hit nearly as hard. Furthermore, if we compare its performance in the first six months of 2009 to the same period a year earlier, we can even see growth registered in certain areas. We have also observed growth with certain types of livestock – first and foremost in poultry farming and some other areas, which had fairly significant growth at eight or even twelve percent.

Q: Did this result from replacing imports?

Medvedev: It resulted in part from import substitutions and in part from implementing programmes we had launched earlier – I am referring to the government programme for supporting agriculture, which originated from a national priority project. And so, in some areas, we have seen gains.

This year was a difficult one for crop production, at least for the Russian harvest. We had a drought, which led to a smaller harvest than we had planned on. Overall, our harvest was decent though – some 90 to 95 million tonnes – but it was nevertheless lower than what we had counted on, and lower than last year when we had approximately 108 million tonnes. Thus, our export potential in grain has become slightly smaller. Still, grain production, which is the major component of our national agriculture, is nevertheless sufficient to meet our domestic needs in terms of grain and guarantee reasonable exports. Russia is still trying to become a major grain exporter, and I believe that we must continue these efforts. But overall, agriculture also faced the problem of receiving fewer loans. There were problems in the funding system that we needed to fix on a case-by-case basis – I am referring to the situation in the banking sector.

Q: The fact that money wasn’t getting out to those who needed it?

Medvedev: Yes, that and other problems. Still, I want to emphasise again that since the demand for food does not drop significantly even during a crisis, the agricultural sector fared better than the industrial sector – and we must learn certain lessons from this. This means that our agriculture sector has great potential. We absolutely must invest in this area, especially since more than one-third of our nation’s citizens live in rural areas.

Q: There were many different predictions about what would happen to the Russian economy this summer. Now it is fall and we can draw some conclusions, since there were negative forecasts in regard to the rouble’s value and the banks performance.

Medvedev: In my view, the government made a number of good decisions. We supported our banking system. At a certain point, it had begun to waver. As a result of our direct support to the banks, we had additional money on the inter-bank market, and our banking system withstood the stress, and now it is doing just fine.

Once we overcame the negative situation in the banking sector, we were able to extend some of the loans and some of the additional anti-crisis funds toward supporting various industries, manufacturers, the defence industry, agriculture, and just ordinary enterprises that were facing financial difficulties. We maintained nearly all kinds of subsidies and nearly all forms of aid, such as the various types of agricultural loans with the so-called subsidised interest rates, wherein part of the interest, up to 95 or even 100 per cent, is paid by the government while the agricultural producers pay significantly less.

Thus, having overcome the situation in the financial sector, we essentially created decent conditions for the industrial and agricultural sectors’ performance. This was the most important factor.

The national currency situation was also quite difficult. At the beginning of the year the rouble became significantly weaker. This was an unavoidable move which occurred in an orderly way. We did not allow for abrupt, intermittent changes in our exchange rate. Nevertheless, nobody was happy about the weakening of the rouble because it painfully hurt people’s incomes.

Currently, the situation with the national currency market and the rouble is entirely calm and stable. Moreover, our national currency has even become stronger – you are aware of its current exchange rate. This is due to a variety of reasons, such as the anti-crisis measures and oil prices which are higher now than during the first and second quarters of this year. Thus, it seems to me that, overall, our reasonably optimistic expectations are now justified. At the same time, there are grounds to believe that next year we will have a whole new set of problems to address.

Q: The anti-crisis plan has now been around for a year. What are the greatest difficulties? What has been hardest to implement?

Medvedev: There are some areas where we are not progressing as quickly as we would like. I have spoken about this before and I have given instructions to my colleagues in the Government. What areas are these?

Well, one example is that at the end of last year, we remembered about one important measure – government guaranties. Unfortunately, they were not being employed actively, even though we really ought to be using them, even during non-crisis periods. So we made a decision and signed a document. At first, the document was not very successful, so we improved the document. One would think that the banks would then find it acceptable and therefore make active use of it. However, despite an established threshold level for these guaranties equal to 300 billion roubles, there are currently very few of them issued.

This means that we have yet to fully learn how to implement our decisions quickly, even ones that are quite timely, urgent and very much needed. In other words, a great deal of time passed between the moment when we made the decision and the moment when it was actually implemented. And this has implications about the future: it implies that in difficult times and during periods of economic instability, we must work as actively and consistently as we can. Otherwise, we simply won’t achieve the necessary results. This is just one example, but it is a very telling one.

Another issue is unemployment, and it is a very difficult problem. Indeed, growth in joblessness was far greater than we had expected. At some point, we had about 5 million unemployed individuals, but then that number grew to 7.5 million. Currently, these figures have decreased somewhat, which means that the programmes we implemented to fight unemployment are working. Still, unemployment figures are nevertheless very high, and we must put maximum effort into drastically reducing them. This challenge stands before the Russian economy as well as other nations, because according to a multitude of estimates, unemployment is the biggest problem that we must overcome. We will promote economic growth and we will give our manufacturing enterprises the opportunity to develop, but what’s most important is to control unemployment. This is a clear challenge for the President, the Cabinet, and other government authorities.

Q: And the regions?

Medvedev: It goes without saying that these are precisely the sorts of issues that the regions have to address. We have strongly encouraged them to take full advantage of employment programs and to create new jobs, and that has helped with some of these problems. But this does not mean that the situation will resolve itself. We have to get behind them and push.

Q: If we turn to the current situation, the rate of inflation in Russia has dropped significantly. In August it was practically zero. Is this a seasonal factor? Or is it also the result of the measures we have taken?

Medvedev: As you are aware, inflation was rampant in this country. We made a commitment to do everything possible to contain it. Some of our efforts have been unsuccessful. Spending has soared in a number of areas. And of course this has created problems. This includes difficulties in making credit available for ordinary people. Mortgages, for example: we fought hard to maintain set interest rates, but it didn't work. Now inflation, to all intents and purposes, really has slowed down and prices are going up more slowly, as a result.

In the month of August the rate of inflation was zero per cent. This is a very rare phenomenon in recent years. There are several reasons for this. Of course, it is linked to a drop in the money supply and an accompanying decrease in production. Our inflation rate has dropped considerably. Generally speaking, this is a good thing for people's incomes and their purchasing power. It's good for consumers too. I wouldn't attribute it exclusively to stabilization measures. After all, these are the consequences of a general economic slowdown. Our challenge now is to continue to work on reducing inflation, because our job is to bring it down to 5-7 per cent or less. Then we will be able to lend at normal rates. Then our citizens will be able to obtain mortgages and consumer loans at reasonable rates.

Q: From the very beginning of the crisis the authorities have emphasized that despite the tight government spending, the social programs of the budget will be left untouched. This runs directly counter to what is happening in other countries, even some of the most affluent ones. This year, salaries of public employees have increased. Our pensions have gone up, along with salaries of the military and social benefits. Is this one of the anti-crisis measures or is it part of an overall economic strategy?

Medvedev: You know, I think that, of course, this is part of our overall strategy. It is a choice that we've made. And this is what it's linked to: we're not a very rich country, we still have a lot of problems, and we have very high, unacceptably high levels of poverty in this country. Therefore, crisis or no crisis, we are simply obliged to do it. And no matter what stage of development our economy achieves, our budget still has to be more socially oriented than the budgets of, say, countries that are at a different level of development.

Crises come and go – our budget must continue to be socially oriented. This should be crystal clear to everyone. And this will be the case until we have achieved an acceptable standard of living for a significant part of the population.

On the other hand, this special social support does constitute part of our anti-crisis strategy. In this sense, elevating pensions and wages, even in circumstances where there are no apparent resources for an increase, is a way of increasing people's purchasing power, which of course helps the domestic market. So it's not only support for individuals, but support for the economy as a whole. In effect, it's a two-fold challenge that we face.

Q: But if I understand you correctly, this will effectively be the strategy for years to come?

Medvedev: Kirill, you have understood me correctly. I mean that our strategy is precisely to fulfill all of our social obligations. This is not some short-term ploy, but part of a strategy that will be in effect for many years to come for as long as we have a developing economy and have not yet achieved the sort of life we want. That is why every social obligation will be funded, and pensions and other social payments will increase according to the schedule that outlines how the increases are to be implemented.

Q: But in such a situation are we, as a country, generally living within our means? Won't all those social obligations have an extremely negative effect on the budget?

Medvedev: You know, it is true we now have a very tight budget. Our budget used to be deficit-free or, as economists say, we had a budget surplus because revenues exceeded expenses. Now we have a budget deficit, and next year it will be quite significant. Nevertheless, we are perfectly capable of functioning with this deficit and servicing it. This is not a tragedy, not a catastrophe for the economy. It simply means that we have to work very hard to improve. Our goal is to achieve a balanced budget or a budget with a minimal deficit within a year. And all the government's efforts and decisions should be directed to this end.

But overall stability, macroeconomic stability, and fiscal stability – all these will, of course, be maintained. There should be no doubt whatsoever about this. We are obliged to make all our payments as they come due: social payments, those associated with the financing of major industrial and economic programs, payments to the military, and our international obligations. All this needs to be taken into account in the budget. The budget has already been submitted to the State Duma and they are working on it as we speak. I think that this work will be completed on time. In this sense I don't foresee any particular problems.

Q: Now the authorities and those in the private sector are already discussing how we will emerge from the crisis. They are even discussing specific points of growth. That is also the subject of your recent article, "Go Russia!", in which, in effect you lay out the key provisions of the forthcoming Presidential Address to the Federal Assembly. In the context of the current crisis, could you talk more specifically about the challenges that you think our country is facing at this time?

Medvedev: You know, whether we're in a crisis or not in a crisis, we can safely say that the economic challenge facing us is the same: we need to modernize the economy. What the crisis has revealed is the economy's various weaknesses. And we must take advantage of this very unpleasant period in our lives, this financial crisis, in order to fundamentally change our economy. Because however you look at it, our development has been very sluggish.

True, everything was okay as long as prices for energy and raw materials were high. Then those prices fell. Our economy was hit hard. Our citizens were hit hard. So we needed to defend ourselves. But there's only one defense against such crises and that is diversifying the economy. We need, as they say, a diversified economy. So our principal task is modernization.

I have identified five main priorities for modernizing our country to which we must relentlessly give our attention, energy and resources. Everybody knows what they are.
There is energy efficiency, because we waste enormous energy resources doing what amounts to heating the outside air. In this regard there are a number of very interesting programs, including those in the creation of efficient new fuels and energy savings. There is information infrastructure, both ground-based and in outer space. There is nuclear power, which has always been our trump card and really can change lives for the better in different parts of our country. There are medical drugs. We need to produce our own medicines. They must be of good quality and they must be sold at affordable prices.

Now, if we make progress in all of these areas, we'll have a different sort of economy, one that is not reliant on only oil and gas – even though these are very important for us, and I'm sure that for decades to come we will continue to be one of the main suppliers of oil and gas – but an economy that has another essential component, one that is firmly based on high technology. We need a modernized, up-to-date economy as our foundation. In this context, modernization means economic modernization.

Of course we have to get on with modernizing our society and our political system. As I have already said, our system of social support also requires changes. We are now engaged in a reform of the pension system. This is a very important subject and long overdue. And we need to do it carefully, so as not to create problems for our citizens, but at the same time improve their situations. A number of new laws on this subject will soon come into effect. For next year, we have allocated large sums of money to finance the pension system. There will be an increase in pension assets, which in turn determine the pension benefit available for each recipient. Now it will be linked to previous insurance payments, to the incomes an individual received both in the Soviet Union and more recently. There will be an increase of 10 per cent across the board and 1 additional per cent for each of the years of employment before 1991. All of these programs are also involved in the process of modernization.

Q: When you talk of modernization, what sort of time frame do you have in mind? About how many years will this process take?

Medvedev: Well, as you know, making predictions is a thankless task. But we are keen to make sure that it takes place as quickly as possible. Not a year, not two, not three, but maybe 10-15 years – that is a perfectly plausible time frame in which to create a new economy, an economy that will be competitive with other major world economies.

Q: I wanted to ask you about something else in this regard: have you set for yourself a point of no return in so far as modernization is concerned? In the sense that there will be no backsliding and we'll be 100 per cent committed to the new economy.

Medvedev: I think that once a significant portion of our revenue is generated by something other than energy exports, let's say at least 30 or 40 per cent of it, then we would already be living in a different economy and in a different country. If we talk about the crisis, the point of comparison is a bit different, because the question of when the crisis is over is everyone's favorite question.

Q: Of course. By the way, how do you imagine the day when you can say that the crisis is over?

Medvedev: You know, if we approach the question in orthodox economic terms, of course it is the day or the moment when our macroeconomic indicators have returned to their pre-crisis levels or even surpassed them. But this is something that ordinary people cannot really feel. I think that it will be the day that Russia's citizens, any ordinary Russian person wakes up, and is able to say: yes, I believe that the economic problems I once had are gone.

Q: Thank you very much, Mr President.

Medvedev: Thank you, Kirill.