Russian production industry has much to learn

President Medvedev spoke to Bloomberg TV about the investment climate in Russia, ways to modernize the country’s economy and its chances of competing on world markets.

­Ryan Chilcote, Bloomberg Television: Mr. President, thank you very much for joining us. You want to turn Russia into a modern country. You've got McDonalds. You've got shopping malls. You've got sushi. What's missing?

President of Russia Dmitry Medvedev: What’s missing? More common things like infrastructure, business infrastructure, and legislation to properly regulate that business activity are missing. The official establishment, the bureaucracy, lack of proper legal consciousness. And a well-developed judicial system is missing. Once we have all that, and provided there is no corruption, it would mean that Russia is ready to steam ahead along its modernization track.

RC: Let’s return to some of the subjects you just brought up a little bit later. I want to ask you about some of the projects that you have associated with modernization, like the Silicon Valley that you want to build at Skolkovo. I've been there. It's just beginning. When is it going to be a place that I can go to and really feel like I am in – get the sense where – when it will look and feel like a place where people are actually making innovative products.


DM: I think that on the whole, as regards modernization, we should not get carried away by individual projects, although that is very important. I always say that modernization is not an abstract thing; it’s a very specific task. At the same time, when we speak about modernization in general, as a development track, it involves first and foremost the modernization of the economy plus those five priorities I outlined last year, priority areas we are working on now. I’m talking about pharmaceuticals, nuclear energy, energy efficiency and so on. All these things are very important. But the most important thing is the economic modernization and introduction of new technologies. This is crucial.


RC: Maybe a more traditional approach would be to look at – because you already have so many natural resources, to look at just manufacturing simple things. For example, in Russia, as you know, and not just in Russia, it is almost impossible to find a single Russian consumer good. If you go into people's homes in Russia, or anywhere, you won't find it, unless, of course, you are talking about food. Would it make sense for Russia, given its position with the huge market of the former Soviet space for the taking, to go into manufacturing?


DM: I believe we should be thinking about developing the consumer market in general by creating good modern products, both consumer products and industrial products. And we should not just go for huge projects, as it was in Soviet times, making just aircraft or rockets. This would be the wrong thing to do.


As regards the introduction of high technology, this should be done both for the man in the street and for industrial production, the way it is done during modernization and upgrading of factories or plants. Eventually, these technologies must make it to the consumer level, and there should be Russian brands on the shelves of our stores. This would be the kind of modernization we seek.


RC: How long, do you think, it will take for an item with a Russian brand name to become a household name around the world?  A couple of years?


DM: I'd like that to happen very quickly. I would like that to happen in a couple of years, but being a person with realistic approaches and ideas, I understand that there are areas where we can promote our brands rather quickly since they are already known. For example, our nuclear energy sector is well-known around the world. We build more nuclear reactors than anyone else and we export them, assemble them, and build new atomic power stations.


If we talk about consumer goods, things are more complicated here, and here I don’t think we should be ashamed of setting up joint ventures with household names. We have a lot to learn, and we have many partners to work with. I don't believe it's something unusual to have assembly lines that reproduce world-known brands, but at reasonable prices. After all, the purpose of the state and society is to give people the opportunity to buy goods at affordable prices, and what you call it is not that important. Although, of course, I would like us to create Russian iPads and Russian iPhones. And certain steps are already being taken in this area by our companies.


RC: Could you tell us a bit more about it?


DM: Your laughter is rather incredulous. But still, our major companies are trying to develop Russian cell phones. And to be frank, I am not sure what product would be used as a model, but I have already seen something. After all, there’s nothing supernatural about it. Rather, the question is whether our cell phone would be in demand, since there is no point in inventing a wooden bicycle. And there’s absolutely no point in creating another iPad.


RC: Doesn't work yet. Right?


DM: I haven't seen anything that works, yet. That is true. But that does not mean that we don't have to invent. We have to create our own models.


Here I have my own feelings, you know. Some 15 years ago when Russia started developing a market economy very actively, I thought that the Russian car industry stood no chance, that there was no point in even trying: the best solution was to buy foreign cars or have famous foreign car brands come to Russia and build their assembly lines here. But I was mistaken. I believe now that we have very good opportunities, not only in terms of setting up joint ventures or building assembly lines for the world’s major carmakers from Japan, Korea, European countries and the United States, but also to create our own models. Simply because our market is very huge and our people like buying cars. And basically, I believe that we can set up modern production of Russian cars – I stress, of Russian cars – on the basis of the VAZ automobile factory in Togliatti.


RC: You are here in Davos. Have you brought any concrete proposals or announcements?


DM: I would not want to run ahead of time. I will present these proposals in one hour and a half. What am I going to talk about? I will talk about the prospects and advantages of Russia’s economy in its current state, about the problems and challenges we have in this area, and let me say that I will be rather frank. There is no point in trying to persuade the world’s business elite that everything is just perfect in Russia. So, I will also be talking about our next steps.


There are some interesting things I will talk about, including (I’ll just give you a hint) an idea that it might be worthwhile discussing the possibility of creating a special sovereign fund that would be made up of monetary funds and state assets in order to attract the necessary amount of private investment, both from abroad and inside the country.


RC: Let’s talk about the laundry list that you want to address here of investor concerns. Like you said, there are many. So let's just start with corporate governance.


Nearly all of the companies that are traded in Russia are either controlled by the state, or controlled by billionaires, also known as oligarchs.


Minority investors, foreign investors often find that in these circumstances they are not treated fairly. For example, Russian law requires that anyone who buys more than a 30 percent stake in a company must make an offer to the rest of the shareholders. However, what happens in practice is, one guy comes and buys 20 percent. And a friend of his who is seemingly not with him buys 20 percent and they are able to officially not be buying as one unit, 30 percent and taking control of the company. It's something that's blatant. All investors talk about it. And yet the regulator does nothing. Do you think the regulators should do more?


DM: I have my own very profound ideas about Russian legislation, particularly, civil law and trade law, or commercial law. You can get around any law, including corporate law, American or British. The question is whether there is an effective control over the way the relevant legal regulations are applied.


Business is always looking to avoid the toughest norms. But some do it in a civilized way, while others push it using uncivilized, brazen methods.


Unfortunately, as regards compliance with legislation in our country, the situation here is as follows: our businessmen often try to strike a bargain with public officials, civil servants and among themselves in order to get around our legislation, which is not underdeveloped in my opinion, and try to close deals that are contrary to law. That includes attempts to evade limitations set forth by applicable laws, the ones you just mentioned. But that is not only a question of the legislation itself; it's a question of legal culture, a question of effective compliance control, and the question of effective work by anti-monopoly agencies. Unfortunately, here we have little to show.


As regards anti-trust legislation and anti-monopoly bodies, well, it seems that people are not particularly afraid of those. Let us look at the way things stand in the United States, where non-compliance with anti-trust legislation is often a violation much more serious than a minor criminal offense, because the consequences of that would be disastrous for any businessman. So, we have a lot to deal with here, a lot to work on.


RC: You talk a lot about corruption and the need to clean up corruption. You've taken some steps. But you, yourself admit really, you haven't accomplished a lot. Why not go after – if corruption is as total as you say it is in Russia, why not go after some really senior government officials? Some governors that everybody knows – everybody knows are corrupt, to set an example? To show people that you know people that you thought were untouchable can actually, and will actually, go to jail?


DM: I would like to say here that we do need to speak legal language. Someone knows that somebody is a bribe-taker. Well, we can think that way about any governor, and not just in the Russian Federation.


RC: Fair point. You have said that corruption is nearly total. It's not just singular cases. Many people are corrupt. So theoretically, it shouldn't be very difficult to find people, where the evidence is there. So why not do that?


DM: I believe we should act as follows. Corruption has indeed penetrated all branches of power, and it has spread far and wide after the emergence of a market economy and the new political system, which is only natural. Let’s be honest: there were no such corruption levels in the Soviet Union. Why? Because there was no freedom and no market economy. Unfortunately, our state officials and our businessmen were not ready to communicate in a civilized way from the start. And corruption grew. Its levels were very high in the 19th century when tsars and emperors ruled our country. But we cannot say ‘Corruption is total, so you can grab anyone in the street, take him to an investigator and make him testify.’


We should act in a different way. If citizens or law enforcement officers have reliable information about certain individuals, this information should be made use of.


Let me tell you, the situation is difficult, but not hopeless. I’ll give you just one figure so that you know and everyone watching this program knows: last year alone, several thousand high-ranking state officials were prosecuted for corruption and bribery. And 2,000 of them were sentenced. Is that a lot, or not?


On the one hand, it is not a big number, but it’s a big part of those held criminally liable. But the problem is different. This doesn't stop people from doing that.


RC: Well, you say that but when Mikhail Khodorkovsky was arrested the first time, it sent a signal to all of the oligarchs that the state was in control. And one thing that happened was everybody started paying taxes. So wouldn't it – wouldn't you have the same effect if you went after one of your own? I am talking about somebody at cabinet level in the government, somebody really senior. Wouldn't that send the same signal to everyone else that this is no longer tolerated?


DM: As regards payment of taxes, not just by Khodorkovsky, but all our businessmen in general. Yesterday I had a look at statistics: last year alone 1,000 private entrepreneurs and some 3,000 employees of major companies were prosecuted for tax dodging.


This is a big number. I didn't expect it to be that high. And I had a look at certain cases (the information was provided to me by the Prosecutor General’s Office): some of those people – I’m not talking about the well-known cases – got 8-10 and 15-year sentences. So, I would say, it’s not exactly correct to talk about selective use of justice.


RC: Let me talk to you about Mikhail Khodorkovsky in a little bit more depth. Every December, Russia's biggest investment bankers and brokers get together for an informal chat. This year at that chat, one of the investment bankers raised his glass to Mikhail Khodorkovsky, not because anyone in that room liked Mikhail Khodorkovsky, I was told, but because they all believed that what happened to him, the second conviction, is devastating for Russia's investment climate. Don't you want the story of Mikhail Khodorkovsky to just go away? Don't you want to stop it?


DM: Let me expand on this for it is, indeed, of certain interest to everyone.


First of all, let me say once again that last year alone several thousand private entrepreneurs and employees of major business entities were sent to prison for tax crimes.


Secondly, I have always believed that the president of any country, including Russia, should not talk about individual cases, just because that would be an interference with the judiciary system.


Thirdly, as regards Mr. Khodorkovsky and some of his colleagues prosecuted by law and their respective sentences….it has not entered into legal force. But I hope it is, needless to say, that basically the prosecution can come up with new arguments and bring new charges against people already serving their sentences, however you take it.


And fourthly, I believe that all talk about the shortcomings of our judicial system as well as any attempts to bring pressure, including on me as the President, are totally destructive in this context because they make everyone else think that the judicial and legal system in Russia is so imperfect that you can simply tell the president or someone else ‘Change the sentence for Khodorkovsky or someone else, and then we’ll believe that your legal system is not that hopeless, that it is kind of working.’ But that would be unacceptable.


Let me tell you, quite frankly: I have discussed this topic – behind the scenes, of course, – with some of my colleagues, high-ranking colleagues. And I told them one simple thing. I said: “As long as you discuss this in secret, it means that we have an ill-functioning legal system.” The President should not interfere with things like this. Let the judicial and legal systems develop independently, otherwise there will be problems.


RC: How can investors be sure there won’t be another Khodorkovsky?


DM: I think that any investor – be it a Russian or an American investor – should abide by laws. Otherwise he can get a term, the way it happened with Khodorkovsky, and as was the case with Bernard Madoff, who got a longer sentence.


RC: You mentioned the rule of law, it is a little bit of a separate category. What, specifically, can you do to clean up the courts?


DM: Well, the judiciary in our country is not isolated from society. Its level of development corresponds to that of public and political institutions. I can tell you for sure, since I know a good deal about this: today we have better trained judges than we had in Soviet times. Why? Because in Soviet times, judges didn't really understand the way economic laws worked.


Now they are better trained, but they are not isolated from society and its influence. In this sense our judges have the same problems as any other representative of authority. They are open to influence and unfortunately, sometimes, under corruption-related influence. What needs to be done? We need to work on improving our judicial system with a cool head. We should motivate our judges. In what way? By offering high wages and introducing extremely tough measures in case a judge commits a crime.


RC: So are you going to raise judges’ salaries?


DM: Yes. We discussed this very topic a few years ago. And I can tell you straight that it was my idea to increase judges’ wages, and those look decent right now. Perhaps not as high as in the United States or Britain, but overall they look fairly good. But that's not enough.


When they offer a fantastically high bribe, there needs to be some other kind of motivation in place. What kind? Well, a person who thinks about it should understand that he would lose everything if he agrees to enter into this conspiracy.


I was citing this example just recently: is it possible to imagine a judge in the US and in Europe having lunch during court proceedings with a lawyer present. That's nearly impossible, for he would be immediately stonewalled and his name would be bent in every way possible. Unfortunately, things like that do happen in our country.


What’s more, judges should understand, there are some unwritten laws, ethical principles, a code of conduct for judges. If someone approached a judge asking him to consider a certain matter in a specific way, that judge should report this immediately to the superior judicial authority, saying that a lawyer for Mr. X has approached him for an unknown purpose. This is the only way to do it properly.


And one last thing, which is not legal, but rather ethical. Unfortunately, the experience of developing the judicial system in imperial Russia was not that brilliant. Even in the 19th century, people didn't believe in courts, so the problem existed even at that time. Therefore, we need to nourish respect for the courts by all our citizens.


RC: You talk about the need for more political competition to modernize the Russian economy. How can you fight corruption in the government if there is no real opposition…..if the opposition – political opposition – in Russia isn't allowed to exist?


DM: That’s not right. The political opposition in Russia does exist. The question is how strong it is. There are four political parties represented in the Russian Parliament, which sometimes really do haunt the Government that has been formed by the leading political force. They criticize the Government, clamor against it and so on, just the way it happens in the rest of the world.


Another thing is that we currently have just one powerful political force, which controls the situation in the parliament. There are negative sides to that, but it’s obvious that there are positive sides, too. What are they? In the 90s, President Boris Yeltsin could not adopt any law because the communists or other parties would block it. We have been able to adopt normal legislation, but that doesn’t mean that United Russia or any other party should get a mandate to rule once and for all.


RC: That is exactly what I am asking about. I am more interested in the opposition leaders that are outside of the parliament. Why is it that an opposition leader in Russia can be arrested at a peaceful demonstration, just because he is at this demonstration?


DM: Again, I wouldn’t want to interfere with the proceedings. But if you mean the administrative arrest of small opposition parties’ leaders, then this issue should be addressed in a lawful manner. No country in the world allows violating its laws on meetings, rallies and demonstrations, or acting against the police by committing unlawful acts against those who maintain law and order.


Well, I don't want to forestall a decision now. I know they have appealed to court; they have the right to do so. But it’s not a criminal offence in the first place; it’s just an administrative arrest. It’s not a sentence. So, let them appeal.


RC: My question is this. You are a very popular president. The opposition is very small. You, yourself, talk about that. Why create these situations, because they're just bad press for the investment climate outside of Russia, where these opposition leaders are getting arrested, where demonstrations – whether they were officially sanctioned or not – are dispersed.


Why not just let them demonstrate? You know you go by the Houses of Parliament in the United Kingdom, and that they're out there every day.


DM: They do that all the time. Out of dozens, even hundreds of demonstrations and rallies, perhaps, only one violates the law. There was just one problem with holding a demonstration on a specific day in a specific place, on Triumphalnaya Square. Once the city administration in Moscow changed, these demonstrations were sanctioned. They gather there, but it’s impossible to file a dozen applications for the same location. By the way, opposition leaders got the sanction, as far as I know. The problem is that they can’t work with each other. Somebody said: “We’ll be there.” Someone else added: “We won’t be there. We’ll take it to another location.” Look, we need to learn to observe the law.


RC: Are you going to run for president in 2012?


DM: I’ll see how things will go.


RC:If you do run, would Prime Minister Putin continue to be your Prime Minister?


DM: It will depend on a whole number of things and circumstances. As regards me, I won’t speak about Mr. Putin right now, ok? He’s another person, my friend, my colleague, so I won’t speak on his behalf.


As for me, I will certainly make my own decision and I’ll do that this year. I mean a decision what to do next. If I think it would be right for the country, for our political system and, first and foremost, for our citizens for me to participate in elections, I’ll do that. If I think the other way, I will state my position openly. And I will say that this is for the good of our society and our state. But if I decide to participate, than I will, of course, make a subsequent decision regarding prime minister. This is obvious.


RC: With your program of modernization in your mind, where will Russia be in five years, using some concrete things – economic growth, investment, inflation? How are these things going to look five years from now?


DM: Well, I would like our growth rates to be at least comparable to those of some of our partners, for example, within the BRIC. We grow at 4 percent a year now, not that bad, compared to the United States or Europe, but not enough for an emerging market. Therefore, we need to grow at 8-10 percent a year. If we reach that goal, that would be great.


Secondly, we do need to improve our pension system, our social insurance system, and our healthcare. If we do that, it would be an even bigger achievement.


Thirdly, we really do need to modernize our economy, upgrade the majority of our enterprises. If we do that for at least one-third of all operating enterprises, this would be a great success in a five-year perspective. This is probably what I want to see in five years.


RC: My final question. Obviously the terrorist act in Moscow was a tragedy. That aside, do investors need to worry about the security situation in Russia? You've got the Olympics coming up. You've got the World Cup coming up. Is Russia's security situation something that needs to worry investors?


DM: Well, I would like to start with something else. This situation definitely is of concern, first and foremost, for all Russian citizens and me as the president. And this is the most important thing because only by consolidating all public forces can we vanquish this evil. We have no right to get hysterical about terrorism and spread out, for this will make terrorism stronger. Look at the way the Americans came together after the events on 9/11. Even those who were not very fond of President Bush said: “Yes, he’s got to be at the helm, he’s got to be tough.”

It’s got to be the same for our country, that’s the only way we can defeat terrorism.

As regards fears and concerns of investors and all those who want to come to Russia, rest assured that we will ensure a high level of security. We will ensure the proper level of security for the Olympics and the World Football Cup, and all other sporting events. This will be a task for the whole of society and for law enforcement agencies and special services, of course. And we will do that as effectively as possibly.

: Thank you very much. I really appreciate your finding the time.


­DM: Thank you.

Also read Aleksey Pushkov’s related column here