​World too tiny for sanctions, they hurt everyone - Russian Minister of Economic Devt

Events in global politics always leave marks in individual economies; and the turmoil in Ukraine has sent tremors across the financial wellbeing of its neighbors. Meanwhile, the US is threatening sanctions on Russia and EU ministers claim Moscow is facing a huge hole in its economy. Is that really so? Is Washington winning the monetary war it launched on Russia? Will Moscow’s turn to Asia change the stakes? Sophie talks to Russia’s Minister of Economic Development Alexey Ulukaev.

Follow @SophieCo_RT

Sophie Shevardnadze: There has been a lot of debate whether people would come to St. Petersburg economic forum: will they boycott it, will they not? So finally there are 10 heads of major American corporations that won’t be attending. Does this mean that politics actually took over the economy or it is business as usual?

Aleksey Ulukaev: Well generally we appreciate the opportunity to get the great list of participants here on St. Petersburg economic forum. And I do understand it was not really an easy decision for some of them to get to here. But anyway generally I think that the business participation is normal. Quite a positive agenda we have here and, plus, keep in mind that this time the timetable is a little bit different. Normally, it was late June. Now it’s late May. So for some participants it was difficult to change their plans to participate.

But anyway I think that business participation is quite reasonable. Of course, some of the companies were under big pressure. I mean from some advice I would say from administration of some of our partners from both sides of Atlantic Ocean. But even in that non-standard situation our business partners preferred to be here and participate in discussions.

Unfortunately, the list of the official participants was cut and it was not usual, really. I mean, the level of ministers and prime ministers and others. But business participation and participation of media and participation for expert society is quite reasonable.

SS:I want to talk about sanctions and what buried actually here. There is a leaked classified report from the EU that suggests that sanctions against Russia would hurt Germany. Is this why Europe is being so reluctant to impose sanctions on Russia? And would it only hurt Germany actually?

AU: Firstly, let’s divide sanctions and sanctions. Up to now we still have the personal sanctions. The list of personalities which have some problems with visa requirements or with their assets abroad and so forth. Plus some very short list of the companies which are under some pressure. But it's not really sectorial sanctions, that is really the point. We know that there were some proposals for the European Commission at least to implement the sectorial sanctions, including some limitations of Russian exports to member countries of the European Community. But fortunately we still have the reasons not to confirm these proposals. And I do hope that sectorial sanctions will not really be in place after a while.

All of us sit at the same board. We live in the very small global world. And you cannot implement, really, material actual sanctions without some feedback to your economy. And when it comes to European society, first of all, general turnover of the trade between Russian Federation and the European Union is more than 300 billion euro. It's a big part of turnover and a big demand for production there, for work and so on and so forth. Plus some of the countries are dependent for energy supply from the Russian Federation. It's not only Germany. It's close to 50 percent, it's 40-and-something percent of gas imported by Germany is produced in Russian Federation. But there are even higher figures in some other countries. In Austria, Slovakia, Bulgaria and others. So it's quite a sophisticated situation in that case.

SS: But do you feel Europe is actually under pressure by United States to act against Russia?

AU: I'm not in position to discuss rumors about that.

SS: But what is general feeling that you are getting?

AU: Well, generally, I agree that there is some linkage between the position of the United States and European society. But you know, there is an absolutely different material position, because the Russian-American trade is less than $30 billion. Russian-European trade is more than 300 billion euro, more than 400 billion euro. So it is an absolutely different situation. So it's easy for American side to think and to discuss the problem of the sanctions. Of course it's much more difficult for Europeans.

SS:But I mean Europe and America as of now are acting as a united front and they are taking a confrontational turn with Russia even though their actions are translated into little in terms of sanctions. America for example: Jacob Lew, who is secretary of treasury, is saying sanctions are hurting Russia. The Kremlin says there is nothing to the sanctions, they are not effective at all. So who has got a poker face? Are we hurting or are we not?

AU: Let us take it side by side. How can we estimate the influence of the sanctions? We still have, as I said before, some very targeted, most personal sanctions, and of course that kind of performance cannot really influence the economy as a [whole]. But it influences the behavior of investors. Some of them in that situation cannot decide to finalize the investment deals that have been prepared before.

We have a lot of deals which are perfectly organized and were very close to finalization. But now they still are in a standby position. They are ready, but they are waiting for some message from Western side or from Russian side but, anyway, we are still waiting and that creates a kind of an investment break. And it costs us of course something in terms of our capital outflow. We have $63 billion in capital outflow in first quarter this year. It costs us something in terms of investments. We have minus 4.8 percent of investments in first quarter of this year, [compared to the] first quarter of the previous year. That is this atmosphere of non-confidence, non-transparency, of waiting, of standby position.

SS: But when you are saying about the hesitancy of investors to execute the final deals with Russia, it also has to do with Russia's position on Ukraine and the situation in Ukraine is not getting any better right now. Do you feel our firm position on Ukraine will scare investors away further?

AU: Here we are on a very political side of the story. It's the dynamic situation in Ukraine, it's very difficult to foresee, it's unpredictable, it’s moving. Anyway, our position is that we are very interested in peaceful and prosperous development in Ukraine. And probably our friends in Europe and America don't understand that during last 20 years we supported the Ukrainian economy with artificially low prices of gas and other resources and credit and so on an so forth. It's roughly $200 billion during the last 20 years. That is our input to somehow support the Ukrainian budget, Ukrainian economy and the social status of life in Ukraine. And we are going to continue with that, to participate in general solution of Ukrainian problem. But we are very much concentrated on the rights of all the parts of Ukraine, all the regions, all the social groups to participate in solution of their destinies there.

SS: But OK let’s talk about the Kiev-Moscow economic relationship. And I'm primarily talking about Ukrainian machinery, nuclear energy, the freight and rail industries - Russia is the biggest client. What is going to happen to them?

AU: Once again it is very much dependent on the Ukrainian leadership, probably, after the elections. If we have really legitimate governance there and with the agenda, with the transparent position and understandable personas, then we will understand better what will be the future of our cooperation. Of course the serious point is the agreement of the association cooperation between Ukraine and the European Union. We started to discuss that problem with the European Union, at a meeting in Brussels with my counterpart in Commission of Trade in the European Community. And I tried to explain that it creates some risks for Russia's economy, because of different things, because of technical regulation. It means we… Ukraine’s signed something around 400 agreements with the member countries of the CIS, different kinds of integration with CIS countries, including, first of all, the Custom Union. And 40 of them are absolutely fundamental. And you cannot just keep it aside.

SS: I want to get back to American sanctions and take it point by point, if I may. We have Microsoft, Hewlett-Packard and other tech giants that are also under European and American sanctions. How would Russia’s business operate? Because everything, virtually everything runs right now under US-made software.

AU: Probably you’d better ask Russian business about that. I still think that probably we, I mean – public opinion - overestimates these messages…

SS:You mean sanctions?

AU: It’s not sanctions. It’s still rumors, speculations about sanctions. So, I have no final solution, but anyway, we are trying - I mean, government officials, and expert society, and business -we’re trying to think about some substitutes. When it comes to the payment systems, for instance, then it comes to custodians and protection of the nominal shareholder rights, then it comes to the system of trade of securities… In all those spheres we have to think about diversification of risks, and it also somehow touches the problem of software.

But I can give you one other example about our position: before the aggravation of the Crimea-Ukrainian situation, in February the American Intel corporation, quite a big player in the software market, asked us - they had some problems with the exporting goods and services to Russia – asked us as the Ministry of Economic Development. Then I had a meeting in Washington, DC, with my counterpart Secretary Pritzker about some assistance… And right now, in this very situation, with the sanctions and speculation about sanctions, we made what Intel asked us about. So we abolished these limits for that. I think that is our response to the sanctions – it’s not symmetrical. We think that we are still quite open for American companies to work here, in Russian market.

SS: Then there is prominent US trader Jim Sinclair, I’m sure you’ve heard of him. He actually says that American sanctions, or what you call, speculations of sanctions, are hurting America itself; they are shooting themselves in the foot with these sanctions, because that could push Russia to put an end to the petro-dollar. Do you agree?

AU: I agree in the sense that all these sanctions are not the one way out. Of course we have to… It’s quite easy to understand – we have to diversify our risks – it’s quite understandable. It means we have to find the way how to make payments and settlements in our national currency. That is the task we tried to solve before, before any speculation about sanctions, and so on and so forth, but probably now we’ll accelerate this.

We own a very good track on that with our Chinese friends for instance. So the national currencies, renminbi and ruble, are used in trade and now we are going to move that [to the] investment-side also. We are talking with some other partners like Brazil, like Vietnam and Korea about the same – how to use the national currencies in trade, investment and other. Of course there are some other position concerning the assets of the business, and of course we don’t demand of business to keep aside from the dollar assets – it’s impossible. But, the point is to seek the way to diversify risks.

SS: I want to give you one more number that European Central Bank chief Mario Draghi He is saying that capital flight from Russia ever since the Ukrainian crisis broke out is $220 billion. The Kremlin is citing the number as one-quarter that. So what’s the real number?

AU: I’ve known Mario for 10 years. He is a brilliant professional, but probably he was somehow misinformed or whatever. It’s an absolutely strange figure. The only reason is that probably that they have not net, but gross estimate. We estimate net capital inflow and outflow. It means export balance between export and import of capital, and that is absolutely in accordance with IMF accounting standards. Using those standards we have the US$63.7 billion – it is an absolutely concrete figure. What is $220 billion? I do not know. As I said, it’s probably gross – it’s both export and import of capital, but it’s crazy to operate with gross figures.

SS: Is it actually something of a problem for Russia? How much of a risk is a capital flight from Russia?

AU: Once again. Of course the capital flight and outflow are different terms.

SS:Outflow?

AU: Outflow – it’s a very economic term. It means that companies and households also, they can change their portfolio of investments. What does it mean? In $63 billion, $20 billion was household money that just changed their deposits. They moved from ruble deposits to dollar or euro deposits, and that is more than 30 percent of all capital outflow, dependent on the households. It was in February and March of this year. In April, they changed their currency positions and started to move to the other side. What will be the final [part] of the story [by] the end of the year? Nobody knows. But I think that we are more or less in balance.

The same with the companies – they have short-term and long-term assets in different currencies. They moved a little bit from ruble to dollar, but now they’re probably moving to the other side. Our focus for the end of the year is something about $90 billion dollars. That means we have 60 and something, so it’s still something between 25-30 for three quarters of the year by the end of the year. It was more or less a normal situation, the capital movement, nothing unusual.

SS:I want to ask you to sum up the state of the economy right now in Russia. In September, you said that actually the Russian economy hasn’t suffered such a serious setback since the [financial] crisis broke out [in 2008]. Ever since Ukraine happened, you have said that technical recession is a possibility. What’s the state of the Russian economy? Is it hurting?

AU: You see, it’s a very sophisticated question. The point is that the period of recovery is over. The recovery, growth is easy for each and any country because you have the labor force, you have a productive force and the only thing you need is demand, right? But now it’s over. We have to find some new sources of growth. We enjoy good saving performance here in Russia – 30 percent of saving in GPD. Unfortunately, not all the saving transforms into investment, so it’s around 21 percent. This gap between 30 and 20, this is the room for increasing of investment.

Unfortunately, up to now, we could not create so friendly environment for investors, just to invest in different projects. And plus, of course, the international tension added something to that uncertainty of investors. So that gap between saving and investing becomes still larger after that. That is not the most important point for Russia. Our focus for this, the growth will be very close to zero, something around 0.5 percent or general growth, and plus, investment will be on the negative side. We expect something about -2 percent of investments. That’s the situation.

SS:There’s a lot of talk about Russia being ready to give up the dollar or euro as its everyday currency of imports, especially when it comes to natural resources. What do you say?

AU: I think that is a process. We are not going to demand the companies, Russian oil and gas producers, just in a day to change their [currencies]. It’s impossible, because there are rules and procedures. But, generally, especially in the situation that our partners are not countries issuing dollars or euro, Asian countries for instance, why on Earth [do] we have to have the [currency] nominated in dollars and euro in that case? So we are going to move, not very fast, but step by step, [towards] using the national currencies, for using the ruble as a measurement for those contracts.