Russia’s Finance Minister: The future belongs to blockchain technology

The US has rolled out new sanctions against Russia. How does Moscow cope with the economic pressure and what does the trade war mean for the global economy? We talked to Russian Finance Minister Anton Siluanov about that and more.

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Sophie Shevardnadze: Mr. Siluanov, welcome to our studio. It is your first interview with us, and it’s great to have you. We really have a lot to discuss. First off, you are number 64 on the so-called Kremlin List, and I don’t know whether  to give condolences or congratulate you – at least you’re not in the top ten... 

Anton Siluanov: At least I’m in good company. 

SS: Quite good! No one’s been left out... 

AS: Well, I don’t know whether congratulations are in order. We are simply doing our job, someone doesn’t like it and doesn’t want us to. They want to put businessmen, politicians and government officials on ‘sanctions lists’, they want to make it difficult for the government to perform its duties. But it will backfire on them - these measures aren’t stopping us from working as usual. Also, w hen someone wants to harm Russia in any way, you know, it’s in our mentality, we take it in stride, so it spurs us into action, mobilises us.

AS: That’s right. Now, speaking of my area of work, which is the economy, we are now, on the contrary, stepping up our efforts to do for business what hasn’t been even planned to be done for years. For example, we are now going to liberalize our currency regulations. Our existing currency laws are a holdover from Soviet times. Until recently, we just haven’t had the chance to change them. Now, all these sanctions make us to improve our domestic business climate, make it more attractive to Russian investors - and, by the way, to foreign investors as well. 

SS: We have dozens of questions regarding that, and I assure you we’ll come back to them later. What I want to do now is to discuss the ‘Kremlin List’ – because I’m not even sure as to what it actually means. When your counterparts from the US Treasury presented it to the Congress, the Congress said: “It’s just a list, no need to worry”. What was that about? Does it mean that, for example, when you apply for a loan at a bank, there is now no telling whether you will get it? What are the repercussions of being on the list? What does all this mean to you, personally, being on a list like that?

AS: As you rightly noted, the list itself was an initiative by the US Treasury, but the final decision is up to the Congress. Not to say that the Treasury hasn’t expressed its own position on the matter. Now, as for what the list means for our kind, so to speak, for officials in the ministries and agencies – well, at the end of the day, it doesn’t mean anything, really. We don’t have any foreign bank accounts or own any property abroad. We do everything using Russian technologies and Russian banks, all the property we have is in Russia. I didn’t feel in any way limited or restricted after the list was published.      

SS: Have you heard the theory that, because the confrontation between the Trump administration and the Congress runs so deep, and because the Congress pressured the Treasury to put as many people on the list as possible, the creators of the list just included the entire Russian government, almost as if they were mocking the Congress?

AS: Well, to me it looks like they weren’t even trying …

SS: It’s silly, no?

AS: …they just listed all of the officials and all of the business people with considerable assets, both in Russia and abroad. They didn’t specify any criteria they used to add a person to the list. What could those even be? Frankly, all these sanctions, especially this latest initiative, look somewhat half-hearted and lazy. I guess we’ll just see what happens next. But I don’t think that my colleagues or I will be affected in any way. 

SS: I see. Now, let’s talk about sanctions in general. This whole story has been unfolding for several years now, with Moscow never even considering backing down or making any concessions. In other words, the sanctions failed to reach their stated political goals – and they probably never will. Moreover, when you ask people how the sanctions have affected them, you hear the same response: those who didn’t buy parmesan cheese before don’t buy it now; those who didn't fly abroad before hardly do that now. Could it be that the sanctions have absolutely no effect on the Russian economy, on the people’s lives?

AS: Of course, on the one hand, these sanctions limit the deliveries of our military goods; they restrict the ability of our country to attract investors and receive loans. Naturally, this affects our economy, because we don’t receive as much investment as we otherwise would. For example, we could have had higher rates of return on our securities than we have today. We could have been obtaining more loans from Western banks to develop our industry and production. Clearly, there is an impact. But on the other hand - I believe we can always find a way out of a tricky situation. So, if they are imposing their sanctions, we just start developing our domestic capacities and tapping our internal resources. Remember how – during the previous US administration – they said that the Russian economy “will be in shambles”, pointing to falling oil prices and sanctions. Well, are we in shambles now? Quite the opposite! We have mobilised our economy, and we now have the lowest inflation rate in all of Russia’s history. We have overcome the economic crisis very quickly, and this gave us an additional push to undertake structural reforms, mobilise our financial resources, so I’d say we did rather well and got out of this difficult period without any significant losses. Even credit rating agencies have recognized this by upgrading our rating.                                 

SS: I do agree that there is nothing more stimulating than being in a hostile environment, but let’s remember German Gref who said in an interview to Financial Times that if the US were to impose wide-scale sanctions against Russia, then the Cold War would seem like child’s play. Would you agree with this assessment?

AS: If we look at the record of sanctions used against other countries, like Iran, we can see that in their case sanctions run much deeper and include such steps as cutting the country off from the SWIFT system and freezing its assets in Western banks. It’s basically a form of financial warfare. It really is. Of course, I hope it won’t come to that in Russia’s case.

SS: But could it? We have been hearing this idea of excluding Russia from the SWIFT system quite a lot recently. Do you have a backup plan in case it actually happens?

AS: This would affect Russia, sure, but also our foreign partners, because it will force us all to use alternative, less practical and less modern payment systems. We know that this is a double-edged sword. This would hardly be a pleasant experience for Russia, but it will be just as bad for our foreign counterparts. 

SS: So you do have a Plan B in case that happens, right?

AS: Of course we do. First of all, we have developed a proprietary technology for interbank message exchange that we can use in Russia – and we do use it already for domestic transactions. It has already been tested and is now used by a number of banks. So, in terms of domestic transactions, we have it covered. As for banking operations involving overseas parties, that’s the area that will be affected. But I believe we will find a way out.

SS: While Russia’s external debt is decreasing, and that is understandable since external investments are shrinking as well. But Russia’s internal debt is growing, isn’t it? It’s about 125 billion US dollars now. What are the risks involved here?

AS: You see, our internal debt is really small; it equals only about 14% of our GDP. If we look at other countries, for example in Europe, it ranges from 60% to 100% of GDP from country to country. In the United States, it exceeds 100% of GDP. Russia’s internal debt is not growing in relation to its GDP, and that’s what matters. Our goal is to have a state budget that would be unaffected by oil price fluctuations or any sanctions. What does it mean? It means that our budget deficit should stay around the possible minimum and that we would generate the budget primarily from domestic investments. If we keep our budget deficit at the minimum, our debt won’t grow either. Our internal debt projections for the next few years stay within the range of 14% to 16% of GDP. So I cannot agree with you saying that our internal debt is growing. It might be growing in money terms, but not in relation to the GDP.

SS: Thank you so much for explaining. This is certainly good news.

SS: There is some kind of a paradox with all these sanctions. On the one hand, the West is seeking to isolate Russia and shut it out from global processes. On the other hand, this isolation also insulates Russia from grand economic problems, doesn’t it? In other words, if the financial catastrophe of 2008 repeats itself today, and the US economy starts to nose-dive again, Russia won’t really care, will we?

AS: Well, the degree of Russia’s integration into the global economy is so high that we have no choice but to care about such developments. There are many things that tie us to the global economy: for example, if the global economy is growing, oil prices follow suit, which is important for us, and that’s a very basic fact. If the economy is in decline, the demand for our key export commodity is dropping, too. Again, that’s something we will care about. The demand patterns are the same.When global demand is on the rise, export volumes grow as well, not only from Russia but from any country, and vice versa. That means that Russia, as part of the global economy, would certainly feel it if the global annual growth rate, which is about 3.5-3.6%, were to decline. All global actors are interested in keeping the current pace of economic development and safeguarding against any serious economic crises.

SS: There’s another aspect of this that I’ve been thinking about - since they want to isolate us, why can’t we just turn to using blockchain and thus avoid the impact of the sanctions? We can move money in cryptocurrencies, past the existing financial system. Wouldn’t it be lucrative?

AS: You mean using cryptocurrency for transactions?

SS: Yes, can’t we just bypass this global financial framework?

AS: To think that transactions in bitcoins can allow you to skirt sanctions thanks to anonymity - this is nothing but an illusion. Measures to control cryptocurrencies are already being developed. In the immediate future, I believe that every payment in cryptocurrencies will be monitored the same way as traditional transactions in US dollars, euros, rubles, etc. But at the end of the day, what is it that makes a cryptocurrency better than the ruble? The answer is – nothing. Suppose there are restrictions on transactions with a certain Russian company on the sanctions list. How can this company deliver its product to the buyer and receive the payment? The conventional way is to use US dollars, or Euros. But if the company is under sanctions, this is no longer possible. So if a company bought, let’s say, some military goods from us, and wants to make the transaction in rubles, there is nothing stopping them. All they need to do is buy rubles at the exchange…

SS: And what about paying in bitcoin?

AS: Sure, but why would you want to do that? The ruble is much more simple, reliable, it’s easier to use. You see, the problem with bitcoin is that it’s volatile: today it costs this much, tomorrow twice as much, then it goes down again. Like I said, bitcoin transactions are just as transparent as with any other currency. The US has already developed a way to monitor these transactions – so if they want to, they can identify you. And other countries are already working along similar lines. In fact, it’s the ruble that is more secure, not cryptocurrencies – this is because all transactions in rubles can be monitored exclusively by our central bank, and no one else. Once again, there is no reason to retreat to using bitcoin, especially when we can safely use our own national currency. 

SS: Ok, I can see now why bitcoin can’t be used to evade the sanctions. But what about general use? I’ve heard you say that only professionals should attempt using bitcoin, and you even discussed the possibility of passing legislation that would restrict its use. But isn’t it the future? Isn’t it inevitable? It’s always been like that: when they invented trains, at first people feared them and went on using horses to deliver mail. What about you, have you tried using bitcoins yourself?

AS: No, I haven’t.

SS: Aren’t you curious?

AS: Well, you see, I don’t believe that the future belongs to the bitcoin. The future belongs to the blockchain technology. It’s what they call ‘distributed ledger technology’, which we are already starting to implement in our own databases, like the asset register. Soon, people will be able to store their data using blockchain. These kinds of applications are very promising. Are cryptocurrencies just as promising? Hard to say. I think that at least for the time being, transactions in conventional currencies will dominate trade. The reason is because they are easy to control – unlike bitcoins, there is a central bank that issues the currency. With bitcoin’s distributed ledger, nobody can control the value of the currency, today it’s this high, tomorrow it’s that, so it’s very volatile. There is nothing backing it. There is no issuing bank, which means there are no controls. The whole process is very chaotic. That’s why I believe that conventional transactions that use dollars, euros, or Swiss francs will still be given priority. Those who wanted to make money using bitcoin have probably realized by now the futility of this endeavour.      

SS: I wouldn’t say that! There’s quite a few bitcoin millionaires around already!

AS: ...And those who’d like to keep something under the radar by paying in bitcoins now have to abandon that idea, because it is no longer possible. As for the blockchain technology, we will use it and, actually, we are already starting to apply it, while I see cryptocurrencies as  simply speculative.   

SS: Wouldn’t you – not in your current capacity but some other day, as an individual – use bitcoins? Don’t you want to become a bitcoin billionaire? Or some other cryptocurrency billionaire...

AS: Anyone would be quite happy to become a billionaire, I suppose! What about you, are you ready to buy some cryptocurrencies?

SS: I’ll be frank. If I only knew how to pay for dresses I like with bitcoins, I’d use them! Right now, I am clueless. But I’ll get to it, that’s for sure. I believe that cryptocurrencies are the future. 

AS: That’s arguable. Let’s see how these things stand after a while.

SS: Now let’s talk about oil – we mentioned it before. The Russian diplomats succeeded in brokering a deal with Saudi Arabia, and OPEC finally agreed to curb global oil production, so oil prices began to grow again.  It seems to me that, whether we like it or not, oil is sometimes more important than politics or geopolitics, or political statements. And thus we see that where it really matters, Russia does have a say. Is that really so, or does it only seem that way?

AS: In this case it is so. We have indeed brokered an extension for the oil production cap deal, and that played a role on the global oil price. Of course, growing global demand for oil has also been a contributing factor here. The fact that the demand is growing has a positive effect on the market and the prices – but so does Russia’s ability to negotiate, because without Russia, a major oil producer and exporter, OPEC wouldn’t have come through with the solution to cap production. Our vision was that it is much better to have a certain degree of predictability in the situation and strike agreements we can rely on, that’s why we made an effort. And I think we’ll continue down this path.

SS: So isolate Russia or not, sanctions or not, Moscow still has some influence on the world economy...

AS: Certainly.

SS: Alright. Can you tell us how sanctions affect Russia’s oil production, I am guessing we use a lot of imported equipment and technology, for instance, when drilling for oil in the Arctic – can we manage without them? Do we have technologies of our own?

AS: That’s a good point. Applying restrictions to our country will indeed stimulate development of our own technologies. For example, Gazprom and Russian oil giants used to import most of its equipment from abroad – while now they are revisiting their policies and beginning to develop in-house technologies and solutions. Of course, it will take a while, but the bottom line is that our industry is adjusting by implementing the so-called import substitution program. So, on the one hand, sanctions do impose limitations, yet on the other hand, our industry can benefit from it.

SS: In an interview given at the Gaidar Economic Forum you proposed the idea that Russia should become a new Norway and that its economy should no longer depend on oil prices. This is all great, but how is it possible if at least one third of Russia’s budget is generated by oil and gas sales?

AS: That’s true. But before it was 60 percent. Almost two thirds. Immediate sales proceeds accounted for 60 percent of our budget. And in 2017, they were 40 percent. In our new budget, we allocated about one third of it to oil and gas, and that’s our current goal, to go down to one third. And I think this is good, it’s close to what I’d consider normal. If we talk about the so-called non-oil-and-gas deficit – this is the figure you get by subtracting oil and gas revenues from the total revenues – it used to amount to 13% of the GDP. Can you imagine if our budget deficit was equal to 13% of the GDP, without oil and gas? And now it is down to 7% of GDP. Our goal for 2019 is to go below 6% of GDP. We are really decreasing our dependence on oil and gas very seriously.

SS: And these aren’t just words? These are real actions?

AS: Absolutely.

SS: These are real actions that will produce tangible results in a couple of years? 

AS: Yes, they are.

SS: Right. Let’s talk a little about what Goldman Sachs said recently. They made a projection of a 3.3% GDP growth for Russia in 2018. Meanwhile Russia’s own Ministry for Economic Development expects only a 2% growth, if I remember it right.

AS: I believe so.

SS: Why the enthusiasm from Goldman Sachs? Why do they see a more jolly picture than Russia’s own government?

AS: Maybe because they’re jolly optimistic people?

SS: That could certainly be one reason. But there’s quite a different set of numbers there.

AS: You know, there are so many various analysts and experts. Some of them predict less than a 2% growth for Russia. I believe our ministry’s projection was just over 2%. Of course it would be very nice to live up to the 3.5% growth projections or go even higher, but I believe we can begin to talk about such numbers in a couple of years. Our task for now is to run a comprehensive structural reorganisation that would trigger such growth. That would involve reorganizing the taxation system, restructuring our expenses, reforming key economic sectors. This will give impetus to economic activity and stimulate economic growth. So my only guess here is that maybe Goldman Sachs is aware of our reform plans and made its projection based on that.

SS: Speaking about the decisions that the Russian government makes – I wanted to ask you about your role, specifically. You’re the key minister in this country...

AS: You’re exaggerating.

SS: Well, a key minister. And you’ve had to deal with so many things, from sanctions to oil prices and the ruble falling. We saw you holding your ground, but in the end, people are always asking you for money, that’s the bottom line. They probably call you stingy or mean, I’m sure of it. The question of whether someone loves you or your millions seems so relevant it probably makes you lie awake at night. It must be a very unrewarding, lonely kind of work. How do you handle that?

AS: Well, no, maybe that’s just what it seems like from the outside. Of course, everyone wants to get more money for their economic sector or projects overseen by this or that ministry, but they all know the budget has its limits. We can’t just take it apart piece by little piece, or it’ll backfire. Yes, I have to refuse, make my case and sometimes I have to get into strong arguments, that happens sometimes too. And sometimes people take it personally.

SS: Everyone does, probably.

AS: You know, I think we got used to each other by now – we’ve been working together in this government for over five years after all. At the beginning, that was probably the case. People thought, “Huh, he allocated additional resources to this person, but not to me, oh, he’s a so-and-so!” That’s not how it works. We at the Ministry of Finance analyse data to see where the money will have more effect on growth, or on social welfare. We have analysts who are just as good as in other ministries, sometimes even better, because often they have to know economic sectors, be it education or healthcare or agriculture, perhaps even better than the experts at the specific ministries. This is very important: I take great care to preserve that continuity, keep this tradition of expertise alive. So when your people can argue their decisions convincingly, justify why you can give money to this and not to that, people get it, and don’t let personal feelings get in the way.

SS: Do you know a person with whom you feel a personal connection? Maybe outside of Russia? I’ll explain. Take Lavrov and Kerry – in terms of ideology, they are opponents. But in terms of their personalities, they match. Even when the rhetoric between our countries boiled down to “who’ll be the first to push the button,” they managed to achieve amazing diplomatic success with the Iran deal. Do you have a person like that? Someone you trust and someone who is very like you? Maybe Christine Lagarde, for example, or someone else.

AS: You mean abroad?

SS: Yes.

AS: Well, we’re not the Foreign Ministry. I know many of my counterparts, especially from G20 countries, as we meet fairly often, several times a year. Unlike Mr. Lavrov, I don’t really have a person like that.

SS: So there is no Kerry to your Lavrov?

AS: No. But I have a very good colleague, or rather had – the former Finance Minister of Germany, Mr. Schäuble. We worked together a lot, especially while organizing the G20 summit in Russia, and we discussed Ukraine’s debt in detail. We had a good working relationship.Now he changed jobs and became the president of the Bundestag. I congratulated him, of course, but I felt a little sorry to see him go, because he’s the person I worked together on international matters for six years, and we had some plans for the future, concerning Ukraine’s debt and its settlement, for example. Now he no longer works at the Finance Ministry, so we’ll be entering into dialogue with other colleagues. But since you asked about a long-term partnership relationship, that would be with Mr. Schäuble.

SS: Mr. Siluanov, thank you for coming. I hope you have a balanced budget, with everything going according to plan, including the oil prices. Thank you very much, and the best of luck to you!

AS: Thank you.