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28 Jun, 2019 07:13

Russian finance minister: We no longer expect Western sanctions to be lifted

Today’s global economy speaks the language of sanctions, trade tariffs and restrictions, and the globalization dream is looking more distant than ever. How is Russia navigating these troubled waters? We ask Anton Siluanov, first deputy prime minister and finance minister of Russia.

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Sophie Shevardnadze: Anton Siluanov, hello and welcome.

Anton Siluanov: Hello. 

SS: We're always happy to have you on our program. Last time I interviewed you was about a year and a half ago, and no fundamental shifts seem to have happened since then, but still, the world has changed. It’s just not the same. "De-globalization" is now a buzzword, we hear it everywhere, from Davos to the St. Petersburg International Economic Forum. But you, I mean, economists, define de-globalization as economies becoming more isolated, tariff wars, protectionism. Yes, we see it all happening and this is what de-globalization brings. Ten years ago, everyone said that globalization would triumph, and the world would be united as one big common economic space. But actually the opposite happened. People started pushing away from others, isolating themselves and cutting everyone else off. Why do you think this pendulum swung the other way? 

AS: Globalisation and the push for a barrier-free economic world drives competition and a more liberal trade regime. Truly free competition, without any restrictions, stimulates output growth and boosts global economic growth. De-globalisation is about protecting your production capacities, your manufacturers, your companies. So the logic goes, "I'll make my companies competitive, and my fellow citizens' lives will improve." But in the end the results will be just the opposite. It's only a matter of time. It's just impossible. We were building a free economy, with free movement of goods, capital and labour force, and now suddenly barriers are put up – trade barriers, I mean. At first glance this kind of policy could bring benefits, but then you'll lose your competitive edge and will have to pay a higher price for imported goods – that will be brought in anyway. The imports would just cost more in such an isolationist country.  

SS: Everyone is unhappy about the existing world trade regulations, there are a lot of disagreements, and it seems that everyone is calling for the WTO reform. There's the thing: as long as the WTO rules in someone's favor, they are fine with it. When it rules in favor of their opponent and competitor, they are no longer fine with it. Reforming the WTO seems to me a bit unrealistic. After all, you can't have an organization that everyone is happy with, can you? Maybe that's what the U.S. realized and said, "Well, we'll just play by our own rules, because we're not OK with this whole WTO thing."    

AS: Yes, there are calls to reform the WTO. First, as an organisation, the WTO was established by a group of countries that decided to remove trade barriers. Second, the conditions for exporting goods to other markets should be predictable and understandable for the actors involved. And what do we have now? Under the pretext of national security, countries simply ignore the WTO. There is in fact a provision that if a country feels there is a national security threat, it can choose to stray from the WTO principles. Now some countries are taking advantage of it. The U.S., for example, sees all these regulations mainly as a national security threat. When the WTO was founded, the spirit and the environment were different. Today everyone is leaning towards protectionism, safeguarding their own interests. It may start with one country, and then you have a group of countries or an alliance. It could be just one country with a large market that would say, "Well, if these states are pursuing an isolationist policy, so will I." And so on. It's not good for the global economy.  

SS: Let's talk about the biggest economy-related news story – the trade war between the U.S. and China. Everyone's going crazy about it. Let’s take the worst-case scenario: the two countries fail to reach an agreement. They definitely won't cut all ties or impose mutual sanctions, because it would be their doom. So we can rule that out. There won't be two separate economic zones in the world. What are we all so afraid of? OK, so we will trade with tariffs. It's not the end of the world, is it?  

AS: No, of course it's not the end of the world. But trade will be down, capital flows will slow down, including investment, and there will be less demand for some goods, including Russian exports. Shrinking exports will obviously affect Russia’s economy and drag down our growth. Russia is part of the global economy, so of course when two leading economies in the world have disagreements, it definitely has an impact on other economies and leads to a decline in economic activity around the world. That's for sure.

SS: At the SPIEF – I don’t know if you remember – I asked our President what's Russia's place in all of this, and he very diplomatically replied with a metaphor, where Russia was a clever monkey looking at this fight from the sidelines to see who wins. So if this clever monkey keeps waiting until the point when this turns into a genuine conflict and watching from the sidelines would no longer be an option, Russia would have to make a choice. What will we choose to do?

AS: We'll act in line with our interests, like any other country, I imagine. And our interests are as follows: First, we need to create an environment that would mitigate the effect any trade wars or storms or economic issues around the world could have on Russia. So we need to make sure we can rely on our own capacity. Second, when we see that sanctions or restrictions are imposed on certain commodities, we should try to come up with proposals of our own, offering our products to the countries which suffer from a less favourable trade climate.

I think we need to cultivate closer ties with our Chinese partners, and that’s exactly what we are doing. Trade between Russia and China is growing. Last year, it reached $108 billion, and our goal is to take it up to $200 billion. It has nothing to do with any restrictions, or the trade war between the U.S. and China. It's because we need to promote our goods, trade wars or no trade wars.

SS: There is this catchphrase now that China is our key economic partner, but the figures show that we do not have a genuinely equal balance of trade with China. I agree, $108 billion is a lot, but what we do is simply export raw materials, while China exports consumer goods and electronics. China’s economy is way more diversified than ours. The Chinese buy our timber and other resources, such as oil and gas, and they don’t really want to import anything else. Of all the money China invests globally, Russia accounts for only 2%, which is very little. So, where is that close economic cooperation with China everyone is talking about? The feeling I get is that we are nothing but a raw material colony to China.

AS: That’s not an entirely accurate depiction of the situation, even though you are absolutely right about the trade structure. We’ve agreed with our Chinese partners to ramp up cooperation in investments, and Chinese businessmen show genuine interest in Russian projects – infrastructure and industries. And there is also the Belt and Road Initiative, not to mention our cooperation in energy, nuclear power plant construction, arms trade and defence, and others. This partnership yields competitive top quality high-tech goods and services. And that is exactly the kind of cooperation we expect from our partners. Also, following the restrictions imposed on Chinese high-tech companies, such as Huawei, we offered our IT products to China, and suggested developing 5G networks together. We invited China to take a closer look at what Russia has to offer, and our Chinese partners agreed. I think we have laid very good groundwork for cooperation with China – and natural resources is by far not the only area. These are the areas we focus on in our collaboration with China.

SS: As you probably remember, we had an interview with you right after another package of sanctions was imposed on Russia some one and a half years ago, and the general attitude was like, ‘yes, that’s bad, but we will manage, and these sanctions will only help us mobilize ourselves, will keep us on our toes, so everything is going to be great.’ Today, government officials and large businesses keep up the same narrative. Believe me, I am an extremely optimistic person, I always keep a positive attitude towards people and all that happens in life. I genuinely try to find the bright side of every problem, but here I can’t see any silver lining, and people whom I know personally don’t see anything good in where we are now. There is no reason to think we have become stronger, the only feeling I get is that we are in stagnation. Do you really think there are opportunities we can tap into?

AS: It’s been one and a half or even two years since we met last time. Indeed, we hoped that sanctions rhetoric would have subsided, but it’s all different now. Today, we no longer expect sanctions to be eased or lifted. I said already, first and foremost, we need to rely only on ourselves. As for your feeling of stagnation, I cannot really agree with you.

We have adopted a completely different strategy. We have outlined the so-called national development goals and set forth a number of national projects. We’ve completely changed our governance. In addition to that, we have embarked on a number of critical projects – we didn’t have proper infrastructure, so we set up programmes and allocated funds to develop transport and digital infrastructure. This is what we really need today to boost economic growth. These are the reasons why I cannot agree with you that growth has stalled. Quite on the contrary, things are moving very fast.

SS: Then why can’t ordinary people see that?

AS: Again, I don’t think you are right saying people can’t see that. First, this year we’ve made a number of improvements in healthcare, and now people are provided with a wider range of services and their quality has also gone up. Secondly, we have started investing heavily in transport infrastructure. It’s been only six months since the beginning of the year and probably in some places the changes are not yet visible, but we do invest a lot. 

This year, we will be allocating 1.7 trillion rubles for national projects, while the overall state budget is 18-19 trillion. So ten percent of all the money will be spent on national projects. You will see the changes, people will certainly notice the improvements in all these areas we’ve focused on. 

SS: So the national projects should be implemented by the year 2024. I do realize that if implemented, these national projects will improve the quality of life of Russian citizens, and will help make the economic breakthrough we’ve been hoping for. Every time we journalists ask if there’s enough money, we get the standard answer, which is yes. But I don’t quite understand who will be paying for these national projects, that are super-ambitious – will it be the government, or the taxpayers, or private capital?  

AS: The government is certainly the main driving force. But we will also attract private funds. The overall six-year budget for national projects is 25.7 trillion rubles. 13 trillion will come from the state budget, both at the federal and regional levels. The rest is to be covered by private capital, by different funds and foundations, including government funds. So both the government and businesses will be contributing. In order to motivate businesses to invest in new projects, we are working hard to provide a better business climate. As we said, Russia is now under pressure internationally. What can we do to alleviate this pressure? We can offer more favourable conditions to domestic investors. One example is the so-called “regulatory guillotine” that is to come into force in 2021 and will help get rid of outdated business regulations. 

SS: You mentioned before that overseas investors are still strongly interested in Russia because it is actually a profitable market. It’s true, they are interested. They are not scared off by sanctions or the red tape. You know what the main problems are; it’s the unpredictability of the courts, excessive involvement of the law enforcement agencies in the economic affairs, and the overall lack of stability. Calvey’s arrest has already been discussed at length, but I would like to refer to the impact that his case has made on the overall environment. The problem is how the court ruled, how the law was used in dealing with one of our major foreign investors, that’s the problem. So, on the one hand, there’s interest, and yet, on the other, there is profound lack of trust, we all understand how risk assessment works. My other question is what exactly will be done by 2021 to alleviate this main concern, other than these procedural improvements? Investors are apprehensive about the law enforcement agencies, the overall unpredictability and uncertainty much more than about the international sanctions or bureaucracy.

AS: I agree that investors do have such concerns. And I do agree with you that our laws and regulations should, perhaps, be made more predictable and, let's say, more investor-friendly. During the recent Q&A session with President Putin, someone said that our inspection authorities need to change their optics. When they come and inspect companies, all they do so far is point out violations, issue fines and collect any tax arrears. But they need to have a different approach to what they are doing. They should rather be helping businesses, for instance by pointing out risks, or suggesting what needs to be improved. Their mission must change. And I think that’s what the business community expects from us – it's not about predictability... 

SS: Could you be more specific? 

AS: It's about a change in the attitude of the authorities towards businesses. 

SS: Are you doing anything specific to change all that? Everyone recognizes it, including the president; everyone talks about making things people-friendly. Everyone understands that it’s a real problem. But what is being done, specifically? When I hear things like “Well, we are working on a bill, we are going to complete it soon,” – all this usually takes a year or two. Can we afford wasting another year or two just talking about the changes while investors still shun the prospect of investing in Russia? 

AS: Let’s look at the Federal Tax Service, or the Federal Customs Service. Both services have dramatically changed the way they handle taxpayers, and this change happened about five years for the customs service, and even less – just three years ago – for the tax service. Here’s another point; the number of court trials on tax cases has dropped significantly, because the tax agency now use the so-called pre-trial litigation. Rather than going to court, which is a lengthy and costly process, tax inspectors settle their issues with companies by referring them to a supervisory tax agency, and a lot of issues get resolved at that level. I believe that all the supervisory authorities should adjust and re-think the way they operate. When I talk to my colleagues at the Federal Customs Service and the Tax Service, I tell them what they should do is warn, assist, and advise businesses, in order to help them fix things in case of errors or violations. 

SS: What about the law enforcement agencies? Because you know, this is the key issue. As someone who is charge of the finances and economy of this enormous country, what can you say to all international investors out there whose primary concern is with the law enforcement? 

AS: I believe it isn’t necessary to send business people to jail straight away for financial and economic crimes. 

SS: Not necessary at all. 

AS: A house arrest would suffice. And steps like this would help create a different business climate and help build trust.

SS: Your colleague Alexey Kudrin recently mentioned - and Presidential Commissioner for Entrepreneurs’ Rights Titov agreed with him - that 80 percent of the small and medium-sized businesses in Russia are running their business in constant fear because they don’t trust - and even fear the existing laws and judicial system in the country. With the international sanctions in place against Russia, our country is already under great pressure. In fact, the pressure on Russia’s economy has never been so great since the 1990s, so small and medium-sized business development is exactly what our country needs right now. It could give our economy that push that it needs so badly, it could jump start it so to say - and yet, what we have on our hands is the situation where the businesses fear their own government. Why is it so bad? Why can't we give these enterprises what they need to just do their jobs fear-free in their own country? 

AS: I don't think they fear the law enforcement system, and by the way, the Federal Tax Service is really soft on them – they inspect less than one percent of the total number of small and medium-sized enterprises in the country. Also, the state runs a massive programme in support of small and medium-sized businesses that offers tax cuts, facilitates access to bank loans, gives new education opportunities, and introduces special tax regimes. We all understand that without the private sector we won’t have enough money for our budget, we won’t get the taxes that are needed to provide healthcare and educational services for our people. Ultimately, all the money is generated by entrepreneurs. So, what the government needs to do is to provide a comfortable environment for the private sector, and that’s exactly what our government is doing. 

SS: Alright. Let’s talk about this next year when all these reforms we’re talking about now and that you say are being discussed gain some speed and when there’s finally some real change taking place, because that is what matters most. Let’s talk about this year G20 summit. Let’s be honest, such events as G20 summits are quite formal and don’t make a lot of real headlines except all this chit-chat about who Putin smiled at and who Trump shook hands with. It’s not where serious decisions are made. What I would like to ask you is, given the current situation, with lots of steam having accumulated under the lid, there is a lot of tension among the leaders, and many of them want things to change - can there be some breakthrough at this summit? 

AS: It's possible there won’t be any major breakthroughs, but I do expect some changes following a number of bilateral meetings, including the meeting between the presidents of Russia and the United States. 

SS: Thank you very much for your time. All the best to you and take care. 

AS: Thank you.