Medvedev on Russia and the global economy
During his interview with CNBC’s Maria Bartiromo, Dmitry Medvedev discussed in detail the state of the Russian economy and its interrelation with its global partners.
From the global recession to the acquisition of the Opel brand, Medvedev discusses it all with a special focus on the upcoming St. Petersburg Economic Forum. RT brings you the full version of the interview.
MARIA BARTIROMO: Mr. President, thank you for joining us. We just saw a sharp contraction in GDP in Russia. I saw your comments on where the economy has gone. Can you give us a status check in terms of where this economy is right now from this downturn?
DMITRY MEDVEDEV: I’d like to start by saying that the global financial crisis hit the Russian economy no less than those of other countries. There are objective reasons for that, as well as subjective reasons related to our condition, our situation.
It’s true that we have been affected by the downturn, and the drop in GDP that we’re predicting this year is 6 per cent or even more. In some areas, such as industrial production, the reduction is even larger, around 14 per cent in a few months. At the same time, we are witnessing other alarming developments, such as the increasing unemployment rate. Today, we have some 2.2 million unemployed in Russia who have registered at job centers. The real figure is certainly higher, since some people don’t register. Using the formula suggested by the International Labor Organization, we can estimate the number of unemployed is 6 million or more. This is 7.5-8 per cent of Russia’s labor force. These are alarming figures, and the government must do something about it.
There are other problems, such as fluctuations of the ruble exchange rate. We had to weaken the ruble rate due to a decrease in foreign currency inflow caused by a decline in exports. Also, we’ve got problems with inflation. Still, I have to say that lately all these negative trends have at least slowed down. Today, as I see it, we are at a stage where we need to understand what will happen next, both as regards Russia and the world economy as a whole.
One thing that made the situation difficult for us is the current structure of the Russian economy. It’s no secret that it was, and still is, largely export-oriented. In the end, this raw material-oriented export became a source of problems. Oil and gas prices have changed, and a number of other key export goods, such as metal industry products, have also become cheaper.
To a degree, we are victims of the economic structure which we have been building for decades. Our main goal for the future is simply to change this structure. I don’t see the situation as dramatic, although it is difficult. Some countries have it better, some countries have it worse, but on average our situation is the same as in most countries hit by the economic and financial crisis.
MARIA BARTIROMO: Can you tell us more about how you will continue to diversify the economy and how you will react to this decline? Give us the status of the Stabilization Fund which you and the former president Putin so wisely set up before the recession?
DMITRY MEDVEDEV: This is our primary goal at the moment – overcoming the consequences which we see today and reforming the structure of the economy. We did spend a lot of time laying the foundation for Russia’s modern economy. Unfortunately, it’s still very poorly diversified.
In fact, I’d say we cannot be satisfied with our current state of affairs in general. We have failed to create a high-technology economy. As I’ve just mentioned, we are still extremely dependent on the export of raw materials. The innovative component of our economy is very weak. We lack immediate implementation of innovative technology in our industries which is the main feature of a modern innovative economy. In other words, diversification of the Russian economy is probably one of the most urgent and important tasks for our country. Of course, we will strive to accomplish it, but in doing so, we need to design a new structure.
As for the Stabilization Fund, we indeed have spent much time and effort to accumulate certain reserves which now amount to billions of US dollars. At one point, we had more than $600 billion in the Reserve Fund. Now we have spent some of this money, but nevertheless, the remaining reserves are still vast. It is still a lot of money and of course, it helps us solve many problems at the moment. But you cannot develop by using reserves alone. Therefore, despite the fact that we continue to accumulate gold and currency reserves and strengthen the currency component as such, we will have to think about the diversification of our economy in general, about launching new production facilities and creating a high-tech, innovative economy. This is probably the main task at the moment.
MARIA BARTIROMO: It has been really an unbelievable moment in time around the world, and it’s a moment where we are questioning some of the things that we thought were givens: the solvency of the banks, whether or not the US dollar is the reserve currency for the world. How do you think the dollar will fare coming out of the recession? Do you see it changing as the reserve currency in longer term?
DMITRY MEDVEDEV: This is another subject we are very much concerned about, because the whole world depends on the situation with the US dollar. Although there are other reserve currencies such as the euro, the pound, the yen, still a lot depends on the situation with the US dollar.
You know, we have our own point of view on this matter, which, incidentally, I presented a year ago at the Saint Petersburg International Economic Forum. Our viewpoint is that the world today needs more reserve currencies, and this is not because the US dollar is bad or the euro is not good enough. The current situation itself suggests that there should be more currencies, which banks, individuals and countries could invest in. This will give us more options should any problem emerge in the economy. The problems, as we understand, initially occurred in the US economy; it is evident now. Had the US government responded differently to these problems, the crisis could have been less serious. But that’s not my point right now; my point is that the crisis in the US economy naturally changed the general attitude to the US dollar.
Therefore, our task for the near future, as I see it, is to establish more reserve currencies. One such reserve currency could possibly be the Russian ruble – as a regional reserve currency, especially taking into account the fact that there are a number of states which are genetically, historically, economically and in many other regards linked with Russia. In this context I believe that at some stage the ruble too could become a regional reserve currency.
At the same time, we do not rule out the possibility of creating a supranational currency, especially since the decisions of the G-20 London Summit provide that the International Monetary Fund will issue various securities for the countries to invest in. Some instruments already used by the International Monetary Fund, such as special drawing rights, for example, represent in fact a prototype of such a supranational currency. What does it mean? It means that in any case we will need a universal payment instrument to lay a foundation for a future international financial system. I do not think this will undermine the US dollar seriously. But I consider it very important for the US dollar and other reserve currencies (including, hopefully, at some moment the ruble too) to have a common link, like special drawing rights or some special currency, that could be used in crisis situations. That is why this idea, brought forward by Russia and supported by our Chinese colleagues, seems to be very productive. We purposefully did not discuss it in the G20 format in London and agreed with our colleagues, that this issue should be dealt with some time later. One of the reasons for that was our intention to avoid further destabilization of currency markets. However, in my view it should be done – sooner or later.
In general, we see the future of the international financial system in establishing modern rules of the game. Speaking of such rules, it has become rather common to talk about the fact that there is not enough regulation, and that we need to adopt a greater number of decisions. As I see it, it is not the point. The point is not in adopting more conventions to regulate financial and economic processes. The point is we need to make such decisions, international conventions and international commitments more efficient and more transparent. In other words, we don’t need more regulation, we need regulation to be more efficient.
Therefore, when we talk about the fate of the Bretton Woods financial and economic system, our position is not that we should discard it. We think it should be modified in such a way that it would meet the needs of the 21st century, take account of a greater number of successful economies, and a greater number of regional reserve currencies. We would like, of course, that ultimately the fate of the financial system is decided not in one place, but, say, at the forums where major economic players meet. We must admit that the Bretton Woods system was primarily focused on a few countries only – the United States, Great Britain, and, to a smaller degree, on other European countries. Today we need to create a modern, universal framework that would unite American perceptions about a fair economic order and financial system, British perceptions as well as the perceptions of other partners from Europe, Russian perceptions, Chinese perceptions, and Indian perceptions as well. Only then can we be sure that the modern regulation will prove effective. Otherwise we will have to confront a new financial crisis in five or ten years. We realize that the international economy works in cycles, and sooner or later crises will happen. The question is how dangerous they will be, how seriously they will impact the global situation. I think this is very important, as far as world currencies are concerned.
MARIA BARTIROMO: You made a very important point, Mr. President, because we had a regulatory structure in place beforehand. But let me ask you about something that you have just touched on, and that is the idea about response to what we have seen, particularly in the United States. Do you expect global inflation in commodities, of course, in the US, if the US dollar currency weakens, and we see interest rates rise to monetize the US debt? Do you expect that we would see global inflation as a result of the movements in the dollar and interest rates?
DMITRY MEDVEDEV: You know, I would not rule out the possibility of global inflation, particularly due to the problems that you have mentioned. Compared to other countries, we, I mean Russia, are in a very difficult situation as concerns inflation. Unfortunately, we failed to cope with inflation earlier, before the crisis. It was about 8%. After we had to partially devaluate the ruble, certain processes accelerated. The overall amount of money in the economy increased. As a result, inflation pressure has grown. This year we expect an inflation rate of about 13 percent, which is naturally beyond the limits of possible as it has a very negative impact on the liquidity, as well as bank rates, and ultimately on those loans that are extended to companies and individuals, because such loans are extended at unrealistic interest rates that we got rather unused to. These interest rates reach 18 to 20 percent a year. That is way too high. Nobody wants to borrow money on such terms here, while foreign cash inflows – European cash resources, and US cash resources – naturally, considerably reduced due to the crisis.
Therefore, our task today in Russia is to seriously reduce the inflation rate. But the processes that you have mentioned, related to the situation with the dollar, the need to resolve various problems in the US economy, including measures to support a number of large manufacturers (as far as I understand a decision will be made in the immediate future about the de facto nationalization of General Motors, a decision worth huge money, dozens of billions of dollars, not to mention the fact that the general US bailout runs into trillions of dollars) coupled with the decisions taken by other countries, may lead to a still greater volume of cash injections. As a result, inflation processes may gain momentum, which naturally will have to be offset by additional emissions. Such additional emissions will have a most negative impact on the global economic situation.
It would therefore be desirable to avoid such a scenario. I have initially told you about the economic situation in this country, but in terms of inflation we, of course, depend on the inflation situation in other countries. By the way, for us, the last few months turned out to be more favorable, the inflation rate in Russia turned down and by the year end it will probably be lower than expected. Nevertheless, it is still a high rate because we have been pursuing the so-called policy of inflation rate targeting and expected to see inflation at some acceptable level of, say, 5 or 6 percent. This year, of course, it will not be like this, but we will strive to curb inflation by any means because this is a very important factor for our economy, as well as for the global economy.
Therefore, in our view, as well as in my personal view, the threat of an accelerated global inflation is present in the current situation, and it may result in any sort of problems, including problems in the banking sector.
MARIA BARTIROMO: I want to ask you about foreign capital and how you can get foreign capital encouraged to come back to the country. But first, let me stop at GM—you mentioned it. What is your reaction to a Russian group acquiring the Opel brand? Do you think this brand will do well here? What are you thinking about it after the GM bankruptcy and the most recent acquisition?
DMITRY MEDVEDEV: The crisis seriously affected the real economy sector both in our country, in Europe and in the United States. These industries sustained the biggest damage. Currently, all the governments are looking for ways to support them. We understand the decisions the US government is making to support its manufacturer. We are making similar decisions with respect to some of our car manufacturers. Perhaps the situation is not as bad in our case, but still the situation is similar: we are extending loans worth billions of dollars.
These processes are very painful for the economy. Speaking of their consequences, this is perhaps the most important thing. We must understand what our exit strategy will be as regards the crisis. What are we thinking about now? Where is the bottom of the crisis. Have we hit the bottom or not? This is the No. 1 question. The No. 2 question is how we are going to come out of the crisis.
Perhaps you know about these approaches, these formulas that experts suggest. There all several options for coming out of the crisis. The first, most favorable option is a V-shaped crisis—a downturn followed by an upswing. The second, more difficult option is an L-shaped crisis—a drop and a very slow recovery. Finally, there is the worst scenario, that of a W-shaped crisis—a drop, a recovery, and another drop.
So, I think this matter of exit strategy is very important. The reason I bring this up is because we are currently making decisions about supporting our national manufacturers. That is a right thing to do, but we should also look ahead and think about the future. For instance, the US government is nationalizing General Motors. What will happen next? Will this stake remain government property? This doesn’t fit well with the market economy concept the United States has developed in the 20th century. Or will the government sell it? If so, whom should it sell GM to? Who will buy it? Moreover, this involves tremendous social responsibility. It’s a huge operation involving thousands of people. It has huge debts, even though GM has the support of the US government.
Similar problems exist in other countries. You’ve mentioned Opel. The company found itself in a difficult situation, and a decision has been made to sell a stake in the company to a consortium which includes Russian structures and Magna. It’s a way out, but we should understand what will happen on the whole, what the future economy will be like in general—especially, the real economy sector because it suffered the most.
We too are taking steps to support our automotive industry, our metal industry, to protect what we call our strategic assets—even though some of these measures are not fully market-based. But that’s what everybody has to do under current conditions. Essentially, governments have to offer loans on favorable terms. The interest rate in Russia is currently quite high because of inflation, but to such major, municipally important companies which have many employees we offer loans on special terms with a low or even zero interest rate—just in order to support them.
How we are going to come out of this situation, how our real economy sector will look in the future, how we can help new owners who will come to this sector, what the government should do if it buys into these companies—these are no longer idle questions. The international economic system will definitely change after this crisis. It is obvious. Of course, we would like this exit to be fast, according to the V model. But we still need to consider our exit strategy. I intend to say a few words about this at the St. Petersburg Economic Forum.
MARIA BARTIROMO: Many people are watching the move in oil and gas of late and wondering if this is connected to the beginning of demand increasing around the world. What is your reaction to the most recent move in oil? Do you think that it’s sustainable? Do you think it is based on demand changes around the world, or it’s a technical move—knowing, of course, that we went all the way from $147 last summer and then down to $32 in January?
DMITRY MEDVEDEV: I’d like to hope that it’s a signal of a general improvement in the situation. Before our meeting, I took a look at the oil price chart. The prices we have today, between $60 and $70, are the prices we had in 2006. Throughout that year, oil stayed between $60 and $70. At that time, we thought this was a high price. Now, I think, it’s a fair price, taking account of the peak we had recently, that of $140-$150 a barrel.
Why are oil prices going up? There are two points of view on this matter. The first point of view is optimistic. Optimists believe that the current situation with oil prices reflects fundamental changes in the world economy, including the economies of leading players like the United States. The money that went into economy, bailouts in the US, Europe, China, Russia and other countries, produced results. The economy is improving. Oil consumption is growing, which causes this trend. Thus, it will be rather stable.
Pessimists, on the other hand, believe that the recent increase in oil prices reflects irregular processes that are triggered by these bailouts but do not last long. In other words, the United States warmed up its economy a little, and oil prices went up. Now there will be another downturn, and oil prices will go down. As a result, the world economy will grow colder. In fact, this slump may be quite dramatic.
I like to hope that the move in oil prices reflects some fundamental improvements in the world economy. But let’s not get ahead of ourselves. Let’s wait and see what happens. Anyway, some processes we see in our country make me conservatively optimistic, because in Russia, inflation is slowing down, oil prices have gone up, industrial output levels have stabilized after the drop, unemployment is not growing as fast. Thus, I like to hope these processes are not accidental.
I think those experts we’ll meet at the St. Petersburg forum can give a more detailed answer to this question.
MARIA BARTIROMO: Knowing what you know now after what we’ve all been through in terms of the sharp economic slowdown, will you be using the oil riches in a different way? Will you be prioritizing differently in terms of the economy here in Russia? You’ve got to operate this economy, lead this economy, regardless of what’s happening in the market, so any of those scenarios may happen. You have to deploy that capital. How are you going to do it?
DMITRY MEDVEDEV: We haven’t discussed this yet, and I’d like to say a few words about this. The crisis is not only a time for dramatic trials and troubles; it is also a challenge life gives us. We ought to use this opportunity. I’ve mentioned that I’m not happy with the structure of the Russian economy, and it’s true. This structure is obsolete; it is largely based on mineral extraction and raw materials exports. It is not innovative. That’s why we should invest more in innovations. In fact, we probably should have started doing this even earlier. We should have invested more in innovations, IT—in what they call a new-type economy. But seeing that we failed to do this prior to the crisis, I think it is very important that we use this situation in order to change the structure of our economy.
Therefore, whatever additional revenues we may have from oil or gas sales, I believe we should spend them mostly on two things. First, we should protect our social programs: pensions, subsidies, health care, and so on. All these things should remain the government’s priority. Our health care and education have traditionally been organized in this way, and for the time being they will remain the government’s responsibility.
On the other hand, we should use extra funds available to us from exports of raw materials like oil and gas in order to really change the structure of our economy. In other words, we should invest these extra revenues not only in developing our oil and gas industry, which is a perfectly natural thing to do—not only in building refineries, petrochemical plants, gas-processing factories, liquefiers and so on. Some of this money should be spent on modern technology: IT, biotechnology, green economy, energy conservation, efficient energy use, and so forth.
If we manage to strike a balance between these two kinds of spending: social spending and developing new production facilities in Russia, we will eventually have a new structure in our economy. This is our most important goal at present.
MARIA BARTIROMO: So what will the best and most important assets of Russia be in ten years? No doubt, oil still, but other?
DMITRY MEDVEDEV: It is generally considered in Russia that our people are creative and ingenious. I hope that in addition to the raw-material aspect of our economy we will develop an intellectual economy. If you ask me about my dreams about ten years from now, I personally think it would be best to have such a smart economy, smart industries—in the most general sense of the word. This is where we should spare no money. We’ve just spoken about this, but I’ll repeat: we should invest effectively in new technology like energy conservation, biotechnology, various kinds of green technology. If we do this, the structure will change.
Thus, in ten years from now, I hope the Russian economy is not simply a strong economy based on raw material exports. It should be an economy with many new industries, modern equipment, modern technology, telecommunications—things that the whole world is doing today.
At the same time, we should preserve our energy and industrial potential that was built during the Soviet period—because the situation in this sphere is also complicated, and we will have to allocate serious funds for it.
MARIA BARTIROMO: Mr. President, let me ask you about investments. Foreign capital is coming into the country. There is a worry by some that the rule of law is not in place and the idea that foreign capital will be protected. Shall I ask you, is foreign capital protected, is it welcome in Russia? It seems that the YUKOS story, the TNK BP story or the Shell selling a 51 percent stake to Gazprom, all have caught world attention and now people want to know if their capital will be protected.
DMITRY MEDVEDEV: My perception of what has happened is perhaps a bit different. I don’t believe somebody was forced to sell their investment through pressure or threats—nothing of the kind. But in my view, as regards the investment climate, it’s true our legislation on investment should be further developed. Recently, we’ve created pretty good legislation in this area, including the legal protection of investment. Like other developed countries, Russia has what is called a national investment regime, where foreign investment is on the same footing with Russian investment, and no distinction is made.
As far as property ownership is concerned, in our country the institution of property ownership is the same as in Europe and other countries. Of course, our legal system is different from those of the US and Britain, but it’s a modern institution.
I’m not too pleased with how the legal protection of investment is being carried out. There are problems with this. Therefore, improvement of legislation on legal protection and the judicial system in our country is a really important task for our country if we want to be able to get have a quick and fair court ruling. On the other hand, recently we made much progress and adopted a number of documents on economic disputes, like the Civil Procedure Code. Anyway, it doesn’t mean that everything goes smoothly.
As for your examples, you know, in my opinion, the situation with TNK BP was not related to Russian legislation or someone’s bad intentions. It’s a usual conflict between shareholders. And I stress that they are private shareholders. There was a Russian private company and a British private company. They made an agreement and established a joint venture with a 50-50 ownership. As an ex-lawyer, I can tell you this is the least sustainable form of conducting business, when there’s no controlling stake and it’s possible to block each other’s proposals again and again. And then these two companies began a rather long and slow dispute. At the present time, as a matter of fact, they have solved it. But I’d like to remark, they solved it without the participation of the state. The state didn’t take any part in it, although, frankly, I admit that both our businessmen and the British side appealed to me. My stand was simple: it’s a dispute between private companies; so, go to court. By the way, that dispute we’re talking about was regulated mainly not by Russian law, because the documents were signed, to my mind, under foreign legislation and in a foreign court. Therefore, this example is not typical.
But foreign businessmen who file lawsuits against Russian companies or against the Russian government must know that they will be guaranteed quick and effective protection by the judicial system—of course, relatively quick, because a legal case never moves quickly. This is something we should consider when we make decisions on the improvement of the current corporate and legal procedure. It’s an important issue to me because the judicial reform is extremely important for our country and I personally work on it as well as on fighting corruption.
MARIA BARTIROMO: So, Mr. President, what are you expecting to achieve from the St. Petersburg Economic Forum? There will be a lot of potential investors coming to Russia.
DMITRY MEDVEDEV: The St. Petersburg Forum, in my view, has already turned into a rather developed economic event which is used by major businessmen in order to communicate with Russian colleagues. Due to the importance of this forum, we’ve asked the Davos Forum to cooperate, and it did support our forum, but the key factor is it’s the main economic event in our country at the present moment. We are waiting for guests from different countries. As a rule, heads of companies arrive, and this is very good. We have a tradition of meetings with these heads of companies. The Russian president traditionally has a meeting with them. I hope the same will happen this year. I’d like those who speak at the forum this year—heads of states, CEOs—to address the practical questions which concern all of us today—even though these are somewhat long-term questions. These questions are as follows: Where are we now? What’s going on with the world economy and our national economies? Are we doing enough to support our national economies? How should we oppose protectionism (although it’s a complicated issue)? What our exit strategy should be like?
These issues, I think, are most urgent today. Let me also add another truth that was revealed to us during this crisis. Exactly a year ago, speaking in St. Petersburg, I said we were standing on the threshold of a crisis, that our partners in other countries could focus on their economic processes with more attention. Sadly, all my forecasts came true. Of course, that it is of no importance now, but we must listen to each other. This crisis has demonstrated how our economic systems depend on each other. Twenty or thirty or even 60 years ago, when the Bretton Woods system was established, there was not such a dependence between economies. At present, if a problem emerges in one place, in one country, whether it’s America, or Europe, or Asia, it may have a disastrous effect on the whole world economy. Therefore, there is a very important conclusion we must draw and follow closely: when making internal decisions about our national economies—regarding parameters of inflation, emission of monetary funds and other economic indicators we directly influence the economies of other countries. This kind of economic globalization is probably the main lesson we must learn from the current crisis. And at the same time it creates better conditions for future development, because we’ll be able to create much fairer financial and economic architecture.
I don’t think the forum is the right place for making decisions, although I do hope very much we’ll be able to speak with all colleagues who are worried by the current economic situation. I hope you will also enjoy it. I hope, you’ll also be able to see that such events in Russia can be efficient for achieving private goals as well, but it’s only one of the components for achieving common economic success. I believe after this forum we’ll be closer to understanding modern economic processes. And we’ll soon have a meeting of the G8 in Italy, where other major economies are also invited. After this, in September, the G20 meeting will take place in the United States. Thus, such forums help us understand the current status of affairs. I hope this is what will happen in St. Petersburg, my hometown.
MARIA BARTIROMO: And I’m honored to be included. Thank you. I’m looking forward to it. Mr. President is it ok, if I have one final question, just briefly, because this is one of the issues that you are discussing now and you will be discussing at the G8 and G20. I was reading about it in the report from the Commission of the US policy towards Russia and that is the stopping of proliferation of nuclear weaponry and, of course, I just wonder what your reaction is to North Korea’s recent actions, what you can do alone or with President Obama or with your colleagues around the world to help stop that proliferation.
DMITRY MEDVEDEV: It’s not an economic issue, but it’s no less urgent, unfortunately. The recent events are really sad, we’ve been acting within the framework of international intermediary efforts to help North Korea out of a complicated economic situation, to ensure that the nuclear program they are implementing is peaceful and does not pose threats to neighboring countries. I must say that North Korea is close not only to South Korea and Japan; it’s not far from us as well. It’s our close neighbor, and we've always got along not badly with the Korean leadership, but the events which happened raise big concerns. Recently, I’ve had many telephone talks. I spoke with the Japanese prime minister, I spoke with the South Korean president, I spoke to some other colleagues, and our opinion is simple: what happened – I mean nuclear tests and the continuing launches of various missiles—both short-range, and now we have reports about possible launches of ballistic missiles – these moves undermine international security and directly contradict the existing documents of the UN Security Council and resolutions of the UN General Assembly. Therefore, we support proposals to adopt a serious resolution condemning what has happened and think about serious mechanisms which will restrain those programs which are in progress, including economic levers. We expect the North Korean leadership to demonstrate understanding and resume talks, because this issue has no other solution. The world is very small. We’ve just mentioned economic problems that unite us. Naturally, the proliferation of nuclear weapons is a much bigger threat. Hence, it is absolutely unacceptable to further expand the nuclear club, to produce nuclear devices in violation of international commitments. Our position is clear: we are ready to cooperate with other countries, with our neighbors, with the United States. I’m prepared to discuss this issue with the US President during our meeting in Moscow in July or in some other format. It’s our common concern. We must make a decision about this.
MARIA BARTIROMO: Mr. President, thank you so much for your time today.
