The deputy prime minister's speech:

Good afternoon, ladies and gentlemen.

I am pleased to speak once again at an important conference at the Higher School of Economics. In fact, I am actually a professor at HSE, although I now have less time to devote to my work with students. HSE has made considerable progress in the development of academic thought, particularly economic thought. We in the government often make use of its services and assistance. In fact, many of our ministerial working groups include HSE scholars. We need to increase the number of such institutions, which at present we are doing, perhaps because we have reached a new stage in economic thought, or perhaps because the financial crisis has forced us to look for new approaches. Indeed, we rely on the services of many institutes. This is very important.

Today I would like to speak about some problems we currently face. I would like to begin by saying that 2010 comes at the conclusion of a decade of reform, which gives us an opportunity to draw some conclusions. This period can be described in many different ways: as an era of recovery, as the era of Putin, or as an era of higher living standards. I would like to remind you that between 2000 and 2010, Russia's gross domestic product increased by 68%, and industrial production increased by 47%. We have restored the GDP to what it was before 1990. That is good. But like some other countries of the world, we could call the 1990s a lost decade in terms of the size of our economy and growth.

In the last ten years, people's real disposable incomes increased by 160% percent, real wages by 230% percent and real pensions by 210%. In other words, the Russian people are now living better. This was a deliberate decision, resulting from economic growth as well as economic policy. The poverty level has also fallen by half. Even last year, at the peak of the downturn, only 14% of the population lived below the subsistence level, compared with 28% in the post-crisis year of 1999. Moreover, the country's fiscal situation has been improved. Real fiscal spending increased four-fold. Revenues have increased by 220%

True, GDP has grown by only 68%. This indicates that we have started to exploit the massive increase revenues from oil and gas. We are now more dependent on our oil industry, on raw materials, and on a temporary high increase in prices. This is one of the conclusions we need to draw today.

In these ten years, the most important change to the fiscal situation has been in the tax system. This is probably our main economic achievement. The number of taxes was decreased substantially, from 50 to 15. Together with special rates used in free and technology promotion zones, and simplified systems for small businesses, agriculture and IT companies, we have a total of 25. Several other measures have been undertaken to reform the fiscal system and make it more transparent, for example new transparency standards adopted by Russia, including in the budget.

The year 2005 will be remembered as a year of monetisation. Before 2005, the Russian government's obligations arising from acting legislation exceed the Russian budget by 200%. And these obligations were not fulfilled. Each year we ignored and suspended them. In certain years, when we began to live in a more civilised fashion, we would suspend up to thirty mandatory provisions. This was not right from a legal point of view. We used a budget law or a law passed with the budget to supersede other laws.

After 2005, we reformed our fiscal system. We stopped having mandates that we could not fund. But if we fail to balance the budget and take on new obligations today, we may run the risk of sliding into populist policy-making and mandates we cannot fund.

A few words about the treasury system, three-year fiscal planning, and building a budget that does not rely on oil and gas. The latter effort has not been fully successful. But the establishment of the Reserve Fund and the National Wealth Fund played a decisive role in getting through the worst of the downturn last year.

Although much has been done, it is still less than we wanted. One may ask why, in a favourable business climate, with very good external conditions, did all our efforts - intellectual, political and organisational - fail to achieve reform, although such efforts were made? We must answer questions as to why the law enforcement system does not function properly, why the judiciary system is weak, why arbitration is not objective and why competition is not continuously fed and encouraged.

Of course, the development of institutions is a more complex issue than it may appear at first glance, more difficult to implement. I am now reading Yegor Gaidar's book Institutions in Troubled Times. It was his last book, full of very interesting observations. Many governments are unwilling to reform when everything is going well and revenue is pouring in, when things occur regardless of the state or the efficiency of institutions. I have shown how such things can occur. Unfortunately, it is only when contradictions begin to accumulate and grow stronger that the impetus for reform begins.

Do we have to sit and wait for this to happen? I think the current global crisis provides a point of reference and a serious warning that we need to re-structure our economic model and institutions. It is only by pursuing economic reforms, promoting competition in the markets, reforming political institutions, and at the same time providing for political competition that these combined efforts can allow society's institutions to function effectively. That goes without saying. And many are arriving at such a conclusion. Our goal is not to miss that chance and begin our work.

I wish now to discuss the current situation. The question is how we will fare in the coming years, and how we will emerge from the ongoing crisis. The early signs of growth evident in the world and this country are very feeble. We realise that economic growth in the world is linked with the fiscal packages of many countries and the efforts of central banks to ensure liquidity. This is illustrated by the current very low refinancing rates. For the time being, the central banks are maintaining very low interest rates. Clearly, as the risk of inflation increases, interest rates will rise as well. Today everybody is waiting for that moment. But how will the actual pattern unfold? Will the rates have to be raised before the engine that drives the world economy restarts? Will the fiscal packages have to be reduced and budget deficits cut back before real demand ultimately takes over? There is no clear-cut answer to these questions yet. The risks, therefore, remain.

Some, however, say, this is not going to be a second recession, but a second crisis. Few economists share this view today, however. But as the global crisis continues, we do not know how the knots so tied will become unravelled. Meanwhile, all countries are watching for attempts by the U.S. government to reduce its budget deficit and by leading European economies to cut back their budget shortfalls. We all understand these are socially unpopular things, but some European countries have already begun these efforts. Germany's new draft budget stipulates cutting government spending and introducing new taxes, including in the financial sector. And this is only a beginning. The likely trend towards deficits in leading countries and the political grounds for new post-crisis packages are still not clear. We see that a good deal here depends on governments, and their political authority and willingness to enact rational policies. Actions will be taken depending on the political situation in these countries.

The situation in Russia is in a way similar, and in a way not. Today we are heavily dependent on the global market. In Russia, GDP growth in the closing quarter of last year was due to an increase in inventories following their slight decline in the middle of 2009. It can be said that our anti-crisis policy was designed to support the population and minimise people's losses. Russia was one of the few countries that maintained real household incomes last year. This is difficult and unique, which is good. But on the other hand, it has extended problems for companies by preserving some of the workforce that was not required during a downturn. Wage levels in the economy were preserved, which during a downturn greatly reduces profits and future investments.

Before the crisis, the wage level was 25% of GDP. Now it is the same. And this despite the fact that following the 1998 crisis it decreased dramatically, increasing opportunities for companies because the cost of labour fell drastically. This was one of the special factors for the recovery in the wake of the 1998 crisis. Now, to protect the population, we reduced some incentives and factors driving growth for the next couple of years. Following such massive support, the need to dismiss excess personnel, increase labour productivity, and cut costs remains. These are the objective factors behind economic growth in the immediate future.

The factors that drove economic growth before the crisis will no longer work. We will not profit from high prices for raw materials. Nor will there be an inflow of capital in the short or medium term. It will be a moderate gain. We should rely on the financial system's potential for modernising the economy. To form a stable macro-economy with low inflation and low lending rates is a key goal and one that in scale and influence surpasses any other government moves to support individual industries and increase their efficiency later. Today, cuts in inflation rates and lending rate are key factors for future growth. And this despite the fact that we are starting in a worse situation than other countries whose lending rates, are now from 0.5% to 1.5%, and on the market, with risks added, between 4% and 6%. We, on the other hand, with a Central Bank refinancing rate of 8.25%, have very expensive loans - about 15%. During the crisis, they were as high as 20% to 25%. We entered the crisis with very high inflation levels and very high lending rates.

There were times when, due to devaluation and inflation, we had to maintain high Central Bank rates. But, as we promised, we have been cutting them since the middle of last year. Now, however, we will in all likelihood stop cutting interest rates. I am speaking not as a Central Bank spokesman but rather as an expert, because there is still the risk of inflation resumption. Prices are currently falling due to low demand, surplus production, and surplus capacities. To put it more correctly, to the surplus capacities created by some growth connected with short-term demand factors. No stable long-term demand has yet emerged, so we are still facing the danger of inflation. As soon as demand grows, we will be in danger of inflation. So measures by the Central Bank and the government to restrict the money supply may again prove necessary.

At a recent meeting of the Banking Council attended by representatives of the State Duma, the Federation Council and the Kremlin administration, we reviewed scenarios for monetary policies. Unfortunately, these scenarios have a high degree of uncertainty due to prices in world markets, capital inflow and outflow, and demand. In this context, conservative monetary policy remains important. This is the sort of policy that the Central Bank will be implementing, I am sure. We should avoid a possible new increase in inflation after we have dealt with seasonal factors, and we should not let inflation increase at the end of the year either. This is also a key factor in reducing capital rates in the market and increasing credit.

The availability of loans in the Russian economy neither increased nor decreased last year, although such availability has been falling in leading world economies. The US and Europe are experiencing a credit crunch. Objectively, this crunch is caused by the downturn and reduced demand, poor prospects for industry, continuing high risks and the uncertainty of future demand, which has not yet fully revived. The same situation can be seen in Russia, only the amount of available credit has remained steady. I think this amount will increase this year by 5% to 10%, but this is an optimistic forecast. It is the effect rather than the cause of continuing trends in demand and economic growth. In a manner of speaking, loans will increase hand-in-hand with demand. And as demand grows, so will the amount of credit in the Russian economy.

Clearly, macroeconomic measures alone will not achieve substantial economic growth and reform, or help businesses cut costs or improve competition. Progress is necessary in all institutions of modernisation and innovation, because it is only through these institutions and by their mechanisms that we can use the technologies capable of reducing production costs and raising labour productivity. We will have to borrow technologies, and we will have to make up for lost time in some industries, which have fallen behind by 10 to 20 years. We need to borrow and build new plants and adopt the latest technologies, by either purchasing them or acquiring them through foreign direct investment.

Foreign direct investment is good for Russia; as a rule, it provides advanced technology, more advanced technology than that currently available in Russia. We must create a safe and comfortable climate for leading foreign companies to invest in Russia or partner with Russian firms.

With low interest rates, our financial system can finance very large projects. Seven years or so ago, it was risky to say that a leading Russian bank could finance a $2 billion project. Today it is absolutely feasible. Given the current capitalisation of the Russian banking system, we can work with foreign banks to implement $2 billion to $5 billion projects, although medium-sized projects would be preferable. The ability to implement such projects today depends not on the shortage of financial resources, but on the investment climate and on how well investors are protected in the Russian market. A breakthrough is needed here. The government is now drafting proposals to that effect, and the president and the prime minister are focusing on the issue. Some of the proposals will be made public soon, specifically at a congress of the Russian Union of Industrialists and Entrepreneurs (RSPP). On April 20, the prime minister will report to the parliament on last year's anti-crisis programme. In this way measures will gradually be announced.

In May, we will offer a new perspective on our policy, which will become natural after the crisis. Substantive changes will be made to the fiscal system. Some of the changes will be described at a joint board meeting with our colleagues from the Ministry of Economic Development. We decided to make this meeting a symbol of our joint work in crisis conditions. In a week's time, next Monday, the Finance Ministry and the Ministry of Economic Development will hold a similar joint meeting.

As far as fiscal policy is concerned, the 300% increase in federal fiscal spending reported earlier will be followed by a decade without increases in spending. At some time in the future, we will have even to trim spending. By as much as 20% in real terms in 2015, according to my estimates. This is a conservative scenario. In 2020, we will reach spending levels of 2010. This is a serious challenge. It means we will not be able to spend as lavishly as before or hope to achieve results due to our extensive capabilities.

Things will also be difficult from a political perspective, especially with regard to government initiatives. Preparing even a three-year budget shows that many ministries, especially the industrial ones, want projects and programmes that would provide subsidies in excess of pre-crisis levels. They believe that we will be able to revive whole industries through fiscal means alone. I think this way of thinking should be adjusted. We must understand that our resources will mainly come from the market, from competition, from the ability of the country's financial sector to generate cheap money. We should not rely on budget resources, which are going to be substantially lower in the next ten years.

I am not going to discuss now how our budget revenues may grow in real terms. I have already spoken on the subject. At the ministerial meeting I will discuss this issue in a little more detail. These are new challenges because we will have to do more with the means available to us. And if we fail to make spending more efficient, if we fail to make one rouble do more work, be it in the construction of roads, or in healthcare, where possibilities for greater efficiency are vast, or other branches, for example, in defence contracts, which suffers from the same kind of shortcomings, then we will have to raise taxes. Otherwise, we will be obliged to meet targets with insufficient resources. I think we will avoid raising taxes. But this means we will have to reassess all our efforts to increase fiscal efficiency, by increasing the transparency of the fiscal system and new institutions.

Thank you.