Mr Prime Minister, colleagues.
Today we can sum up the results of the past year, which was difficult for the global economy, including Russia. In 2009, our economy and the decisions we had taken in preceding years were put to test. It can be said that we have achieved nearly all the main goals of our anti-crisis policies and crisis management programmes. However, some problems that had not been resolved before the crisis remain on the agenda.
I'd like to say at the beginning of my address that it is still possible that Russia will see another crisis due to the continuing global crisis; we must analyse this situation in order to more clearly plan our actions. It is important that we diagnose the problem correctly and do not relax too soon. I'd like to emphasise again that the global growth that began last year has not yet become sustainable. The global economic growth rate will remain low for the time being. The IMF expects it to be slightly higher than 4% this year and 4.3% next year. Growth in Russia could also be slightly higher than was planned when the budget was being prepared, about 4%, although the Ministry of Economic Development says it will remain below 4% for the next few years.
This year we will feel the effects of last year's very low levels: it will be very difficult to maintain high growth rates. The situation in Russia will largely reflect the global economy. The largest economies have felt the effects of the strictly balanced fiscal policies. To enhance trust in its economy, the US administration announced that they need to lower the country's deficit gradually from approximately 10.5% this year to 3% by 2015. It should be only slightly more than 8% in 2011. This is an ambitious goal.
The European Union has decided to start lowering the budget deficits of its member countries in 2011, eventually cutting them to 3%. All post-crisis countries face similar problems. However, we know that the writing off of bad assets in the global financial system has not finished yet. Analysts estimate them to be about $2.3 trillion in bad debt worldwide. Only $1.5 trillion have been written off, meaning that one-third remains to be written off, according to global financial organisations. This action could also affect Asian countries, whose growth is yet to be inspected.
The value of non-performing mortgage loans worldwide has exceeded 10%, meaning that there has been an increase in housing stock for sale in the next two or three years.
This will influence prices on the real estate market, which could fall in the next few years. This will in turn affect the balance sheets of banks that issue mortgage loans.
In general, industrialised consumer countries not only took advantage of the global economy and the globalisation drive, as well as capital movement, but also maintained consumer growth through borrowing. For example, France's debt, which accounted for 20% of GDP in the early 1980s, is now 77%. Germany's debt jumped from 39% in the early 1990s to 73%. The EU's average debt is now 78%.
In other words, the resources they exploited in the good years have been exhausted. In the next 10-15 years, these countries must adopt a consumption model based on a low growth rate. It cannot be supported by factors that are yet to be mobilised, nor will it be supported by high demand.
Unemployment will remain high. The end payer of all these loans, people who work, will for the time being lack the resources necessary to maintain demand. Clearly this calls for a review of the economic model across the leading economies.
Changes will also be influenced by the imbalance that developed before the crisis, when some countries consumed while other countries funded them, as could be seen in relations between the United States and China, which had a large budget surplus. Consequently, Asian countries will remain growth leaders for the time being.
Their role in the global economy will continue to grow. They are our closest neighbours. However, even China's growth could be slowed by the problems that have accumulated. For example, last year real estate prices grew 40% in some districts of Beijing and 80% in several other Chinese cities. That money created a bubble, and now the situation in China will depend on whether it maintains its growth rate, something everyone views as the driving force behind the global economy.
As a result, the structure of the global economy will change; it will become more efficient, the financial sector will be regulated more strictly, the lack of such regulation provoked the recent recession. However, the government will focus on infrastructure modernisation, development, the introduction of alternative power sources, and the implementation of innovations. These are our goals for the next few years.
Russia must find its place in the international division of labour, as Mr Putin has said, and we must pinpoint those factors that will affect our economy. We must admit that our macroeconomic policy should only rely on the mining sector and high oil prices to a limited degree.
We must continue to diversify our economy and pinpoint sources of instability in consumer demand. I am referring to high popular consumption levels due to high oil prices and capital inflow backed by our foreign currency capability, which has strengthened the rouble. They are unlikely to greatly facilitate economic growth.
We must achieve our priority goals for strategic planning and modernisation. We must seek to innovate and create a system under which all enterprises, and not only particular economic zones and innovation centres, will be interested in attracting investment and introducing innovations. This alone can set the economy in motion, as I have always firmly believed.
Macroeconomic indices and the stability of fundamental indices are the critical factors. In 2006, we cut inflation to 9%, but it accelerated to 13% in 2007 and 2008. Those were favourable years, yet we failed to restrain inflation. And we entered the crisis in a position of having to issue loans to some companies at a 25% annual interest, taking into account risk. We failed to prepare properly for falling inflation; we could not help enterprises with a Central Bank zero interest rate and a minimum market rate taking risk into account. We could not do this not because we didn't want to, but because we had not created conditions to allow it, while we pursued a spending policy during the good years.
I will refrain from making the obvious conclusions now, but what I would like to say is that emerging markets are more susceptible to external shocks than the developed ones that I just mentioned. Therefore, while the upper limit of acceptable national debt is 60% for countries in the Euro zone, emerging markets, including Russia, cannot afford more than 30%-40%. We should be more cautious here, since Russia is more sensitive and less viable today, along with its heavy dependence on oil exports.
Incidentally, India incurred 15% inflation last year, and is therefore raising refinance rates on its market. We need to cut the budget deficit down to 1% or even to zero, not 3%. Against this backdrop, oil prices are a key factor in balancing our budget. Let me remind you that, as we were planning a strategy of releasing ourselves from oil dependence and planning government expenditures to ensure stability, we agreed that we could afford to spend our oil revenues only if the average annual oil price for long-term contracts would be at least $50 per barrel. This price has been discussed with experts and is included in the terms of oil and gas transfer.
The budget code includes a plan to reduce the spending of Russia's oil and gas revenues from 6% of the GDP to 3.7% by 2011 and to never cross this threshold again. This is about the country's oil and gas returns which can be spent without fuelling inflation and excessive appreciation of the rouble, so that we would not have to accept budget obligations higher than what we can fulfill.
We were following along with this, but the economic downturn interfered with our plans. Last year, we planned expenditures based on an oil price of $95, but it fell to $61 per bbl. Our expectations were too high in the first place, and eventually oil and gas transfer totaled 11% of GDP, together with the spending of part of the Reserve Fund - the accumulated oil and gas export earnings. This means that oil and gas earnings covered half of all national spending. The economy's dependence on oil was not reduced at all, although we had expected these funds to be used.
As of today, the 2010 federal budget can only be balanced with an oil price of $95, considering that we will also tap the Reserve Fund. A price set at $95 per bbl would ensure the complete balance of the budget. But what will the actual oil price be? Maybe $50 like I said? Many analysts now predict that it will be $60, considering that oil prices have been higher than expected in the past few years.
This results in the ecstatic expectations that the trend will continue. However, in the first quarter of 2009, the price was only $40. They have been citing $60, but this would be difficult for us as we need to meet a variety of goals while keeping within these limits. Therefore, I believe the lower limit would be $70. This is the softest constraint we could use for planning the budget. If the price of oil rises to $70 per bbl next year, as we hope it will, then it would mean that Russia would run a 4% deficit of GDP. If it is $50, then we will run an 8% GDP deficit, which is risky. We need to think twice before we choose a final strategy. It is obvious that we could not cover a 7%-8% deficit or even a 5% deficit with foreign and internal support.
Considering the potential of Russia's oil and gas sector and the economy's dependence on the global oil price, we need to reduce the budget deficit to 3% in 2012 and to zero in 2015. That is, if the prices are higher, we need to cut the deficit. If the Economic Development Ministry tells us that we should plan for higher actual prices next year, the deficit needs to be cut to below 4% - if we take $70 as a benchmark. I know what you are going to ask now: "How about the programmes that need to be started today?" Right now, we need to rechannel funds to support specific sectors and innovative projects aimed at modernisation. I know that most of the expenditures have already been designated, specifically for important social and infrastructural projects. Yet, we cannot afford to increase the deficit.
I already anticipate the reproaches against Kudrin for again taking the money from projects aimed at modernisation and innovation. But, this is not what I am doing. We need to redistribute the cash, but the process could take two or three years of drawing up state programmes, reviewing spending and restructuring the expenditures to incorporate the new goals. However, this should again be done within the limits I mentioned; otherwise, we will seriously increase the risks for the economy as a whole.
Although we will be spending the Reserve Fund, we will most likely increase revenue next year. Even if we spend it this year, this would possibly result in slightly higher oil prices next year. Then, the deficit would most likely be lower than the 6.8% according to what has been predicted for April, but 5.2%-5.4%, depending on the pension fund deficit. Even the latest predictions suggest that it will be greater than expected. But of course, the government will duly handle the issues with the pension fund.
There are problems with the Compulsory Medical Insurance Fund. Some of the expenditures may have to be increased, but even so, the deficit will probably remain within the 5.4% limit. Nevertheless, even with the knowledge of the limitations we will have in the next few years, it would be difficult to adopt new programmes without a revision of the existing obligations. The National Wealth Fund, which remains almost untouched, is not meant to be used to resolve these problems. It is meant to cover other risks that Russia will face in the next three to five years.
These risks have to do with a worst-case scenario, in which shrinking payroll funds will increase taxes going into the pension system. Therefore, we will have to tap the national Wealth Fund to implement the ten-year programme of co-financing the voluntary pension savings. It would require trillions of roubles over the ten-year span. The National Wealth Fund has also allocated, under an exclusive initiative, 450 billion roubles to VEB to issue subsidised loans in the next decade. This amount has already been allocated for the next ten years.
If we fail to reduce the deficit and optimise spending, we will have to go back to raising taxes. There is another option of course, which is issuing more cash. Perhaps some governments will do so - those who cannot politically support a smooth consolidation of finance or fight inflation and the devaluation of their liabilities, salaries and pensions.
It is especially important to preserve a stimulus for saving which would create a base for investment in Russia. Otherwise, the country's internal financial market will lose its competitive edge - I am talking about the conditions of financing and the amount and term of the loans available.
I will be speaking about the situation in the Russian regions. All this has to do with the fact that they are going through a difficult time and that our expenditures are about equal to the regional ones, as Mr Putin indicated here. In Russia, if I may say so, there are regions which are oil powers with budget surpluses and there are those which have already accumulated debt, like Greece. We have already had the opportunity to help these regions.
I will not hide the fact that the Moscow Region belongs to the latter category. The government had to intervene at crucial moments to prevent default and to assuage the financial institutions' doubts about financing the regions. If we had failed to help, the risks in the financial markets would have increased. We must continue monitoring the financial situation and promoting good financial management.
Today, the budget deficit in the regions is not very high. Before the financial crisis in 2008, it was only 0.1% of the GDP. Some regions had a greater deficit, as others had a surplus. Last year, the total deficit was 0.8%. This makes up a significantly smaller proportion of the national budget deficit. The Russian regions' total debt at the beginning of the year was 1.24 trillion roubles.
Of this amount, the municipal debt is 891 billion roubles. It is important to take a look at the geography. In 2008, there were five regions with debts exceeding 50% of their revenues. In 2009, there were already 11 such regions. We want to ensure that once they exceed 50% of their revenues, the regions begin exercising stricter control of their finances so as not to go beyond the annual budget deficit that they can afford.
Typically, the annual deficit must not exceed 15% of revenue. Taking these limits into account, we should once again consider the debt stability of the regions. Some of the regions have credit ratings, but some others do not. Infrastructural problems exist primarily at the regional level. This is an extremely important undertaking, and we need to address it together with the regions by providing additional support and increasing subsidies, as Mr Putin mentioned in his report.
Under these circumstances, strategic planning should play a more prominent role. The LDC 2020 (a long-term development concept) is a key document. We should not abandon the goal and the indicators that we have set. We need to think everything over once again, but these goals should remain in place and serve as a clear road map for accomplishing these tasks in more challenging conditions. Various instruments, including the government programmes that we will use, should become such guides.
The government should designate certain functions to specific departments and ministries. And the particular ministry will then be responsible for the implementation of the key tasks in the assigned area. State programmes will be widely used to support the economy, maintain social stability, and develop infrastructure.
I believe that the key role in this should be assigned to state programmes, since we need a mechanism for achieving objectives and completing related tasks. We need resources to do this, and not just financial resources, but also regulations, tax privileges, and the property that has been transferred to the ministries in pursuance of such programmes. I believe that we are capable of reaching a qualitatively higher level in our efforts to achieve the objectives that have been set. Our goals and policies should be made public.
I do not think many people know how the federal targeted programmes (FTP) are implemented, although the Ministry of Economic Development has been providing detailed information about them. As they are carried out, they are adjusted and can become less ambitious. Since the beginning of the year, the government has adopted more than 10 policy documents. They were initiated before the economic downturn and then slightly modified based on the circumstances of the recession, but they still allocate trillions of roubles in state support.
We have drafted 300 policy documents over the past decade. Last year, at the Security Council meeting, the president and all of us deliberated over approaches to the strategic planning of the Russian Federation. As a result, an appropriate decree was issued defining the tasks and objectives. A list of policy documents has been identified and should form the basis of the strategic activities of the government and other bodies. We still need to work on the contents and coordination scheme of these key documents.
With regard to the public spending effectiveness programme, I have already addressed the issue to a certain degree, but I would still like to highlight one aspect of the program. We should not only be concerned about the cost of each kilometer of the road, but also about building the road with the best technologies and using the sturdiest surfacing within the limits of available funds. Furthermore, this should be the responsibility of the government ministries under their own increased efficiency programmes.
The main approach to increasing efficiency lies in the review of each program by experts and professionals. Programmes should be constantly monitored, including review by the public. This, in fact, is the key instrument of becoming efficient.
Yet, not even the wisest men can prepare a flawless document. It still needs to be put to a public test. But, unfortunately, we often make rushed decisions. This was especially true at the peak of the crisis.
We must return to the practice of thoroughly examining all programs and procedures. And under these procedures, we must adhere to the principles of responsibility, the separation of powers between the federal and regional authorities, and between the state and businesses. We need to strictly define these responsibilities.
On tax policy: at a meeting on Thursday, the government will discuss tax policy for the next three years. As regional representatives are present here, I would like to say that although it is not in this document, we will still need to return very soon to the issue of cancelling or reducing the benefits on taxes that are transferred to the regions of the Russian Federation. Mr Putin spoke in great detail about the financial sector. I would only add that we have a clear plan for enacting appropriate legislation for the next two to three years in developing the areas of banking strategy and strategy for the financial markets, as well as the concept for developing an international financial centre. During this period, we must overcome the lack of quality legislation in the area of financial regulation, as compared with the legislation of leading nations. In addition, we need to take into account the requirements for the crisis period, which are being developed by the Council for Financial Stability that includes three representatives from Russia. The financial sector should reciprocate. In addition to creating sound macroeconomic and regulatory policies, as well as adopting relevant legislation, it should provide sufficient resources in order to modernise our economy.
Thank you very much!