Deputy Prime Minister and Finance Minister Alexei Kudrin has addressed the 14th annual investment conference "Russia and the CIS: On the Way to Globalisation", sponsored by the Renaissance Capital investment company.
The minister said that Russia's budget deficit last year was 5.9%. "This year we expect 5.4% if the oil prices remain roughly at the same level as today," Alexei Kudrin announced. "Next year we should cut the deficit to 4%, in 2012 to 3%, and in 2013 to 2%." He said Russia's economy was still heavily dependent on oil price fluctuations and one has to take into account the concomitant risks in the national economy. "We propose to achieve zero budget deficit by 2015," the minister said. He does not rule out that the oil price over the next three years may fall to $60 even though at present it hovers around $75 per barrel.
Mr Kudrin unveiled a forecast for some macroeconomic indicators for 2010: "We plan a GDP growth of 4%. In the first quarter, GDP grew by 2.9%, not much by pre-crisis standards. If the growth rate in the world continues, we too will have a positive situation and positive growth," the deputy prime minister noted.
Inflation this year will be about 6-7%, Alexei Kudrin predicts. "Inflation should not be higher than that; it should gradually go down. The trend will strengthen depending on the credit history, so it would take several years for the market and the investors to gain confidence that such macroeconomic parameters are sustainable and will be controlled by the government," he stressed.
Alexei Kudrin also predicts a 2.9% growth in fixed asset investments in 2010. "In 2011 we expect a higher growth rate, about 8.8%," the finance minister said.
Transcript of the speech by Deputy Prime Minister and Finance Minister Alexei Kudrin at the 14th annual investment conference "Russia and the CIS: on the Way to Globalisation," June 29, 2010
Good afternoon,
The previous speaker was former President Clinton. He had an impressive track record in economic policy. During his presidency the United States had a budget surplus for the first time in many years. When we first met in the early 2000's, he asked me, "Where is your red pen with which you cross out expenditures?" This fits the usual perception of what finance ministers should do. They should stick to rigorous financial discipline today, when the global financial crisis is not yet over. Economic recovery is a time to be careful in increasing leverage, in increasing government spending and dependence on the financial markets. These limitations, generally treated as theoretical and included in the regulations of banks and financial institutions, become very real when a crisis breaks out.
This is the best time for testing all our key regulations and key rules. Most probably, these rules should be adjusted, because the 15 years of good life interspersed with brief periods of minor recessions, the period when the advantages of globalisation were used, created a sense that we live in some kind of post-crisis world and that one could unreservedly build up assets and spending. Some believed that in spite of the spending the market would grow and any products could be sold. Today we are reappraising the potential and rediscover that no one has abolished figures, and that one should beware of bubbles. We should assess these risks both at the national and international level.
I returned from the Toronto G20 summit yesterday and these matters were discussed there. World GDP dropped by more than 4%, but is expected to grow this year. But the growth is not sufficient grounds for claiming that the world economy has recovered from the crisis. Among the key issues discussed by the G20 was the question of when is the best time for curtailing fiscal programmes and cutting deficits, and to what extent it may undercut the still somewhat fitful rate of growth in the world and cause additional problems.
Two positions were discussed. Clearly, world growth is still largely sustained by the fiscal packages of the leading countries. But the situation in Europe has shown that the debt crisis is around the corner and that what seem to be insignificant factors today may threaten entire nations and markets and the euro zone. Countries with large GDPs and large economies should be wary of debt crises.
A number of states, even in Europe, are on the brink of crisis. We are aware of the position of the International Monetary Fund, which thinks that Japan's aggregate debt, UK's large deficit, the extensive accumulated debts in Italy and some other countries pose potential risks for the world economy. Therefore we should remain vigilant. The G20 took a very important decision whereby in 2011 many countries should launch budget consolidation, i.e. a phased reduction of their deficits. Deficit should be cut by 50% by 2013 and by 2016 a stable level of deficit in relation to the GDP should be achieved. Thus, we will only know the final model of debt policies of leading countries by 2015-2016. This will determine the situation in the debt markets in the coming years.
Russia, as you may remember, determined the stimulus scenario as early as last October. Last year, the Russian budget deficit was 5.9%, and this year we expect 5.4% if the oil prices remain at roughly the same level as today. Next year we should cut the deficit to 4%, in 2012 to 3%, and in 2013 to 2%. Like other countries, Russia is going to diminish its constant debt model and borrowing model by 2015. That's assuming the oil prices, which today are in the neighbourhood of $75 per barrel, remain stable. We propose to reach zero budget deficit by 2015. So far we are still highly dependent on oil. This means that our dependence, our debt model is based on the oil price forecast. Because the price is highly volatile, I think over the coming three years we may see oil prices continue to fall to as low as $60 and less. We may have the price of $60 for over six months. I am making this forecast on the basis of available analysis. I think the risks to our economy, considering its specific character, should be taken into account.
The oil price values I have mentioned are possible at any time over the next three years. It is difficult to say exactly when it will happen. The key event that will contribute to this will be the increase of official base rates by the world's leading central banks. Then the flow of liquidity into the market will slow down and the countries' financial packages will start shrinking. Thus, government demand that supports them will also taper off.
I think the time will also come when bubbles, for example, the real estate bubble in China, will start deflating. This spells changes in the financial balances, including the banks in China and in other countries, as bad debts are written off. As a result of the curtailment of the fiscal package, temporary jobs created in the United States, Europe and other countries may shrink. We may see some stabilisation and growing unemployment. It may be merely statistical, but it is possible. The markets will react to this news. We may face a fairly difficult recovery period, when the oil price will be volatile. And that is an important factor for our country.
One of the key decisions of the G20 is the drafting of the standards of financial regulation. It was clear before the crisis and became even clearer during the crisis that a large amount of borrowing is risky. Heated debates are going on as to where and how to formulate standards that would make the economies less cyclic and how to make sure that the oversight agencies remain on the alert even when things are fine. Standards are loosely applied because everything seems to be fine. As soon as there are signs of a crisis, the regulatory bodies toughen their policies with regard to entire sectors of the economy or individual institutions. This has a pro-cyclic effect, intensifying the credit squeeze and contracting economic growth. We should drop that model of financial market regulation. How should we do it? What should be the standards during the period of normal development? How to use the reserve, the insurance at difficult moments? The Financial Stability Council is developing such standards. Russia is involved in this work. Present here are members of the world headquarters for the regulation of financial markets. We see in this room Alexei Ulyukayev, Deputy Chairman of the Central Bank of Russia, and Vladimir Milovidov, the head of the Federal Service for Financial Markets. They represent Russia at the meetings of the Financial Stability Council.
The G20 has determined that some rules will be developed by the time the next meeting is held. This meeting reviewed the interim results and progress in the drafting of these standards. Among the key reforms discussed by the G20 was what may be called the system of financial security. This is a system of funds and credit lines that states may receive during a crisis so that what happened to Greece and some other countries does not disturb the world markets so much. The system may include strict provisions for our fiscal policy as well. But if necessary, countries should have ready access to a serious credit line that ensures them against a debt crisis. The work must be spearheaded by the International Monetary Fund, which should have sufficient reserves. As you know, the International Monetary Fund is allocating substantial reserves for the creation of the European Stabilisation Fund, thus helping to stabilise the euro.
Russia has its own funds today. The government has accumulated reserves, mindful of the lessons of the 1998 crisis. We still have a sufficient safety margin in terms of reserves. Besides, for this crisis we have one more important advantage, which I am sure you appreciate. Our debt-to-GDP ratio is 10%, the lowest figure in the G20. In addition to the available reserves, the size of government debt is Russia's advantage in the markets, including investment markets. In fact, we are not affected by the debt crisis unfolding in the world. Indeed, we have created a EurAsEC anti-crisis fund, which has been operational since June. We have allocated $70 million to shore up Tajikistan's fiscal balance and balance of payments. We will help our neighbours; this is a manageable sum. We seek stability in the CIS zone.
We use an array of instruments to support our neighbours. Belarus received over $3 billion in loans over two years. We have cut gas prices for Ukraine on mutually beneficial terms. The shortfall in revenue as a result of the deal with Ukraine is about $4 billion a year over nearly 10 years. In return, we are discussing the opportunities Russian business may get in Ukraine, such as the development of energy; we have also signed a lease for a navy base in Ukraine. I am confident that cooperation will prove mutually beneficial. Russia has turned out to be better prepared for the crisis, but we are ready to help our neighbours. I am not going to enumerate all the loans we have issued in the last two years to Armenia and other states.
The G20 made some decisions on the construction of the world financial architecture, which in our opinion consists, above all, of the standards of regulation and the creation of new interstate councils, the International Monetary Fund and the World Bank. In the same group of issues is the creation of a new system of cross-monitoring of countries. Then not only the International Monetary Fund, but also working groups comprising experts from several countries would offer an independent assessment of the macroeconomic situation and analyse the budget policy of individual states, including the United States and China. That these countries have agreed to such international assessment marks a first step.
We are currently discussing just how binding these recommendations should be. For now, these conclusions will be distributed as recommendations. At the same time, I think we are creating a system that eventually governments will come to rely on. That will form the basis of a future regulatory system that will be capable of imposing penalties, because we understand that the market has become global and the influence of many countries and major players such as China, or other countries that issue reserve currencies, is very important for the entire world.
The management of the International Monetary Fund and the World Bank is also on the agenda. It has been proposed to increase the share of rapidly developing countries plus emerging markets in the International Monetary Fund management zone. We are probably not talking about Russia, but about such countries as China, India and others that have a disproportionately small say in these organisations. Russia is a shareholder in the IMF and the World Bank, and we also represent our country in those organisations and take part in the board of directors twice a year, make decisions on the day-to-day running of these global financial institutions. We will continue contributing to the creation of a global financial security system.
I must say a couple of words about what the future holds in store for Russia.
We plan a GDP growth of about 4%. In the first quarter, GDP grew by 2.9%. This is not much of a growth by pre-crisis standards. We believe that global demand for our commodities is the key factor. If the growth rate in the world is maintained, we will also have a very positive situation, positive growth. Consumer demand will be ensured by growing incomes and a decrease in savings rates for a short period. That said, I think our success will, in the longer term, hinge on the tendency of Russians to keep their savings in domestic financial institutions and the ability of our financial institutions to provide a serious financial resource for the modernisation of the Russian economy. Our key target for three years is, on the one hand, to create a regulatory framework that meets international standards both in coordinating markets and investments and, on the other hand, to create conditions for saving to make borrowing on the internal market competitive with similar supply of capital and lending on the world markets. We have still not managed to do it on the domestic market and our financial institutions and enterprises tend to borrow more from abroad. Before the crisis, a high inflation rate, rapid strengthening of the rouble and continued speculative trends prevented the Russian financial market from fully meeting the challenges of modernising the economy. The new potential of the Russian financial market should be tapped in the next three years.
Inflation this year will be around 6-7%. My colleagues, for example, Alexei Ulyukayev, will tell you more about forecasts. He believes that inflation may be even less than 6%. This is understandable; it is due to a drop in demand in time of crisis. Our task for the next three years is to prevent inflation from growing beyond this year's level. It is important that inflation goes down. All this will stimulate saving, tend to reduce the lending interest rate and create so-called long money. Obviously, that trend will depend on the credit history, so it will take several years for the market and the investors to gain confidence that these macroeconomic parameters are sustainable and will be controlled by the government.
We expect fixed asset investments to increase by 2.9% this year. Growth in 2011 will be higher, about 8.8%. Investments will increase by about 8-9% over the next three years. That is less than before the crisis, but we are working with a lot of uncertainties. Bank lending will grow by between 5 and 10%, I believe. Alexei Ulyukayev will give you the Central Bank's forecast.
We have three serious analytical groups working at the Ministry of Economic Development, the Finance Ministry and the Central Bank. We hold independent views, we share them and proceed from these expert assessments. This is one of our strengths. We do not garble facts but say what they really are. I don't think our findings differ all that much from those of independent analytical centres whose opinions are very important for us.
Exports will not grow very fast during these years; imports will probably grow faster. That will stabilise the balance of payments and the national currency. Today, the chances of the rouble growing stronger or weaker are about the same. We are in a rouble equilibrium zone and its exchange rate is mainly connected with the changes in the world currency markets. We do not expect the exchange rate to encourage large-scale speculation. I repeat, the imponderables of the market and the state of the balance of payments indicate that the market is fairly stable and the chances of it going up or down are about equal.
Thank you.