Alexei Kudrin's remarks:

Ladies and gentlemen,

First of all I would like to thank the sponsor of this forum, Vedomosti, for inviting me to speak here again. I personally appreciate this newspaper for its interesting and impartial style in covering our economic decisions and political discourse.

I expect an extensive discussion today. We'll need to focus on the economic crisis which, in my opinion, is not over yet. I believe that the global economy is still coming through the recession and many signs point to this. The threat of a debt crisis still persists. The possibility of budget consolidation, which is projected to account for anywhere between 3-4% and 8% of a country's GDP, is still under question, even in leading, developed economies. This question still remains open. But these measures are absolutely necessary. Otherwise the negative impact of these economies on the global economy will grow.

Developments in Ireland have put Europe's sustainability to the test again. Clearly, this is not the last such crisis – production rates and budget revenues haven't returned to the pre-crisis level yet. And we cannot say yet that the positive trend is consistent. In the words of President of the European Central Bank, Jean-Claude Trichet, the next decade is likely to be a sober decade.

Most likely, growth rates will be low, since crises like this cannot but cause structural changes to the economies and regulatory mechanisms of both domestic and global markets. New regulatory processes intended to avoid the further spread of crisis symptoms are being developed now, but this process will take time, at least several years, due to the global scope of the crisis. But as we move ahead with this issue, including through the G20, we'll see whether we'll be able to keep the global economy from backsliding and if we'll be able to find new growth drivers.

As for Russia, we have yet to deal with our disproportionate revenue sourcing. Our dependence on oil has only increased. The percent of oil sourced revenue in the budget is as high as it's ever been. This issue is critical since budget expenditures and the government's ability to meet its commitments depend on these revenues.

At the same time, we take advantage of high oil prices which increases budget revenue, and we are also using petrodollars from the Reserve Fund. However, we have been overusing them, in my opinion. Even before the crisis in 2008, only 6-7% of oil and gas derived income went toward budget expenditures, while today this percent has reached 13-14%. We haven't eliminated this disproportion yet. We still largely depend on oil-based revenue.

Regarding manufacturing industries, despite the fact that their performance has reached the pre-crisis level in general, several industries, for example engineering, remain 20% short of pre-crisis levels. Agriculture is doing a bit better now than before the crisis. The construction and steel industries haven't yet made up for the gap – production rates here are 8% lower than before the crisis. This is why we cannot be absolutely confident about the future.

And the main thing is that the factors that we capitalised on before the crisis, including those spurred by high oil prices and short-term capital inflow, are not as effective now, and won't be effective in the long run. But we don't really want to rely on them anyway.

The main concern for Russia, which we have already identified, is that we will simply sit back after having used our huge reserves to fight the crisis, and get used to a new level of oil dependence and expect the economy to grow on its own. Our dependence on oil remains considerable, which is why we have been unable to eliminate several critical disparities, exacerbated by demographic tendencies. To resolve theme we have to reschedule and optimise public expenses, and tax increases remain our main instrument. This creates an additional burden for business and compromises opportunities for private investment.

We always weigh alternatives to decide which is more preferable at a given moment. The decisions of the Government, the president and the parliament clearly show that support for the public sector through higher pensions and social security guarantees adopted before the crisis are absolutely necessary. This is a political choice, and this choice is balanced. However, this approach is still being debated.

Excuse this digression, but the United States' GDP plummeted by 29% between 1929 and 1933 due to the Great Depression, one of the largest declines in history. The population's after-tax income fell 28% while unemployment reached 22%. Today, the edge has been taken off some of these social problems, at least, due to various tools the global economy has used in recent years. Governments have managed to preserve the opportunity for development which is resuming now – which means we have prevented a greater fall in the GDP by various means, mainly through the central banks' monetary policies, state large fiscal packages and an increase in public debt.

We have met some critical challenges of the crisis. Generally, employment and the public mood have improved. However, we still do not know everything about how to support our economy, how to get out of the crisis and what new decisions world economic regulation requires.

What we can say with a greater certainty is that we should prevent imbalances on par with what we had prior to the downturn. That should be many countries' collective policy. The G20 has dedicated its work to this goal and is endorsing the applicable documents. The approach currently being taken by most countries – such as halving budget deficits against those of the crisis years by 2013 – are collective decisions. The European Union is even pursuing sanctions against countries that do not hit the target. The G20 has also determined to stabilise the level of public debt after 2016. All of these collective decisions are meant to reduce the imbalances.

Next comes the problem of currency wars, another variable in the current situation and a development of the crisis – a decision was made in Seoul two weeks ago to avoid excess devaluation.

We are making decisions on global economic regulation. A set of tools was prepared recently as one of the results of the downturn. These tools will help bridle recessions and downturns later on. Perhaps, now monetary agencies better understand the danger limits of overheating. We realise that a crisis in finances or in the economy can spread from sector to sector – from finances to the economy. Imbalances in the fiscal sphere of budget deficit may cause a deficit in current accounts and in the balance of payments. We need more flexible rates to reduce imbalances. All of this will be analysed and laid out in greater detail in the coming years as recommendations to governments.

I began with imbalances. The crisis hit our economy on many indices more severely than some other national economies due to persistent specifics and risks – underdeveloped institutions and trading markets, and a strong dependence on oil. From a roughly 5-6% surplus in 2007 with oil at $70 a barrel, we slipped to a 5-6% deficit when oil was back to about $70 during the crisis. This negative, fiscal gap reached 12% of our GDP. It was also large in some leading countries. The fall was roughly 8% in the United States and Britain, and 2% to 3% for the OECD countries overall. So Russia still strongly depends on external factors and a structurally underdeveloped domestic economy. That is why we need more daring decisions concerning structural reform.

We pursued an extremely aggressive anti-crisis policy. The amounts in our anti-crisis package, calculated with IMF methods, were as much as 4.5% of the GDP in 2009 and up to 5.3% this year, against 1.8% and 2.9%, respectively, in the United States. We needed far greater reserves to mitigate the crisis and regain a general development trend today.

We established the Reserve Fund before the crisis, which made our success in overcoming the crisis possible. The European Union is establishing a stabilisation fund with IMF participation. It is becoming common to set up such funds now. This is another evident conclusion from those events.

Russia, a country strongly dependent on oil, should turn back to fiscal rules limiting the budget deficit in sectors not involving the oil and gas industries. We had such rules before the crisis, which the Budget Code stringently stipulated. Prior to the crisis we planned to shift during the transition period from the 6% oil and gas transfer to a 3.7-4% transfer, that is, a deficit covered by oil profits and loans. We proceeded before the crisis from an annual average world oil price of $50 a barrel. In fixed prices, we will have an oil and gas transfer not exceeding 3.7%, while now it is 13.9%. We have to return to 4.5% at the highest, which means that we need transition time and have to go back to a certain level of non-oil and gas deficit. I think we will be ready by spring to make such adjustments in the new budgetary cycle, starting in 2012-2014. We consider this a factor in Russian economic stability for the years to come. That is the lesson we have drawn from the crisis.

The forum materials contain a question on what influential central event we can expect. Parliamentary elections are just such an event next year, with a direct economic impact. Our life in the upcoming years depends on who will be elected to parliament and with what political platforms and economic initiatives. Are there any other answers? I think there are; let me explain. You know, when oil prices are high and one has easy money and can afford extravagance, economic platforms don't matter much. One is in a state of "controlled prosperity" because the per capita GDP grows due to such prices, such amounts of oil production and such world rent. Russia's federal budget grew more than four times in real terms and almost fivefold in terms of expenditures, so the average wage also rose considerably. It grew faster than labour efficiency. I mean that it is easy to make handsome gestures in such a climate. It is not so any longer, and we have to make choices.

I dare make another digression, this time on what we should regard as the conservative tradition of a conservative party. A conservative tradition emerged from the protection of the values of individualism in the economy, competition, support for business and reducing state participation to a minimum. When the Great Depression created huge problems, President Roosevelt enhanced government control, for which everyone criticized him. His anti-crisis programme assumed an increase in government control from the labour market to the financial market. It worked for the next 30 to 40 years. John Maynard Keynes, the ideologist of this economic policy, substantiated these concepts.

Ronald Reagan and Margaret Thatcher reversed the global trend. Privatisation, tax cuts, a reduction in government expenditure and influence and greater support for the enterprising spirit all regained popularity. Mrs Thatcher said at the time that she did not know what state interests were, but knew what the interests of man and family were. She revived the enterprising spirit and steered Britain out of the ranks of second-rate countries with unstructured economies, where the public knew public servants only for pilfering. Mrs Thatcher formed present-day Britain. In fact, what she accomplished was a revolution.

We are facing a choice. Do we want to support conservatism in its traditional shape? At present, conservative parties are in office in more than twenty European countries, starting with Nicolas Sarkozy, Angela Merkel and Silvio Berlusconi. Or will we support conservatism in a Russian sense? During perestroika, the word "conservative" referred to those who wished the socialist system preserved. To be sure, these terms are highly conventionalised. We should always take the specifics of political and government systems into account. But it is not a case of terms but of the policy we want to pursue. Some say that the free market has discredited itself and could not overcome the crisis, so state control should be enhanced now. I do not agree with them. According to the Organisation for Economic Cooperation and Development, the role of the government sector in the Russian economy exceeds that of the United States or of Europe approximately fourfold – by two to four times in fact. We face this problem: giving elbowroom to free enterprise and the removal of barriers.

A strong and rigorous governance system, able to protect entrepreneurs and guarantee strong and objective arbitration has always been the key principle of conservatism. We are only beginning to realise that the state should not determine what business should do, how to distribute its efforts, or what fields to engage in. Businesses will bring progress and breakthroughs to given sectors, even in such where their success will be unexpected to the state.

So we will have to be more discriminating in our choice without the financial backing we've had in previous years. We are increasing pensions during the crisis through higher tax rates, and we intend to increase defence spending while other countries, including the United States, are cutting it. This shows that we are not quite true to the conservative tradition in the classic sense but are enhancing the role of the state. But this is a choice. It is a political situation, so it's normal. I think we will make these decisions next year. I am sorry; I have exhausted my time limit with this digression.

Thank you.