- Seemingly, the Government was working at a relatively measured pace without any major emergencies in 2012. Is this because there was less work to do than last year?

Igor Shuvalov: Stability does not mean a slower pace of work. There is much more work to do now actually. The Government is now focused on the quality of its work, which is natural when there is no crisis to combat and there is basic macroeconomic stability. In other words, there is less work now than we used to have before, but other projects are beginning to demand a much more profound and systemic approach.

There are no emergencies, no budget crises... We do not need to sell assets to cover budget gaps. A housing project is becoming a priority issue on our agenda, and we have to focus on this in earnest now. We finished the APEC project and have taken up the much more daunting strategic project to develop our export capacity in the Asia-Pacific region. Earlier, we built a university and bridges. Now, we are busy forming a modern financial regulation model, which is an even more complicated task. Some time ago, the question concerned how to win the right to host the World Cup. Now, we are working on a project to make sure that is properly organised in 2018.

The way it works is that the process of resolving a problem takes you to the next level with new, more formidable challenges. This is what building points of growth and new institutions is all about.

- Politically, 2012 was a fairly busy year, whereas economically it was rather uneventful. Is this a contradiction?

Igor Shuvalov: For me, as a Government member, the way that we ended 2012 is another confirmation that the country has learned to overcome challenges at a certain level. Even with the complex political processes of 2012, such as the State Duma and the presidential elections, we managed to finish 2012 with confidence. I would even say well in the economic sense, with moderate and controlled inflation levels. Many of our neighbours have near-zero growth rates whereas our economy is growing. We would like to see it grow more, but in 2011 we achieved relatively high growth rates as well. We will get the final figures for 2012 in late January, but, according to the preliminary data, the GDP grew by about 3.5% in 2012. Very nice.

In 2008, we had a real crisis, which we were able to overcome. So, we already know how to confront such tough challenges as global crises. We have never been bad debtors, including domestically. Elections to the Duma – despite the dissatisfaction of certain groups – did not adversely affect the economy, and did not give rise to an outbreak of populism or instability, which at times occurs in such situations.

I consider this a real achievement because our institutions are becoming more sustainable. To put this in perspective, in 1998 it seemed that the Russian political system would not be able to survive that year, but it proved to be adaptive, and it has once again confirmed its adaptive nature now.

- In 1998, the adaptive changes in the system led to a change of government and to leftist Yevgeny Primakov becoming the prime minister.

Igor Shuvalov: That is exactly my point. Under the Constitution, the system transforms and adapts to Prime Minister Yevgeny Primakov or President Vladimir Putin. In fact, it undergoes a genuine transformation. The duration of the presidential or the parliamentarian term is not the key factor here.

- Leading government expert Vladimir Mau quite openly draws parallels between the current stability and the stability of the 1970s, stating that back then they were unaware of the threat of lower oil prices, had no reserves, and the political system under Leonid Brezhnev was more rigid...

Igor Shuvalov: Well, Leonid Brezhnev did not have to worry about elections. Later, in 1985, and then in the 1990s, the situation started changing so fast that the new leaders had to pay attention.

- Many refer to 2012 as the year of failed expectations. People were expecting changes, conflicts, and other developments, but there was no high-profile news. Does the Government see this as a positive or a negative factor?

Igor Shuvalov: I understand where you are coming from as a media representative, but political boredom is usually favourable for economic growth. If there is no big news, investors realise that the political system is adapting to new realities, and the economy is growing quite steadily, shrugging off all political processes. In general, investors are not interested in sensational news.

However, we must move on. The first thing that we need to understand is what Russia should look like by 2018. What our institutions will look like, how the courts will work, how property rights will be protected, how the common regulator will work if we manage to create it, how well the financial market will grow over the next five years, and how we will use capital for infrastructure development... In order for us to successfully address these and many other issues, we need to preclude any and all disasters. We do not need any unwanted events. Should they arise, there should always be an adequate remedy at hand in the form of anti-crisis measures or existing institutions.

- Until about mid-2012, the Government was officially preparing for the crisis, mainly in Europe, but the anti-crisis rhetoric had almost disappeared by autumn. Does the Government believe that external shocks are less likely to happen in 2013, or is it just tired of waiting for the crisis to break out?

Igor Shuvalov: Let's begin with the crisis that was unfolding fairly rapidly in Russia as of 2008, although it had affected other countries even earlier, primarily the United States. I often recall the G8 meeting in 2007 where President Putin said that we were concerned about the state of US financial markets that may deteriorate into a crisis. Not everyone took this remark seriously. Unfortunately, everything that the President was talking about became a reality.

In 2008, we came up with the following formula for the Duma – a return to pre-crisis GDP levels will mean that we exited the crisis. We had a recession, the worst among major developed and developing economies. We are now back to pre-crisis levels and we should ensure appropriate growth. While we were working on our domestic programme, we closely monitored the situation in the United States and the EU. We understood that the initial decisive steps in the United States and the softer steps and solutions in Europe will mean a quick withdrawal from the recession for the United States and a more complicated situation in the EU. In other words, the European economy's problems will affect growth in Russia, since the EU is our largest trading partner. By early 2012, we had reached the pre-crisis GDP level. The state of the global economy did not warrant the conclusion that the global crisis was over. Even though we have achieved these formal figures, we know deep down that the situation can turn around any minute because we are dependent on foreign markets.

Today, we may have to agree with those who argue that the global crisis continues unabated. We are going to live through quiet and not so quiet times during the crisis. The government that was formed in 2012 had to get ready for the most challenging circumstances. This level of readiness is still there, but we have been actively preparing for approving the budget for the next three-year period since mid-2012.

Our approach to budgeting was also conservative. Heeding the advice of the experts with whom we have worked for 18 months to prepare the development programme for Russia until 2020 (Strategy 2020), we returned to the budget rule. Although this means tough discipline with regard to spending, the budget based on this rule was approved and signed off by the President. We are starting 2013 with a budget based on a new macroeconomic structure and a broad range of anti-crisis measures.

- The budget rule was adopted when everyone believed that the crisis would get even worse. Do you think that this rule could be tweaked in 2013?

Igor Shuvalov: The budget rule will, of course, have to be changed if external variables turn against us, but if external variables remain more or less unchanged, we will act based on this rule. Certain Government members and Duma deputies suggest using more lenience when using the budget rule, so as to focus primarily on infrastructural development in Russia. We will consider these issues in the coming weeks, and we hope to have a meeting with the Prime Minister on this matter in February.

According to the proposal by the Ministry of Finance, we should increase the total amount of sovereign funds to 7% of the GDP. Many Duma deputies and several economists state that once the reserves reach 5% of the GDP, we will be able to use these funds to finance short-term – one-to-three-year – projects, rather than use them for covering fixed expenses without undertaking long-term social or other fiscal obligations. These projects concern infrastructural development, modern education, healthcare, and affordable housing – things that matter for improving our quality of life.

The question of 5% or 7% should be discussed with the Duma. Also, the Government cannot be the only one to decide what such funds should be spent on.

- Is “discussed with the Duma” a figure of speech, or is the Duma indeed in a position to engage in a discussion with the Government on such an important issue?

Igor Shuvalov: Not unlike some of our Western partners, you are confusing us with the Soviet Union. This is a routine modern democratic process in our country. They keep pushing us – and very strongly at times. For example, Duma Budget Committee head Andrei Makarov discussed this issue not only with me but also with Prime Minister Dmitry Medvedev. Initially, the Prime Minister did not support the idea of ​​going from 7% down to 5% of the GDP, since we were concerned about additional costs. Now, though, his position is straightforward. He wants the Duma to come up with specific projects in February. If they can clearly show that their implementation can improve the quality of life in Russia at the expense of the funds saved by cutting the accumulated funds in the reserves during this political cycle, then we will enter into a discussion with the Duma.

- It became known in the first days of 2013 that there may be a way to circumvent the Government's tough stance in the state programmes, as most government programmes have been designed in two versions – standard and optimistic. Does this mean another increase in the Government spending that is being included now in the Government documents?

Igor Shuvalov: Many proponents of tight fiscal discipline call a situation where spending under Government programmes is based on the approval of the fiscal plan and will only be implemented if there are additional revenues disgraceful. I understand what the financiers are concerned about. Additional expenses can give ministers an even better lever for exerting pressure on the Government and on legislators, which will increase public spending, whereas the budget based on ther budgetary rule precludes the opportunity of spending increases.

Should we set our sights high? Of course we should, but our position should not be based on irresponsible financial behaviour. The Government is presently working on Government programmes, fully aware that the country may have additional income sources. All programmes should be specified, so that we can prioritise government projects that will benefit from an additional trillion roubles that may become available in the budget. Clearly, all needs cannot be met, but we cannot allow lobbyists to have access to these funds either. This work has yet to be done. We should realise that the Government has additional income, and the priority rules governing such programmes require to spend it accordingly.

– Privatisation is considered to have been the major news event of 2012 that never took place…

Igor Shuvalov: It is a fairly popular fallacy among your colleagues. Didn’t we have news of privatisation in 2012? What about Sberbank? VTB? Rosneft? Apatit? SG-Trans? The Murmansk and Vanino ports? This is just off the top of my head. We made our approach to the matter very liberal. There are privatisation agents that have been selected in a transparent fashion. It is not even a Government mechanism. These agents help companies establish corporate procedures and become more open. At the same time, they work with prospective investors and stock exchange experts. This process takes place mostly outside the Government. We trust the most reliable and reputable agents to do this work and pay them accordingly. After that, once the market is prepared to buy our asset at a lucrative price – and even more so if an efficient investor comes along – we have no restrictions for selling such an asset.

All of the companies that are on this list can at a moment’s notice be put up for sale on the market. Sovcomflot, which we failed to sell in 2012, is one such example. With regard to Sberbank, we wanted to sell it earlier in 2012, but postponed the deal on two occasions. But as soon as the market was ready to buy the stock at a good price, we sold it immediately.

- The privatisation of the mid-1990s was a policy-based public sale of assets to willing buyers, whereas privatisation in 2013 is rather a thoroughly-prepared deal between the Government and investors?

Igor Shuvalov: Our goal is not to have someone buy our assets regardless of the cost. Privatisation only takes place when there is an investor, and an amount of money that our consultants consider fair. If this condition is met, you can have everything on the list.

- Still, does this apply to Rosneft or Gazprom? Can Rosneft actually be sold at any time before 2016 as the privatisation plan says?

Igor Shuvalov: There are no restrictions. Rosneft may be the case of an unconventional sale of shares, but BP, if the process is completed as planned, will become a shareholder of Rosneft, and this is what we call privatisation. Rosneft will, of course, be further privatised, and this will be a complicated process that will involve the direct sale of shares owned by the state and state-owned companies and the exchange of assets. However, this has nothing to do with replenishing the budget with funds from the sale of Rosneft. The goal is to make Rosneft a fully transparent, competitive energy company after privatisation. The company should in no way be inferior to such global industry leaders as Exxon.

- What do the major foreign investment banks that you work with think about this strategy? Some of them cut their business presence in Russia, while others expand it...

Igor Shuvalov: Investment banks have gone through lean times, and they are now looking at Russia and the entire Eurasian region as a place where they may have a chance to give their investment opportunities a new lease at life. Many see the situation differently than the media. If you look at the level of development of institutions and the level of education of our people, you realise that this is the right time to invest in Russia. The capital is available, and we are discussing investment opportunities in Russia with many prospective investors. Our responsibility is to get projects ready.

There are not enough projects. We do not want investment banks to focus on our energy companies all of the time. Unfortunately, regional governments work poorly at a time when investment bankers should have a lot of business in the regions. The regions are huge and many are the size of a small country. All projects related to local energy supplies and infrastructure can be of interest to investors. The regions should also be involved in privatisation, which they are reluctant to do, although many of them have a lot of assets that can lure investors. Meanwhile, regional officials come to see us and ask for money to build a road. Why don’t they sell their companies, bring in investors, get billions of dollars, and use them to build roads? By doing so, they would create a whole new life for their people because privatisation means an influx of capital, modern technology, innovative infrastructure, a whole new image of a region, and a major boost in economic growth.

- This situation is nothing new to investment bankers. They saw the same thing in South Korea and Eastern Europe, where they also had to deal mostly with Governments and local authorities.

Igor Shuvalov: No, they do not see us as South Korea or Eastern Europe. They see us as a totally different country – Russia. At some point in time in New York, an investor told us that their earnings are higher in China, but there are more losses in China as well, whereas in Russia 40 projects are profitable with only two operating at a loss. With all of the promise of growth that the other BRICS countries may have, Russia offers opportunities at a much higher level.

- For a long time, the Government was expected to borrow funds on external markets and to invest them in projects in Russia. In any case, that was the path taken by many emerging economies in Southeast Asia. While remaining mindful of the strategy used by the “tigers”, Russia is deliberately avoiding such policies. Is this the country's long-term position?

Igor Shuvalov: We abide by a strict rule with regard to our public debt. The aggregate public debt cannot exceed one-quarter of the GDP. There is a schedule for authorised borrowings for years to come. Yes, our accumulated debt is low, and it may be tempting for the Government to go ahead and borrow money to resolve problems. However, it is a matter of choice in terms of the strategy that we follow.

To improve the quality of life in Russia, we should always show real improvements. However, these improvements should take place without affecting the existing macroeconomic balance. It would be wrong to maintain high reserves and excellent macroeconomic indicators, but fail to achieve any serious improvements in the quality of life during this political cycle. By 2018, we can have excellent macroeconomic performance indicators. Given stability, investors will gradually expand their businesses. This, of course, will happen, but the results will be felt by future generations.

However, the President is setting completely different tasks for us. In his message to the Federal Assembly, he said that we should already live with dignity today, right now, so we need to find solutions that will drive growth without compromising macroeconomic stability. National debt can be accumulated only at the rate that we have agreed upon.

We do have an understanding of how much money we can send to infrastructure bonds. Following the tough fiscal rule, we can allocate up to 350 billion roubles for building transport infrastructure, but only on the basis of credit repayment.

- The issue of infrastructure bonds in 2013 is likely to be associated with the prospects of tighter financial supervision and creating a mega-regulator. What is a Central Bank-based mega-regulator – a project to promote the financial market or to protect existing players?

Igor Shuvalov: I think that we overdid it with the term “mega-regulator”. It would be more accurate to call it a single regulator. We have discussed this topic extensively with experts, and focused on ways to expand the financial market. Unfortunately, the Government did not have a professional partner back then that would enjoy a certain degree of independence. I believe that a financial market regulator should be almost as independent as the Central Bank in terms of monetary policies. As investors have a high level of confidence in the Bank of Russia, and international experience suggests that banking and financial regulation can be combined, many experts have suggested a single regulator.

- From the Government's point of view, will a single Central Bank-based regulator and banking supervision rules applied across a relatively free financial market attract new players to such a market?

Igor Shuvalov: For example, we discussed the funded component of pensions, and its detractors tell us that the level of oversight on the market is so low that no public institution can vouch for the safety of the funds which, in fact, belong to retail and corporate account holders. Their level of protection is much lower than in the banking sector. Or a foreign investor may say that our financial market’s infrastructure is not sufficiently sound for them to consider coming to Russia. In order for them to come here, to create funds and to trade in securities, they need a transparent and competitive environment, proper regulations, and supervision... They want companies to be prosecuted for their mistakes, shortcomings, or fraud, as in Europe or the United States. Thus, we need to oversee private funds, private pension funds, and managing and insurance companies – the same way as we do in the banking sector.

- Opponents of introducing a single regulator say that it might involve the risk of seeing small- and medium-sized players leave the financial market, and large operators, such as state bank subsidiaries, establish a greater presence on these markets. Do you share these concerns?

Igor Shuvalov: There are small banks in the banking sector. At the beginning of the crisis, the Government asked the Central Bank if it made sense to use this opportunity, and to encourage as many lending institutions as possible to consolidate with an eye towards ending the crisis with two to three hundred banks... The Bank of Russia said that if a small bank is run well, then it should most certainly be given a chance. By the same token, small private pension funds or insurance companies should be given the chance to remain in business as well.

I believe that small, steady operators will be better protected by a single regulator than they are now.

- Will non-banking institutions obtain access to refinancing by the Central Bank once a single regulator is in place?

Igor Shuvalov: This issue is being discussed, and the Government will discuss it with the Central Bank if it receives the powers of a single regulator. I believe that this is a fair and an important subject that should be discussed with the bank. Perhaps our decision should not cover all securities, but we should decide on refinancing non-banking institutions by the Central Bank in some areas. We will discuss how to do this over the next six months or even the next year.

- What do major banks think about a single regulator? For them, such a project would concern the Central Bank’s expansion into all sectors of the money market, including sectors where they have already established their own rules?

Igor Shuvalov: Of course, bankers wondered what we need this regulator for, but they ended up agreeing with our approach. I believe that we have answered all of their questions about this issue and explained to them how we plan to create it without breaking anything and even improving things.

However, everyone should get ready. With the establishment of a single regulator and the introduction of the Basel II and Basel III rules in 2016, we will have a much more transparent situation where regulators will be able to see the financial group as a whole. We should never have to experience anything similar to the trouble that we had with the Bank of Moscow. What might the financial and banking market participants not like about such new developments? Understandably, supervision will be toughened. Banks and financial companies occasionally indulge in various types of market misbehaviour and insurance companies cut themselves slack at times. A serious regulator will be a game-changing innovation for them, as stricter requirements will be introduced. By and large, this means one thing – greater protection for investors.

For us, this is still an issue of growth. During this political cycle, banking and financial regulations in Russia should in no way be inferior to the ones in developed OECD countries.

- Will the creation of a single regulator lead to the spreading of financial asset insurance mechanisms to individual non-banking institutions, similar to deposit insurance agencies in the banking industry?

Igor Shuvalov: We believe that the depositor’s right to insure its deposits is an important asset that has a role to play not only in the banking industry. We need to have some kind of insurance on the financial market as well.

- Is the decision to create a single regulator a settled matter? Do you know who is going to head it?

Igor Shuvalov: In his report to the President, Prime Minister Dmitry Medvedev made a case for a single regulator. We are now waiting for the President's decision. Of course, it is also important to make the right choice with regard to who will head such an entity. Who will lead it? Sergei Ignatyev is an outstanding head of the Central Bank. He has done a lot for the banking sector's development in Russia and has been a tremendous professional all of these years. It should also be noted that if the Central Bank receives additional responsibilities and the President agrees with this proposal, then it is very important to choose the right person to carry out this project. It is important for this person to be as sound a professional as Mr Ignatyev.

- In late 2012, investors became concerned with the Government’s decision to amend the basics of the tax system, and, in particular, to discuss the sales taxes. Is the decision to keep the VAT final, or will you continue discussing it?

Igor Shuvalov: When we started working under Strategy 2020, the experts suggested making changes to the tax system that we agreed with, and they were approved by the Prime Minister and the President. If a tax innovation is something that needs to be done, we should implement it in 2012 and refrain from increasing taxes in the current political cycle until 2018, unless there are very compelling reasons to do so. If there is a need and an opportunity to lower taxes, the Government will make an informed choice, but taxes cannot be raised before 2018 unless it is really necessary.

- Cutting taxes in Russia sounds like paying lip service...

Igor Shuvalov: Says who? The Government can do so, and such a decision has been taken. If the economic situation allows us to improve the tax situation, we will do so. All taxation-related decisions have been taken during the 2012 legislative period. We are not going to look into other ideas that may worsen the situation of taxpayers.

The debate about sales tax versus VAT has been going on for years. In accordance with an order issued by the Prime Minister, experts compiled a report that was heard in December 2012. This report does not so much concern stacking the sales tax against the VAT, but rather the Russian tax system’s relevance to our economic goals and objectives, and its competitiveness with respect to our major economic partners, such as CIS countries, the EU, and the United States.

As a result, we confirm that there will be no legislative changes that will worsen the situation for taxpayers and investors. We will create an expert working group that will support various tax ideas. This group should analyse the sales tax versus the VAT. At a recent meeting held by the Prime Minister in December, experts refuted the idea of replacing one tax with the other.

If push comes to shove, we can allow the regions to charge regional sales taxes in addition to the federal VAT, thus giving them an additional source of revenue and a powerful tool for competition between regions. It would be an undesirable move, though. However, this decision will be reserved for the next political cycle, which is after 2018.

- Economic growth in Russia in 2012 was based on an increase in retail demand supported by individual income growth and steady savings rates. Will the Government stay the course in increasing individual incomes and expenses in 2013?

Igor Shuvalov: The Government likes it when people start consuming more services and goods, or saving more for retirement or paying for their children’s education. But if the Government and the voters do so in a way that does not have anything to do with increased labour productivity, we are in for big trouble. A weak economy that is unable to manufacture competitive products will inevitably get destabilised if the Government has many commitments with regard to its citizens.

- Dubai has been unsuccessfully destabilising that way for decades... Russia is frequently compared to the oil monarchies of the Persian Gulf where most people are more than happy with such a situation...

Igor Shuvalov: Dubai is a small emirate with a small population, whereas Russia is more than a country. It is practically a continent, a large federation... For us, an increase in real disposable income is a problem that goes hand-in-hand with increasing labour productivity. Few people realise that the Russian people’s level of consumption is similar to that in OECD countries, but our labour productivity is much lower. This does not mean, though, that we should take things away from the people. God forbid! We want people to make even more money than they do now, but changes in the price of labour must fall in line with improvements in the quality of labour.

Russia should be on the list of the top five global consumers, but we also need to improve our labour quality accordingly. Recently, I met with Sberbank Chairman German Gref to discuss productivity. Sberbank was in the process of adopting a productivity growth programme, which they believed was extremely ambitious, since it provided for a 2.5-fold increase in productivity. However, the stakes are getting higher now. There are international corporations whose programmes provide for a 10-fold increase in productivity. Such goals may seem unrealistic, but corporations know that they are taking up such challenges with good chances of success.

- The Government keeps saying that it would like to go back to the time when the capital was flowing into Russia in large amounts and is prepared to go to great lengths to see this happen again. However, capital inflows have a downside. The absence of large capital inflows keeps inflation low, helps preserve political institutions, protects national capital, and safeguards against unexpected changes...

Igor Shuvalov: We want such changes to occur. We are not afraid of them. Conversely, we are planning all of our changes regarding institutions, so as to encourage foreign direct investment. We need this for modernisation, which is impossible to achieve without capital. To be sure, what we need is not speculative capital, but rather direct investments, and for this we require new projects... If we come up with interesting projects, the capital will follow. I am confident that we are creating such an economic environment for capital investment that will allow us to improve the economy overall, to increase productivity, and to improve the quality of life. Most importantly, we should have this environment in place as soon as possible.