23 january 2013

Plenary session of the World Economic Forum in Davos, “Scenarios for the Russian Federation”


Speech by Dmitry Medvedev:

Mr Schwab (Klaus Schwab, founder and executive chairman of the World Economic Forum in Davos), ladies and gentlemen. Apparently, my task is to refute all three of the scenarios in about 20 minutes and to explain what we are going to do. I will certainly do that, but first of all I would like to thank you for the invitation to take part in the forum in Davos, which brings together leaders of global business and politics, as well as representatives of international organisations and scientists. This is the third forum for me (each forum is special and represents a kind of milestone in our national development), but this is the first time I attend it as the Prime Minister of the Russian Federation. It is particularly important for me to speak here today, considering that Russia will chair the G20 this year, as mentioned by my colleagues.

To begin with, I’d like to thank the Russian and foreign experts who developed these possible scenarios of Russia’s development. Let me say straight from the start that I don’t consider any of them entirely realistic, and not only because, as German Gref (Sberbank CEO) said, these are scenarios where the government has no role to play. I don’t think they are entirely realistic for other reasons as well. That said, the approaches used to develop these scenarios and the ensuing results are certainly useful, though any approach is conditional. They do not produce precise quantitative forecasts. It is easy to make a mistake. This is an analysis of what the various uncertainties in our economy and decisions by the authorities can lead to. As my colleagues have already said here, all three scenarios are fairly pessimistic and this is a good thing. It would be worse if we had three optimistic scenarios that could let the government sit back and relax. Pessimistic scenarios are useful and important for analysing the situation as a whole. Let me recall that I saw similar and even much gloomier scenarios during my presidency in late 2008 and early 2009 when the financial crisis was at its peak and the situation was much worse. None of those scenarios has come to pass. So I consider these studies fairly useful for understanding the situation in the global and Russian economies and the trends that will determine their development in the next few years. This is a good foundation for elaborating correct policy aimed at transforming potential challenges and threats into new opportunities and sources of sustainable growth.

There is one more thing concerning the recent voting that I would like to share with you. Frankly, I was absolutely sure the first question would get the vast majority of the votes. It was clear early on because it reflects the present view of Russia and the challenges faced by our country. That may not necessarily be true, but it should nevertheless be reckoned with. I will be frank with you – I voted for the other one.

As our economy is dependent on energy exports, lower prices on global commodity markets remain a major threat to us. This is why we are constantly concerned about the stagnation and the banking crisis in Europe, the debt problems facing the United States, and the structural risks in China. There is no doubt that these issues will be the focus of the G20 throughout 2013.

I would like to say something that, I believe, is important for Russia. We are not interested in overly high energy prices, as they impede global growth. More than that, they aren’t good for the Russian economy either. At the same time, prices that are too low will lead to the other extreme, which is resource shortages precluding sustainable economic growth. The current level of oil prices is more or less optimal for both producers and consumers. They often ask us what we are going to do without a windfall of petrodollars? Will the Russian economy collapse? Will Russia fail as a nation? Of course not. Indeed, our economy is heavily dependent on energy exports, but this dependence is greatly exaggerated. Much of our recent growth wasn’t paid for by oil and gas revenues, but rather by an increase in consumer goods and services production. In the long run, our policies should lead to a significant expansion of food exports, as Russia has sound prospects to become the world’s largest agricultural producer, as well as intellectual services as we have a large educated workforce in our country. I am positive that they will be as much in demand in the future as oil and gas are today.

The macroeconomic situation in Russia is fairly stable. Last year, economic growth stood at 3.5% and inflation was 6.6%. This was despite the drought and the low crop yields. These are rather good figures given the present state of affairs. The unemployment rate is slightly above 5%, which is the lowest figure in Russia in recent years and the lowest among developed economies.

Importantly, the growth was driven not only by increased domestic consumption, but also by a near-8% increase in investment. This is the minimum sustainable investment rate for Russia. We want to achieve 5% economic growth, although many say that this is unrealistic. However, you should always set your sights high. Five-percent growth should secure us an increase in investments at an annual rate of 10% over several straight years. This is exactly why we are interested in a massive influx of foreign investment. We are joining the partnership for modernisation with the vast majority of European countries and initiating our own government programmes with the use of private investment funds.

Finally, Russia has a very low foreign debt of about 3% of the GDP. We closed last year without a budget deficit. We have significant international reserves and a security blanket in the Reserve Fund and the National Welfare Fund – an amount over $500 billion.

Importantly, and this was a difficult decision for the Government, although it was the right one... We have introduced a tough budget rule whereby extra oil and gas revenues will be saved and used only in periods of low energy prices. Doing this wasn’t easy. I would like to thank everyone who helped us to make this decision.

The figures that I gave you shouldn’t make us complacent. We are faced with three pessimistic scenarios. Obviously, growth is slowing down, and the global economy remains unstable. The hope that a way would be found out of the crisis without having to resolve existing financial and regional imbalances failed to materialise. Despite all of the efforts that were made, the post-crisis recovery is still precarious. The crisis may return and a global recession is likely to happen.

Our increasing integration with global processes, including in relation to our recent World Trade Organisation membership, requires Russian companies to significantly improve their competitiveness – both in terms of productivity and the use of energy resources. This is an indisputable fact, but our major risks do not lie outside the country. Our internal limitations – and this is rightly mentioned in all the three scenarios – are now coming to the forefront. The primary threat is that we have made too little progress in addressing these challenges.

On the other hand, it would be wrong to assume that we are just treading water. In fairness, we have done a lot of what we discussed previously, including here in Davos. You should go to Russia and see for yourself. The biggest, most recent achievement, which, no doubt, should make every Russian pleased, was the stabilisation of the population at around 142 million. So far, the doomsayers who predicted that Russia’s population would dwindle by 2 million people every year have been proven wrong. Targeted policies have helped to significantly increase the birth rate and – no less important – to reduce mortality, mostly due to improved healthcare. Last year, for the first time in two decades, the resident population of Russia was up, and the birth rate exceeded the death rate. Fairly difficult years lie ahead, so we’ll need to focus on reducing mortality rather that encouraging births.

The second important result is our complete integration into global markets. After 18 long and hard years of negotiations, Russia has become a full member of the WTO. Frankly, I am pleased with this accomplishment. The breakthrough occurred over the last few years. I would like to use this opportunity to once again thank all of the friends of Russia who helped us to get there.

The fact that these negotiations are over is a powerful, positive signal not only to foreign, but also to Russian investors. It is a sign of the recognition of our achievements in building market institutions, in improving legislation, and in enhancing the efficiency of public administration.

Our next step would be to join the Organisation for Economic Cooperation and Development (OECD). To be sure, the WTO and the OECD are not some sort of ideal entity that provides immediate benefits to new members, as some may think. There is no such thing. However, they make our companies operate according to common global rules of competition. The illusion of a comfort zone that is provided by an off-limits market is very dangerous, and we know this first-hand.

It leads to inevitable defeat in the mid- and long-term perspective. This is why we were eager to enter the WTO and use its rules to create a competitive environment for Russian businesses. We wanted our companies to take advantage of new opportunities to do well on global markets. This was our goal.

I’d like to repeat that Russia is an open country no matter what anyone thinks or says. We are part of the global economy and global politics. By and large, we are facing the same problems as other countries – risks to the balance of the pension system (we are debating and taking decisions on this issue); inadequate energy efficiency and environmental safety of production; the need to create good jobs and find innovative sources of growth. This is just a partial list of our common challenges. We are ready to tackle them in cooperation with our partners. We are ready to share best practices with them and help each other. We must seek compromise, not put our partners in awkward situations. We invite to Russia all those who are prepared to work together. 

The third important result of our work is the recent formation of institutions that contribute to economic growth through investment and innovation. Our development bank has already turned into a powerful institution that funds long-term investment projects. The Export Insurance Agency has started working. Speaking from this rostrum two years ago I mentioned for the first time the need to work with strategic foreign investors. Now we have the Russian Direct Investment Fund, which raises money from foreign co-investors. Amendments to our stock exchange laws have already enhanced the demand for rouble assets, turning the rouble into an increasingly important regional currency.

We have a fairly ambitious goal in the investment sphere – to boost investment from 20% to 25% of GDP,  increase funding for transport and energy infrastructure and replace old inefficient production lines with high-tech ones. We are counting on considerable direct foreign investment to help solve these problems. Incidentally, I’d like to mention that yesterday we took an important decision to use part of the accumulated pension reserve to fund investment projects with long payback periods, primarily infrastructure. Needless to say, these funds will be preserved by all means with the help of a guarantee mechanism that we will create in the near future.

Much of what I talked about in Davos in 2011 concerned innovation. I mentioned the need to support innovative and venture businesses, make technology transfers to mobilise and modernise our industry and create the conditions for economic mobility. Work in these areas is our priority and is in full swing. We have key projects like Skolkovo, but the most important thing is that our leading universities have stepped up their research. We are building a system for commercialising the products of R&D and are trying to establish technological alliances with foreign partners that are promoting products on foreign markets. Importantly, our goal is not simply to sell these products but also to take our place in the global added-value chain. This is far from a complete list of what was said and done. However, now I’d like to return to the priorities of the Russian Government.

Ladies and gentlemen, the priority of the Russian Government, my priority as the Prime Minister is to make all government bodies work better. The results of the recent vote in this hall bear this out. I’m convinced that unless we resolve this task it is impossible to advance in any key areas, whether it’s institutional reforms, macroeconomic stability or social progress. Effective administration is an urgent issue not only for Russia but also for the rest of the world. It is a concern both of governments and private corporations. We are seeing examples of how greater efficiency could help solve all kinds of problems, such as budget bottlenecks in the United States or the crisis in the Eurozone. This is an urgent matter for everyone. In general, this is not a new issue. Humankind has faced it for centuries if not millennia. I’m always happy to quote the Chinese thinker Lao Tzu. He said: “When a country has many prohibitive laws, its people become poor. When a country has many sharp weapons, it is in for troubled times. When more laws and orders are issued, the number of thieves and robbers is growing.”  In this context, little has changed in the last 2,500 years. The task of effective administration is still on the agenda.

In a global economy, countries are competing not only for traditional gains like labour and capital. The competition between governments is also becoming more intense. The ability of a national economy to compete is increasingly determined by the soundness of that country’s economic policy. A question suggests itself – what must we do to win this battle? The existence of a competitive environment both at home and on a global scale is indispensable for this. I’m referring to several things – first, we must have political competition or competition between different political forces that should produce the best programme for society’s development. Second, we must have competition between our regions in which they elaborate regional development strategies and form successful regional teams. This is all the more important because our regions are very different in terms of appeal, as was already mentioned here. Some regions are close to world leaders in terms of ease of doing business, whereas others are obvious outsiders. The Government must set itself the task of balancing the development of different territories. In particular, we must establish new growth centres in the south of the country and its Far East.

We have launched the National Business Initiative and are following the relevant roadmaps. We want to achieve the very ambitious goal of reaching the top twenty countries on the ease of doing business ranking by 2020. This is a very challenging goal, but again all goals should be ambitious. Otherwise they are not goals. We have a vital interest in achieving this because without a sharp increase in investment we will not be able to ensure decent economic growth.

Third, we must let companies compete in all sectors of the economy. The task of the government in this context is to create equal conditions for doing business for all. Scaling back the excessive presence of the state in the economy is an ideological issue and the ideological direction of our policy.

Some time ago I initiated a new programme to privatise state property and improve the management of state assets. We have already achieved the first results. Blocks of shares of major state-owned companies have been privatised. The budget has received more than seven billion dollars from this. If we count the companies under indirect government control, the sum is over $10 billion. This figure is a guidepost for the future.

I’d like to emphasise that this is not merely a budget indicator. For the most part, the boards of state-owned companies include professional and independent directors. We will continue this work because we have seen its positive effects.

Fourth, establishing a competitive environment in education, healthcare and other social spheres. Neither the state, nor private businesses, can have monopoly rights here. Only competitive educational institutions are in a position to create a genuinely competitive class of professionals that Russia so desperately needs. The housing market should also become competitive, since this is the only way to provide affordable housing to consumers.

Fifth, competition of jurisdictions on all global markets. The fact that we saw this trend unfolding was one of the main reasons for our decision to create the Customs Union and the Common Economic Space with our neighbors and partners. Each partner strives to create the best business environment on its territory for all businesses, including small- and medium-sized ones, so this is a win-win situation. The overall investment climate gets better as we reduce tax, administrative and other barriers. We are also working to create new jobs, in fact, a new common market for labour, goods and services.

There’s one more thing that I’d like to mention. We often hear accusations, at least in politics, that the Customs Union and the Common Economic Space are all about reviving the Soviet Union. This is nonsense. There’s no way we are going back into the past. Look around, look at yourselves and at us. We have all changed, we are looking toward the future, and we have a clear blueprint for promoting mutually beneficial integration. By the way, we are implementing this by building on the positive and negative lessons of the European Union. In this regard, we are confident about our success. Indeed, there are many challenges, but benefits abound, too. That is why our proposal to the European Union is to take our cooperation to another level and introduce visa-free travel, and to form a common economic space that will become a single market from the Atlantic to the Pacific.

I'd like to take this opportunity to criticise our European partners, since they don’t always hear what we are saying: the dialogue on visa regulations is taking an inordinate amount of time. Work on critical markets, such as an energy market, is therefore running into unnecessary impediments. Most tragically, the rules of the game are sometimes changed after the fact. In fact, the assets are being withdrawn and agreements that were signed earlier are being violated. We do not oppose changes, but the result should be beneficial for all the countries concerned. Moreover, we are interested in such changes, but unilateral actions cause things to work out differently. This is unacceptable for Russia, and we will continue the dialogue with our friends and partners in the EU across all areas of our cooperation.

We believe that it’s important to develop partnership in other areas, in particular with other BRICS counties. This association is getting stronger and cooperation is improving in all areas. By the same token, the G20, which brings together most of the leading countries, is becoming more effective as well. I remember the early days of the G20. I remember the skepticism that filled the room back then as we were going through a severe economic crisis. Nevertheless, we have created the G20, and it has played its part. We managed to consolidate the very different positions of many countries, and did so in time, otherwise the outcome would have been quite different. Therefore, we are prepared to cooperate in all mutually beneficial areas.

To sum up, I would like to reiterate that the effectiveness of public authorities and promoting a competitive environment in all areas of economic and social life are critical for the country, the President and the Prime Minister. We will maintain our focus on this work.

With regard to the things that need to be done. It is imperative that we ensure a system-wide and active dialogue with civil society – a dialogue that involves feedback and ensures consistent Government actions. We have all the required mechanisms for this work. I know these mechanisms are not ideal, and they have only just started functioning, perhaps for the past six months or so. At any rate, work within the format of the Open Government and involvement in the relevant global partnership is the main innovation for my Government colleagues and myself. The discussion of the most important draft laws currently involves representatives of the most diverse public groups, experts and representatives of various professions.

More efficient governance should be ensured by applying new managerial techniques, as is happening today all over the world. Many of them, including project management and performance management, as well as the so-called lean technologies, have been successfully conceived by the business community and are being successfully applied there. Perhaps these technologies can be modified on the mutatis mutandis principle and also used for public administration purposes.

We have to move forwards and develop other interactive forms of cooperation between the Government and society, as well as mechanisms that ensure permanent feedback, rather than just feedback during elections, and which make use of modern communications systems. The same crowdsourcing makes it possible to use the knowledge and expert potential of everyone concerned. Information technology enables the progress of major projects to be monitored and allows us to promptly respond to problems. This reduces the distance between the Government and the people and helps in decision-making. These technologies provide a new status for decisions that have been adopted. It makes their legitimacy, popular legitimacy, if you like, considerably greater. This is very important in the 21st century. These decisions can no longer be perceived as directives that have been imposed from above or as the result of lobbying. This allows society to control the Government and to keep it informed about the extent of society’s satisfaction with the decisions being adopted. Equally important is that it makes it possible to identify talented people and promote them.

Colleagues, I will submit mid-term guidelines of the Government’s performance at its meeting one week from now. So this is like a training session here in Davos. These tasks have been set by the President, the Government and by our perception of global challenges and specific options for our subsequent movement forwards. This is the Government team's main document, which, in my opinion, has already evolved and is functioning, despite the difficulties of establishing any team. It is our intention to make Russia a really open and attractive country in the next few years. Perhaps we will not be able to accomplish everything, but this will not diminish our resolve. We are ready to provide all the required opportunities for high-tech investment in a variety of industrial and social fields. We are also ready to provide the required opportunities for young people who want to receive a high-quality education, discover their talents and for professionals from various countries. This is the only way to achieve sustained social progress and to ensure a decent quality of life for the people of Russia. Therefore, despite the pessimistic scenarios, I share the optimism of Sir Winston Churchill, who believed that the difficulties to be overcome are no greater than those that have already been overcome. Thank you.

John Lipski, Acting Managing Director of IMF (via interpreter): Thank you, Mr Prime Minister, for sharing your opinions with us.

Before we end this meeting, the Prime Minister has kindly agreed to answer a number of questions. We have asked the advice of public media outlets and of course it was decided not to ask any questions with a hidden meaning but to ask open questions instead. We have singled out two questions. You probably believe that you have answered these questions but you can answer them or not, and make comments.

The first question is: Why are the people of Russia not investing any more in their economy, and what should be done in order to improve these prospects? And the second question is: What is being done in Russia in order to increase the feeling of civic responsibility among its citizens?

Dmitry Medvedev: All right. As for investment… I believe that, even though these issues have been raised by the social media, they don’t reflect the current situation very accurately. Actually, Russian businesspeople invest in their own country to a much greater extent than in any other countries. You only have to look at the current statistics. We estimate that in the last year Russian investors accounted for the majority of capital investment, that's about $400 billion. Despite all the reservations, difficulties, current managerial shortcomings and real problems in the Russian economy, our investors are still channeling their money into the Russian economy. I believe that this does not require any special proof today. Rather this reflects some common perceptions and maybe perceptions dating back to the 1990s when many Russian entrepreneurs used to buy assets, including personal assets, in other countries. The current situation is completely different. Today, most loans taken out by our entrepreneurs in Russia and with foreign banks are invested into Russia. I believe this information is not accurate.

As for the second question, on civil activity, I believe that we have managed to adopt decisions that ensure greater civil activity over the past few years. What comes first – civil activity or political decisions, or vice versa? This is a philosophical question. Anyway, I would like to state openly that current Russian civil society differs considerably from what existed, say, five to seven years ago. Is this a good or a bad thing? I believe that it's good because our civil society has become more mature. It voices its own demands with regard to the Government, demands that are sometimes quite uncompromising and tough. Most importantly, all this should be in accordance with the law, it should not contravene the law and order. In 2012 and even in 2011, we passed decisions which enabled civil society to develop. When I was President, I made a decision which was subsequently supported by the Russian parliament. This decision was aimed at changing the system for establishing national political parties. We now have very many of them. This does not mean that they exert any influence on the national situation, but the choice is much greater than before. And I am confident that those parties which don’t currently assert themselves as major driving forces in political life will become such driving forces a few years down the line. Or, at any rate, they will establish alliances and blocs which will directly influence the development of the political situation and the formation of civil society.

Therefore I would like to say that our civil society has become more mature and that the state should behave more wisely with regard to civil society. This is the only way to accomplish those ambitious objectives that I have just mentioned.

John Lipski: Thank you. Thank you very much for these answers. Will there be any concluding remarks before we end this meeting?

Dmitry Medvedev: I believe that I have already said a lot. I probably find it hard to add anything to this presentation which has just been made. I would like to thank those present for listening attentively to my report. Thank you for speaking your mind on the main aspects for improving life in our country and for creating a modern efficient economy. I would like to thank all the experts for what has been done during the compilation of these three scenarios. I would like to say once again that these three scenarios are important for us. We value them because they are negative, and this is a powerful warning.

I would like to say once again that I am absolutely confident that none of these scenarios will come true. The fourth scenario will be implemented. The extent of its success depends on all of us. It depends on the Russian business community, Russian civil society and, in the long run, on the entire Russian people and on our friends who have gathered in this auditorium today, and who are helping us to create an efficient state and build a modern economy. Thank you.