Prime Minister Vladimir Putin’s speech at the opening ceremony of the World Economic Forum
28 january 2009
Esteemed Mr Schwab, Mr President, ladies and gentlemen,
I am extremely grateful to Mr Schwab for his kind words about Russia. I often attended Davos forums when I worked in St Petersburg but, regretfully, I have had no time to do so in the last few years. I am glad to see Russia given the opportunity to speak up on global economic problems during this trying time. I would like to thank the forum's organisers for this opportunity to share my thoughts on global and Russian economic developments and to share our plans and proposals.
In his opening address, Mr Schwab said we would not harp on the past and pay excessive attention to the "why's" of the crisis, so I will not accentuate it all. However, we cannot find remedies unless we examine the roots of the current economic disease.
The world is now facing the first truly global economic crisis, which continues to develop at an unprecedented pace.
The current situation is often compared to the Great Depression of the late 1920s and the early 1930s, and it is true that there are some similarities.
However, there are also some basic differences. The crisis has affected everyone in this era of globalisation. Regardless of their political or economic system, all nations have found themselves in the same boat.
There is a certain concept, called the perfect storm, which denotes a situation when Nature's forces converge in one point of the ocean and increase their destructive potential many times over. It appears that the present-day crisis resembles such a perfect storm.
Responsible and knowledgeable economists and politicians must prepare for it. Nevertheless, it always flares up unexpectedly-just like the Russian winter. We always make painstaking preparations for the cold season, yet it always arrives in an unexpected flash. The current situation is no exception, either. Although the crisis was simply hanging in the air, the majority did not want to notice the rising wave.
In the last few months, virtually every speech on this subject started with criticism of the United States. This time, however, I will do nothing of the kind.
I just want to remind you that, just a year ago, American delegates speaking from this rostrum emphasised the U.S. economy's fundamental stability and its cloudless prospects. Today, investment banks, the pride of Wall Street, have virtually ceased to exist. In just 12 months, they have posted losses exceeding the profits they made in the last 25 years-an unprecedented scope! This example alone reflects the real situation better than any criticism.
The time for enlightenment has come. We must calmly, and without gloating, without going into excessive details, assess the root causes of this situation and try to peek into the future.
In our opinion, the crisis was brought about by a combination of several factors.
The existing financial system has failed. Insufficient regulation has contributed to the crisis, with failures to duly heed tremendous risks.
Add to this the colossal disproportions that have accumulated over the last few years - primarily, disproportions between the scale of financial operations and the fundamental value of assets, as well as those between the increased burden on international loans and the sources of their collateral.
The entire economic growth system, where one regional centre prints money without respite and limits and consumes material wealth, while another regional centre manufactures inexpensive goods and saves money printed by other governments, has suffered a major setback.
I would like to add that this system has left entire regions, even partly including prosperous Europe, on the outskirts of global economic processes and has prevented them from adopting key economic and financial decisions.
Moreover, generated prosperity was distributed extremely unevenly among various population strata. This applies to differences between social strata in certain countries, including highly developed ones, and equally applies to gaps between countries and regions.
A considerable share of the world's population still cannot afford comfortable housing, education, and quality health care. Even a global recovery posted in the last few years has failed to radically change this situation.
And, finally, this crisis was brought about by excessive expectations. Corporate appetites with regard to constantly growing demand swelled unjustifiably. The race between stock market indices and capitalisation began to overshadow rising labour productivity and real-life corporate effectiveness.
Unfortunately, excessive expectations were typical not only of the business community. They set the pace for rapidly growing personal consumption standards, primarily in the industrial world. We must openly admit that such growth was not backed by real potential. This amounted to unearned wealth, a loan that will have to be repaid by future generations.
This pyramid of expectations was bound to collapse sooner or later. In fact, this is happening right before our eyes.
One is sorely tempted to make simple and popular decisions in times of crisis. However, we may face far greater complications if we merely treat the symptoms of the disease.
Naturally, all national governments and business leaders must take resolute actions. Nevertheless, it is important to avoid making decisions that, even in such force majeure circumstances, we will regret in the future.
This is why I would first like to mention specific measures that should be avoided and that will not be implemented by Russia.
We must not revert to isolationism and unrestrained economic egotism. The leaders of the world's largest economies agreed during the November 2008 G20 summit not to create barriers hindering global trade and capital flows. Russia shares these principles.
Although additional protectionism will prove inevitable during the crisis-and we see it today, much to our regret-all of us must display a sense of proportion.
Excessive intervention in economic activity and blind faith in the state's omnipotence is another possible mistake.
True, the state's increased role in times of crisis is a natural reaction to market regulation setbacks. Instead of streamlining market mechanisms, some are tempted to expand state economic intervention to the greatest possible extent.
The concentration of surplus assets in the hands of the state is a negative aspect of anti-crisis measures in virtually every nation.
In the 20th century, the Soviet Union made the state's role absolute. In the long run, this made the Soviet economy totally uncompetitive. This lesson cost us dearly, and I am sure nobody wants to see it repeated.
Nor should we turn a blind eye to the fact that the spirit of free enterprise, including the principle of personal responsibility of businesspeople, investors and shareholders for their decisions, has been eroded in the last few months. There is no reason to believe that we can achieve better results by shifting responsibility onto the state.
There are many business leaders at this gathering. The constant temptation of nestling close to the sources of state well-being is perfectly understandable, but at the same time, these sources are not inexhaustible, nor are they cure-alls.
And one more point: anti-crisis measures should not escalate into financial populism and a refusal to implement responsible macroeconomic policies. The unjustified swelling of the budgetary deficit and the accumulation of public debts are just as destructive as adventurous stock-jobbing.
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Ladies and gentlemen,
Unfortunately, we have so far failed to comprehend the true scale of the ongoing crisis. Nevertheless, one thing is obvious: the extent of the recession and its scale will largely depend on specific high-precision measures, due to be charted by governments and business communities and on our coordinated and professional efforts.
In our opinion, we must first atone for the past and lay our cards on the table, so to speak.
This means we must assess the real situation and write off all hopeless debts and "bad" assets.
True, this will be an extremely painful and unpleasant process. Many will be unwilling to accept such measures, fearing for their capitalisation, bonuses, or reputation. However, we will "conserve" and prolong the crisis if we do not clean up our balance sheets. I believe financial authorities must work out the required mechanism for writing off debts, one that corresponds to today's economic needs.
Second. Apart from cleaning up our balance sheets, it is high time we got rid of virtual money, exaggerated reports, and dubious ratings. We must not harbour any illusions while assessing the state of the global economy and the real corporate standing, even if such assessments are made by major auditors and analysts.
In effect, our proposal implies that the audit, accounting, and ratings system reform must be based on a return to the fundamental asset value concept. In other words, assessments of each individual business must be based on its ability to generate added value, rather than on subjective concepts. In our opinion, the economy of the future must become an economy of real values. How to achieve this is not so clear-cut. I have no explicit answer. Let us think about it together. After all, this is what such forums as this are convened for, thanks to Mr Schwab.
Third. Excessive dependence on a single reserve currency is dangerous for the global economy. I think it is clear to everyone now. Consequently, it would be sensible to encourage the objective process of creating several strong reserve currencies in the future. It is high time we launched a detailed discussion of methods to facilitate a smooth and irreversible switchover to the new model.
Fourth. Most nations of the world convert their international reserves into foreign currencies and must therefore be convinced that they are reliable. Those issuing reserve and accounting currencies are objectively interested in their use by other states.
This highlights mutual interests and interdependence.
Consequently, it is important that reserve currency issuers must implement more open monetary policies. Moreover, these nations must pledge to abide by internationally recognised rules of macroeconomic and financial discipline. In our opinion, this demand is not excessive.
At the same time, the global financial system is not the only element in need of reform. We are facing a much broader range of problems.
This means that a system based on cooperation between several major centres must replace the obsolete uni-polar world concept.
We must strengthen the system of global regulators based on international law and a system of multilateral agreements in order to prevent chaos and unpredictability in such a multi-polar world. Consequently, it is very important that we reassess the role of leading international organisations and institutions.
I am convinced that we can build a more equitable and efficient global economic system. But it is impossible-and presently unnecessary, for that matter-to create a detailed plan at this event today.
It is clear, however, that every nation must have guaranteed access to vital resources, new technology and development sources. What we need is guarantees that could minimise the risk of recurring crises on par with the current one.
Naturally, we must continue to discuss all these issues, including at the G20 meeting in London that will take place in April, as has been mentioned here.
Our decisions should match the present-day situation and heed the requirements of a new post-crisis world.
The global economy could face, for instance, trite energy-resource shortages and the threat of thwarted future growth while overcoming the crisis.
Three years ago, at a summit of the Group of Eight, we raised the issue of global energy security. We called for the shared responsibility of suppliers, consumers, and transit countries. I think it is time to launch truly effective mechanisms that ensure such responsibility.
The only way to ensure truly global energy security is to form interdependence, including a swap of assets, without any discrimination or dual standards. It is such interdependence that generates real mutual responsibility.
Unfortunately, the existing Energy Charter has failed to become a working instrument able to regulate emerging problems. Even countries that have signed and ratified it turn a blind eye to it just when it should be implemented.
I propose we start laying down a new international legal framework for energy security. Implementation of our initiative could play a political role comparable to the treaty establishing the European Coal and Steel Community. I have no doubts on this matter. That is to say, consumers and producers would finally be bound by a real single energy partnership based on clear-cut legal foundations.
Every one of us realises that sharp and unpredictable fluctuations of energy prices are a colossal destabilising factor in the global economy. Today's landslide fall of prices will lead to a growth in the consumption of resources.
On the one hand, investments in energy saving and alternative sources of energy will be curtailed. On the other, less money will be invested in oil production, resulting in its inevitable downturn-which, in the final analysis, will escalate into another fit of uncontrolled price growth during an economic boom and pave the way for a new crisis.
It is necessary to return to a balanced price based on equilibrium between supply and demand, to strip pricing of a speculative element generated by many derivative financial instruments.
Guaranteeing the transit of energy resources remains a challenge. There are several ways of tackling it, and all must be used.
The first is to adopt generally recognised market principles of fixing tariffs on transit services. They can be recorded in international legal documents. This practice should affect oil and gas, nuclear fuel, and power generation to some extent.
The second is to develop and diversify the routes of energy transportation. We have been working long and hard along these lines.
In the past few years alone, we have implemented such gas pipeline projects as Yamal-Europe and Blue Stream (to Turkey). Experience has proved their urgency and relevance.
I am convinced that projects such as South Stream (a gas pipeline that will run to Bulgaria under the Black Sea) and Nord Stream (to reach Germany directly across the Baltic Sea) are equally needed for Europe's energy security. Their total estimated capacity is something like 85 billion cubic meters of gas a year.
Some of our partners and Europe have recently proposed expanding this capacity. We are considering their proposals now; in fact, I think it is the proper time to consider expansion.
Gazprom, together with its partners - Shell, Mitsui, and Mitsubishi - will soon launch capacities for liquefying and transporting natural gas produced in the Sakhalin area, and that is also Russia's contribution to global energy security.
Incidentally, LNG technologies and market have bright growth prospects and are extremely important for energy security.
We are developing the infrastructure of our oil pipelines. The first section of the Baltic Pipeline System (BPS) has already been completed. BPS-1 supplies up to 75 million tonnes of oil a year.
Let me add that the seaport with the pipeline approaches have been built practically in no time - in a few years - from scratch in the wilderness. Oil traffic through the system also reached 75 million tons in a few years' time.
Work is currently under way to design and build BPS-2, the system's second leg along the Gulf of Finland coast, with a projected capacity of 50 million tonnes of oil a year. Overall, 140 million tons of crude and refined products will be shipped through the system.
We intend to build transport infrastructure in all directions. The first stage of the pipeline system Eastern Siberia - Pacific Ocean is in the final stage. Its terminal point will be a new oil port in Kozmina Bay and an oil refinery in the Vladivostok area. In the future a gas pipeline will be laid parallel to the oil pipeline, toward the Pacific and China.
We are beginning another project with Turkmenistan and Kazakhstan, the Caspian Pipeline.
I would like to emphasize that we should certainly make the environment one of our priorities while implementing such projects.
We always conduct environmental studies at early stages of each project to take care of environmental issues. We also make substantial investments in restoring the environment.
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Addressing you here today, I cannot but mention the effects of the global crisis on the Russian economy. We have also been seriously affected.
However, unlike many other countries, we have accumulated large reserves. They expand our possibilities for confidently passing through the period of global instability.
The crisis has made the problems we had more evident. They concern the excessive emphasis on raw materials in exports and the economy in general and a weak financial market. The need to develop a number of fundamental market institutions, above all of a competitive environment, has become more acute.
We were aware of these problems and sought to address them gradually. The crisis is only making us move more actively toward the declared priorities without changing the strategy itself, which is to ensure a qualitative renewal of Russia in the next 10 to 12 years.
Our anti-crisis policy is aimed at supporting domestic demand, providing social guarantees for the population, and creating new jobs. Like many countries, we have reduced production taxes, leaving money in the economy. We have optimised state spending.
But, I repeat, along with measures of prompt response, we are also working to create a platform for post-crisis development.
We are convinced that those who create attractive conditions for global investment already now will become leaders of the global economic restoration.
Our priorities include: the creation of a business-friendly environment and development of competition; the establishment of a stable lending system, resting on sufficient internal resources; implementation of transportation and other infrastructure projects. I have mentioned some of them here.
Russia is already one of the major exporters of a number of food commodities, and our contribution to ensuring global food security will only increase.
We also plan to actively develop the innovation sectors of the economy, and above all those in which Russia has a competitive edge - space, in the broad sense, nuclear energy, and aviation. In these areas, we are already actively establishing cooperative ties with other countries. A promising area for joint efforts could be the sphere of energy saving. We see higher energy efficiency as one of the key factors for energy security and future development.
We will continue reforms in our energy industry, including the adoption of a new system of internal pricing based on economically justified tariffs, which is among our top priorities. This is important, particularly in the context of encouraging energy conservation. We will continue our policy of openness to foreign investments.
I believe that the 21st century economy is an economy of people, not of factories. The intellectual factor has become increasingly important in the economy, which is why we are planning to focus on providing additional opportunities for people to realise their potential.
We are already a highly developed and educated nation, but we need Russian citizens to obtain the highest quality and most up-to-date education in those professional skills that will be widely in demand in TODAY'S and TOMORROW'S world. Therefore, we will be proactive in promoting educational programmes. We will expand international and other student exchange programmes. We will also create such conditions that the best researchers and professors - regardless of their citizenship - will want to come and work in Russia.
History has given Russia a unique chance. Events urgently require that we reorganise our economy and update our social sphere. We do not intend to pass up this chance. Our country must emerge from the crisis renewed, stronger, and more competitive.
Separately, I would like to comment on problems that go beyond the purely economic agenda, but nevertheless are very topical in present-day conditions.
Unfortunately, we are increasingly hearing the argument that an increase in military spending could solve today's social and economic problems. The logic is simple enough. Additional military allocations create new jobs at the initial stage. This is evident.
At a glance, this sounds like a good way of fighting the crisis and unemployment. This policy might even be quite effective in the short term. But in the longer run, militarisation won't solve the problem, but rather will quell it only temporarily. What it will do is squeeze huge financial and other resources from the economy instead of finding better and wiser uses for them.
My conviction is that reasonable restraint in military spending, especially coupled with efforts to enhance global security, will certainly produce significant economic dividends.
I hope that this viewpoint will eventually become the predominate global one. For our part, we are prepared for intensive work on discussing further disarmament.
I would like to draw your attention to the fact that the economic crisis could aggravate the current negative trends in global politics.
The world has lately come to face an unheard-of surge in violence and other aggressive actions, such as the present Georgian leadership's adventurous outing in the Caucasus, recent terrorist attacks in India, and escalation of violence in the Gaza Strip. Although not apparently linked directly, these developments still have common features.
First of all, I am referring to the existing international organisations' inability to provide any constructive solutions to regional conflicts, or any effective proposals for interethnic and interstate settlement. Multilateral political mechanisms have proved as ineffective as the global financial and economic regulators.
Frankly speaking, we all know that provoking military and political instability, regional, and other conflicts is a helpful means of distracting the public from growing domestic social and economic problems in certain countries. Such attempts cannot be ruled out, unfortunately.
To prevent this scenario, we need to improve the system of international relations, making it more effective, safe and stable.
There are a lot of important issues on the global agenda in which most countries have shared interests. These include the anti-crisis policies we are discussing, joint efforts to reform international financial institutions, to improve regulatory mechanisms, ensure energy security-which demands teamwork by all of us- and mitigate the global food crisis, which is an extremely pressing issue today.
Russia is willing to contribute to dealing with international priority issues. We expect all our partners in Europe, Asia, and America, including the new U.S. administration, to show interest in further constructive cooperation in dealing with all these issues and more. We wish the new team success.
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Ladies and gentlemen,
This is what I would like to say in conclusion.
The international community is facing a host of extremely complicated problems, which might seem overpowering at times. However, the journey of a thousand miles begins with a single step, as the proverb goes. It is commonly used in Russia and in many other countries, as far as I know.
We must seek a foothold in our moral values that have ensured the progress of our civilisation. Integrity and hard work, responsibility, and self-confidence will eventually lead us to success.
We should not despair. This crisis can and must be fought by pooling our intellectual, moral, and material resources.
This kind of consolidated effort is impossible without mutual trust, not only between business operators, but primarily between nations.
Therefore, finding this mutual trust is a key goal on which we should concentrate now.
Trust and solidarity are key to overcoming the current problems and avoiding more shocks, to reaching prosperity and welfare in this new century.