The meeting was attended by Prime Minister Dmitry Medvedev, Chief of Staff of the Presidential Executive Office Sergei Ivanov, First Deputy Prime Minister Igor Shuvalov, Deputy Prime Minister Arkady Dvorkovich, Presidential Aide Elvira Nabiullina, Economic Development Minister Andrei Belousov, Justice Minister Alexander Konovalov, Finance Minister Anton Siluanov, Central Bank Chairman Sergei Ignatyev, Presidential Adviser Sergei Glazyev, chairmen of relevant State Duma committees and representatives of the expert community.
* * *
Excerpts from transcript of the meeting on economic issues
President of Russia Vladimir Putin: Good afternoon, colleagues,
As agreed, we are here today to discuss the Russian economy’s short-term development outlook. I expect to hear concrete proposals on measures that will help us to ensure stable economic growth, give ourselves maximum protection against fluctuations in the global economy, reduce the risks of downturns in production in key sectors, and stimulate business activity.
I remind you that at our meeting at the start of this year we noted the worrying trends in the global economy that we observed in the second half of 2012. As we can see, these trends continue now. This was something I discussed last week when I met with the Prime Minister, and it’s something we talked about in some detail yesterday too. Today, I would like to hear from the experts and the Government members.
I remind you that the Eurozone economy shrank by 0.6 percentage points in 2012. Some of the Eurozone countries are in a difficult situation with their debt commitments. True, there have been some positive signals here of late, but the situation remains complicated nevertheless. We see the solutions being used to resolve the debt problems in particular countries, Cyprus, for example, where the chosen measures are essentially undermining confidence in the financial system. The experts cannot say for certain how these kinds of extraordinary measures will affect further developments in Europe and what long-term consequences they might produce.
Unfortunately, negative trends are continuing in the Asia-Pacific region too, which had been showing robust growth despite the problems in the global economy. The Japanese government is taking vigorous measures to revive its national economy, above all by unprecedented increases in money supply. There has been a bit of a slowdown in growth rates in China.
The situation is complicated in the United States. The analysts are quite optimistic in their forecasts. The USA has made some big spending cuts, but we cannot say with certainty yet just what effect this will have on the US economy. The IMF revised its latest US GDP growth forecast downward by 0.2 percent, and also revised its global growth forecast downwards from 3.5 to 3.3 percent.
We must be prepared for the effects that a drop in production and crisis signs in the global financial system could have on our economy. Some of these effects are already making themselves felt, as we can see. Our economy grew by 3.4 percent last year, but this was largely the result of a good start in the first half of the year. Economic growth started slowing down in the second half, above all due to a drop in export demand.
Furthermore, lack of business confidence has led to more capital flowing abroad and a drop in investment activity. The slowdown is reflected in most of the macroeconomic indicators. The first quarter results show that industrial output stopped growing and exports were down by 4.5 percent. Unemployment rose slightly at the start of the year. The increase is slight, but nonetheless there, though, fortunately, unemployment remains at a record low.
GDP growth in the first quarter of 2012 came to 4.8 percent, while in the fourth quarter it was 2.1 percent. For the first quarter of 2013 it was only 1.1 percent. The Economic Development Ministry has revised its economic growth forecast for 2013 downwards to 2.4 percent, but this is with energy prices still high. Let me bring to your attention that a growth rate of 2.4 percent is lower than the global economy’s growth rate. It’s been a long time since we were last in this situation.
I stress again that these are all worrying symptoms. At the same time, I do not want to overdramatize things. Russia’s economy is still quite solid overall. Global markets are increasingly volatile, but oil and other commodity prices remain quite high. Russia has substantial gold and currency reserves, and the budget reserve funds provide us with a safety cushion. What is also very important is that people’s real incomes are not falling, thank goodness, but continue to grow, slowly, yes, but they are growing nonetheless.
There are positive economic indicators too. Industrial output was not growing at all at the start of the year, but year-on-year growth for March showed an increase by 2.6 percent. Many analysts think that economic growth should pick up again in the second quarter. It is important today to decide what we can do to stimulate this process and boost our economic actors’ confidence.
Some decisions, above all medium-term measures, have already been taken, including measures to improve the investment climate and develop the financial market. These measures must all be implemented within the deadlines.
I repeat again that we need to do everything we can to ensure our economy’s stable development. We need a package of measures to stimulate economic growth. In this respect I note the following important points.
First, many people propose revving up economic growth through budget spending alone and changing the budget rules to make this possible. It is clear however, that budget measures alone are not enough to resolve the tasks before us, and if we change the budget rules we would have some risks to face. All of you here are well aware of the risks involved. I would like to hear views on this matter.
Second is the question of infrastructure development, above all in the transport and energy sectors. We have already discussed before how the lack of infrastructure creates big obstacles that hinder faster economic growth.
There is often not enough long money for infrastructure development projects. I gave the instruction at one point to examine the possibility of long-term investments using funds from the National Welfare Fund. The Government agreed with this idea and was to take the according measures and propose the needed mechanisms. I would like to hear from you today on what has been done here.
Third, the current slowdown in economic growth raises the risk that regional budget revenue will be less than was planned. We discussed this just recently and examined the problem in detail during a meeting in one of the regions. We were looking at the effects this would have on the work to resettle people from dilapidated housing, but we discussed the issue of budget revenue in general too. This situation raises the question of the regions’ ability to meet their spending commitments, above all in the social sector. This is something we should look at too, today. I expect to hear your proposals on this issue, your ideas on how we can meet the spending commitments – and I make it clear that these commitments remain in force and no one is going to annul them – without undermining the regions’ economic and financial situation.
Let’s start work.
<…>
I would ask my colleagues to speak first, to identify their priorities for the future, and a little later each person present here will have an opportunity to state their position on the issues proposed for discussion.
Mr Belousov, please.
Economic Development Minister Andrei Belousov: Thank you.
Mr President, Mr Prime Minister, colleagues,
To put it briefly, the first point – the current economic slowdown – is unfortunately largely caused by internal factors rather than the global economy. There is a detailed analysis of the global economy’s impact, and it shows that the situation is far from clear-cut with the capital outflow. In the first quarter of 2013 we have had the highest inflow of direct foreign investments in the Russian economy in recent years. It was also high enough in the third and fourth quarter of 2012, reaching $15–16 billion. Although the outflow from banks is high, amounting to $30 billion, there is a special reason for that and we need to look at it separately.
The second point, which has nothing to do with the current situation but which is often stated in explanations, is that we have reached a certain limit in economic growth, that the period of recovery growth is finished and we have reached the limit of production capacity. This is often explained by the fact that we have low unemployment rate and that businesses do not cut down personnel, which means they are operating on the verge of production capacity.
We have conducted a study which showed that, first, capacity utilisation level today is about 65%, and that is considerably lower than in other countries in Europe, the United States and so on. Our second finding was that large and medium-sized companies are cutting down personnel to quite a significant extent, and, unfortunately, there is a rapidly growing shadow economy. These were the two main trends we discovered. Therefore, we have a decline in unemployment against the backdrop of rapidly growing shadow economy.
There is a macroeconomic reason for the slowdown which has to do with the fact that we have three negative macroeconomic factors at the same time.
The first factor is the strengthening of the ruble, which amounted to 20% in real terms compared with 2007 and was further enhanced by the growth of rates, prices, cost drivers of natural monopolies and the growth of wages.
The second factor is an increase in interest rates, despite the fact that Mr Kudrin [former Finance Minister] often said that the decline in inflation will lead to lower interest rates. Inflation is decreasing (it now stands at the annual rate of about 7%), and by the end of the year we expect it to be less than 6%, while the interest rates are going up: the interest rates for loans with a term of more than one year are over 12%. This trend is the direct opposite of what was anticipated.
Finally, the third factor is fiscal consolidation. The inhibiting effect of fiscal consolidation has been recognised by virtually all international organisations, such as OECD and IMF. It is a major reason behind the recession in Europe.
That is the combination of factors we have discovered.
Vladimir Putin: Thank you, I understand.
I must admit, there are some points in my notes that I didn't mention earlier, but Mr Belousov covered all of them. My question was that we need to examine, frankly and openly, the factors behind this slowdown and decide where it is the effect of the slowing global economy and where it is our own domestic problem, as well as to determine the extent of this process and what we must do to turn the situation around.
Mr Belousov addressed all these points and didn’t forget to challenge Mr Kudrin. And rightly so – Mr Kudrin should not feel like only he can challenge us. Let’s listen to Mr Ignatyev’s response. I am sure he will tell you that the strong ruble is not to blame and the interest rates are just fine.
Go ahead, Mr Ignatyev.
Central Bank chairman Sergei Ignatyev: Mr President, inflation remains high. Let me remind you that we expect between 5% and 6% in 2013. In fact, over the past 12 months (March-on-March), the inflation rate was 7%.
Now, about the situation in the banking system. I believe that it remains stable. Continuing growth of the loan portfolio, in particular, bank loans to individuals and non-financial organisations, that is the real sector, increased by 20% in the past 12 months. The GDP for the last 12 months, from the first quarter of 2012 to the first quarter of 2013, increased by 1.1% according to the Economic Development Ministry. That is, if we compare the lending dynamics and GDP dynamics, lending grew at a very good rate. Even if we subtract the inflation rate of 7%, the loan portfolio increased by around 12% in real terms.
Vladimir Putin: Is that compared to the same period last year?
Sergei Ignatyev: Yes, for the past 12 months.
Vladimir Putin: That’s a decent result. What has been the increase in loan portfolios in the main areas of economic growth, for example in Europe, the United States and South East Asia?
Sergei Ignatyev: Most European countries have seen a drop in the loan portfolio.
Vladimir Putin: And we are 12% up?
Sergei Ignatyev: That’s right, approximately 12% in real terms.
Vladimir Putin: And in the United States?
Alexei Kudrin: From 3% to 5% over the past three years.
Vladimir Putin: And in Asia?
Sergei Ignatyev: Asia has probably experienced growth but not more than in Russia.
However, bear in mind that, as I said, the nominal portfolio as a whole, without taking inflation into account, is 20%, and lending to enterprises, that is, non-financial organisations, has increased by 14% in nominal terms. Consumer loans have increased by 37% in the same period, although this growth is evening out little by little. There was a very large gap in the second half of 2012, but we made some adjustments and now this growth is evening out. That is the situation with lending and I would not say it is bad; it is exactly as we want it with growth around 15–20% in nominal terms. This is a healthy growth for the current situation in Russia.
The situation with liquidity is also normal. Should the need arise to increase liquidity, if there is a shortage for some reasons beyond our control such as capital flight or something like that, then the Central Bank is ready to provide up to 1.5 or even 2 trillion rubles through the traditional refinancing tools. There's no problem.
Now as for the exchange rate, the currency exchange rate is now much more flexible than it was a few years ago. Now we use the mechanism of a floating exchange rate band.
Vladimir Putin: Some of our colleagues believe that it is too flexible. What is your opinion?
Sergei Ignatyev: I cannot agree with that. Formally, what we have is the regime of managed floating; in fact it's almost free floating. We carry out foreign exchange interventions, but very minor ones, and the main purpose of foreign exchange interventions, or I should say the only purpose of foreign exchange interventions is to restrict sharp fluctuations of the exchange rate. We have sold currency, but in very small amounts; one, two, three months ago we bought small amounts of currency in order to limit the volatility of the exchange rate.
Now as to what is probably the most important indicator, the interest rates. We made the decision in the beginning of April to reduce some, though not all, interest rates at which the Central Bank lends to commercial banks. I think that the Bank of Russia will continue the downward trend in interest rates. Inflation is a major factor in making these decisions. Currently it is still higher than the target we set – I do not mean the Central Bank alone but the Government, the Central Bank and the Parliament, when the law on the budget for the current year was passed. So we will do our best to reduce inflation to below 6%.
As for the inflation forecasts for the coming months, I have a very strong feeling that inflation will go down. The main factor is falling grain prices, which rose very sharply last year after a bad harvest, but now they are falling and will continue to fall. Other reasons include moderate dynamics of money supply – the growth rate of money supply is now about 14% a year, which is a normal rate – and a relatively stable ruble exchange rate. This factor will determine the future changes in inflation, which will most likely decline. With lower inflation, the Central Bank will cut its interest rates.
Naturally, when we make a decision about interest rates, apart from inflation, which is of key importance, we take into account the entire set of macroeconomic indicators. First of all, this includes the growth of industrial production, investment and retail trade. We take into account the unemployment rate, which is at a record low now. If you eliminate seasonal employment, the unemployment rate stands at 5.3% according to our estimates – we don’t have the final figures from the Federal Statistics Service yet. That is a very low unemployment rate – I don’t think it has ever been lower. The balance of payments, the currency market, the exchange rate, and so on – all of these factors are taken into account. We make the decision to reduce interest rates based on these factors.
Vladimir Putin: Mr Ignatyev, we have said many times, both at expanded meetings and in one-to-one conversations, that we must try to gradually make a transition to a floating exchange rate, which is generally good for the economy and for all economic operators. Some experts and our colleagues now believe that the lack of the necessary amount of currency intervention leads to a decrease in the money supply. You just said that there is a moderate growth of the money supply, and that is enough.
Sergei Ignatyev: That’s right.
Vladimir Putin: So there are no negative consequences that some of our colleagues have mentioned, in your opinion?
Sergei Ignatyev: I don’t believe there are. The source of the money supply growth in the past, before the crisis, was almost exclusively the purchase of foreign currency by the Central Bank.
Vladimir Putin: Yes, this is what I'm saying.
Sergey Ignatiev: Whereas now it is not the only source. We buy a moderate amount of currency. On average, in the past two years we have purchased some currency. We have both bought and sold currency, but on average we were buying. In addition, we lend to commercial banks directly, which also leads to the issue of money. That is about all. Maybe the situation with the budget as well.
Vladimir Putin: What about strengthening of the ruble, which Mr Belousov mentioned?
Sergei Ignatyev: We have seen the strengthening of the ruble in real terms for the past ten years. It started with the rise in oil prices. I am sorry, but it is an almost inevitable objective process. It has been taking place over the last decade, and there has been an increase in the real effective exchange rate by about 4–5% per year. Last year, the real effective exchange rate rose by about 5%, and in the first three months of this year by about 2%.
Vladimir Putin: You mean you do not see any significant changes?
Sergei Ignatyev: It is approximately the same trend as we had before the crisis, when the economy grew by 7–8% a year.
Vladimir Putin: I see.
Sergei Ignatyev: We have the same trend now.
Vladimir Putin: Thank you.
<…>
Vladimir Putin: (on the financial sector) We can see the shocks in the Eurozone – there is no other word for it – and I am not even talking about Cyprus, but about the Eurozone giants, maybe with the exception of Germany – there are problems everywhere. There is not a single problem-free country. Yet they assess their risks differently, and have a smaller margin.
We do not attack our financial institutions as much as they are attacking them in the West. We believe that representatives of this economic sector will begin to assess realistically the situation in our own country and their own role, as well as the amount of aid that we have always provided for this sector in difficult times. Therefore, we must look at risk assessment and the margins. But we will do this at a different time in a calm mode.
Naturally, no matter what solutions we adopt, they will not be arbitrary and will be taken only in a dialogue with the business community and representatives of the relevant economic sector.
<…>