Economic Development and Trade Minister German Gref and Finance Minister Aleksei Kudrin on current economic indicators and the situation on financial markets
German Gref: The results of Russia’s economic development in April were available at the end of the week. In April GDP rose by 7.1 percent and GDP growth over the past four months amounted to 7.7 percent.
In April the growth of industrial production was slightly lower than what it was in March but nevertheless the indicator is not bad — 4.6 percent. The index of industrial production grew by 7.5 percent over the first trimester. This is more than twice what it was last year (in the first four months of 2006 growth was 3.5 percent).
We have observed good growth in agriculture: 2.7 percent in April and 2.2 percent over the past four months.
The rate of enterprises’ investment activities remains very high. In April investments in fixed capital increased by 19.4 percent and over the past four months they increased by 19.9 percent (in comparison, over the first four months of 2006 growth amounted to 6,9 percent). Of course, the growth rate last year was low but this year it is still three times higher than what it was. Of course these are very good results.
Vladimir Putin: And are currency inflows and investments continuing to grow?
German Gref: Capital inflows are growing. In April capital inflows amounted to 17 billion dollars and over the first trimester they reached the record figure of a surplus 30 billion USD.
Vladimir Putin: What was the figure for 2006?
German Gref: Last year, inflows amounted to a surplus of 41 billion USD.
Vladimir Putin: And over the first four months of 2007 they now amount to 30 billion?
German Gref: And Russia’s gold and currency reserves have risen by 82.5 billion dollars over the past four and half months and have now reached a record figure: 369 billion USD. And that is very good: it is a positive indicator of the growth of real wages. In April real wages in Russia grew by 19.3 percent. Last year this figure was 11 percent and over the first trimester there was an 18.5 percentage increase in real wages.
Vladimir Putin: And what about labour productivity?
German Gref: We have not yet calculated labour productivity — so far we only have preliminary data. I think that we can calculate it after receiving all data sometime in early to mid-June.
Vladimir Putin: The rouble continues to grow stronger. I recently spoke with the President of the Central Bank. They are not yet attempting to mitigate the negative impact on the processing industry — and I think that you approve of this — but nevertheless this is one of the most important effects.
German Gref: The rouble has grown by 2.3 percent since the beginning of 2007. However, the Central Bank has now prepared to taken action. Indeed, there are very large capital inflows and as of 1 July the Central Bank increased reserve requirements by a percentage point, from 3.5 to 4.5 percent. This is a preventive measure.
Vladimir Putin: The cabinet can also take preventive measures in other areas. What does the stock market look like today?
German Gref: We have now observed a slight increase in the stock market.
Over the past month it grew by 8.5 percent, however, since the beginning of the year it increased, as far as I recall, by only 1 percent. This was because we had quite serious problems in the first quarter.
Vladimir Putin: And now it is growing again?
German Gref: Yes it is.
Vladimir Putin: What are the restrictions on investing in Russian blue chip stocks? Is the Central Bank investing in some of our domestic companies?
German Gref: Vladimir Vladimirovich, that I do not know.
Finance Minister Aleksei Kudrin: There are no restrictions now.
Vladimir Putin: No? All restrictions have been removed?
ALEKSEI. KUDRIN: The present regime whereby the rouble is convertible does not foresee any restrictions on investing in the stock market.
Vladimir Putin: No restrictions on Russian, domestic investments?
Aleksei Kudrin: On investments by any investor, including foreign ones, in the Russian stock market or when purchasing shares of blue chip companies. No restrictions other than certain rules relating to procedure and registration.
Vladimir Putin: The government has invested in foreign securities. Why are we not investing more in Russian securities?
Aleksei Kudrin: The problem is that the cabinet is using oil and gas revenues from its reserves and were these funds to be invested in the domestic market then they would have two negative effects. The first is additional money on the market: simply more money would remain in the accounts of Russian banks. And now, on the contrary, we must limit such government intervention on the domestic market in order to maintain stable inflation and exchange rates.
The second issue is that such extensive governmental investments in a Russian market that is not yet fully developed will increase speculation on the market.
Vladimir Putin: I see. World prices for energy resources increased and we simultaneously observed a certain degree of stagnation on our market. The cabinet could think about what could be done in such unusual, unordinary conditions in order to compensate for an unnatural situation. I would ask you to reflect on this in the future.
German Gref: Another important indicator that I would like to mention concerns our exports and imports. Our exports increased by 7.3 percent during the first trimester and imports increased by 41.1 percent. Machinery and, in particular, heavy equipment dominates among our imports. The process of modernising our industry is evidently continuing and bulk purchases of equipment are taking place. This is certainly a very positive development despite the fact that imports are growing at rates of nearly one and half times higher than what we had predicted. But in such positive conditions — including in light of the increase in the population’s incomes — this increase might be to some extent inevitable.
On deliveries of Polish meat to the Russian market
Vladimir Putin (addressing Agricultural Minister Aleksei Gordeev): The Economic Development and Trade Minister mentioned the rising prices of some food stuffs, including meat, as one of the indicators that we should pay attention to. You know that one of the issues we discussed quite heatedly with our colleagues in Samara at the recent Russia-EU summit was the delivery of Polish meat to the Russian market. What is happening in this respect? Does the fact that you banned Polish meat from our market influence the prices?
Agricultural Minister Aleksei Gordeev: Minister Gref said that it was a normal seasonal phenomenon and especially affects fruit and vegetable products. If we talk about the prices of meat then, on the contrary, prices in Russia have fallen considerably. And this raises questions of the profitability of agricultural production and price stability. With regards to Polish meat, we made several proposals to the Polish party and the European Commission in order to lift temporary restrictions or emphasise that we have no complaints against Polish farmers or peasants supplying live animals for slaughter. Already on 2 May 2007 we were ready to make the corresponding inspection in accordance with our agreements and international practice generally. Unfortunately, we have yet to receive a reply from the Polish party or from the appropriate commissariat of the European Commission. For that reason we are waiting for the corresponding clearance and are ready to start evaluating these enterprises.
Vladimir Putin: When did you send this letter with suggestions?
Aleksei Gordeev: We sent it 30 April 2007.
Vladimir Putin: So you have been waiting for an answer for 20 days now?
Aleksei Gordeev: Yes, we are waiting for an answer. Unfortunately, we have not yet received one.
Vladimir Putin: And was there a ban on importing animals to be slaughtered? Did we implement this ban?
Aleksei Gordeev: Yes, as of September 2006 we did not import any live cattle for slaughter from Poland.
Vladimir Putin: During our discussions Mr Barroso told me that ”we do not consider that this represents a step forward“, since the alleged ban by Russia’s Agricultural Ministry never occurred.
Aleksei Gordeev: This ban did exist and can be proven. As of September there has been no animal intended for slaughter that has entered the territory of the Russian Federation from Poland.
It is strange that such high-ranking politicians are discussing specific, expert-level topics since we met the EU Commissioner and Veterinary Services more than once. And they did not raise these issues with us.
Vladimir Putin: They are raised here. We must answer these questions and correctly build our relations with our partners. Our relations in this area must be reciprocal ones. We understand the problems and I told our colleagues about them. The EU gives huge subsidies to agriculture and a significant number of these products are then dumped onto our market. Of course we must think about our own agricultural producers but we must also act within the framework of existing agreements.
Incidentally, what are our agreements with the EU in this sphere? What are our mutual obligations?
Aleksei Gordeev: Vladimir Vladimirovich you have asked what is probably the most important question. Unfortunately, our relations do not have a legal foundation and problems relating to veterinary control are not regulated directly with the EU Commission according to the appropriate legislation. We have bilateral agreements with each country. These contain the responsibilities of a given national veterinary service. And in 2004 the EU commission confirmed that this regime will continue.
The problem with Poland demonstrated that the Commission ostensibly assumes responsibility for these topics and issues. But if this were case we would need to have corresponding agreements that would constitute a legal framework. We would also need to understand that it is precisely the EU and the Commission’s managerial bodies that are able to provide appropriate documentation and make quality controls. This is a serious issue and if we start to raise it now then we are still at the beginning of the road.
Vladimir Putin: You need to go further down that road. It is necessary to depoliticise these issues and to resolve these problems at the expert level. And of course we need to resolve them with goodwill, in tandem, and by taking into account both the interests of our partners and our citizens. For there are almost 40 million people in Russia that are somehow linked to agricultural production. This is not a trivial matter for Russia and it does not simply have some kind of abstract theoretical significance. It has a practical significance for millions of Russians. And we must develop our relations with our partners in a normal and civilised manner. We therefore need to continue this dialogue and to look for solutions.
We have no shortage of problems in agriculture ourselves and if more arise from transit goods from third countries, rather than from the European Union, then this will create additional problems and very significant ones. Nevertheless, it is possible to find a solution to this problem. I would ask you to intensify the dialogue.
Finance Minister Aleksei Kudrin on the meeting of G8 finance ministers
Aleksei Kudrin: A session of G8 finance ministers was held this weekend in Potsdam, Germany. The meeting took place in the G8 format, with full attendance and with a full agenda. This was a preparatory meeting for the actual G8 summit.
We discussed issues relating to managing public finances effectively. This is now an important topic for all countries, for both developing and developed markets, since it has been recognised that budgetary rules can have a very important influence on market stability and on the extent of budgets’ influence on today’s markets. And unfortunately, different countries have very different indicators that go beyond a given framework. For example, even in Europe part of the total amount of a state’s debt, the budget deficit, increase in expenses, and subsidies for certain sectors of the economy are beyond the scope of the Austrian Agreement. All these factors can have a big impact on markets.
The second issue consists in supporting and helping African countries. We discussed the implementation of a number of initiatives that should improve the management and transparency of public finances in those countries, including by better employing revenues from the extraction of mineral resources in Africa to fight against poverty. As a matter of fact, these revenues are rarely included within these countries’ budgets; instead, they are appropriated by multinational corporations because a lack of proper taxation, are lost to the so-called cronyism involved in distributing various deposits, <…> because of other factors that are definitely linked with corruption. And increasing the transparency of taxation and the process according to which permits are allocated is a key factor in reducing poverty in countries that have significant mineral resources.
A number of issues were related to energy and climate change. And Russia made a major report on this issue, a report that we prepared based on the basic judgements of our ministries and departments. And we had a discussion on this issue and paid particular attention to the prospects of the Kyoto Protocol. But we were not able to produce any really important results and failed to determine certain quantitative limits and responsibilities for countries.
We also discussed responsible lending and relations with countries that have benefited from debt relief. We are writing off debt, reducing these countries’ debt burden, and meanwhile their opportunity to incur new debts is increasing simultaneously. And a number of countries are starting to make huge loans to these countries, taking advantage of the fact that they are no longer in debt and lending to them at such a rate that these countries will once again require help. These instances exist. In fact, this practice is liable to be perceived in a negative way. A number of leading countries in the world are engaged in this practice.
We also discussed a number of other issues, including the fight against financing terrorism. One issue that we discussed was related to the possibility of giving the FATF [an international organisation designed to combat financial crimes] a new mandate. It involves searching for and eventually returning assets that were stolen or extricated from the countries that rightfully own them. Of course this first and foremost affects many African countries, but there are, shall we say, a number of issues that we could resolve since assets were stolen from Russia both in the pre- and in the post-war periods. We have points of contention with a number of countries about the assets of the former Soviet Union. For that reason we would also benefit from positive effects.
The First Deputy Prime Minister on launching the first generating unit of China’s Tianwan nuclear power plant built according to a contract with Rosatom.
Sergei Ivanov: Rosatom’s experts finished building the first generating unit of China’s Tianwan nuclear power plant, with a design capacity of 1,000 megawatts. And the day before yesterday the customer — the Chinese party — began to use this station for commercial operations. In other words, work on the first generating unit has been completed.
The second generating unit is now working at 30 percent of its nominal capacity and by the end of 2007 we must complete all work on this unit. We will, therefore, have upheld our commitment (I know that you discussed this with the Chinese leadership) to complete two generating units this year. This is certainly our largest civil engineering project in China to date and there is no doubt that we will fulfil all our obligations. The first generating unit is operational.
Vladimir Putin: I would ask that you not forget about our own plans to develop nuclear energy within Russia. The government has formulated enormous tasks in this regard. I mentioned this in the Address to the Federal Assembly earlier this year. I hope that everything will also proceed according to plan in Russia.
Sergei Ivanov: Yes, two generating units per year. We must attain the design capacity of two units within Russia in addition to all our export contracts.
On the development of the Sukhoi Superjet passenger aircraft project
Sergei Ivanov: <…> Aeroflot and the closed joint stock company Sukhoi Civil Aircraft will sign another contract to purchase 15 of our Sukhoi Superjet civil aircraft. This is already Aeroflot’s second contract with the United Aircraft Manufacturing Corporation and its subsidiary company, Sukhoi Civil Aircraft. The first contract has been signed for 30 airplanes. To date 61 solid contracts have been signed for this aircraft. And even conservative estimates for this year suggest that we will have one hundred solid contracts, not taking into account protocols of intent and plans. Along with this, the foreign market is also very interested in this narrow body aircraft. And we must actively put this aircraft into operation by 2010 since the Tu-134 and Tu-154 aircraft will be withdrawn from operations en masse.
Vladimir Putin: You told me about the proposals that our foreign partners had made on increasing cooperation on this aircraft. We need to make decisions as soon as possible and to move forward in this direction. In general the offers are good ones.
Sergei Ivanov: Major foreign aviation groups would like to cooperate even more closely with us on this particular type of aircraft.
Vladimir Putin: And are they offering us their network?
Sergei Ivanov: Both the network, service and maintenance around the world.
Vladimir Putin: Well then let’s do this.