President of Russia Dmitry Medvedev: Mr Stepashin, I am very interested in what you have to say.
Audit Chamber Chairman Sergei Stepashin: There are many issues to discuss, but the most important one is our federal budget. The Government has presented a draft federal budget in a timely manner. We have almost finalized our opinion on it; we discussed it at the board meeting on Monday, and now, we are working on the summary which we will present it to the Government. I can report that the key points of the Budget Address you have formulated are included in the budget. In spite of the crisis, we have been able to draw up a socially-oriented budget, just as we did last year, and this has largely contributed to a positive social situation we observe in our nation today.
The second issue I would like to address is the industrial policy financing. Today, we are seeing more financing geared toward industrial policy, including information technology, as we discussed at the innovation forum earlier today. Before, this kind of financing was scattered and sporadic, but now, it is beginning to form into a system.
I note with satisfaction that we have seen a number of specific measures aimed at making the use of budget funds more efficient; still, there are some things that we need to pay attention to. The first is perhaps the most important: although we have been able to keep inflation in check and have even had better results than predicted, in the last two months, the actual lending rates have remained at 14 to 15 percent, and sometimes even 18 percent – we have not seen rates this high since 2001. All this, despite instructions from you and the Prime Minister. This makes loans significantly less accessible to the non-financial sector of the economy. The Government has already allocated USD 200 million to provide support, including support to the banking sector and lending to the non-financial sector of the economy. Still, the situation has yet to be resolved. Then there are tax regulations. I am referring to transfer pricing arrangements. We have yet to pass Tax Code amendments, which would allow export-substituting companies to save millions of rubles in taxes every year. The same is true of the dividend policy. Thus, our opinion includes recommendations to the Government to pay attention to this matter.
One hackneyed subject that is becoming somewhat politicised today are the revenues from legal vodka sales. Currently, this makes up 0.5 percent of the state budget revenues. In the Soviet times, the figure was 20 percent. Thus, we suggest addressing this issue one more time: we should either improve the USAIS [Unified State Automated Information System for controlling production and distribution of ethanol, alcohol, and alcohol-containing products], or we should consider introducing a state monopoly on alcohol.
Overall, we feel that we really have the opportunity to meet the forecast inflation figures for next year. In spite of the fact that our budget is economical (in the positive sense of the word), the macroeconomic data you have available regarding oil prices show that most budgetary goals for next year can be achieved. We will most likely be ready for a smooth economic recovery. The Audit Chamber’s assessment of the situation is the same as that of the Ministry of Finance.
Dmitry Medvedev: I am glad that the Audit Chamber has assessed the current state of affairs in regard to the implementation of the federal budget and the President’s Budget Address. We must continue to monitor macroeconomic indicators. I do not think that we should be overly happy with current inflation levels for a very simple reason. If we had managed to lower the inflation under normal circumstances, that would have been great, and we could have given credit to the Government and other institutions that influence the macroeconomic situation for this achievement. However, this reduction has been caused by the recession, which is even causing deflation in many nations, thereby limiting their opportunities.
Still, in this situation, a decline in inflation is good for our nation and for the needs of our people, because it has a clear effect on our prices. Overall, I feel that we could reduce the inflation even further – I say this because our efforts to reduce money supply overlap with the actual production loss, a trend that is generally negative. But for some particular indicators this has a rather clear implication which means a lower pressure of money supply on the market.
As for the other issues you spoke about, we will need to reflect on them, including the issue of improving regulations governing alcohol sales. I gave instructions to the Government as a follow-up to the suggestions that I made this summer. None of the suggestions should be disregarded; instead, we should thoroughly analyse all of them and lay down modern rules for the alcohol market in our country. Incidentally, this is also relevant to our antialcoholism efforts since alcohol abuse unfortunately remains an acute problem in our nation.
In regard to what you said about banks, I do not think that the gap between the Central Bank’s refinancing rate and actual lending rates results only from banks’ unwillingness to lower these rates. Clearly, we need to continue working with banks, and the Government is doing exactly that. But the problem is also caused somewhat by their expectations. We must restore the trust which is important for banks in closing loan transactions. The banks have set high interest rates because they assume that the current situation may turn out to be more difficult than the Central Bank believes it to be. The Central Bank’s challenge is to clearly convey its policies and to introduce reasonable regulations, in part through the use of its guidelines in this area, thereby influencing the final loan interest rate.
Naturally, there may also be cases when banks are simply trying to take advantage of the crisis and earn a little something extra, but overall, high interest rates reflect a more complicated trend that must be taken into account.
It is true that the refinancing rate is now at its lowest level in Russia’s post-Soviet history. It is therefore a challenge that the Central Bank must work with the Government to resolve. For your part, please continue monitoring the situation in this area.