President of Russia Dmitry Medvedev: Colleagues,
Summer has ended and it is time to discuss the economic situation and take a look at what the future holds, all the more so as a year has gone by now since the global economy entered this difficult period. A year has passed, but there is no single clear-cut trend, and this is something we are all aware of.
The Economic Development Ministry’s statistics indicate some signs that the general slump in the country’s economy is over and, we hope, a transition towards recovery is underway. Our GDP posted decent growth for the second quarter of 2009 – up 7.5 percent on the first quarter, and it grew by 0.5 percent over the month of July alone. There are also positive tendencies in industrial production, freight turnover and transport. The fall in capital investment has stopped.
This change in the situation has been helped by stabilisation in the global economy and, of course, by the extensive anti-crisis measures our Government has implemented. These measures concerned financial market actors, strategically important enterprises, and most important of all, our people, who have received timely help in finding employment, undergoing re-training, and have received special support in a number of cases.
Of course, these are just general signs of improvement. It is too early yet to speak of a stable positive dynamic, all the more so as these signs are not as significant in scale as we would like.
We need to continue our anti-crisis policies for now, but I nonetheless propose that we discuss today the post-crisis development scenario. That is, I propose that we evaluate the current state of the different economic sectors and their development prospects, and examine our enterprises’ preparedness to compete in normal fashion once the crisis is over.
Second, we need to analyse the experience we have gathered over this period, take note of its positive aspects, and also note the problems and mistakes that are inevitable in this kind of situation, so as to avoid ineffective spending and uncoordinated and untimely action.
Of course, we also need to make a concentrated effort on public sector enterprises, private companies and banks. We need to be clear about who will ultimately receive support. The condition that support will go only to generally effective owners remains in place. Support will go only to owners that demonstrate a justified development programme and readiness to use new technology and carry out modernisation. Of course, borrowers also have to be responsible and have to understand that they must answer for the loans they take out. These loans have to be paid back.
One final issue is that of qualified professional personnel. This is something we have been addressing with targeted action. We have a number of programmes in place. In general then, we have plenty to discuss. There are some optimistic signs, and there are also very big difficulties still ahead. I propose that we weigh up all these different aspects.
I now ask the heads of the different ministries to give brief reports on the situation.
Let’s begin with Mr Shuvalov.
First Deputy Prime Minister Igor Shuvalov: Indeed, it’s been exactly a year since we began to feel the negative effects of the unfolding global financial crisis on the Russian Federation’s economy. On September 16, we had an emergency meeting where we identified the initial measures for reacting to developments on the stock market and possible measures for supporting the banking sector. We assumed that during this time, we needed to work under new conditions, practically around the clock; we reported to the Prime Minister daily on the changing situation, and briefed you, Mr President, on how the situation was developing.
We felt that among all the work being done by the Government, we needed to focus our efforts in four key areas. The first area was the banking sector and the financial market. The second was individual sectors of the economy, such as retail business, construction, and others, as well as the difficulties faced by certain businesses. Government leaders visited some companies to decide whether they needed special support. The third focus was measures of social support for individual categories of citizens, as well as all matters related to unemployment, unemployment benefits, and special support measures for individual categories of citizens, pensioners, and others. Finally, the fourth and most difficult area of focus was budgetary decisions, because we understood that budget revenues would decrease and we would therefore need to pass a particular anti-crisis plan. We needed to make decisions on reducing certain expenditures and increasing others. As a result, in November, the Prime Minister approved the first anti-crisis plan, which we subsequently began to carry out.
After we determined the key parameters of the 2009 budget in the modified format, we received instructions from the Prime Minister to conduct a wide public discussion of the anti-crisis plan in all of our nation’s regions and federal districts. We reported back to you on the main areas of focus and benchmarks in our anti-crisis work. We reported on the main approaches of reacting to the crisis to the parliament. Our anti-crisis plan was supported when the Law on the Modified Federal Budget for 2009 was passed by the parliament.
Many of the items and trends in this plan are being carried out quite successfully. But at the same time, we find ourselves getting stuck in certain areas; we are responsible for making everything work, including matters related to providing state guarantees. We initially proposed a procedure for providing such guarantees which could not be applied in practice; we then amended it, and now, we are struggling with various difficulties. Nevertheless, state guarantees are being provided. We are hopeful that in the upcoming weeks, by the end of October, we will be able to complete much of this work.
Dmitry Medvedev: How much money is currently allocated toward state guarantees?
Igor Shuvalov: Right now, we have signed state guarantees worth 56 billion rubles [about USD 1.8 billion]. But the Finance Ministry Commission and the Economic Ministry Commission have made decisions amounting to about 150 billion rubles, i.e. 50 percent of the total amount set aside for these purposes in the federal budget.
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Furthermore, we had a fairly tough conversation at one of the last Cabinet presidiums on spending budgetary funds within the 2009 budget. We have observed some inequality in the spending of these funds, and we feel that spending this money evenly from month to month must be an element within our anti-crisis measures.
Some of our measures for supporting the consumer market have not been very active – in particular, measures related to car purchases. We launched the corresponding scheme, but we did so fairly late. We have made a decision to increase the price of cars that can be purchased through loans, which we are subsidising. We have made some other decisions as well.
Our housing package is very extensive – the most extensive in recent years. The same is true of the budgetary decisions made in 2009. Still, we are fairly slow in implementing these programmes. I must say that the Defence Ministry and the Regional Development Ministry are quite active. Right now, these are major players on the housing market. Still, we have room for improvement in making this work advance more quickly.
Overall, I can say that the anti-crisis plan is being carried out. In the upcoming days, we will report to the State Duma on how we are implementing the anti-crisis plan. To give a brief summary, we have sometimes lacked efficiency in resolving certain matters. In addition, we found ourselves in very difficult conditions, when we needed to readjust documents and find new approaches. Clearly, this does not make us any less responsible, and we admit that decisions on certain matters took a long time. Nonetheless, the anti-crisis measures that were approved in April generally indicate that we were constantly thinking about the kind of post-crisis plan we will have, how our economy will recover from the negative events that we have been facing, and how we will develop our plans after the pique of the recession is behind us. Right now, we are doing this work together with the Economic Development Ministry, the Finance Ministry, and other agencies, and we are ready to report on our initial approaches to these issues.
Dmitry Medvedev: I would like the two ministries responsible for economic and social policies to brief us on the current situation as well.
Minister of Economic Development Elvira Nabiullina: Speaking of the current economic situation, I can say that according to our estimates, the economic downturn has indeed come to a halt. We have seen the revival of production, and many key economic indicators are now moving upward, based on the latest data on the Russian economy, as well as the global economy, where we are also seeing positive trends and a fairly optimistic outlook.
We have readjusted our forecast for 2010; we discussed it yesterday at a meeting with the Prime Minister. Data on the global economy have allowed us to readjust our hypotheses regarding oil prices – we now believe they will be higher. However, I would like to note that we are nevertheless maintaining a conservative approach to our forecasts and assumptions, because even oil prices can be very volatile, and the fact that many governments are making cash injections may affect prices.
Nevertheless, many key parameters in our forecast have gone up, including the gross domestic product. Just two months ago, we were forecasting a one percent growth rate in 2010, but we are now forecasting a 1.6 percent level. Similarly, for industrial production we were forecasting 0.8 percent growth, but we now believe that rate will be 1.4 percent. We discussed this forecast in great detail, based on many indicators. But it is also important to consider what model of growth will be representative of post-crisis development, and it is important to gain some long-term lessons from this crisis.
Naturally, the crisis has exposed weak areas that we were aware of and which we had begun to work on; but now, it seems, we need new, additional mechanisms and we must work at a more rapid pace. One of our greatest weaknesses is our dependence on mono-export, our dependence on oil exports, and international capital markets, especially since many of our companies financed their investment projects through external loans.
Now, at a time when we see a revival in production, occurring under the influence of a favourable economic situation abroad, it is clearly very important to intensify our own, internal sources for national growth, by supporting domestic demand and supporting the competitiveness of our sectors. Currently, a significant part of our domestic demand is satisfied through imports: imports account for over a third of our food supply and over half of our capital goods. Clearly, it is very important for us to develop our own competitive production, and one of the key tasks in our post-crisis development is to increase the competitiveness of our own economy.
The second issue is our dependence on external loan markets. We need to have our own well-developed financial system and banking system, and we need our own source of “long-term money” for modernisation and development. Thus, macroeconomic stability and low inflation are very important, and so, we are aiming to lower inflation in our forecast and in our budgetary policies.
There are also matters tied to encouraging savings and creating a source of “long-term money” as well as fully re-establishing the work of development institutes, which in many cases were forced to focus entirely on anti-crisis measures. Thus, we already have several suggestions regarding additional mechanisms to emphasise the modernisation aspect within our anti-crisis measures, and overall measures related to post-crisis development. We are ready to report on these measures.
Minister of Healthcare and Social Development Tatyana Golikova: Almost a year ago, beginning on October 1st, the Government of the Russian Federation began monitoring the situation on the job market because of the economic situation taking place during the fourth quarter of 2008.
Between October 2008 and April 2009, the number of unemployed individuals in our country rose from 5 million to 7.1 million, from 6.6 percent to 9.5 percent.
Between May and August of 2009, our unemployment levels decreased to 8.3 percent, accounting for 6.3 million people.
(Next, the Minister gave additional data on unemployment and talked about specific measures of working with both registered unemployed individuals and people at risk for layoffs, as well as about work on retraining graduates and creating more jobs related to small businesses.)
As for 2010, we are continuing the work of all our regional programmes, expanding them somewhat, and enriching them, taking into account the practical experience that we already have.
We predict that by 2011, it may already make sense to reduce the amount of organised community work and worker transfers to other regions, compared to what we have in 2009 and what we will have in 2010.
As far as social benefits and retirement pensions are concerned, I must say that we have fulfilled all of our plans. All social benefits were indexed in due order. We have just one decision left to make, which we will need to implement beginning on December 1, 2009, concerning this year’s biggest increase in the base component of pensions – an increase of over 30 percent. That will be followed by amendments to our pension-related legislation which will go into effect beginning on January 1, 2010. Right now, we are working actively on preparing all of the bylaws. And some of the citizens who are to receive pensions in the early days of 2010 will already receive their new pensions in December 2009. Furthermore, all of the social benefits that depend on inflation levels are all provided for in the 2010 budget, with necessary financial provisions based on the rules that we apply even in non-crisis conditions. In other words, we maintained all the same legislative norms for social benefits that were in effect in 2008 and 2009.
Dmitry Medvedev: Regarding the social issues discussed by Ms Golikova, we certainly need to keep up work in all of these directions, because although we have been discussing some positive trends today, those trends are just now beginning to take shape, and we must provide our people – those who have lost their jobs – with all the opportunities available through the anti-crisis package. As for employment, we clearly need to continue working with the regions. Incidentally, when I meet with regional governors, the first question I usually ask them is about unemployment in their region – the percent of people unemployed. And overall, they confirm the trends that were mentioned by the Minister of Health and Social Development.
I would like to hear a few words from the Chairman of the Central Bank regarding the current financial situation. Mr Ignatyev, please tell us about how things stand.
chairman of the Central Bank of Russia Sergei Ignatyev: I will begin with the good news. As you know, inflation in our country was at zero percent in August. Of course, the inflation rate was affected by seasonal factors. It resulted partially from a decrease in vegetable prices. Nonetheless, there was an inflation rate of 0.4 percent in August of last year. Overall, during the first eight months of this year, inflation has totalled 8.1 percent. And I do not see any reason why we should have any significant inflation in the remaining months of this year. I think that inflation will be much lower than the official estimate, which currently predicts this year’s inflation to be 11.6 or 12 percent, if I am not mistaken.
The ruble’s exchange rate remains stable, without any clear trend of increasing or decreasing, but it has become much more flexible than it was a year or two ago. We are gradually moving toward a mode of free floatation for the rouble’s exchange rate and inflation targeting, which allows us much firmer control over inflationary processes. Because of this, the scale and frequency of the Central Bank’s currency interventions on the money market have decreased significantly, and our currency reserves – or rather, the Central Bank’s gold and foreign currency reserves – now remain at a stable, high level. As of September 5, these reserves stood at nearly USD 405 billion.
The Central Bank is gradually reducing interest rates, and since April, the refinancing rate has been reduced five times. In April, it stood at 13 percent per annum, but now, that rate is 10.75 percent per annum. And it is quite likely that this rate will continue to go down in the near future. There has been an even more notable drop in the interest rates on so-called unsecured loans from the Central Bank. In February, the interest rate for unsecured loans was as high as 18.7 percent, but as of September 7, it was 11.4 percent, i.e., a drop of over seven points.
The interest rates the banks offer their borrowers – first and foremost on loans to corporate borrowers – are also slowly decreasing, although less so than we might like. And now, they are hovering at an average of around 15 percent per annum. Still, they vary depending on the risk and the borrower’s rating. Interest rates may be 13 percent for some, and 20 percent for others.
Private bank deposits have shown stable growth; according to our data, they increased by 1.4 percent in August – just slightly less than in the previous months – but the rate at which deposits have grown is quite satisfactory and normal; I do not see any problems in this area.
Now, I will talk about some of the more difficult problems. First of all, bank loans to the non-financial sector, i.e., to companies and individuals, are showing practically no growth, although in August, according to preliminary data, the loan portfolio of Russian banks increased by 0.8 percent; still, this statistical increase is mainly due to Sberbank, which increased its loan portfolio by 1.9 percent. At the same time, this is not a very reliable trend, and we need to somehow promote growth.
Banks are still reluctant to provide loans to the non-financial sector, since they feel that this involves very high credit risks. We are seeing continuing growth in overdue debts to banks on the part of borrowers, but this growth has slowed very significantly. I also just received information regarding the month of August: the arrears on loans to corporate borrowers have increased by only five percent in August. This is the lowest rate of growth in this area since the beginning of the year. I would say that banks in this situation are reacting quite adequately, in that they are creating sufficient provisions to cover possible loan losses. And despite this growth in loan arrears, capital adequacy remains at a high level. Right now, the overall capital adequacy of Russia’s banking system is around 19 percent, which is significantly higher than the required minimum of 10 percent.
I can say that we are seeing a gradual breakdown of the vicious circle when the banks do not provide loans to the non-financial sector because that sector has bad financial standing, and therefore represents a high credit risk; meanwhile, the non-financial sector has bad financial standing because it is unable to get bank loans. It seems that the breakdown of this vicious circle may have already begun, judging by the changes in overdue debt, but we need to further encourage this process.
I feel that it is very important to continue implementing two measures. First: loan guarantees have long been promised. These decisions are now being made. But I would like to emphasise that what’s important is not making the decision to provide these guarantees, or even providing the guarantees, but rather, providing loans against these guarantees. In other words, the guarantees must have an effect on bank balances. This is the only way that we will achieve any results.
And second: I am asking you to provide the second tranche of subordinated loans more quickly, because decisions are already being made, and we need to make money available. As far as I know, such decisions have already been prepared and made in regard to several banks, but the banks have not yet received that money. If we do this fairly quickly, I think the process of breaking the vicious circle will be accelerated.
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