President of Russia Dmitry Medvedev: Good afternoon, colleagues,
It is a great pleasure to address this forum today. I hope that the forum will develop and gain more recognition with every passing year. I want to start by saying a sincere thanks to everyone present today and everyone who agreed to speak at the discussions.
This year’s forum is a very special event. It is taking place at a difficult time, probably one of the most dramatic periods in the global economy’s development, and this cannot but have an impact on the environment and mood.
Unfortunately, the weather has let us down too this year, but then again, perhaps this sort of weather is better suited to the economic mood. Let’s hope that the rain will soon end and the wind will die down, and that the sun will shine brighter than it did this morning.
Most experts think that the global crisis has reached its peak and that we are in the middle of the deepest recession in decades. We discussed the economic crisis at last year’s forum, as those present last year will remember. We said then that the current global regulation system would not be able to prevent economies from taking a negative turn, and we warned about the possibility that economic life could take a downturn on an unprecedented scale. Unfortunately, these predictions turned out right. The financial crisis was followed by a sharp drop in production, a big rise in unemployment and falling incomes and living standards for millions of people.
For objectivity’s sake, it should be noted that over the weeks running up to this forum, the main financial markets have shown some signs of livening up, and a number of analysts think this indicates that the crisis has hit the bottom, that its most difficult phase is coming to an end, and that the start of recovery is in sight. I think it is still too early to be getting out the champagne, however. It’s not for nothing that some economists have called the financial crisis a long-running and very resistant ailment.
A popular topic of conversation today is figuring out which letter the economy’s development, the crisis’ development resembles. Using Roman letters, people cite variously L, V, U, W, but of course, what is important is not the letters, but the figures the crisis leaves in its wake. In money terms, the problems measure into the trillions, regardless of which currency we refer to. These are the trillions we are forced to spend on dealing with the crisis. And worst of all, none of us are spared these costs. But it is already possible today to draw a few conclusions from everything that has happened.
First, no one has managed to avoid being caught up in the global crisis. Modern communications and financial technologies enabled the crisis to spread incredibly fast and affect all countries. Only Antarctica is probably still an oasis of stability. The conclusion is obvious – the only way we can overcome this crisis is by working together. To be successful in addressing the problems before us, we need to have an intensive exchange of information and ensure a high level of coordination in our work.
Second, those whose job it was to forecast events and facilitate this coordination were not ready for the depth of the crisis and turned out to be too rigid, unwieldy and slow in their response. The international financial organisations — and I think we need to state this up front and not try to hide it — were not up to their responsibilities, as has been said quite unambiguously at a number of major international events such as the two recent G20 summits of the world’s largest economies.
Furthermore, we have had confirmation that our pre-crisis analysis of global economic trends and the global economic system were correct. The artificially maintained uni-polar system and preservation of monopolies in key global economic sectors are root causes of the crisis. One big centre of consumption, financed by a growing deficit, and thus growing debts, one formerly strong reserve currency, and one dominant system of assessing assets and risks – these are all factors that led to an overall drop in the quality of regulation and the economic justification of assessments made, including assessments of macroeconomic policy. As a result, there was no avoiding a global crisis.
These are pessimistic conclusions, but I want to say one thing. I think that we have managed to avoid a worst-case scenario because different countries and governments have shown a willingness to cooperate more closely than in the past, indeed, perhaps work together more closely than at any other time in the whole of economic history. The G20 has already got together twice to address these issues.
Of course, we have not reached the point of complete agreement and specific common decisions, but clear progress has been made nevertheless. We have established some institutions that make it possible to engage in open dialogue and take into consideration all participants’ interests in order to arrive at mutually advantageous solutions. First on this list I would name the Financial Stability Board, which brings together the world’s 20 biggest economies. We hope that it will soon start its work in full.
I want now to list the main directions in which we think it essential to make progress over the coming months.
First, we need to agree on procedures for drawing up new regulation standards for financial markets and financial institutions. We need to find a road between the two extremes of leaving the existing system untouched and sharply increasing the role of regulation. If countries go for the first option, leaving the current system unchanged, which is a possibility, especially once the acute phase of the crisis comes to an end, we would ultimately end up on a road taking us straight towards a new crisis.
The second road, sharply increasing regulation, would inevitably end up substantially slowing down economic growth even once the situation becomes stable again. This is true, incidentally, not only of regulation but also taxation. Many countries are raising taxes today, if only in an attempt to avoid an excessive budget deficit, but the cost will ultimately be lower global economic growth rates in general. It is therefore clear that we need to look for solutions above all through restoring confidence in each other. We do not need huge swathes of new international rules. What we need are some effective and transparent rules that create incentives for everyone, from ordinary market players to regulators, to act rationally in order to guarantee and not hinder sustainable growth, and we need the rules that will regulate this action.
Work is already underway at the expert level on these issues today and should lead to the convening of an international conference to approve the policies drawn up. I take this opportunity to confirm last year’s invitation to hold here in Russia such conference to discuss not just conceptual approaches but perhaps specific proposals.
The second thing we need to do is implement the G20’s decisions on reforming the international financial organizations. We firmly believe that it would be a mistake to limit ourselves to cosmetic changes as some countries, and perhaps the international financial organisations themselves might want. What we need are financial institutions of a completely new type, where particular political issues and motives, and particular countries will not dominate. Aside from these points, if we look closely at the situation and the institutions we have today, we see that there is no one really to take on the job of providing early warning of crisis situations, coordinating macroeconomic policy at the global level, and keeping watch over the international currency system. This is why it is in our interests to carry out real and successful reform and not just make some cosmetic changes, make a few improvements here and there but leave the substance untouched.
Colleagues,
Looking ahead to the future, we have to answer a whole number of questions that are preoccupying the entire world today. These questions are on our agenda and are reflected in the forum’s main themes. What are these questions? They are simple questions, questions of concern to all, questions that are at once very simple and very complicated. What will be the price of oil? How can we ensure stability on the energy market? It is clear here that the only solution is for producers and consumers to work together and implement a coordinated energy policy based on legally binding agreements.
We have already sent our proposals on a new legal framework for international energy cooperation to all of our partners. We hope that this initiative will meet a positive response and that our work together will see the conclusion of mutually advantageous international agreements and the drafting of new rules for energy cooperation or the adjustment of existing energy agreements, but the adjustment that would take into account the concerns of all the different countries.
I made some comments on this subject just recently. I think that the main problem with regulation in this sector is not in a lack of rules, but in the fact that these rules, unfortunately, are often one-sided in nature. We need to draw up universal rules that everyone can agree with. Otherwise, the rules we have will not be enforced, and instead of normal order in the sector, we will have crises and disorganisation, and this would be unacceptable.
The second question regards the choice of model for developing market relations. Will governments be able to keep their promises, will central banks be able to perform their functions, and will they all abandon the current much more active and sometimes even stringent state intervention measures to protect domestic markets, or will governments continue to be key players in market relations and all the different economic processes? Ultimately, this is a question about what is happening with our economies and what the economic model of the twenty-first century will look like. These are complex questions, but I hope that we will be able to formulate some views on these issues.
In any case, I want to say that protectionism today, when we have a global economy, no matter what the motivations behind it, only succeeds in pushing problems inwards but not curing them. An increase in state participation, state ownership in most economic sectors should be seen as a perhaps inevitable but only temporary solution.
At the same time, it would also be a mistake to see all of the decisions taken since the middle or end of last year as harmful. The measures taken during the crisis’ development phase, during its most acute phase, were only a small addition to the huge amount of protectionism and state intervention that had built up over the preceding period. In this sense, the measures that were taken were nothing so out of the ordinary. The real question now is, where do go from here? Of course, this is an issue that requires a comprehensive approach. It is not enough to just come up with fine-sounding political slogans.
Another key issue on everyone’s minds is the stability of the global currency system. The reserve currencies determine the stability of this system’s existence and operation. We have noted on a number of occasions the objective trend indicating the need to develop new reserve currencies. Many countries are moving from talk to actual action. This is true of Southeast Asia and Latin America, for example, and our national currency is being increasingly used in settlements with a number of countries.
I think that practically all of you will agree with me that the existence of the strong euro as a reserve currency has played a big part in mitigating the global crisis’ impact in many European countries. The decisions being taken today to establish anti-crisis funds (we have also taken such decisions and they will soon be approved by EurAsEC [Eurasian Economic Community]), and increase the International Monetary Fund’s resources will bring about changes in the relative strength of different currencies. These decisions will also see an increased role for special currency instruments such as the IMF’s Special Drawing Rights. It looks likely, given the increasing weight of regional currencies in international settlements that the structure of this rather specific instrument, already a prototype of a supranational currency, you could say, will gradually change. We should not run ahead of ourselves, but this is probably one of the examples of a possible road the world could take in developing something similar to this kind of supranational currency. We also need to re-evaluate the potential part gold can play in the global currency system. There have been a lot of varying assessments and proposals regarding gold in this respect of late.
In a situation when the economic interests of issuers of reserve currencies have a direct impact on the state of global economy it would be a mistake to avoid discussing these issues. This is a point we made directly at the G20 summit in London. The countries issuing the reserve currencies used in the world today have a particular responsibility when it comes to macroeconomic policy. Countries whose national currencies are not reserve currencies can end up in some situations hostage to the macroeconomic policies of countries that issue reserve currencies, and this is something we should not forget. We could all end up ultimately becoming hostages in this very complex situation.
The advantages that countries or groups of countries gain from having strong reserve currencies should go hand in hand with a greater degree of coordination and greater responsibility for the decisions taken in this area.
We realise that no one can create a reserve currency through virtual means. You cannot simply decree a national currency a reserve currency. Our task therefore, the Russian Federation’s task, is to make the ruble more attractive, make it a reliable and convenient means of payment for our companies, our neighbours, and for everyone who wants to use it in their transactions.
Ladies and gentlemen,
Russia has not been spared from the current crisis, given its global nature. Furthermore, I must admit that many of its trends have hit Russia particularly hard. This is partially due to the obvious flaws in the structure of the Russian economy which, unfortunately, we have not yet overcome in the period of reform during recent years. I am referring to the well-known fact that our export and financial markets are dominated by companies whose only activity is the extraction of raw materials. This is also due to the fact that our financial system is still at a relatively early phase of development, resulting from the absence of so-called “long-term” money in our economy, insufficient depth in our financial markets, and continually high rates of inflation.
Nonetheless, during the last few months, we have been able to stabilise the financial situation, and get through as best we could, given the circumstances. We have provided assistance to the industries. We are also putting a great deal of emphasis right now on the development of small businesses. Naturally, some decisions are quite difficult to make, and some decisions have brought about significant problems. This applies first and foremost to decisions by the Central Bank regarding currency exchange rate fluctuations. Many countries have sharply decreased their national currency value. The Bank of Russia decided to follow a different policy, the one of a phased national currency devaluation. I feel that decision was the right one as it ensured the stable operation of the national payment system and, just as importantly, prevented panic withdrawals of bank deposits. Thus, we avoided a drastic drop in the value of the ruble. Today’s situation on the financial market shows that the actions taken were appropriate. By the way, yesterday, the Bank of Russia decreased its discount rate for the third successive time, providing hope that the interest rates on banking loans will subsequently go down – this is greatly needed today for our industries and all financial market consumers.
I would like to specifically emphasise that my absolute priority as President, as far as anti-crisis measures are concerned, is the social protection of our people. This has been and continues to be our greatest concern. Still, we will not limit ourselves to providing direct monetary assistance.
What’s most important right now is to create conditions for allowing our citizens to improve their job qualifications, to get additional training, and if required, to get an entirely different profession. At the same time, each individual must understand one simple fact: today, people need to be more flexible, and occasionally change their occupation, or even their place of residence, in order to maintain their families’ living standards and educate their children. This responsibility does not only fall on the government, but on each of us, in turn.
When speaking at the Forum a year ago about our long-term development strategy, the so-called “Four I’s” strategy (institutions, infrastructure, innovation, and investments), I said that we need to add here an additional element: intelligence. Today, I would like to elaborate on this topic. Our goal now is to form an intelligent, “smart” economy, and a corresponding intelligent and smart society. This assumes a significantly higher living standard and the predominance of a middle class, capable of changing and adjusting quickly to the changing world. Today, we absolutely need an active class of entrepreneurs, operating in a competitive environment; in developed countries, this class represents the foundation of their economic success. That is the kind of success in national modernisation that we would like to see in our nation within the next several years.
This kind of modernisation cannot take place in an economy overtaken by other processes, one that is infested with corruption and is ruled by an ineffective bureaucracy.
A research historian once wrote that even as far back as the 18th century, the Russian government bureaucracy grew at the same pace as society, swallowing the society as it expanded. This is a well-known but highly unwanted scenario that must be avoided.
Another important direction for us is to reinforce and improve the performance of our national financial system. The ultimate goal is making Moscow a major international financial centre. This goal is still underway, regardless of the crisis. Furthermore, in a way, the crisis has made it more relevant.
I would like to note that our recent decisions on reforming the pension system will also help to shape a long-term structure of financial resources, which is necessary for our financial system and financial architecture.
In the short-term, our most urgent task in this area, as for most countries, is to clear the balance books of so-called “bad assets”. I do not think that it is a good idea for Russia to have “bad assets” bought up by “bad” or “toxic” banks, although this idea is now being implemented in other nations. We will see how they fare. Still, we will be using other instruments to resolve this problem. This will include helping to strengthen banks, investing government funds into their capital when absolutely necessary, as well as mitigating risk factors by using mechanisms that support the banks and the borrowers alike.
Today, we are thinking about more than just getting out of the crisis as quickly as possible. We must get out of the crisis with a renewed and stronger economy. In this regard, the government assistance provided to certain companies must be conditional on the modern technologies implementation, energy efficiency improvement and labour capacity growth to ensure manufacture of highest-quality products meeting most strict and up-to-date standards.
The events of the last several months in the crisis clearly indicate that we are taking too much time in resolving these challenges. If we just wait for the crisis to pass, then we will lose years, and will ultimately find ourselves facing another crisis, which may be even more dramatic than this one.
Colleagues,
Today’s decision-makers are responsible for making the global economy more healthy and stable, and less susceptible to global risks. The current crisis will most certainly reshape the world. It will see a change in economic development leaders, economic behaviour models, and the way markets function. The new models that will emerge over the coming years will have to go through the test of time and prove their effectiveness.
Clearly, any crisis is unfortunate. Still, I would like to conclude by saying that no crisis should ever call into question the inherent worth of freedom and the democratic, cultural, and economic values held by modern society, which we have fought for over the course of centuries.
I would like to wish you success in these endeavours. Thank you.