Interview with Arkadiy Dvorkovich, economic aide to the Russian president, by Mikhail Fishman: "Arkadiy Dvorkovich: 'We Always Said: Russia Is an Open Country'"

 

Russia has entered a phase of grave crisis. The oil price has fallen, the Central Bank was forced to let the ruble exchange rate fall from November onward, and a downturn in production has begun in industry. Presidential economic aide Arkadiy Dvorkovich explained to Mikhail Fishman the logic of the authorities' reaction to the crisis and suggested that things will soon begin to be rectified.

 

Fishman: In Russia, the crisis began with the fall of the stock market. Did you expect the fall to be so deep?

 

Dvorkovich: No. But our stock market is, after all, still fairly small and a significant volume of money left it -- not only because of Russia's problems but because of the problems of the world's banks and funds. They were trying to collect cash to solve their own problems. And in this sense the fall in the Russian stockmarket reflects the global situation.

 

Fishman: Does it not reflect the distortion of the Russian economy, in which short-term investments play a more marked role?

 

Dvorkovich: Of course. That was also what I was referring to when I said that the Russian market is small. At the moment long-term sources of capital are still in the process of developing, and in the Russian market there is no possibility of attracting significant volumes of long-term resources. Short money is inclined to go away quickly.

 

Fishman: So it turns out that the link between Russia's economy and the global economy is weak? And the growth of the stock market was secured exclusively through short-term capital?

 

Dvorkovich: On the contrary -- it is extremely strong. We are an integral part of the world economy. Recently we have seen that we are integrated as strongly as can be. This is indicated both by the importance of foreign trade in the GDP and by the role of foreign borrowings. This was no surprise. We always said that Russia is an open country. We were deliberately opening up the economy and ensuring the convertibility of the currency in order to obtain the maximum benefits from the influx of capital and from foreign trade. And we exploited these benefits pretty well.

 

Fishman: Companies were not selling shares in their capital but were ensuring their growth by means of loans. Now the state is spending huge sums of money buying up these debts.

 

Dvorkovich: It is not spending money, it is offering credits. This is not free money. We believe that in the vast majority of cases it will be repaid, and moreover with interest, and the taxpayers can only gain from this.

 

Fishman: Why rescue them? A big company loses assets on margin calls. Well, so be it.

 

Dvorkovich: First, in the majority of cases problems with payments on debt to foreign creditors will lead to demands for long-term redemption from Russian creditors. Russian banks will have to ensure 100% reserves on all borrowings for those who did not fulfill their commitments on other debts. And that means the need for a sharp increase in capital for all Russian banks, and especially the most important banks. This could simply prove more expensive than providing prompt assistance with the fulfillment of external commitments.

 

Second, support is being given selectively, not on the basis of lobbying potential but on the basis of an evaluation of the influence of the situation in particular groups of companies on the economy. We are talking about groups like Rusal, Renova, Alfa, and our oil companies. Examining the structure of their business -- in order to see how far the problem of buying back debts will influence the current activities of all the other companies in the group -- takes time. And prompt support has gained us this time. Now we know what reserves shareholders and companies have, where they can sort things out themselves, and where state support is needed. But as a rapid and flexible solution, this support on foreign debts was, of course, necessary.

 

Fishman: The state banks are acquiring these assets as security. Not everyone will be able to buy them back. Is there a plan for what to do with these assets?

 

Dvorkovich: The situation will be analyzed individually in each specific case. First of all, the state has no intention of launching a new nationalization campaign, no strategic plans to increase its share in the economy. These assets will be regarded as under temporary ownership. They will be sold. True, in a number of cases an extension of the term of credit agreements is also possible. The decision will be made on the basis of the extent to which a company's problem has become a solvency problem or has remained a liquidity problem. The participation of foreign investors is also not ruled out. However, not spontaneously, but on the basis of analysis and negotiations with investors.

 

Fishman: But it looks as if the state is saying: This is ours, we will not give it up. That is how the buying of debts is being perceived.

 

Dvorkovich: It does not matter how it is perceived. The important thing is what we achieve in the end.

 

Fishman: The ruble exchange rate is steadily falling. A number of experts are proposing that reserves should not be wasted and the ruble should be allowed to fall. An analogy with (the card game of) preference springs to mind. Maybe it is better to cash in one's tricks immediately?

 

Dvorkovich: I would prefer not to compare a policy that influences people's lives, with a card game. In 1998 more than 30% of citizens were below the poverty line. In the past eight years the number of poor families has been more than halved, and we have no right to squander these achievements. Therefore there will be no dramatic devaluation. We are analyzing how the change in the rate of exchange is influencing people's behavior today. A steady fall gives people, banks, and companies the opportunity to adapt to the situation. The most important thing now is to allow time to restructure assets and commitments, to change behavior and maybe the style of consumption. In short, to change life.

 

Fishman: If the oil price, for instance, falls further, the result will be the same: a collapse in the exchange rate. But the reserves will already have been spent.

 

Dvorkovich: Oil prices could either fall or rise, with a probability of about 50%.

 

Fishman: About the same as meeting a dinosaur in the street.

 

Dvorkovich: If oil prices remain low or continue to fall, a further reduction in the rate of exchange is inevitable. But if they rise, that means that prices of other Russian exports will rise and a significant fall in the rate of exchange will no longer be so obvious. We cannot just flip a coin here.

 

In the fourth quarter of this year the government and, first and foremost, the Bank of Russia, which makes independent -- I wish to emphasize, independent --decisions, made a specific choice and now they are following it. The situation could change, and then other decisions will be made. I repeat: The main emphasis will be on people's interests. We do not want to cause any upheavals.

 

Fishman: A sharp fall in the rate of exchange could prove economically healthy and at the same time cause grave psychological consequences. Which is more important?

 

Dvorkovich: The Central Bank is an autonomous body. Consultations with other organs and branches of power are always held, in all countries. But the final decision is made by the Central Bank. All aspects of the situation are important to it. It examines how the change in the rate of exchange influences the banks, how the change in the rate could influence the debt problem -- a reduction in the ruble rate will increase the cost, for Russian companies, of servicing the foreign debt, which is denominated in dollars or euros. This problem could get worse. The advantages of the reduction in the rate of exchange are also obvious: an increase in the competitiveness of Russian products both inside the country and abroad.

 

Fishman: Do you have some idea of which sectors will see a positive effect?

 

Dvorkovich: Obviously those that are more geared to domestic consumer demand. That means agriculture, the automotive industry. Exporters will see benefits in the foreign markets. That means the chemical industry and the metallurgical sector. To some extent also machine building. These are really important sectors.

 

Fishman: Can you estimate today the extent of falling budget revenues next year not only from oil but also from the nonpayment of taxes?

 

Dvorkovich: The Finance Ministry has not yet presented its final calculations. Nonetheless it is clear that we are talking about losses measured in trillions of rubles. If our budget system as a whole is approximately 18 trillion rubles, the losses could total around 20% of that sum. That is quite a lot. And it will lead to a budget deficit, which will be covered mostly from the resources of the reserve fund.

 

Fishman: Is there enough money?

 

Dvorkovich: First, yes, there is. Second, an analysis of expenditure and programs, of the potential for reducing the costs of organizing various projects, is currently under way. The prices of many things have fallen, first and foremost in investment projects, capital expenditure. Much can be made cheaper without loss of quality.

 

Fishman: Is there enough (money) for 2009?

 

Dvorkovich: And for 2010. And partially for 2011, given the present oil prices. We have time, at least through 2009, to look at what could be adjusted in plans for the subsequent years.

 

Fishman: It is possible to survive out of the reserves even for two years. But what then?

 

Dvorkovich: It is not a question of surviving or not surviving, but of how best to realize the planned priorities. We do not intend to abandon innovation-led development or investment in people. Much could be done more effectively and more cheaply. Much must be changed, first and foremost in financial policy. We are completing a discussion of the parameters of the reform of medical insurance and pension insurance. Here there could be an adjustment to financial decisions that were planned under a more positive scenario.

 

Fishman: The decision to reduce value added tax never did get made, but what is currently the single social tax is increasing.

 

Dvorkovich: The burden could rise in 2010, but firstly, before that, in 2009, it will fall. Secondly, if no other decisions are made, there will be at least partia lcompensation through the reduction in profit tax. But not full compensation.

 

Fishman: Especially if there is no profit.

 

Dvorkovich: Especially if there is less profit, let us say. But both the president and the prime minister have publicly confirmed that in the first quarter we will return to the question of possible additional compensation for the growth of insurance contributions in 2010. It is not our aim to increase the tax burden.

 

Fishman: You said recently that things will start getting better next year. Why?

 

Dvorkovich: It may not happen, but it may happen, and the chances are considerable. World markets have shown in recent years that they can react flexibly to problems. And today the process of cleansing ourselves of debt and sin is proceeding quite quickly. Much depends, of course, on the decisions and actions of the incoming US Administration. The situation throughout the world will depend on how quickly the strongest economy in the world can cope with the problems. I have a feeling that it is possible. Not a return to an easy life in conditions of rapid growth, but a revival of the world economy -- and the Russian economy as part of it -- could begin next year.

 

Fishman: The decision has been adopted to extend the (Russian) presidential term. Yous aid this is useful for the economy. In what way?

 

Dvorkovich: In a more considered, calm approach to long-term projects, because the president will have the opportunity to engage in real business for a longer period, rather than election campaigning and finding his feet. With a four-year term, two and a half or at most three years are left for implementing policy. From our viewpoint, in the current period, by virtue of the scale of the tasks, that is not enough for Russia. And the president's initiative here is very timely. We will certainly need to implement large-scale projects in the next 10-20 years.

 

Fishman: Do you reject the view that frequent alternation of the regime revitalizes the economy?

 

Dvorkovich: Mostly it revitalizes politics, of course, but not the economy.

 

Fishman: These things are connected.

 

Dvorkovich: The question is, what is more important: the revitalization of the economy, or delays to the implementation of economic policy and established plans. In any case a compensatory factor is absolutely essential -- the existence of strong institutions of the civil society, feedback through the mass media, through public institutions, through the party system. Otherwise the proposed solution will be ineffective.

 

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Source: Russkiy Newsweek