Interview, under the rubric "The Actors," with Aleksey Kudrin, Russian deputy chairman of the government and minister of finance, conducted by Yevgeniya Pismennaya, Nadezhda Ivanitskaya, and Vasiliy Kudinov: "'We Should Not Drive Our Tanks Onto the Mines,' -- Aleksey Kudrin, Deputy Chairman of the Government and Minister of Finance"

 

The minister of finance compares the economy to a mine field -- now is the time when each mine must be carefully dug up and the mine passages tested. The main challenge, according to Kudrin, is to preserve the stability of the macro economy: if it is rocked by an additional deficit or large injections of liquidity, it will lead to an exodus of capital and higher prices.

 

Hanging on the door of the cabinet in the business office of First Vice Premier and Minister of Finance Aleksey Kudrin is a sign that says "The crisis not permitted to enter." It is strange to see such an inscription in the office of the herald of the second wave of the crisis. "So do you know that your colleagues consider you the staff pessimist?" we ask right off the bat. Kudrin smiles and says quietly: "I do not consider myself a pessimist; I simply evaluate the situation comprehensively."

 

(Vedomosti) Your opponents suggest that you lower taxes, notably the value-added tax, and then business will revive and economic indicators will begin to rise.

 

(Kudrin) Every crisis has its fundamental causes. The cause of the current crisis is that the value of the assets and objects is unclear. The market is simply keeping silent. So lowering taxes by several percentage points would not have a crucial positive impact, but then it would expose the budget and the problem of realizing the accumulated social obligations would arise. Raising pensions in one wave increases expenditures by roughly 1.5% of GDP, and that is with a general decline in income of 5% of GDP. The most important thing now is to behave extremely cautiously; problems need to be prevented, not created. In its present condition, the economy can be compared to a mine field: each mine must be carefully dug up or bypassed: we should not drive our tanks onto the mines. We do not often ponder why with a small deficit the economy can grow, and the private sector can expand regardless of government fiscal support. And now with the huge injection of money through the deficit and Central Bank credits, GDP is falling. The economy has its own laws that are not completely subject to state regulation or to injections. We must always remember that. State injections of money during a crisis period in many countries can be compared to an intravenous drip for a patient. It is important only until recovery, when the strength of the organism is then able to maintain its activity independently. But full-fledged activity cannot be maintained by an intravenous drip. It is the same way with the economy too. And all the state support measures must be evaluated as to what effect they will have in the future: will they be of benefit or will they simply have to be paid for with a big and expensive state debt. Then expenditures will have to be reduced and taxes raised to service the debt.

 

(Vedomosti) It is not quite clear: bypassing the mines -- is that really an action strategy?

 

(Kudrin) Each structure -- a bank or a company -- is supposed to create its own stability itself rather than just rely on the state. That is the strategy.

 

(Vedomosti) But certainly the government is tempting the company by offering liquidity now and it spent a lot before the crisis, isn't that true?

 

(Kudrin) That is true, in the pre-crisis years, the state heated up prices. It heated them up by what it said -- we will build roads and hospitals and pay high wages, and still the oil producers will have a considerable amount left so that they can buy up everything that they can. So it in fact turned out that the state did not keep watch and even in a certain way provoked this overheating. The state's expenditures were essentially an emission. We spent the taxes obtained from oil and gas, but the economy did not require such a large amount of money. The state should simply regulate the amount of money in the economy, the exchange rate, and inflation. We encouraged the currency to get stronger and even more dollar borrowings by companies. The government followed a pro-cyclical policy. Recently bankers came to me and talked about how loans issued to modernize production cannot be repaid to them. The newest high-technology plants are coming to a halt. That is in fact an example of how future demand has been calculated incorrectly.

 

(Vedomosti) But demand was also stimulated through high oil prices.

 

(Kudrin) Of course, the money ended up in the economy, and it seemed that we had plenty of everything. Now that is coming to an end.

 

(Vedomosti) Can stimulating supply rather than demand be considered the government's mistake?

 

(Kudrin) Before the crisis we for the most part supported demand. Construction of roads and wages mean an increase in demand. That was how the bubbles in construction, trade, and real estate were created. But they crash with low income from oil and low budget expenditures. Now we seem to be attempting to soften the shock from their disappearance, since these sectors pulled many other sectors after them, and now their disappearance is very painful. From the standpoint of anti-crisis policy, it is more appropriate to support moderate demand without trying to preserve the bubbles. It is less appropriate to support supply, since with the overproduction that has appeared in conditions of the crisis, that postpones the time when we get out of it.

 

(Vedomosti) So what do you think of the first stage of the government's anti-crisis support? Has the correct action plan been selected?

 

(Kudrin) The absolutely correct one. The debt of our companies is moderate. In relation to the amount of GDP, the weight of foreign debt of the corporate and state sectors before the crisis came to 31% of GDP (and the banking sector -- 14.5%). That is substantially less than in the leading countries. In addition we have large reserves. The state should insure companies using the reserves, since the changed foreign situation is the reason for it all. The government made it easier to repay debts, and it prolonged the period for restructuring the debt using the ruble exchange rate. Certain companies got the debts back in rubles, and some -- in hard currency. We created a good (safety) cushion in the corporate and banking sectors.

 

(Vedomosti) So what do you think of the program for refinancing VEB (Foreign Economic Bank)?

 

(Kudrin) At the time when there was not enough hard currency and margin calls were made, the state promised $50 billion, but it gave only $11 billion and shut down the program. And during this period about $200 billion from the gold currency reserves leaked across the border. Some people took their rubles, exchanged them for dollars, and exported them either to pay a debt or to build up reserves in the form of hard currencies for future payments. In reality it is this figure that is the real price of support. And the $11 billion from VEB is merely one of the transactions that was needed to make sure that certain strategic companies reinvested their assets in Russia. Even without VEB they would have done this, but perhaps with more difficulty and at higher cost, but in this case we received blocks of stock in enterprises that were considered important as security.

 

(Vedomosti) But even so isn't there still the danger that many Russian assets will go abroad?

 

(Kudrin) Some of the assets will go. It is impossible to keep that from happening. But they rejected the VEB program because as a result one-third of all bank deposits now are in hard currency. In order not to take exchange rate risks, a bank must have proportional assets in hard currency. Some of the credits must be issued in dollars so as to bring the structure of liabilities and assets into line. It got to the point where banks were temporarily keeping around $40 billion in free resources in Central Bank accounts at 1%-2% or even 0% interest. So there is no need for VEB to rebuke the government. It was a quick step and timely, but it soon became unnecessary -- after all, the market offered a much larger amount of resources.

 

(Vedomosti) Can the law be repealed?

 

(Kudrin) As to refinancing, the law is no longer needed. The amount of resources obtained by banks and companies during this period already amounts to tens and hundreds of billions of dollars. During this time banks alone paid off $50 billion worth of debts, and virtually without state support. And many companies are now paying off their debts.

 

(Vedomosti) Business, for example, is often offended at the idea of going to the government for support: you give money selectively (to AvtoVAZ, for example), it is impossible to obtain state guarantees on credits, and support of the stock market is wasted money.

 

(Kudrin) You forgot to mention an important measure -- the floating devaluation policy. And also -- measures linked to lowering taxes and making additional injections in social policy and in some sectors. On guarantees -- now if a guarantee of 50% of the credit has been issued, then after a default starts, the bank must sell the security and in some cases even bankrupt the delinquent. Banks are suggesting a different scenario: for the state to pay 50% right when the default starts and only later does the government together with the bank begin to sell the enterprise's security. Above all the banks want to obtain cash. So the point is not the guarantee but for the banks to have fewer expenses.

 

(Vedomosti) So the bankers are to blame that state guarantees are no longer issued?

 

(Kudrin) State guarantees are nonetheless agreed upon for a few enterprises. Formalizing a credit is a long procedure: appraisal of the security, for example.

 

(Vedomosti) In that case for state banks why didn't the government rescind the directive on raising the credit portfolio of companies by 2% a month? After all, in that way the regime stimulates the issuing of credits to not very good borrowers.

 

(Kudrin) For now it was decided to wait on the decision to rescind. You were also asking about support of the stock market. From the beginning we considered this not a rescue measure for the stock market but profitable investment of state capital. We are keeping the capital in Central Bank accounts, and the Central Bank is placing it in foreign securities, and now part of it has been placed in VEB accounts, in other words, on the domestic market. VEB obtained excellent profitability -- more than 40% a year.

 

(Vedomosti) So what do you think about support for AvtoVAZ? Is that really appropriate -- to support it directly from the budget? You can't call this decision a systemic measure.

 

(Kudrin) It is a city-forming enterprise, and its shutdown would lead to serious social consequences.

 

(Vedomosti) Is there no other reason?

 

(Kudrin) No. If the budget did not help, no one would help. Budget support is the only possible solution for AvtoVAZ.

 

(Vedomosti) What is the role of banks in the program of anti-crisis measures? Alfa-Bank President Petr Aven says that without banks the government simply would not be able to handle things, but only the largest will survive.

 

(Kudrin) That is not correct. Actually in 1998 small banks survived -- just as there were more than 1,000 of them, more than 1,000 remained. Small banks do not have big risks on their balance sheets: they obtain money from clients and extend credit right away. The largest banks burdened themselves with the most risks: they borrowed big resources from depositors and invested them in long-term assets that were not very efficient -- buildings, land parcels, development projects, and securities. It seemed that their balance sheets had good assets -- Gazprom and Sberbank securities, for example, but because of the lower value of these securities, gaps appeared in the banks' balance sheets. But medium-sized and small banks did not buy such assets, because they simply did not have the resources and usually used less volatile state securities. So no matter how odd it may now seem, the ones that suffered most were the large banks, which are in fact being helped the most. The top 30 banks have 4.5 trillion rubles in personal deposits, and the total in the banking system is 5.9 trillion rubles. Support of banks includes truly preserving deposits and supporting the extension of credit to the economy. And banks' most acute problems are the rising defaults on credits: on average they are rising by 14% a month. And it is clear that for now everything will continue to develop specifically according to this logic.

 

(Vedomosti) You are naming some radical figures. It seems that now the average figure for defaults is 3%.

 

(Kudrin) In Russia defaults on a particular payment are classified as defaults. But the methodology is more complicated in the West. So in order to bring it into line with international standards, the Russian indicator must be multiplied by 2.5. So even now defaults on credits come to 7.5%. Banks will require capitalization by stockholders. That is why we are willing to offer subordinated credits under conditions of refinancing with the state.

 

(Vedomosti) Who is conducting the stress tests, the Central Bank or the banks?

 

(Kudrin) For now the banks themselves. Sberbank and the VTB (Foreign Trade Bank) made a stress test in simplified form. The federal budget for the VTB, for example, included a safety margin of up to 10% defaults, which comes to around 200 billion rubles this year. For Sberbank its main stockholder, the Central Bank, is supposed to determine this issue.

 

(Vedomosti) Will there be supplemental emissions of VTB and Sberbank stock this year?

 

(Kudrin) For the VTB -- most likely yes. For Sberbank -- the stockholders will decide.

 

(Vedomosti) Is the Central Bank promising to lower the refinancing rate soon?

 

(Kudrin) Before September 2008 the Central Bank for the most part sterilized money in the economy. In this situation the refinancing rate as such did not operate at all. But when the exodus of rubles started because of the expectation of a devaluation, only then did the Central Bank through pledge auctions truly join the market. As of 1 January, almost 2 trillion rubles had been accepted as unsecured credit. This practice continues, but in extremely expanded form and with greater risks -- the Central Bank accepts credits of Gazprom and other rated companies as security. A boom on Central Bank credits occurred in the winter. Central Bank credits make up 14% of the resource base of banks now. But now their magnitude is slowly dropping. We selected a model where the budget would replenish liquidity in the economy through a deficit (essentially we are taking out the money from Central Bank accounts and directing it to the economy in the form of budget expenditures), and the Central Bank is reducing the volume of credits somewhat. So the Central Bank's influence on the credit rate is still low, just as it was. With its rate the Central Bank reflects the risks of the economy and inflation and acts as a restraint on the economy's obtaining too much money. It is specifically at this moment that the Central Bank is reducing its credits, and that means that it certainly should not lower the credit rate. A tendency for inflation to drop is now evident, so the gradual lowering of the rate is possible.

 

(Vedomosti) You are looking at the future cautiously. Will that have an effect on next year's budget?

 

(Kudrin) We have not yet made up our minds completely. We will spend the next few months calculating. But for us it is already clear that the main summarizing factor of the budget will be a 5% deficit. If the volume of GDP is suddenly lower than predicted, budget expenditures in nominal value will have to be kept below the deficit amount marker. If we can handle this task, we will be able to say that we are managing our economy and obligations.

 

(Vedomosti) Do you already understand how this year's budget will differ structurally from last year's budget?

 

(Kudrin) All public social obligations will remain, that's for sure. It is obvious that there will be fewer subsidies to the economy. The large number of them now is an anti-crisis measure. FTsPs (federal target programs) will be adjusted: some will remain at the previous amount, while some will be reduced. An understanding has been reached that programs that stimulate high-technology orders for Russian enterprises will remain at their full amount. For example, the Glonass (Global Navigation Satellite System) and Kosmos (space) programs. And the main difference is that the 2009 budget is an abbreviated version of the law on the budget, when all the articles have been reduced in roughly equal proportions. The 2010 budget will be completely rewritten. We will finance only the absolutely most important things. I think that it will be very useful. While we used to permit ourselves to rapidly build up income even as compared with the increase in GDP, we will no longer be able to afford to do that. Unfortunately, there is no guarantee that the world economy will begin to come out of the crisis in 2010. And many are hoping that state support will be prolonged. Even now we can say that no matter how events develop, state support will be lowered. In 2009 the amount of the stimulus package will come to 6% of GDP, while I cannot name the figure for 2010, but it will be substantially lower.

 

(Vedomosti) So does that mean that investments will actually disappear altogether?

 

(Kudrin) The new principle of budget planning is that ministers within the limit assigned to them will themselves correlate the amount of current and capital expenditures. Our main task is to preserve the stability of the macroeconomy. If we rock it with an additional deficit or large injections of liquidity, it will lead to an exodus of capital and higher prices. The fundamental indicators influence the solution to the crisis more than many localized measures. The fundamental indicators must be kept and their strength increased; it must not be reduced. Each of our steps must pass the test -- are we increasing the strength of our economy or making it weaker? And all localized solutions must also pass this test. The state should not take each enterprise by the hand and teach it to work. Especially since the state does not even know how to do that. The state is supposed to preserve the conditions for the economy, and then all the institutions will start working -- banks will begin to issue credits more boldly and the citizens will begin to buy more boldly.

 

The Reliability of the Ruble

"My savings were always kept in rubles in Sberbank. And even when all the coming measures on devaluation were already clear to me, I deliberately decided not to replace the ruble. Although my savings are certainly not small. I calculated that the question of savings is the question of what currency I want to conduct expenditures in. Since I want to improve my material status in Russia, it is not the currency exchange rate that bothers me but inflation."

 

The Minister's Income

 

Aleksey Kudrin's income in the last year came to almost 5.7 million rubles, the minister of finance indicated in his (income) declaration. He owns an Audi A6. His wife Irina Tintyakova received much less during the year -- 223,400 rubles. But then she owns two land parcels (470 square meters and 8,400 square meters), a residential building (94.4 square meters), and an apartment (42.4 square meters). An apartment of 120 square meters in size is registered to Kudrin's son Artem.

 

Biography

 

He was born in 1960. He graduated from the economics department of Leningrad State University.

1990 -- deputy chairman of the economic reform committee of the Leningrad Soviet Executive Committee

1992 -- chairman of the Main Financial Administration of the St. Petersburg Mayor's Office

1996 -- deputy director of the Russian President's Staff and chief of the president's Main Control Administration

1997 -- first deputy minister of finance, and starting in 1999 - first deputy chairman of the governing board of RAO YeES (Russian Joint-Stock Company Unified Energy System) and first deputy minister of finance

2000 -- minister of finance

2007 -- vice premier of the government

 

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Source: “Vedomosti”