Interview with Economy Minister German Gref (Part 1)

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Question: Mr. Gref, what means does the government have to contain the growth of the Russian currency against the U.S. dollar and the euro? Is the government thinking about how to help Russian exporters suffering from the strengthening ruble?

Answer: The strengthening of the national currency definitely pleases us, but, as you have said, this process affects our exporters. The Russian Central Bank maintains the ruble's exchange rate by means of huge interventions. This process is adjustable and is constantly being improved. In 2005, for example, the Central Bank introduced a two-currency basket as a new operational benchmark for currency interventions. This increased the volatility of the U.S. dollar's rate against the ruble, but reduced that of the euro's rate against the ruble. In the beginning, the euro accounted for 10% of the basket and the dollar for 90%. As players on the domestic foreign-exchange market got used to new conditions, the Central Bank revised the basket, increasing the share of the euro. Now the ratio is 0.45 to 0.55 in favor of the dollar. This allows fluctuations in the ruble's effective rate to be leveled out in a flexible and deliberate manner.

Q.: How will the Stabilization Fund be used? How will the government be able to put this money into the economy without provoking a surge in inflation?

A.: So, you are also interested in the most popular question in Russia now, "How should we spend the Stabilization Fund's money?" In fact, the danger lies not in spending the state's huge savings, but in making ill-considered attempts to spend it on the country's domestic needs, thereby accelerating inflation. This is a difficult subject, because it is necessary to determine the exact ratio of monetary and non-monetary components when spending the savings. I believe that we are partially succeeding, at least judging by the gradually falling influence of the money supply on the growth of consumer prices.

You can judge for yourself: the average annual growth of the money supply in Russia in 2004-2006 was over 40%, i.e. 30% higher than the inflation rate in the same period. The anti-inflation plan drafted by our ministry and adopted by the government in May 2006 had a decisive influence on reducing the inflation rate. This is a set of measures designed to slow down the growth of consumer prices, particularly utility and housing tariffs. As a result, in 2006 utility bills grew almost twice as slowly as in 2005 (17.9% versus 32.7%). The government pursued a tough tariff policy toward monopolies. These two factors helped to reduce the inflation rate in 2006 from 10.9% to 9%. Judging by the first three months of this year, we are staying within the planned figure for 2007, 8%. We have been reducing inflation by 1-2 percentage points annually and hope to reach 5%-5.5% by 2010.

As to the Stabilization Fund, I can say that we plan to divide it into two parts: a Reserve Fund, equaling about 10% of GDP, and a Future Generations Fund. The Reserve Fund will serve as an "airbag" in case of a drastic reduction in budget revenues in order to finance mandatory spending. In 2008, we plan to take 163.7 billion rubles from the Stabilization Fund to pay off foreign debt. The three-year budget does not stipulate spending any money from the Stabilization Fund in 2009-2010.

Q.: Could you please explain how the Russian Investment Fund will be used and how it will function? Will it consist entirely of money from the Stabilization Fund? What is its present size?

A.: The goal of the Investment Fund is to provide state support to investment projects of national importance. We have already decided on the selection process, required documents and methods of monitoring investment projects. They will be co-financed by the private sector; there must be a clear division of responsibilities between the government and the private investor. Finally, they should not lose money. There is a wide choice of such projects in the social and economic sectors, infrastructure and high-tech. There could also be projects aimed at carrying out institutional reforms. The Investment Fund can also be used to finance the drafting of documents necessary for investment projects that apply for state support, for example, under the law "On concession agreements."

The Investment Fund is fully formed by the state budget. It accumulates windfalls from oil exports and money saved on interest rates due to early repayment of Russia's foreign debt. At the beginning of 2007, the Investment Fund equaled about 110 billion rubles; add to that the leftover balance from 2006, and it amounts to 175.1 billion rubles.

Q.: What measures is the government taking to support the Russian IT sector? Can we expect Russia to become a leader in the global electronic industry some day?

A.: I for one believe that Russian IT specialists and programmers are among the best in the world. Our task is to help them use their potential. Today, the government is actively assisting the development of information, communication, nano- and biotechnologies: it has launched a program to set up several technology parks in the country in 2006-2020. The pilot projects will appear in the Moscow Region, the Novosibirsk Region, the Nizhni Novgorod Region, the Kaluga Region, the Tyumen Region, the Republic of Tatarstan and the city of St. Petersburg. The federal and regional budgets will finance construction of office buildings, manufacturing facilities and engineering, transport, housing and social infrastructure in these parks. This year's budget allocates over 2 billion rubles for this purpose. The program will create 75,000 new jobs and allow 100 billion rubles' worth of high-tech products to be manufactured by 2010.

We have finally gotten around to setting up the Russian investment fund for information and communication technologies. We have appropriated 1.5 billion rubles from the federal budget for the fund's authorized capital this year. At the initial stage the fund will be state-owned, but later we will gradually attract private capital as well. By 2010, the government will stop contributing to the fund's authorized capital altogether. Experts are already considering the fund's first investment projects, which will receive up to 100 million rubles each. In addition, we are gradually reducing the tax burden on Russian IT companies. Necessary amendments to the Tax Code have been made, and one of the key conditions for an IT business to qualify for tax exemptions is to be export-oriented.

Q.: Russian industry is still centered around the commodities sector. What are the general directions of Russia's industrial strategy in seeking to diversify the industry and economy in general?

A.: In recent years, Russia has begun to witness positive economic changes. There have been consistent reforms in the economy, development of market institutions, and growth in attracted investments, including foreign investments, both portfolio and direct ones. At the same time, it is impossible to ignore the great influence the commodities sector has on Russia's economic development. It is well known that over 50% of the Russian budget's revenues come from taxes and payments from the oil and gas sector. In order to achieve a structural shift in the economy and reduce dependence on raw materials, the government is taking certain measures: setting up the Investment Fund, supporting small and medium-sized businesses, creating special economic zones, developing technology parks and considering participation in strategic infrastructure projects. These steps will encourage investment in non-commodities sectors, the high-tech sector and services, and small and medium-sized businesses, which will gradually help to diversify the economy away from raw materials.

Q.: What are the government's priorities in the investment sphere (energy, transport, telecommunications)?

A.: Investment in fixed assets grew by 13.7% in 2006 (compared to 10.9% in 2005). A total of 4.6 trillion rubles was invested in the economy, double the figure for three years ago. The biggest increase was posted in the oil and gas sector (up 28.7%) and in housing construction. The share of the fuel and energy sector in investment grew by 2 percentage points and of agriculture by almost 1 percentage point in 2006. Investment in machine building grew by about 16% on 2005, and investment in the ferrous and non-ferrous metals industry also grew faster than average.

Q.: How does corruption affect the Russian economy? What specific measures are being taken to reduce it?

A.: It is clear that we cannot expect the economy to be a big success until we have shaken off the bonds of corruption. A poll conducted in 2006 by the Advisory Council for Foreign Investment showed that 22% of foreign investors viewed corruption as the main obstacle to investment in Russia. As many as 17% said administrative barriers (licenses, permits and other bureaucratic obstacles) were the second biggest negative factor. So we are working to eliminate these harmful phenomena, which have become enormous. The concept for Russia's administrative reform in 2006-2008 includes a section fully devoted to efforts against corruption. Taking into account the maxim that "the man is weak, and the temptation is great," we intend to set up a system of anti-corruption measures so as to eliminate the roots of corruption.

This could include a complete analysis of the corruption potential of all bills, ensuring their compliance with anti-corruption standards, and constant monitoring of the corruption level and structure.

I understand that all these measures may seem too scientific, but they are indispensable components of the efforts against existing and possible violations. Simultaneously, we will begin "hunting" in places where officials could be corrupt, such as agencies that make purchases for state needs, distribute housing, etc. These measures will not be effective until we provide people with socially important information about these agencies. The introduction of the so-called "one-window" principle could also be of help, when interaction between state officials providing state services and individuals and organizations will be depersonalized.  

We have even resorted to placing microphones in some federal and local government bodies with a high potential for corruption, and mandating that applicants be received only at specially designated locations. We also urge people to lay information against unscrupulous officials, a method often used in Western countries. Many government institutions have a system of internal reporting of corrupt behavior, analysis of complaints and proposals from individuals and legal entities in order to root out cases of corruption. The mandatory rotation of government officials is also expected to help.

Moreover, the Russian parliament is now considering the government's bill "On ensuring access to information about the activities of state bodies and bodies of local self-government." It provides for greater access to information about their activities and the mandatory disclosure of information that is not a state secret.

If corruption as a phenomenon is intractable, we should at least minimize it. I hope that our efforts will make this dragon less scary and that its influence on the lives of ordinary people and businessmen in Russia will at least be brought down to a civilized level.

 

(The continuation of the interview with Economic Development and Trade Minister German Gref will be posted soon.)
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