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Russian Economic Development Minister Maxim Reshetnikov spoke in an interview with the Financial Times about the potential for foreign business to expand operations in Russia, the extent to which the Russian economy is protected from external risks, and the development of long-term dampening mechanisms to prevent the transfer of global price fluctuations to the domestic market and support manufacturers in the country.
FT: Can the Russian economy do without an influx of foreign investment, how dependent is Russia on foreign investment?
М. Reshetnikov: I would not confirm any reduction in the number of foreign participants, that is a question for the forum organisers. We have very intensive contacts with business representatives, European businesses in the first place. We held several meetings, in general, all the companies confirm that they will continue to implement investment projects, all are very interested in the changes that will take place in the Russian economy. That is, they see a prospect, show interest and are willing to invest. For our part, what we see in the special economic zones is that all the projects from last year, despite all the restrictions, have continued to be implemented, and enterprises are being commissioned. Businesses - both Russian and foreign - operating in the country feel absolutely fine, confident. We do not notice any of these negative tendencies here.
FT: Have investors stopped paying attention to the new sanctions imposed on Russia?
М. Reshetnikov: There is some pressure, but it exists primarily in the financial markets. We see this in the fact that the ruble exchange rate is slightly weaker relative to the fundamentals, we understand that there is some volatility and nervousness. As for businesses that actually invest, create enterprises and development centres here, engage in trade or provide services - everything is fine here.
FT: So there is no such thing as German or French businesses saying they would very much like to invest but are afraid? That kind of intimidating effect?
М. Reshetnikov: There is no such effect. Of course there is some pressure, but it is expressed in the fact that not all the cooperation that would be beneficial to our countries is implemented due to restrictions - which we believe to be unfair. But nevertheless, the space for interaction and manoeuvre remains large and this interaction is ongoing.
FT: Can we say in general that Russia is becoming less vulnerable to these pressures?
М. Reshetnikov: It seems to me that in aggregate it is a fact that the Russian economy in general is becoming less vulnerable to external fluctuations, but that does not mean that it is invulnerable at all. Of course, we feel all sorts of fluctuations on world markets and sanctions, but obviously the Russian economy has a large margin of stability, and that margin has grown in recent years.
FT: Due to what in the first place?
М. Reshetnikov: Due to economic growth, the increasing complexity of the economic structure, its diversification, due to the fact that we are doing more ourselves. We have a core set of essential technologies, we are actively digitising and investing in our own science, education and healthcare. We have invested a lot in infrastructure in recent years. This infrastructure is in demand, it pays for itself and gives new business opportunities due to the fact that we actively use the territory of our country, including the Far East, Siberia, the Central part, due to the fact that we realize the transit potential and build ports as part of the combined infrastructure, due to the fact that we actively develop towns and metropolitan cities, tourism is developing. Progressive development is taking place on all these fronts. This does not mean that we have already done everything that needs to be done, there is still potential. But it is impossible to deny the tremendous progress the country has made over the last 15-20 years.
FT: Judging from the conversations on the first day of the forum, as far as the Russian economy is concerned, would you say that the pandemic in its most acute phase is already over?
М. Reshetnikov: It is obvious that we are back on a growth trajectory, a regenerative growth trajectory. There is now a regenerative growth, but we are well aware that it will then be transformed into normal growth. The government has been preoccupied with two tracks all last year. The first is to support citizens, small businesses and the economy on the presidential instructions. To help businesses survive all these restrictions, pandemics and so on as painlessly as possible. And in parallel with this, we have been working on just the structural changes that will allow our economy to grow faster.
FT: Are such changes and support designed for a long term?
М. Reshetnikov: In all these elements, there are systemic things and there are temporary, anti-crisis things. The anti-crisis programmes are still active, but they are coming to an end. If we talk about price issues, we have moved away from administrative regulation, which actually existed for a very limited period of time and was seen as a very temporary measure. Now the economic mechanisms are working, there are subsidies for the manufacture of products. There are issues of establishing flexible export duties, which are dampers designed to reduce the impact of world prices on our economy. These economic measures are also divided into temporary ones (obviously, subsidising the manufacture of products is a temporary measure), and as soon as the external situation allows, prices stabilise, we will stop doing it. As for the dampening mechanism, this is a permanent long-term mechanism which will remain in place and which, on the one hand, will prevent this transfer of price fluctuations (exactly fluctuations, it does not mean that it completely isolates them), their peaks to our market, on the other hand, will provide the necessary resources for manufacturers to make investments in our agro-industrial sector – this is one of our growth points – and will allow further deepening of processing: from grain to cattle breeding, dairy production and so on, that is, to move towards a more complex economic structure and creation of new value-added chains.
FT: Do you think that the problem with food prices, which worsened towards the end of last year, has largely been solved?
М. Reshetnikov: The issue of global inflation, as you understand, is on the agenda, and one cannot say that Russia is unique here and that we are the only country facing a rise in global prices for food, for example. Many countries are confronted with this and different countries will have different responses to it. We have developed this mechanism of long-term dampers for ourselves, and in general, we can see that it works.
Another point is that all this requires coordination, including within the framework of the Eurasian Economic Union for the long term, since we have common markets. To say that global food prices have stabilised and reached their peaks - I think we both realise that no one will give such a guarantee right now. There is a lot of volatility and there is more than enough speculative money on the commodities markets. Therefore, any reports of "harvest prospects", as we say, often cause hypertrophied reactions and can be an excuse to open another race for one product or another. This is why we are watching foreign trade very closely and, if necessary, constantly taking measures in order to, once again, on the one hand, support our exports, because it is very important for us to continue supporting exports, and we are one of the most open economies in the world in terms of the ratio of foreign trade turnover to GDP, and on the other hand, protect our population, our consumers from these price peaks.
FT: The Russian prime minister recently said that the greed of individual manufacturers, which has led to these price hikes, needs to be tackled. I have spoken to many business people, including those in the food industry, and they have been a bit offended by this phrase about greed. Do you think this has been the case? Has the greed of manufacturers harmed the Russian consumer?
М. Reshetnikov: The authorities urge not to use opportunistic short-term fluctuations to take advantage of the situation at the expense of the population and consumers at some point and to try to create cartels or monopoly collusion or something else in order to make money. Hardly anyone can call the money earned from cartels or monopolies honest. We have anti-monopoly legislation, the Federal Anti-Monopoly Service, which monitors this, and in this respect any abuse is unacceptable, especially at a time like this.
On the other hand, businesses are chasing profits and that is perfectly normal. It is very important that businesses have no doubt that their willingness to invest, their honest work and play by the rules will be rewarded. Rewarded primarily by the market, if the business gets it right. We are now seeing economic peaks and we understand how high business profits are in certain sectors of the economy, usually large businesses. And we are all very concerned about where these profits will be channelled. Whether it is invested in the country, in the same companies or in other companies, and what matters is how the business behaves.
So it is a question of our taxation system and to what extent it is [appropriate] in a situation of extremely high peaks on a number of commodities, to what extent society perceives the current level of taxation as fair. This is directly linked to where businesses will direct these funds next.
But it must be said that we have had this kind of discussion before, when oil prices were at their peak. And it has seriously changed our tax laws. So, of course, some amendments to tax legislation are possible as a result, but it all requires predictability. It is very important that businesses understand this and do not feel cheated.
And it is unlikely that anyone in business area would now say that they were banking on all these peaks happening in 2020.
FT: Apart from particular measures, are the authorities now expecting business to be more socially oriented? That is, to share profits, to invest in the country?
М. Reshetnikov: It is indeed a question of taxation, because in the end, it is the taxpayers' money that finances all social programmes, which have been increased substantially, simply many times over the past year. These are both national projects and the social benefits announced by the President.
FT: That is, business has to realise its role. How can this be put into practice? Only through new tax mechanisms?
М. Reshetnikov: The President has clearly stated that our tax mechanisms should encourage businesses to invest. In other words, if you invest all the profits you earn, even if they are very high and so on, you take the capital and invest it in new production, hotels, factories, development centres, research centres - that's one story. If you take profits out on dividends, which is fine in general as well, and we are interested in developing the stock market, but nevertheless dividends are usually about consumption, then it may well be that there should be a different level of taxation so that we encourage investment.
FT: Now businesses have concerns, they feel they are not sufficiently protected, there was a poll on RBC a week ago that said 80% of entrepreneurs believe they can become victims of unwarranted criminal prosecution, and even 20% of prosecutors agreed with them. Can the authorities do more to make companies feel more secure? Because when they hear words like greed in their address, I think it is natural that they become apprehensive.
М. Reshetnikov: It should be noted here that any business fears are based on the fear that someone will come to them and make some demands that either the businesses did not know about, or are excessive and knowingly impossible to fulfil, or there will be some unsecured legal procedure, or they will not be protected from this by the legal system. The government has undertaken a major regulatory reform called the "regulatory guillotine". More than tens of thousands of old regulations, including those from the Soviet Union, have been abolished and replaced by a new, clear, updated single comprehensive system of acts - about 480 in all. All of these acts have been further and very thoroughly discussed with businesses to ensure that everything unnecessary, unrealistic, impossible and so on has been removed. And this work was done in a short time and in sufficient depth. At ministerial level, literally, we sat down and dealt with the most important cases for businesses. For example, we sat down with our colleagues, with the Minister of Natural Resources, and sorted it out. Businesses have complained that in some cases they have to discharge cleaner water than what they take from the reservoir. That is, taken away and essentially operating as treatment plants for water bodies - such were the requirements. And we have found the necessary compromises to both protect environmental interests and at the same time reduce the burden on businesses. And such compromises we have found on so many points. This does not mean that the job is 100% done. No, we still have 'homework' for this year. We have postponed some of the most difficult issues, it has taken time to find that balance. We will continue to do it.
The second point is that there is a big reform of control and supervision of all procedures, so that the task of controllers is not to go and write out fines, but to warn and explain. There should be clear and understandable 'tick boxes' for inspection so that businesses understand how they will be inspected.
Moreover, last year we introduced a moratorium on inspections for micro, small and medium-sized businesses. Extended this year for small and micro-businesses. And by and large, for now at least, we can see that nothing terrible has happened. This means that we go to check where there are no particular risks. Let's use this new risk-based approach to reconsider, to stop inspecting places where nothing happens, and to look where there are really problematic situations. So this system works, and we expect that by doing so we will significantly reduce the level of risk in the economy and increase security.
FT: What is your inflation forecast right now?
М. Reshetnikov: We think it will be maybe a bit higher than our forecast, we will specify it in July. But at the same time it is an understandable risk, we understand how to manage it, we are careful about it.
The past crisis has taught us a lot. First and foremost the implementation of big, large support programmes for people and small businesses. In the vast majority of cases, it is small and medium-sized businesses that we have helped. And the employment recovery that we are now seeing, the job recovery, is largely due to these large programmes implemented by the state. Of course, this softening of fiscal and monetary policy was unprecedented for our country. Therefore, the rate of recovery is now tangibly higher than what we had expected. This does not mean that we are going to run and adjust the numbers now, because of COVID. Unfortunately, the situation does not allow us to relax completely. Nevertheless, in terms of economic dynamics, we are recovering. And most importantly, this year we have not only dealt with anti-crisis programmes, although this took a lot of effort and was under the President's control, but we have also dealt with systemic issues of low-carbon development, hydrogen, electric transport, digitalisation, infrastructure development. We are now preparing new projects for investment from the NWF (Russian National Wealth Fund). Investment legislation has been modernised and the "grandfather clause" has been introduced. We have had many positive and visible changes, which we expect will "play out" in the next 2-3 years and give additional economic growth rates.