TV CHANNEL RUSSIA 24,
INTERVIEW,
02.11.2015, 17:41

CORR: Good afternoon Andrei Nikolaevich.

Andrei KLEPACH, Vnesheconombank Deputy Chairman, good afternoon.

CORR: All over the world, economic growth is slowing down. What should major financing institutions fear and where should they invest?

Andrei KLEPACH: The world is different – in fact, economic growth is slowing down in China but estimates vary here, for example, some expect its economy to grow at a rate of about 6-7 percent. Economic growth is slowing down in Brazil, which is also going through the economic slump. But as a whole according to estimates by the International Monetary Fund and the Organization for Cooperation economic growth is somewhat accelerating at a rate of 3.8-3.9 percent this year, it was three percent earlier and now many expect a growth of 3.8-3.9 percent. But countries behave differently. Such drivers of economic growth as China are slowing down but Indonesia and India are accelerating. In the long run, after 2016 both Russia’s and Brazil’s economy will start to grow. Europe is reviving a little, Americans are expecting about the same growth rates of 2.5 percent as now.

CORR: In this connection, is Vnesheconombank changing its strategy in its capacity of a major financing institution?

Andrei KLEPACH: We are responding not only to how growth rates are changing in the world but also to current challenges and needs of the Russian economy and therefore VEB is determined to build up its loan portfolio, investments and participation in capital of its subsidiaries. Moreover, now that lending growth rates have slowed down significantly in our country, VEB hasn’t slowed down so far and VEB’s share in the credits extended to non-financial companies last year and now has increased by 6.5-6.7 percent as compared to the loan portfolio in the economy as a whole. And VEB’s specific feature is that it focuses on investment lending and that’s why its share in long-term credits is also on the rise and now it exceeds 13 percent. So, we are a limiting factor countering investment slump and in terms of investments VEB’s role is great.

CORR: Are you going to change your strategy for 2016, are you going to increase lending or are you worried that credits might not be repaid in the current economic situation? It’s clear that things are not as good as you would like them to be.

Andrei KLEPACH: There’s always something wrong with our economy. There is a word combination American rollercoaster and in America they have Russian rollercoaster. In fact, a part of loan portfolio is restructured, payment periods are changed and interest rates are reconsidered. To a greater extent than other commercial banks, VEB either retained effective interest rates or increased them to a lesser extent thus giving rise to a problem – by raising funds from the market and receiving refinancing from the Central Bank through REPO transactions we often work at a loss as opposed to commercial banks if we deal with the projects needed by the state that must be continued. So, here VEB has to operate in a somewhat different as opposed to a commercially oriented bank. And we have to keep on funding infrastructure projects, projects associated with operating facilities built in Sochi, new projects as well as minerals production projects.

CORR: The Central Bank of Russia jointly with the World Bank announced that they would develop a new model of Russia’s pension system. What sort of model might it be, what can pensioners hope for?

Andrei KLEPACH: Pensioners should expect stable reliable pensions and investments if we mean investing pension savings. It’s hard to foresee what proposals the Central Bank and the World Bank would develop but above all the Government is responsible for pension reform and certain decisions have been made in this respect. There are several problematic aspects associated with a funded portion of pensions. Now a decision has been made to freeze it for a period of one year once more and use these funds to finance the deficit of the Pension Fund. Nevertheless, there is a question, how will citizens manage funds already saved? There are private pension funds and there is a state managing company – Vnesheconombank, which is also responsible for investing a significant part of pension savings. So, Vnesheconombank is competing here with other institutions in which people place much confidence. So, I hope that in 2016 we’ll be able to develop a new model of a stable pension system to avoid making temporary decisions.

CORR: Do you believe that the fact that the Finance Ministry has frozen the funded portion of pensions means that the Finance Ministry has exhausted all other possibilities to solve the problem of budget deficit?

Andrei KLEPACH: I wouldn’t say that. There is always a range of solutions but each solution has its pluses and minuses and if we don’t use pension savings we will have to cut down expenditures and it is almost impossible under the current conditions because this is 300 hundred billion or to run a huge budget deficit and borrow on the domestic market or use financial resources of the Reserve Fund to a greater extent. But as the budget does not provide for increasing domestic debt it would be wrong to spend financial resources of the Reserve Fund intensively. Nevertheless, I believe there is a possibility and a niche for borrowing more actively on the domestic market and for pursuing a more active debt policy. By the world’s standards our debt is not large - it’s a bit more than 12 percent of GDP. But it’s clear that it’s not cheap, we don’t have cheap credits but there is a possibility for increasing our domestic debt.

CORR: How will a freeze on pension savings affect investments in the country?

Andrei KLEPACH: I think that in the short term, it won't have any influence on investments because funds that go through private pension funds are not essentially used for making investments. It’s more important here that both business and the financial system are in need of rules and we have made temporary decisions for the third year in a row. In this case the Government said it and I hope that during 2016 this pause will be used to factually develop a stable model of pension reform.

CORR: What is in your opinion the most plausible scenario of Russia’s economic development and will our severe dependence on oil prices persist and as a whole is the fall in oil prices a plus or a minus in the current situation?

Andrei KLEPACH: I don’t think that low oil prices are good for us because an almost 50 percent fall in oil prices reduced Russia’s export income by about 150 billion dollars and this factor had a negative impact on Russia’s economic growth. Maybe, business and the Government are more worried by GDP than ordinary people, nevertheless, everybody was hurt because people’s real incomes and wages decreased, this year real wages will decrease by more than 9 percent. Nevertheless, besides oil prices, there are other things that play a crucial role for the Russian economy, for example, our ability to upgrade our economy, make investments more effective and boost productivity. And here there is much room for maneuver . In order to create a sustainable economy it’s not enough for us to simply boost efficiency and productivity, we have to carry out serious structural economic reforms. Above all, we should encourage sustainable domestic demand and those economic factors that work for the domestic market. Although industrial output is falling this year, our food sector has operated successfully so far. I think that next year, given import substitution and a good resource base created but our domestic agriculture, it has good opportunities for growth and in the longer term a potential for exports. We can export flour and we export it as well as our candies to say nothing of vodka and other drinks. Our export and agriculture potential is great, for example, we can see record amounts of grain exports. But some time from now our animal production in which large investments have been made in the past years could enter the world’s markets. But it won’t be easy for us to do it we need to receive certificates, we need to invest in logistics but there is a potential for increasing exports. Moreover, we have started to substantially increase supplies to China during the current and the past year. Chinese people believe that our food stuffs are better and in any case they are healthier.

VEB has also started to make its projections. We expect our economy to grow even faster than government’s forecast of 0.7 percent, we expect economic growth to be from 0.7 to 1 percent of GDP growth. Even now, our smelting, oil and gas industries are increasing their exports. We believe that exports of our mechanical engineering products might also increase. In terms of exports, VEB plays a special role because the Russian Export Support Center is its pet project and VEB’s important responsibility and significant financial resource are allocated to fund the Center. So, we believe that as a result of this activity we’ll be able to increase exports of mechanical engineering products and not only defense-oriented products but also civil-oriented ones. Secondly, our economic reserves have dropped significantly but our assumption is that they will start to recover. As far as consumer demand is concerned, it will continue to stagnate and even fall slightly but I would like to say that we haven’t hit the bottom yet. As far as investments are concerned we proceed from the premise that there is a potential for increased investments in the next year. In our estimates, this year investments have decreased by about11 percent but next year investments might grow somewhere 0.6 percent and maybe about a zero. Private investments might recover as well. It’s very important for us to return to the dynamics that was seen in the Russian economy in the 2000s. If we want to get back to an issue of competition, we talked about at the start of our conversation, we should assume that if the world’s economy grows 3.6 and further on -3.8, 3.9, we should achieve these growth rates to retain our role in the world and it’s not only a matter of national economic sovereignty, it’s also a matter of narrowing the gap between us and industrialized countries and it concerns everybody, each family. Our main task is to achieve an economic growth rate of about 4 percent and we can accomplish it because there is a potential for increasing consumer and especially investment demand. But to make this happen people and above all business should be determined to invest above all in Russia. The capital outflow is now lower than it was expected earlier. At the start of the year, some expected capital outflow to be more than 100 billion, others – about 90 billion, our Bank’s forecast was 87-90 billion, now capital outflow is likely to be about 60-65 billion. Nevertheless, this is a huge amount, this money is fleeing Russia and we should get back to an economic development model when amounts of capital outflow are not significant and when at some point in the mid-term capital starts to flow into the country, despite sanctions, despite Russian capital flight.

CORR: Andrei Nikolaevich thank you for your interview.

Andrei KLEPACH: Thank you for your questions and I wish our economy every success.