HOST: Good evening Andrei. Thank you for finding the time for an interview.

Andrei KLEPACH, Vnesheconombank Deputy Chairman (Chief Economist) – Member of the Board: Good evening.

HOST: You’ve put forward one of the most interesting ideas today. You said here at the forum that it might be worthwhile for Russia to think of carrying out a same sort of operation on the gas market as Saudi Arabia is carrying out on the oil market - a same game to a certain extent. Could you say in more detail what this idea is all about?

Andrei KLEPACH: First, as opposed to oil where we appear to have reached a ceiling production level of 533 million tons, there is a potential for increasing gas production. We are in a position to increase gas exports substantially. For example, now we export about 160 billion cubic meters but in fact we can export more than 200 billion cubic meters. The question is whether there is a demand, a market for it. It is clear that Europe won’t buy it in such huge volumes for economic reasons - its economy is either stagnating or recovering very slowly. And for political reasons we have problem going to the East. This means that there is a need for infrastructure and it will be built. But there is also a question of strategic choice. We can either keep export volumes at a stable level or increase them insignificantly. What does this mean? Now gas prices are falling and they will keep on falling. And in this situation liquefied gas is starting to account for a greater market share. The number of suppliers is on the rise too. Europe imports a lot of liquefied gas and America is most likely to start exporting gas. These volumes are not very large but they are going to influence prices significantly. You can either adapt to these conditions or lose your market share as is the case with Gazprom now. OPEC countries and Saudi Arabia went through this sort of situation in the 2000s. They were losing their market share. Prices were at the peak and then they started to go down. But they could keep them. Instead of such a passive adaptation, the Saudis launched a counter-offensive and started to beat their competitors and above all Americans and to some extent us and tap our markets in Poland and Germany. But the price paid for it was a sharp fall in oil prices. This is their way to beat competitors. There is also a threat to our gas that we supply via pipelines. And there will a fierce competition on Asian markets where historically high gas and liquefied gas prices are starting to dwindle. Under these conditions. we can follow rules of the game and we can also play our own game by increasing production volumes. Maybe, this sort of approach would be strategically justified.

HOST: By the way, a gas market is not an oil market. It is a lot more segmented. First, what segments does this competition deal with? Second, if we launch this sort of offensive, will Gazprom have to sacrifice some of its fundamental principles, for example, long-term contracts, price development and etc? Will we have to operate more on the spot market? Or maybe it’s a matter of increasing independent producers’ export volumes?

Andrei KLEPACH: We don’t have any reliable information on LNG production costs with regard to our and other countries. But according to expert estimates, gas prices could keep on going down significantly and gas exports will remain to be profitable including our LNG projects both on Sakhalin and the Yamal LNG project.

HOST: This means that LNG is competing with LNG?

Andrei KLEPACH: This is the first sphere for competition, because American shale gas is more of our indirect competitor. Competition with other energy resources is also a possibility. China’s oil consumption is more than 3 billion tons of coal per year. Potential demand for gas is huge, although it is growing slower than expected earlier. I think that in the future China is bound to increase its gas consumption volumes by many times . They have their own sources, they have also methane production potential. We have to enter this market. And we are in apposition to do it. Somehow India will follow China’s path. There are Iran and Iraq too. But we can also supply gas to India in the future. In a sense, we have to change rules of the game here. We should apply different approaches to contracts and not only to spot ones, we should identify our own benchmark gas prices which are not directly tied to oil prices. And I think we’ll have to set up a sort of mini “gas OPEC” with our partners and colleagues from Central Asia. Here I mean above all Turkmenia and Uzbekistan which are now major suppliers of gas to China where we can use the existing capacities. We should not build the Altai gas pipeline worth more than twenty billion dollars but we should reequip and launch the Asia-Center gas pipeline. Yes, it’s a transit through Kazakhstan and other countries. We have a negative experience with Ukraine. But I think we can play here a different game. They are our partners and we can supply gas through their gas pipelines to the Chinese market.

HOST: Now I suggest we move to the Forum’s main theme; this is “Russia. Strategy 2030”. What sort of consensus over this strategy can you see after the Forum’s first day? How is it being worked out under these very difficult conditions? What sort of strategy in your opinion should it be?

Andrei KLEPACH: It’s a good and positive thing that in our difficult times when we approve a budget for a period of one year or even shorter and we start cutting or optimizing it right after approving it, we nevertheless discuss Russia’s long-term plans as well as strategic vision of Russia’s future its resources and ways of developing our human capital and land. Arkady Dvorkovich said that we should use not only hydrocarbons but also our human, land and agrarian capital. Discussions are underway and it’s very important for us to learn lessons from how we implemented the strategies we had. Our official strategy approved by the Government is a concept of long-term socio-economic development until the year 2020. It was approved in 2008.We failed to fulfil many quantitative parameters, for example, with regard to economic growth rates because a different economic situation developed but the ideas on which it was based are still relevant and justified. And we should understand why we failed to put in effect those ideas and what changes we should make. Here I mean ideas related to a technological breakthrough in the economy and a stake in making significant investments in the development of human capital and a stake in developing new technological initiatives related to biological, medical technologies, structural economic shifts in exports and import substitution. We should try to understand what we could do under these conditions because we froze and even cut expenses in real terms on science, education and public health care. We cut the expenses as a result of the fall in oil revenues. Maybe be we should get back to a strategy of economic growth and in order to make this happen we should increase our government debt, above all, our domestic debt to be able to fund our social sector, the creation of new services and a new quality of human capital.

HOST: When experts are talking about the current economic crisis they often compare it with some analogues. Most often, they cite examples from Latin America’s history, for example Argentine in the second half of the nineties. Can you compare the current economic dynamics in Russia with something that already happened somewhere in the past? And how is this crisis in your opinion going to develop? Is it going to last for decades or is economic growth going to recover a year or two years from now?

Andrei Klepach: I think that Latin America’s development differs from ours. Those who didn’t like Argentina’s development model and institutional decisions made, used Argentina’s example to scare people almost throughout the 2000s. Argentina went through several defaults but it is developing. We have also Brazil’s example where they even had a left-wing government that carried out reforms, but nevertheless until recent years it enjoyed high economic growth rates and its nominal GDP exceeds that of Russia. In terms of purchasing-power parity Brazil is lagging behind. This enabled Jim O’Neil to create BRICS which is comprised of Brazil, China, India and Russia. These countries demonstrated a very dynamic development in the 2000s. Our challenge now is to become a dynamic country that could have and implement an economic growth model in line with our domestic needs which is attractive for Russian business, Russian citizens and for other countries. Our development model had a positive image in the 2000s. The current crisis is a pretty serious test. But I think we have a good chance to overcome it. And it’s not a matter of a 10-15-year stagnation. To my mind, our economy is sure to get out of the crisis. But would we be able to develop dynamically or our development would be weak. As opposed to Brazil, we have serious demographic limitations. We have a lot of structural problems and large social obligations which they don’t have in China. We can develop without fulfilling them but we can also try to strike a balance between significant investments in human capital and a stake on efficiency, productivity and flexible structural shift in the economy. We have a unique research and technological potential. We have highly qualified production workers and competitive engineers. Although we have a lot of problems. We have, for example, labour shortages. But I think we’ll be able to find solutions that will allow us to develop pretty dynamically.

HOST: So, we can assume that the worst is behind us at least as far as financial markest are concerned.

Andrei KLEPACH: I think that the most serious shocks on the financial markets are behind us. But serious challenges inside the country still remain. And they can bring about certain social unrest. Economic situation will remain to be rather complicated in 2016 and even at the beginning of 2017. We need to take very serious measures. In fact, the Government has now considered a crisis management package. It resolves many specific problems. But in order to respond to the current challenges, for example, the risk of a serious economic downturn this year, we need to take additional measures including budgetary and monetary stimulus as well as certain institutional, structural reforms.

HOST: Andrei, thank you for your answers.