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.
Q.: The Kremlin supports the idea of setting up national champions in all sectors, while you advocate a competitive environment. You are one of the few government members who oppose the set-up of new monopolies. Recently you criticized the merger of Gazprom and SUEK. Why would this alliance be harmful for Russia? And do you believe that reforming RAO UES is possible and that it could attract foreign investors?
A.: It is a mistake to believe that the state encourages the emergence of mega-corporations. The government is making efforts to reform the sectors that have traditionally been dominated by a large monopoly. This process is long and hard.
Another priority of the government's economic policy is to ensure favorable conditions for large investment projects. Implementing the biggest ones, which are related to the country's strategic economic interests, requires attracting first of all Russian investors able to put money into projects that will have a significant impact on the entire economy.
However, I do believe that the participation of Gazprom, Russia's largest investor, in SUEK could have negative consequences. It is important to preserve a competitive environment in the economy instead of working toward state monopolistic capitalism, which may stall the country's development. Gazprom positions itself as a global energy company and is present in oil production, oil refining, gas processing, media assets, power generation, and foreign gas- and oil-exploration, production and refining projects. This requires huge investment and high-quality management. At the same time, meeting Russia's gas demand and honoring its contracts with foreign partners is a serious challenge for Gazprom. It also has huge projects developing new fields, which require enormous investment. I have repeatedly said that Gazprom should focus on its core activities, and I will defend this position. This is my principled opinion.
As to the outlook for RAO UES' restructuring, the deadline has already been set: it is June 1, 2008. Restructuring will progress gradually till that time, and foreign investors, if interested, will have the opportunity to put money into this sector. Now they are especially interested in territorial and wholesale generating companies that have been separated from RAO UES and are being floated on the stock market.
Q.: You have repeatedly said that Gazprom's investment in gas production is insufficient and that there is a risk of a gas shortage because of fast growing demand. What amount of investment do you advocate and what fields are able to ensure sufficient gas production in 2009-2015?
A.: Our ministry has repeatedly pointed out that Gazprom's investment program of recent years allocates only 30% of total funds for production, while development of new fields alone, according to its own estimates, will require $100-$300 billion until 2020. I believe that the problem of stagnating gas production in Russia should be resolved through comprehensive measures. First, it is necessary to reconsider Gazprom's investment in new gas fields, to introduce energy-saving technologies at businesses (this is especially relevant for Gazprom, which consumes 53 billion cubic meters of gas a year) and to ensure the proper conditions for independent producers to increase their production, because their potential is at present limited by the capacity of the single gas supply network. I would also note the lack of clear planning and financing in both existing and new projects.
In 2006, we launched the development of the Pestsovoye field in the Arctic, with a capacity of 30 billion cubic meters of gas. This is comparable to Russia's gas exports to France. As to new promising areas, I can name several fields in Eastern Siberia and the Far East, the gas deposits on Yamal and Sakhalin and, of course, the Shtokman field in the Barents Sea. The fast development of infrastructure in these districts will allow gas export routes to be diversified and output to be boosted.
Q.: If there is a gas shortage in 2011, who will face a decrease in supply, foreign buyers or domestic consumers?
A.: Gazprom is responsible for gas supplies to domestic consumers in compliance with the law. As to gas exports, Russia has proved its reliability as a partner over more than 20 years and has always honored its obligations. Our country has never been accused of disrupting exports. The government is now working to set up the best possible energy balance that will ensure Russia's energy security and its ability to honor all energy supply commitments.
The decision has been made to gradually increase domestic gas prices with a view to reaching the same level of profitability as exports by 2011. In 2007, Russia will go over to gas supply and shipment under long-term contracts. This will guarantee long-term investment plans for both gas producers and consumers, increase investment in developing the gas sector, set up a better energy balance and allocate additional funds for the development of gas production and infrastructure.
As to the near-term outlook for gas production, Gazprom will soon launch production at the big Yuzhno-Russkoye field. Its investment program allocates significant funds (26 billion rubles) for the development of the Bovanenskoye and Kharasaveiskoye fields on the Yamal Peninsula. Preparatory work is underway on the Shtokman field. Along with launching new fields, steps are being taken to develop a free gas market. We have launched regular auctions of gas produced by Gazprom and independent companies. For this purpose, the monopoly has been ordered to guarantee independent suppliers free access to its pipeline network, which is, in fact, state-owned.
Of course, much will depend on Gazprom, but we also seriously hope that the share of independent producers will grow. Now they account for 29%-35% of gas supplies to the industry and the energy sector, and the figure is set to reach 50% by 2015. We project that up to one fourth of Russian gas (150 billion cubic meters) will be sold on the gas exchange by that time.
I believe that the measures we are taking will help to avoid a domestic gas shortage. And the government will not get a headache trying to decide where to sell gas, abroad or to domestic consumers. But, honestly speaking, if there is a gas shortage after all, we will perhaps be more worried about the domestic market. Without energy, economic growth will slow down. The country's gas exports have been too big for a long time, and they cannot grow at the same pace. As domestic and export prices become equal, domestic gas sales will replace revenues from gas exports. Judging by the first three months since the launch of the gas exchange, the market price in Russia has been growing tremendously.
Q.: Gazprom seems to be still inclined towards large acquisitions, both in the oil sector and abroad. For example, it has made it clear that it wants 50% of TNK-BP. Can you imagine Gazprom becoming a shareholder in Gaz de France some day?
A.: Much is being said about Russian gas producers' expansion abroad. And it is not always impartial. Such trends are typical for all big multinational energy players like Gazprom. Energy companies want to reach consumers on national markets directly, not content themselves with selling energy to national resellers. An analogue of this is foreign investors' desire to invest in field development instead of buying commodities from sellers.
Gazprom has plans to enter Europe's retail markets. Notably, from 2008 it will sell gas to consumers in Italy, France, Austria and Hungary. Late last year it signed agreements with Italy's ENI and Gaz de France, which will allow for direct supply of Russian gas to the Italian and French markets from 2007. Direct supplies to Italy will reach 3 billion cubic meters by 2010, and deliveries to French consumers will total 1.5 billion cubic meters a year. Similar agreements were signed earlier with Austria's OMV and Germany's E.ON.
As is well known, the price of Russian gas supplies to Europe is only half of the retail price at which it is sold to consumers. So an increase in exports benefits local resellers and speculators rather than those who produce this gas in the Arctic and lay pipelines in the permafrost. I do not see any danger for French consumers if gas is delivered to their homes by Russian gas producers instead of French resellers. It is the price and quality of service that matter.
As to Gazprom's investment in assets outside its core activities, I have opposed it and I believe that the priority for a company like Gazprom should be increasing gas production, meeting the economy's growing gas demand, and faster development of exploration and necessary infrastructure. I do not agree with its arguments that gas reserves should be developed after future amounts are already sold and that it is risky to make a huge investment when you do not know whether this gas will sell. It is not correct to assume the current situation and market demand will stay the same for many years to come.
Q.: When will Russian consumers buy gas at market prices? Will Russian industry have time to adjust to market prices? Won't liberalization of gas tariffs for Russian companies deprive them of the last advantage they have over foreign rivals?
A.: Gas prices in Russia are regulated by the government. Since 1991, they have fallen significantly behind the industry index. Gas is the cheapest item in the energy basket (coal, oil, fuel oil and gas) in our country, which does not reflect its demand. On the one hand, this situation is a competitive advantage for us, but on the other, it does not help to attract sufficient financing to the industry.
Last fall, the government worked a lot on determining the best scenario for raising gas prices. It drafted a schedule that allows reaching a price that will ensure profits on the domestic market equal to those from exports by 2011. Russian consumers have four years to adjust their investment programs and budgets and get ready for market-level gas prices.
It is important to note that the increase in gas prices alone will not eliminate the need to set up a market mechanism for setting gas prices inside the country and to develop the gas market in Russia. The emergence of market price-setting mechanisms will be encouraged by equal development conditions for all players on the gas market, the transparent system of access to gas distribution, the possibility of signing long-term contracts with consumers and mechanisms for attracting investment in pipeline development.
As to the influence energy prices have on the competitiveness of Russian companies, their growth will encourage the implementation of energy-saving technologies. This strategy can be pursued with the help of long-term contracts for electricity and gas supplies, reducing the amount sold at regulated prices and raising prices to a level at which it will be economically necessary to implement energy-saving projects.
Q.: Foreign carmakers are expanding on the Russian market at the expense of Russian ones. Despite that, the government seems determined to save AvtoVAZ. Do you believe that AvtoVAZ will be able to survive in the long run manufacturing fully Russian cars? Won't it have to assemble foreign cars?
A.: The Russian car industry is developing quickly. Assembly of foreign models alone has attracted significant investment in the sector, over $2 billion in the first stage. I believe that it is important that well-known brands are bringing cutting-edge technologies with them.
Russia now has 12 car assembly projects. Agreements have been signed both with leading international carmakers and Russian producers: AvtoVAZ, Severstal Auto, Izh Auto, Toyota, Nissan, Volkswagen, General Motors, Ford, and GM-AvtoVAZ. Another six projects are planned. I would like to point out that these projects will set up a full-cycle assembly line that assembles, welds and paints cars; they will also produce car parts in Russia.
AvtoVAZ now has equal access to all these mechanisms of state support. It uses them both independently and in its joint venture, GM-AvtoVAZ, which, combined with the use of imported parts, will help to improve the competitiveness of its cars. AvtoVAZ is a commercial organization. It follows market rules and determines the major directions of its development independently, including decisions on its car models. Hundreds of thousands of Russian cars are produced at its plant alongside foreign models. The demand for them is still high.
Q.: Can we speak of financial and legal guarantees for foreigners willing to invest in Russia after the Russian government has taken steps to drive foreign investors out of the Sakhalin projects?
A.: The reason for the Sakhalin campaign is well known. The constant rise in the project's cost was indefinitely delaying the time when Russia was supposed to start getting profits. Even the project's Western participants agreed with that. After all, any transaction should offer bilateral guarantees. The project in question, Sakhalin II, saw constant budget overruns, which kept postponing the collection of budget revenues; and the foreigners failed to comply with the key clauses of the agreement. But the project's fate was finally sealed by numerous violations of environmental laws. They caused the biggest concern in Moscow and among the island's population.
Of course, the Russian oil and gas sector needs more direct investment, including from abroad. There are many large and capital-intensive projects, and Russian companies do not have enough funds to carry out all of them independently. Yet it should be remembered that the energy sector, notably, the development of bigger fields and pipelines, is considered strategic, so foreign investors' access will be limited.
The government wants Russian energy companies to retain controlling stakes in such projects. But it will work out clear, understandable and stable rules for foreign investors to become partners in these projects. Circumstances have changed and the Russian government's requirements have gotten tougher. Not everyone likes it, of course, but serious Western companies are learning to live by the new rules.
Things change, and the rules of the game for foreign capital in Russia are being improved accordingly. What suited us earlier is now absolutely unacceptable, such as foreign companies' participation in projects under product-sharing agreements, which seemed the only possibility in the mid-1990s. I am certain that this country no longer needs PSAs.
Q.: Insufficient investment in the Russian economy might be caused by the business community's lack of confidence in the government. What is it doing to restore this confidence?
A.: Last year, Russia saw a record amount of domestic investment. So talking about the Russian business elite's lack of confidence in the authorities is somewhat far-fetched. On the contrary, many now say that Russian businesses are getting better adjusted to the present conditions and the government's requirements. We now hear each other better, and as a result, private businesses are becoming more open.
Also, Russian companies are becoming quite competitive compared with foreign firms. They can already undertake and carry out grand projects in the energy and other strategic sectors on their own. Naturally, the authorities assist them. This is how the Shtokman project in the Barents Sea should be viewed. Russia is positive that Gazprom can develop it independently without outside help. But that does not mean that we do not need partnership with Western companies or foreign investment.
Q.: What is delaying Russia's entry to the WTO [World Trade Organization]? Why is it still easy to find pirated films and software in the center of Moscow? Can Russia join the WTO before the end of 2007?
A.: It is crucial for us to join the WTO in 2007 so that we enter the next political cycle as a WTO member. Many figures in Russia's three-year budget are based on the assumption that from 2008 Russia will be in the organization. We want to join the WTO, but not at any price. Russia is now in proactive multilateral talks with the European Union and the United States. I hope that all the unsettled issues will be resolved within the next few months.
We have calculated the budget's losses from reducing the existing import tariffs after WTO accession. The average weighted customs tariff rate will be 11% in 2008, 10.3% in 2009 and 9.9% in 2010. The present rate is 11.7%; the tariff for agricultural products is 18.6% and for industrial products 10%. This means that we will lose 40 billion rubles in 2008, 70 billion in 2009 and 100 billion in 2010. However, I cannot say that there will only be direct losses, because we will benefit from an increase in trade turnover. But it is impossible to say how big it will be. So we are now calculating only direct losses.
Indeed, our future partners in the WTO are very concerned about the protection of intellectual property rights and the fight against piracy. Although we have done a lot and have achieved some progress, even more will have to be done within the next one or two years. We cannot move forward without resolving this problem. Unfortunately, this, along with the arbitrary legal system and insufficient protection of property rights for both small businesses and large corporations, is one of the problems that still need to be dealt with. We intend to finally resolve them after accession to the WTO.
