OREANDA-NEWS. On 27 February 2009 was announced, that Oleg Deripaska, Chairman of Supervisory Board of Basic Element Company, spoke at the 11th Russia Business Roundtable, organized by Economist Conferences in Moscow on Feb 11, 2009.

Below are abstracts from his remarks:

Cut cost & fight overcapacity

"I do not have to describe the situation, it is clear. We must deal with several problems - overcapacity, radical change in consumption patterns, and how consumers will make their decisions in the next 3 years based on their financial situation, their preferences, and on the future value of products. And, of course, we need to carry out measures on financial restructuring, and operate in a very difficult environment. There is an overcapacity in different sectors of the Russian economy, and we as a Group which includes commodity, manufacturing, consumer product businesses feel it".

"The most important issue is cost, and we fight cost day and night to make sure that we retain only the capacity which will be competitive in the long term. Applied to the current situation, by long-term I mean the next 18 months".

"It is not easy at all: in many businesses we must cut cost by 35-40%; some help comes from declining prices on materials we bring to Russia from abroad. In aluminium we must cut costs by 500 USD per the ton in the next 4 months, which we will do and which will require restructuring of a lot of capacity. The latter creates social problems, a problem of how to maintain social comfort and conduct relations with the regions and federal government. This is the most important exercise which every company in Russia will face".

"Consumption pattern and what consumers will buy in the next 18 months, of course, largely depends on the available financial instruments. At the moment there is almost no ready solution to this. We believe, however, as in the case of our auto company, that people will buy a product which is reliable, which they can fix in any circumstances and which probably is much simpler than it was a year ago. For example GAZ will make sure that its LCV division delivers new product which will be priced below 6000 USD. It will be the most competitive product on the market for the next 24 months and that's the way how we believe we will win the competition in this segment".

"Financial restructuring will, of course, involve a lot of issues with banks, like whether banks have sufficient liquidity. In Russia, no one talks about toxic assets yet, but it's certainly an issue. Russian toxic assets differ from US and European toxic assets. We have a number of assets, especially in commercial real estate, in the portfolio of our industrial companies, which we accumulated looking forward to rapid growth, and we have built a lot of new capacities which now will either idle or will have totally different level of revenues. How to deal with this type of assets is at the moment a matter of direct negotiations between a borrower and a creditor but we believe that sooner or later there should be a common arrangement for this type of situation".

Russian economy will be in good shape in less than one year

"I believe that Russia now is much better equipped to deal with crisis than it was in 1998. A lot of people who are present here today remember how difficult it was from July to November 1998. But today we have similar opportunities. Rouble devaluation is almost over. We have an opportunity to grow in infrastructure construction, import substitution, agriculture products, and retail. With a proper restructuring of our capacity we will continue to be very competitive in our exports. Of course it will be painful to go through the second quarter of 2009, when next round of drop will occur. But overall I believe that Russian economy in less than 1 year will be in quite good shape".

"We heard recently from our top authorities that it may take longer and we should prepare for the tough time, but I still believe that our situation this time is much better than it was in 1998. Today we have vertically integrated companies in many sectors: it gives us a lot of opportunities, a lot of flexibility with the cost. As I mentioned earlier, Rusal has been able to cut cost by almost 30% in such a short period of time, something that would have been impossible in 1998, because back then we were disintegrated and we didn't have sufficient level of consolidation on the market. Today we have a great opportunity to bring out of the business a lot of capacity which is too marginal to exist, a good opportunity to clean the system and start it again".

"Today I am more optimistic than I was in September 1998. Although I would say that today we are in June of 1998, rather than in September".

Rouble devaluation may help but won't solve all problems

"We would like to see the rouble a lot weaker, it would help us fight the crisis. But staying competitive in the environment when you need to slash almost half of capacities is a major task for many companies. Rouble devaluation may help but won't solve our problems. Rouble at the moment gives us an opportunity to adapt to the new situation".

"In the industrial sector we feel much better now than in January. Of course, one can say that this is because of China or the stimulus package. But I think it is the rouble devaluation that gives us room for manoeuvre".

"Most of the work should be done inside of companies. This is a fight for competitiveness and we must use instruments which need to be developed. We need a proper approach to production issues, production system instruments and to resource saving. We need to keep in mind environmental issues which may not appear to be high on the agenda at the moment but still are important and require a solution. After Copenhagen meeting in December 2009 new carbon payments will be introduced and we have to deal with this reality".

"Our customers expect that we deliver a competitive product, not only in terms of price but also in terms of quality. This is why I do believe that monetary policy should be primarily focused more on a problem of providing money to the end user. I doubt that we need high interest rates at the moment. I wonder what it will solve. I guess that policy of high interest attempts tries to solve the issue of inflation. But in my view the money supply is not something that causes inflation in Russia. Russian inflation has always been triggered by problems of physical supply, distribution, retail system, logistics, price on utilities such as power, gas, and railway transportation".

Social stability matters

"I do believe that social stability is something that matters at the moment. Some of our companies have to reduce staff by almost 30%. In this situation we talk to unions, regions and people, promising them that in 18 months, when we are able to restart production lines, we take them back. It is our, let's say, deal with them, and they trust us, that's why they agree although they will have to wait until the situation improves".

"So this is not about rouble, at the moment it is about social stability. Rouble could be at a better rate but at the moment social stability and other production related issues are even more important than rapid devaluation of rouble".

State companies became more flexible on prices

"State companies display proper approach to pricing. Now one can negotiate tariffs with the railway company. If you can guarantee the volume they give you pretty good terms, to make sure you stay competitive. So you have enough time to adjust your costs. You can also negotiate with the power supply company. This is a great opportunity for us to increase speed of the cost cutting through negotiations. As I mentioned, monopoly and antitrust regulations are very different from what they were in 1998. You can see it on the example of petroleum products, how they react to current changes. We believe they will push prices down to the level where they should be, because it is very important for a lot of our consumers and suppliers".

Housing program - a unique chance for over 30 mln people to buy their first homes

"There are many reasons why I'm not overly optimistic about infrastructure being a panacea. Infrastructure projects in Sochi, Saint Petersburg or Vladivostok won't save the whole Russian economy during the crisis. What I'm more optimistic about is effectiveness of support for the housing market. We have 39 million people without their own home, and it's more than 14 million families. The situation is quite different from the one in European countries where people have problems with mortgages and foreclosures. These people in Russia have no opportunity to get their own apartment or house. I do agree that it's of course important to build an airport in Sochi, in Saint Petersburg or Vladivostok, but to build an airport in another area, where we expect traffic to go down, would be a waste of funds".

"Today we have a unique opportunity to give our people, at such a difficult moment, a chance to get housing loans, and the government can provide funds directly to people, not to an agency or a ministry. I can see that even in Moscow real estate prices have dropped by more than 30%. I'm not talking about high-end real estate market which was always based on speculation and expectations. I'm talking about ordinary houses, made of prefabricated construction blocks".

"This is an opportunity which we could use in many ways - for example, to increase workforce mobility by implementing the program in Russian regions, not only in Moscow and the major cities, but also in Omsk, Irkutsk, Stavropol and other regional industrial centres".

"Seven months ago, due to the absence of housing, we faced a situation when we couldn't bring qualified workforce to Krasnoyarsk, and we needed such because we have strict discipline rules and high qualification requirement at our plants, thus we need well trained specialists who can read technical documentation; the same I can say about our retail and construction businesses. We hold on to the people. I remember that less than a year ago a group of head-hunters, hired by one of our competitors, an international corporation, stood at the gates of our plant bearing posters and offering jobs to our workers at the competitor's nearby plant. Why? Because our workers are well trained. Moreover, if you compare our management today with what it was 20 years ago - it's completely different in terms of skills".

"In 1960's Nikita Khrushchev made it possible for millions of people to get housing, although of a low quality. We have a better opportunity today. We have infrastructure in place, huge investments have been made in construction materials sector, and there is cheap and highly qualified workforce available. The cost of construction went down 50%, and if government can break down regional clauses on investment program, which includes regional co-financing of social and utility infrastructure, it would really provide the sector with a very competitive solution".

"I think that it's reasonable for the government to help individuals receive loans to build their own homes or apartments. It will solve a lot of problems, including structural problems of our recent growth period. These steps can help the banks and create jobs. It would create predictability in the construction sector".

"The housing program in the next 7 years could solve problems of more than 30 million people - they would be able to borrow, the customer would have a much better position. This also applies to consumer product companies. It would create a completely different landscape in Russia".