OREANDA-NEWS.  February 2, 2012. “The upcoming decades will be a time of great challenges, risks and transformations that will inevitably lead to the emergence of new global economic centres. I would like, and I very much hope, to see Russia, which has all it takes to do so, become one such centre.”

 Vladimir Putin’s address:
 Ladies and gentlemen, Mr Gref (German Gref, President and Chairman of Sberbank) said that we have some outstanding speakers here. I don’t consider myself to be one of them – there are better speakers in Russia. He also quoted a Chinese proverb, and I thought of another one: To see farther, you must sit higher. Considering my current position, I think I have the right to put forth the government’s view of processes that are taking place in the world, in the global economy, on what we consider Russia's place to be, and our economic policies.

A discussion is underway world-wide on the global economy and the risks involved in it. All the leading economies and all other countries are working on their development strategies. Responsible governments are considering further actions and potential instruments of economic development. Russia is one such country; it is no exception to the general rule. We are part of the global economy and so will obviously encounter the same problems (what am I saying? We have already encountered them) as other countries, while at the same time trying to resolve our own problems amid global transformation and against the backdrop of new trends in global economy, technology and civilisation.

In our view, the current period of turbulence and instability in the global economy will not come to an end soon, and many international experts share this view. None of the reasons for the continued financial upheavals has been eliminated. Moreover, the 2008 crisis, which our respected guest, Mr Paul Krugman, predicted (Paul Krugman, a US economist and winner of the 2008 Nobel Memorial Prize in Economic Sciences) has obviously entered a new stage, revealing such large-scale in-depth problems as the debt crisis of corporations and entire governments, and the imbalances of the financial sector, which has swelled out of proportion and has become largely speculative and far removed from economic realities. By the way, this is not only my own opinion or the opinion of my colleagues from the Russian government or our economists – I regularly meet with business leaders, the chief executives and major shareholders of large corporations, and top managers of both American and European companies. All of them point to a swollen financial sector that is removed from economic realities. It is a destructive process of de-industrialisation and a loss of quality jobs in the leading economies of the eurozone and the United States.

It's obvious that the world will never be the same. Considering the change in terms of historical categories, we believe that the issue at hand represents the end of a period of political, economic and financial domination of a number of states, which has lasted nearly five centuries. The main global growth centres are shifting out of the so-called historical (relatively historical) West, and the importance of the Asia-Pacific region and, certainly, BRICS countries, is growing.

Coming to terms with this reality is sure to be difficult and rather unpleasant, in particular because for 20 years before the crisis many experts and politicians predicted a completely different, much more positive future for the traditional world leaders. It seemed that the Western economies would continue to grow and that nothing was threatening, or in principle could threaten, savings that had been converted into hard currency, as we once called it – that is, US dollars, Deutsche Marks, and later, euros. The Western economy seemed especially stable against the backdrop of the chaos that swept across Russia in the 1990s. There was a persistent illusion that one can accumulate wealth while fostering consumption, without being concerned with efficiency and competitiveness, that growth is possible without further development, growth on credit. And in fact, that is how it was.

Now, we have sobered up. The eurozone’s consolidated sovereign debt is equal to nearly 90% of the GDP. Figures differ from country to country, from 80%-85% in some countries to 124% in Italy and Greece. Taken together, the figure is around 90%. The structural problems of the US economy have also become obvious: the US sovereign debt has reached USD 15.3 trillion or more than the country’s GDP. The United States is living on credit. Tensions in the financial systems of Europe and the United States persist… I must say that this is not good news for us. Let me be straightforward about it – I will largely repeat what our colleagues and experts from the United States and Europe have already said – this is not good news to us. I’m not excited to say what I have to say. We just have to admit and duly note it. This is not good news, primarily because these systemic risks jeopardise the global economy and the dynamic growth of new leaders, such as China, whose economic welfare is likewise dependent on developed economies.

It is becoming increasingly clear that the risks of another global recession remain unchanged whereas the recovery and the emergence of a new growth model may take a long time. There are two scenarios available. Under the worst-case scenario, all current problems will worsen, and authorities won’t be able to make any crucial decisions either at the national or international level. Such a scenario may lead us to continue gobbling up future resources, debt accumulation, increased protectionism and trade wars leading to political instability and the weakening of the middle class in many developed nations. The best-case scenario calls for the rejection of bubble economies and returning to the economy of real entities, values and assets, an economy that can be measured in human values, an economy that creates jobs instead of derivatives. Many of our colleagues here are experts and have vast economic knowledge. Nevertheless, I’ll allow myself to say that, according to expert estimates, current global real assets are estimated at about USD 60 trillion, whereas financial derivatives are estimated at USD 600 trillion. That’s ten times more!

We believe that the driving force behind development includes access to another level of technology, which is not exclusively about technical innovations. This is rather about different approaches to culture, business, work, consumption, investment and education. The technical breakthrough in itself will present major challenges to many countries. For example, the potential energy revolution, that is, transitioning to hydrogen fuel or other alternative fuels, may, or likely will, result in a drop of prices for oil and other hydrocarbons, which are Russia’s main export items. This is a real challenge for us. On the other hand, according to the same estimates, including by UN and international experts, consumption will grow in the next 15-20 years, and the fuel structure will change slowly. Russia has a historical chance to use its natural advantages to modernise its economy.

In a word, the upcoming decades will be a time of great challenges, risks and transformations that will inevitably lead to the emergence of new global economic centres. I would like, and I very much hope, to see Russia, which has all it takes to do so, become one such centre.

What are our basic premises? Without a doubt we have completed the post-Soviet period of development. Russia is internationally recognised as a market economy. This year we are joining the WTO. Our partners have made their decisions, and now it’s our turn to make one, which we will do within the next few months. The Common Economic Space of Russia, Kazakhstan and Belarus came into existence on January 1, 2012. In this regard, I’d like to express my gratitude to top government officials of these countries for their professional and pragmatic approaches to integration in the post-Soviet space. We are on our way to a deeper form of integration – the Eurasian Union. Already today, the shared market of the Common Economic Space includes 170 million people. The GDP of the participating countries, calculated by purchasing power parity, exceeds USD 3 trillion, outperforming Germany and placing fourth after the United States, China, India and Japan.

Russia is the world’s sixth largest economy and has all it takes to become a top five economy. I’m confident that this will happen. We ended last year with good results if you look at the aggregate economic outcome. Without exaggeration, this is one of the world’s best results. Economic growth over 4% is one of the best rates among G8 members. No, not just one of the best, it actually is the best result among other large European economies.

More to be posted soon...

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Comments and answers to Vladimir Putin’s questions

Regarding the speech by Paul Krugman, Professor of Economics and International Affairs at Princeton University

Vladimir Putin: We are discussing the crisis linked with the debts in the U.S. and the eurozone. But if we look at the global consumption market, the world’s solvent demand on the one hand and its productive capacities on the other, and the reserves stockpiled by major economies and biggest global companies, it seems that we are simply having another fit of economic glut. This issue certainly requires precise calculations. A number of specialists (I have talked with them many times) believe that this is the root of all evil. It is possible to pay off debts step by step but the main problem lies in excess production.

Moreover, some experts believe the global crisis came to a head in the late 1980s but was delayed by the Soviet Union’s disintegration. It opened new segments of the global market – the former USSR and its spheres of influence, which began to consume everything in large quantities. In this sense the global crisis of overproduction was delayed whereas now it occupied its rightful place. What do you think about this thesis?

Paul Krugman (via interpreter): I have heard this opinion and I don’t share it at all. I have never understood what global overproduction means. It does not mean that there aren’t people in the world who don’t want to buy any more. And it does not mean that the world produces too many cars. When we reach the stage when every person in China will be able to buy a car, the potential demand will be enormous. We do not have a crisis with workers or inadequate production. I think we must invest in infrastructure, not in real estate. We must train unskilled workers.

I don’t think this is a crisis of excessive production. This is a crisis of debt and a decline in demand. Demand had been steadily growing but we cannot rely on it at all times – there are other problems as well. In the 1930s everyone said that the crisis was deep and structural and that we would never be able to fully use production capacity, that we would never need workers. People said the same things in 1945-1946. And then we had a period of economic recovery that started with a major government spending programme and it appeared that there was no lack of demand for products or workforce. As John Keynes used to say, we have a problem not with the crisis but with fuel because cars need fuel to keep moving.

Vladimir Putin: The Great Depression ended with WWII, the mass destruction and the need for economic recovery practically throughout Europe. New products were required and new markets opened. But you have just acknowledged the problem with solvent demand. Yes, people want to buy things, probably they would like to get them for free – I understand them and I would probably also like to get something for free but the question is whether they can pay for these things. I think I understood your position. It was important for me to hear your opinion. Thank you very much.

Regarding the speech by Prof. Raghuram Rajan of the University of Chicago

Vladimir Putin: There are objective indicators showing which people live below the poverty line and which do not. We and, say, the Europeans have different ways of calculating this. By the European yardstick, the number of people living below the poverty line in Russia is about 26% and by ours 12.5%. But both show that the number of these people has been cut almost in half in the last 10 or 11 years. By the Western yardstick we had about 52% living below the poverty line and now it is 26%. By our estimates, we had 25% of such people and now their number dropped to 12.5%. During the last year the incomes of our citizens grew less than in the year before. Their salaries went up by about 3.7% and the total real income of the population increased by a mere 0.4%-0.5% because pensions and social benefits were growing at a slower pace than in 2010. This is why we did not reduce substantially the number of people living below the poverty line last year. In previous years the dynamics were much better. I hope we will continue the positive dynamics this year as well.

Why did I ask? One of your theses is that inequality is growing. This is why I asked – do you mean the number of people below the poverty line is growing? I think the answer is yes – their numbers are increasing in the United States, no matter how you calculate it. But I think this is not even the point.

Was the number of people feeling this inequality smaller in past decades or centuries? Not at all! I think they were even more numerous. The question lies elsewhere – now people no longer wish to put up with this. This is what it is all about, but the roots of the problem are different. You have quite rightly pointed to the middle class, its well-being and so on. But let me make one quick remark about the idea that one cannot feel happy having accumulated debt. This depends. Many in this country and the United States feel happy regardless of their debt. The consequences may be grave but this is true. This inequality did not become more or less pronounced between different states either. It was even worse before but people in the world are no longer willing to tolerate this – the attitude has changed.

As for… Sorry, I can’t even make it out myself – I’ve scribbled something in chicken scratch. I was in a rush because it was listening intently. There is strong dependence on consumption in the United States. So what? Dependence on consumption is strong everywhere. There was not enough regulation. The only point I’d like to make is that when we talk about reducing government regulation we primarily mean ineffective regulation because in this country we do not have civilised market regulation – we have only crude administrative pressure. These are slightly different things. I simply think that it is important to mention this to the audience here, in Russia. Thank you very much.

…What are we talking about? What has Mr Gref said? That we must adopt a decision to cut social spending? Which of the deputies will vote for this? Those who do will be identified, their names will be published online, and they will not be elected next time. This is a problem. They must vote for very painful but nevertheless necessary decisions. At least we are doing it when necessary. Some countries don’t do it at all. And if they do, the opposition immediately stokes protests against what are obviously necessary decisions, urging people to rally and inciting them to smash shop windows and the like. We will not talk here about the countries where the situation is really turbulent – I wish them courage and political health. Take Argentina. What was the situation there? Instead of consolidating forces to resolve problems that were clear to experts, society and political parties, they led people into the streets, inciting them to smash shop windows and to blow up banks. My question is: Does this system have a future or not? If its foundations are retained, what other elements should be changed to lead the economy out of the dead-end? And not push countries from… This forces countries to lose their leading positions in the global economy, which ultimately leads to the degradation of society and social institutions. This is clear. And it means that there is a glitch in the system. This is what we wanted to say.