Vladimir Putin Attends Russia 2012 Investment Forum
OREANDA-NEWS. February 3, 2012. 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. Our inflation rate is the lowest it's been in Russia in the last 20 years. It is still fairly high as compared with developed market economies, but at 6%, it’s still the best figure in the past 20 years. This is already comparable to countries like Great Britain, who had a 4.5% inflation rate in 2011, if my memory serves. Attaining the lowest inflation rate in 20 years speaks to our focused efforts and success in this area. This doesn’t have to do solely with the foreign trade. This is also about the focused work of the government. It is connected to our support of agriculture and the negligible increases in food prices last year. This is also connected to the fact that we set aside a portion of oil and gas revenue and are not using it for consumption. For example, we received additional revenue in 2011 due to good market prices, but we used just 10% of it for consumption. This has also contributed to inflation targeting. I hope that we will see the inflation rate decrease to 4% in the near future.
We possess a budget surplus. We are the only country among major developed economies with a budget surplus. We planned a small deficit initially, and we believe that it may materialise this year or in 2013, but I’m positive that we will be able to reduce it to zero. This year’s surplus is almost 1% of the GDP. Russia has the world’s third largest gold and currency reserves, and the government reserves are growing. We have an extremely low and safe sovereign debt of 10.4% of the GDP. The external debt is as low as 2.5%.
Most importantly, in addition to the current balanced economy and solid macroeconomic indicators, Russia also enjoys basic, long-term and powerful advantages. Our core resource consists of a talented, creative, well trained and educated people. This is an enormous treasure and a good starting point from which to launch modern manufacturing processes. By the way, positive changes are taking place in the social sphere as well, and I’ll say a few words about them now. Just like in the rest of Europe, we are faced with demographic challenges, but our ongoing attention to this problem is yielding positive results. In a matter of one year, the average life expectancy grew by 1.5 years. This is very good. Mortality has decreased by over five times, which is the best figure for infant mortality in the past 19 years.
Getting back to the economy, our economy boasts high savings rates, which helps create significant reserves for further development. Our goal is to convert these savings into investments. According to the majority of independent studies, Russia is among the top five economies in terms of having the greatest potential for attracting foreign direct investments. This wraps up good news, and I’ll now turn my speech to our problems, of which we have plenty.
Russia disgracefully ranks 120th worldwide in terms of its real investment environment. This is a sad place to be. Poor implementation of a rich potential has historically been a problem for Russia. Our generation must break this vicious cycle, utilise our capabilities in full and make Russia into a global leader. Like I said before, we have all that it takes to become one.
The most significant challenge that Russia will have to confront is the challenge of low effectiveness. In terms of its economic volumes, Russia is not far behind Germany, but its labour productivity is 2.6 times lower, and its energy efficiency is 3 times lower. Russia’s per capita GDP is half that of Germany. Essentially, low effectiveness is what is behind all other vulnerabilities of the Russian economy, including the raw material nature of our economy with its low-productivity workplaces, technical backwardness and uncompetitive investment climate. Certainly, this problem needs to be addressed comprehensively by improving the quality of human capital, motivating workers and encouraging entrepreneurs, as well as developing the accessibility of infrastructure and affordability of financial resources.
The creation of modern production facilities and high-tech, well-paying jobs is the most effective means of changing our economic and employment structures. You are aware of our plans to form at least 25 million new jobs in the next 10 to 15 years. I used the term “form,” rather than “create new ones” for a reason. Creating 25 million new jobs in a matter of ten years is an impossible task. However, this can be achieved through changing production processes, or changing those we already have or creating new ones.
In fact, the issue has to do with starting an engine for continued renovation of workplaces. Where can we create them? Clearly, the commodities-based industries and related infrastructures are unlikely to offer any additional workplaces. About 5.5% of workers are employed in this sector, so new quality workplaces will need to be created in the non-commodities sector. This will be tangible evidence of crucial changes taking place in the Russian economy. In fact, we must shift from a rent- and commodity-based redistribution economy to an economy of creation and development. Incidentally, processing industries need to be further expanded and developed. We do not want to oppose such notions as a industrial and post-industrial economy. Modern practice and expertise gained by other countries clearly show that one cannot exist without the other. De-industrialisation leads to a weakening of research and engineering centres, followed by a deterioration of quality higher education. On the other hand, without post-industrial sectors, conventional industries lose access to innovation.
New jobs tend to be created through direct investment. Government spending is also very important, for example, in building infrastructure, where the government plays a truly important role. The government is indispensable in co-financing major projects where private businesses are not yet prepared to take on individual risk. There’s no doubt that private investment has a decisive role to play in general. We are aware that private capital goes only towards promising projects and only in a favourable investment climate. The true nature of today’s global world has to do with competition between countries for capital and businessmen. To win in this competition means coming out on top in the fight for the creation of well-paying and exciting jobs, a better quality of life and new opportunities.
Colleagues, our goal is to join the ranks of countries with the best business environment within the next few years. I spoke with my colleagues yesterday as we thought about whether we should talk openly about this, and then decided that we should go ahead and share our goals for the future. We need to move up 100 spots in order to go from 120th place to 20th place in terms of the business environment. What do we need to do in order to get there? We should keep things simple and pragmatic. The deadlines for hooking up to power supply grids must be decreased by a factor of four. An accountant must complete tax returns three times faster. A truck will spend seven times less time at customs than it currently does. Obtaining a construction permit will be five times faster than it is now, and there will be three times less paperwork involved in the process. That’s the way it should be across all spheres of our life. What are the underlying principles of our development strategy?
First of all, the issue concerns the presumption of fair business practices. Based on the stereotypical dishonest businessman, the state introduces all kinds of oversight and supervisory bodies, bans, approvals and excessive reporting. I don’t mean to say that we don’t need reporting, because we do and we shouldn’t go to either extreme, but excessive reporting should be eliminated, because it’s bad for law-abiding entrepreneurs.
The next principle concerns the broad use of the best international practices that have been proven effective elsewhere. We have a great opportunity to analyse and implement the best positive developments that have been achieved in other countries. Finally, it’s not up to a government official to decide on investors’ needs. I’m convinced that entrepreneurs should be able to formulate their requirements for customs, tax, administrative and other procedures. In other words, the creation of a favourable business environment is a partnership project with the participation of the state, business and society. I must say that we have already begun this work. I’m sure that there are members of business associations present here. They should be well aware that we maintain ongoing contact with them while drafting federal Russian laws or subordinate legislation of the Russian government. We run all these drafts past them and make appropriate changes before making final decisions. We will make wider use of this practice.
We have prepared specific additional measures across all areas in order to improve the investment climate. I’d like to make you aware of certain steps that we are currently working on.
First, there will be a businessmen’s rights commissioner in Russia. He will protect the rights of all businessmen, not just foreign investors. We already have such an ombudsman. He will be provided with a special procedural status and entitled to represent businessmen in court, consider their complaints and submit proposals to government authorities. In certain cases, he will have the power to suspend departmental regulations pending court rulings, and will apply to court às an interim relief in order to be able to promptly stop actions of government officials.
Second, a fast-track administrative court procedure with guarantees for businessmen is already in place. The legal burden of proof lies with administrative bodies. I believe that these guarantees could be enhanced, and the trial procedure should be made as short as possible. Conversely, the time it takes to appeal court decisions by businessmen should be extended.
In addition, administrative and property cases should be combined in administrative legal proceedings. Businessmen should have the right to receive compensation for property damage directly in administrative cases. The winning party should be increasingly relieved of paying legal fees. In fact, the issue is about creating an analogue of administrative courts. I believe that such a system must be formed on the basis of arbitration courts, since they already have facilities for information transparency and professional judges who can consider administrative cases, including those involving taxes.
Third, as I mentioned in my recently published article, all rudimentary Soviet legal thinking should be removed from the criminal law. I’m referring to all kinds of loopholes that can lead to the criminal liability of one of the parties in an economic dispute. I hope that this will result in reduced corruption, especially in law-enforcement agencies. In particular, criminal proceedings cannot be initiated with regard to tax disputes without the appropriate decision of a fiscal body concerning existing tax arrears. Importantly, such a decision can be appealed in court. Similar mechanisms should be used during prosecution for economic malfeasance. For example, a person cannot instigate criminal proceedings based on the illegal nature of a transaction without the transaction having been recognised as invalid by an arbitration court. I also believe that disputes involving self-regulating organisations and their members should be considered exclusively by arbitration courts.
Fourth, changes in the philosophy of oversight over businesses (which is very important), and a transition from various government permits to liability insurance. In so doing, we will broaden the field of activity for self-regulating organisations.
And, with respect to this, my fifth point. Public associations of businessmen will be entitled to file legal claims to protect the interests of entrepreneurs. This will enable a small business owner to defend his rights, to engage in disputes with top-ranking officials, such as governors, and to do so not just on his own, but on behalf of a fairly powerful public organisation. This should be enshrined in law. We must expand the area of application for group (class) actions that can be filed by entrepreneurs.
Sixth, we will harmonise our corporate legislation with that of our key partners, primarily in Europe, across all positions. We need to introduce the best international practices in the sphere of shareholder’s agreements. We will speed up this work.
Let me reiterate: this is just the first package of proposed measures. I’m confident that it will make the Russian economy more transparent and, as I have just said, it will have a very strong anti-corruption effect. However, these measures are not enough. I believe that society must actively participate in the establishment of an anti-corruption agenda. We must take the rejection and resentment of corruption on behalf of the society and put it to work so as to be able to utilise our society in an actual fight against corruption. We have proposals to this end. I will speak about them at the session of the supervisory board of the Strategic Initiatives Agency tomorrow and at the convention of the Russian Union of Industrialists and Entrepreneurs next week.
Ladies and gentlemen, I’d like to emphasise that All reforms should be based on people and their inner desire to improve our country. This was the case in the 2000s when we brought Russia together, and I’m sure this will happen again today at this whole new level of our development. I’m confident that the energy of a civil society, primarily of its creative class, will become the main driving force behind Russia’s future prosperity.
Thank you very much for your attention.