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with Igor Yurgens, Chairman of the Management Board, Institute of Contemporary Development

13.04.2009 / Energyboardroom

Mr. Yurgens, how has the financial crisis hit Russia, how difficult the situation is now for the country, and has it been affected more or less than other G8 or the BRIC countries?

Well first of all it’s not worse than any other country, probably a little better than some. On the unemployment side we are definitely better than most of the developed European countries, official unemployment is no more than 2%, hidden or partial unemployment may go up to 4% but not yet. So on the social side of that, and taking into account the pledges made by the central government of PM Putin, rising unemployment benefits up twice, pensions considerably etc. we don’t feel social tension so far… On the economic side, of course there were very serious cuts in the metal industry, in the financial sector, in housing and construction, and so on and so forth. The effect will be felt in the 2 quarter of the year, more than it was felt in the first quarter of the year. Consumption is shrinking, but expectations are that we will weather the storm relatively well if it’s not going to be a long storm. If we are not hit by a second wave of the fall of the price for traditional Russian commodities, like timber, gas and oil etc., then we are ok, relatively ok. We have spent 1/3 of our national reserves, which was the great cushion accumulated during the windfall prices of oil and gas, that means it will take us through all budgetary constrains for a 1.5-2 years. So, if we hit the bottom in a year or so, if we see some part of stabilization by the beginning of 2010, then I would say that Russia weathered the storm. If it doesn’t happen and if we have further decline in commodity prices, then plan B: – 10% GDP, higher unemployment and serious social tension, especially behind the Urals, where there’s is considerable amount of o called “mono-cities”, the cities which depend on the existence of one plant, and in this case even the life support systems of the cities depend on that plant—if the plant stops even electricity and heating are a problem. The government is preparing itself for this scenario B…

As one of the institutions giving advice to the Government on the route ahead, what do you think should be done?

Yes, we are contributing to the advice. And our advice at the moment is embodied in the name and even the face of Vice Primer Minister and Ministry of Finance Mr. Kudrin. The non-spending party! (Laughter) Supporting the demand side of the economy, not the supply side of the economy.

But, a lot of the reserves have been funneled into the economy to several different enterprises out there, and I am under the impression, that you did not necessarily agree on how this has been carried. Maybe not may be in the principle but in the way it was carried out. Could you please elaborate on this for us?

We said in our report that technical reaction of the government satisfies us. These daily made solutions for extraordinary situations went well. The Russian government reacted swiftly and in proper places of the economy, in neuralgic points of the economy, and sometimes even ahead of the schedule of some other G8 countries, so from this point of view we don’t have complaints. The complain of the group which prepared report was that at the moment we don’t have a clear picture of what the central Russian government see as strategic scenario after the crisis, at the second term, getting out of the crisis and making up a new society, diversified, not dependent on oil and gas. So that was our criticism. Institution making is not on the making. One of the serious troubles of this society getting out of the crisis was lack of the institutions of the civilized society worthy of G8. Institutions-building is the number one thing to be done.

Economic institutions, we should be more diversified from our point of view. To economic institutions financial system, budgetary system, pension reform, all of those big things which make society more stable, even in case of the crisis. This was our criticism and sort of advice. And I hope they will hear us.

Just like many other specialists, you have talked a lot about the need to diversify economy here. From an outsiders’ point of view, it doesn’t seem like much has been achieved, and the Russian economy continues to be very much dependent on oil and gas. Until last summer, everything was very rosy for the Russian economy because oil and gas prices were though the roof… But, if id didn’t happen then, when there was money to go around, how can it be guaranteed that it will happen now, and how should it really be implemented?

Through institutions as I told you. If institutions are better organized then you have different budgetary code, different tax code, and different financial system. And then when you can lay money in gas and oil sector through these institutions you diversify your income base and the direction of your investments.

So far it was not done, and it would have been illogical for example for Mr. Alekperov, from Lukoil, to take part of his money out of oil and invest it in timber. Why, why should he? At the same time, if the institutions were at place, and strategic planning based on academic knowledge, indicative planning not imperative planning of the State… If Mr. Alekperov would have known that in nanotechnologies there are openings, there were tax breaks to promote the industry….

Well, there is RUSNANO right now with 5 billion dollars for investments, for example…

For instance, yes… So when the institutions exist, the forecast exists, the academic knowledge is there, then it would be profitable for him to take a chunk of his money and invest it into nano, or bio or whatever… But that’s for the future. It’s empty talk at the moment, I agree with you. At the moment we just have to go through the crisis and see what happens next. And the market should give us examples and impulses; which industries will be more profitable than others and where there’s a success.

So you think the crisis will let die naturally those who are not fit for what’s coming next?

It should! And what people do with the auto industry in the US, I don’t think it’s healthy.

But for a country which is 90 or 80 percents dependent on oil and gas… most of the specialists who we have interviewed so far coincide that the State can not let this industry fall and that the State has to put money into it, because a lot of the companies have lost a lot of their market cap as the stock market crushed and if they had US$120 billion market cap before, now they have 80% less, and they can not raise enough funds to modernize and so on… Do you think the State sho0uld help the O&G sector in this country or which part of it, and on which conditions?

All of those are very good questions, that’s why we insist that institutions should exist. Because only with institution, including political ones, this kind of debate can end up with something consensual. So the nation, not two people in the Kremlin, the nation decides that for us it is most important to bail out oil and gas and drop auto and metal for example. Who decides that?

So the problem here in you opinion is that there is an autocratic way of deciding?

Yes, but it is one of the problems—there many others as well.

Alongside the economic crisis, has this lack of transparency, debate, institutions, contributed to the fleeing of foreign investors from the country since last summer…

Portfolio investors, not strategic investors. Speculators. No strategic investments were affected.., well some may have been but only in automobile sector… But to be exact on the capital flight it was not only foreign investments, more of the flights were
Russian investments, taking their money to more stable and reliable economies.

The Russians were talking the money out! Don’t they trust their own country?

They don’t trust an economy which is only transit economy, the economy without mature institutions and an economy which is much more volatile today. Where in the central or eastern Europe, in the Asian economies in transit, where you don’t have this phenomenon? Everywhere it’s more or less the same. People and proprietors and investors and owners look for the best investments. If it is volatile and dangerous they take money out. If it’s more reliable, they bring back it again to the same T-bones of the United States, though United States is not in the best of shapes.

So, if the key is to build all these institutions to balance and check the ‘all-mighty State’, who, besides the institution your head and other small bubbles of dissent, is interested in changing this? The Russians went to the polls and elected a President and a Prime-Minister by huge numbers and they were not questioning any of the existing policies… Are they ready for this now, at this time of crisis? Is the country ready to push in this direction upgrade the political institutions and diversify the economy?

No one is interested in anything but surviving of course, but that’s what we are talking about. Let’s think about the future, because this would be sort of misspent use, if you just extinguish the fire without thinking what you will plant after the fire. That is what we are asking our government, civil society and people to think about it. Ok, we will extinguish the fire which will come down one of these days, and what we will plant then? The same inflammable trees or we will do differently? Simple logic says lets think about better economy, oil and gas for sure, with more diversification inside of it. Because petrochemicals are a fantastic opportunity, for instance, you don’t have to go to nanotechnologies immediately or bio or whatever. Do the same thing, but not only upstream – downstream as well. Diversify! Go ahead! Make some fantastic changes!

But ‘diversification’ has been preached by the Government for a long time. Why are the companies not doing it?

We’ve been thinking of it since long time ago, but the reforms have not been finished yet. During the posh years there were no stimulus, and now in the meager years there is a stimulus to think of something else.

Could we say that the companies were ‘sleeping in their laurels’, not investing, during the times of plenty?

Oil, alumina, nickel… yes, there were sleeping in their laurels. Well, some of the most foresighted were playing with ideas of the philanthropic investments into the universities, to the education system, blah-blah-blah, but that was not the system. The system is when it is motivated by taxation, by investment encouragements, by fundamental research. You can not do it within one company. Without fundamental research and by that we mean a reform of education, who will tell you about this nanotechnologies? Can you invent it in Lukoil? From day to day you are drilling and getting more and more money. Alekperov is a clever man and he’s investing t the education of the engineers, but who tells you that there’s nano which in the petro-chemical chain will change the whole thing. That should be fundamental system brought by the new educational system, by good marriage between students, professors and small companies. And to do this you have to do many other things. This is modernization, the change of the institutions, the change of the paradigm.

So how would you like to see Russia say in 5-10 years time, in terms of how the economy should be structured alongside the political system?

As a G8 member in its own right. In freedom, dignity, good relationships with neighbors, with balanced economy, balanced political system, respected and respectful. This is it….

As you are talking about good relationships with neighbors, I can not help but thinking of what happened at the beginning of this year with Ukraine. And that has damaged the reputation of Russia a lot. How do you mend your reputation and build on that image?

…The only instrument for not losing face and solving the situation would have been international regulation, which is in principle is stipulated I this Energy Charter and Transit Protocols. But we are in very difficult negotiations with the European Union. The EU recognized the transit generally and doesn’t recognize the transit on its own territory in the Transit protocol. On the other hand, it says ok, Ukraine is not part of us, so solve the problem on your own. Ok, let’s have the guaranties that we pump and have our money back. So it’s a very difficult case that should be solved through the international instruments, and I hope after all our negotiations on the Energy Charter and Transition Protocol, there we will be an international law…. (Referring to Ukraine and Georgia) It would have taken much more patience that we had, and we lost image-wise but we made our point and acted from the economic and political interests of Russia.

But from a long term perspective it is surely in the interest of Russia to build long term relationships with the rest of the world…

…From my point of view, only through the international instruments, because no one will believe to the version of the story that Russia tells. Not any more. In fact, the minute we brought, thanks to Sarkozi, the international observers, the whole atmosphere in Europe changed, because those international observers really saw the truth… So from this point of view only internationally we can build on our reputation. Unfortunately no one will believe us. We are surrounded by people who don’t like us, historically and for other reasons. We are maybe not the most likable guys, but we have to survive! (Laughter)

Thank you very much, Mr. Yurgens.



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