Yevgeny Primakov became Prime Minister at the height of the 1998 crisis. Although he had inherited mainly huge debts, even the acerbic liberal Andrei Illarionov admitted that "the economic policy pursued in that period was the best in several decades". The snags set by the current crisis and how soon Russia will emerge from the recession were some of the subjects we discussed with the President of the Chamber of Commerce and Industry, Academician Yevgeny Primakov. He was interviewed for Izvestia by Marina Zavada and Yury Kulikov.
"This is not the end"
Q.: At the recent Davos Forum, Vladimir Putin said mockingly: "The crisis came out of the blue, like winter comes in Russia". You were among those who seemed not to see it coming. In February 2008 you said cheerfully: "I don't think the crisis will be on the same scale as in 1929 when the Great Depression happened". What do you think about it?
A.: I am not a prophet. I do not claim to be a seer who predicts exactly how world events will develop, including in the economy.
Q.: Are you offended by our words?
A.: (laughs) I am responding to your joke. On a serious note, no person in the world (perhaps there are some, but I don't know them) has ever predicted the approach of such an unusual crisis. The avalanche that began in the US covered the whole world. This does not mean that the sources of the Russian crisis should be attributed only to the events that happened in the mortgage system in the United States. We ourselves had made many mistakes which determined the features of our crisis and the fact that Russia has been hit harder than many other countries.
The Government has already taken some anti-crisis measures. Nevertheless the pressure on the domestic economy is not easing. And this is not the end of it, unfortunately. I wish I were mistaken, like on the previous occasion. But according to my assessments, it will be a long time before Russia gets out of the crisis.
Q.: For over a year one could be pardoned for hoping that the "ideal storm" that started on the American shores would die down without devastating consequences. But what prompted Finance Minister Alexei Kudrin to describe Russia as an "island of stability" when the hurricane had already reached us? Does it have something to do with the "Chernobyl syndrome": concealing an emergency to avoid panic or a failure to realise the scale of the threat?
A.: It has nothing to do with the "Chernobyl syndrome". This is, if you like, the "Kudrin syndrome". He seeks to justify the line that he pursued as Finance Minister.
Q.: But did Mr Kudrin sincerely believe that Russia's financial policy had made the country a safe haven amid a raging crisis?
A.: Apparently Mr Kudrin believed that the accumulated reserves would make the country stable. He thought that if the pockets were full of money, then the economy would not be rocked. But before long it became clear that this was far from being the case.
Q.: You had warned against making a fetish of the Stabilisation Fund, our "piggy-bank". You proposed reaching into the "piggy-bank" and using the money to address priority needs. Is it the approach of a generous man, formerly from Tbilisi, who is allergic to stinginess? Or is it a pragmatic position of an economist who is convinced that money should work and should not be kept under the mattress.
A.: My personal traits have nothing to do with it. As an economist I have always objected to treating the Stabilisation Fund as untouchable. Money should be spent inside the country. Naturally, not all the money, part of it should be as a reserve. In fact, many people thought so. By the way, Vladimir Putin had a similar opinion. It was his initiative to divide the Stabilisation Fund into the Reserve Fund and the Welfare Fund. The latter was to be used to develop the economy and meet social needs. Unfortunately, it was not done in time. So the second part of the fund has also remained frozen.
Q.: We got the impression that the Prime Minister tried to protect Alexei Kudrin when speaking at the Duma.
A.: I wouldn't say so. On the contrary, the programme of anti-crisis measures says for the first time that the Russian crisis was partly due to the imbalances of the preceding period. Although the document does not give concrete names, it is clear that it refers to the failed policy of the Government's financiers.
In any case, the imbalances are glaring. Commodity export has accounted and still accounts for 40% of GDP. The share of industries that develop and introduce new technologies is barely 10%. The fact that for a long time reserves have not been put into the real economy but stubbornly converted into American treasury bonds instead of being used inside the country to diversify the economy... as a consequence Russia will most probably emerge from the recession in the second wave, after the developed countries.
Q.: So, even though we are trying to use the safety "cushion" to protect ourselves from the financial upheavals, you have not changed your opinion that we should long have started investing in innovations, roads, ports, the development of infrastructure and that would dampen the blows?
A.: I have been reinforced in my conviction that the Stabilisation Fund was needed above all to gear the economy towards innovation, to restructure it.
"Patching up of holes wouldn't be helpful for long"
Q.: The former Economics Minister German Gref, fighting off those who wanted to tap into the Stabilisation Fund, explained that if it were done the money would inevitably be stolen. A bit too crude for a Government member, but it is a valid argument, isn't it?
A.: One should catch thieves rather than hiding the money... Besides, fear of inflation was the main reason cited to justify keeping huge amounts of money untouched. The argument was that inflation would soar if we started spending our savings. During a high-level conference I asked: "How can there be inflation if we build roads? Public works will spur the production of concrete, cement and metal..." But our financiers have a monetarist view of inflation. They are afraid to increase money supply. In reality, inflation is growing much faster because of colossal monopolisation in our country.
Q.: Whatever one may say, only the "cushion" is keeping the country from going under.
A.: We have already spent a lot. And what happened? The gold and currency reserves have shrunk. The budget deficit will be huge this year and probably next year.
Q.: So those who said that instead of a "cushion" we will soon have an empty pillowcase were right?
A.: Pillowcase or no pillowcase: this is beside the point. The argument is over what should have been spent and what should have been saved.
Q.: In other words, about proportions?
A.: Properly speaking, about proportions... The discussion today is already purely theoretical. Previously we had to compare two scenarios in the period of upheavals. Under one scenario, petrodollars are used to make important steps towards diversification of the economy. Under the other scenario money is stashed away against a crisis. I have no doubt that we would have handled the crisis much better if we had changed the economic structure.
Q.: What is done cannot been undone. What should be the main area of effort now?
A.: We face a triple task. All the three areas are closely interconnected. First, we should minimise the inevitable losses that will occur in the economic and social spheres. Second, it is necessary to identify the growth points, prioritise them in order to optimise our emergence from the crisis. And thirdly, it is necessary to create a new economic model taking into account the mistakes and failures of the pre-crisis period.
Q.: The Russian Government prepared a package of anti-crisis measures and almost simultaneously the US Congress adopted an economic stimulus plan for its country. America increased "smart" investments in science, cutting-edge technologies, education, and is spending more on medical care. Don't you think that our package of anti-crisis measures is less ambitious? It concentrates on patching up holes, and that can only be helpful for a short time.
A.: You have rightly said that the Obama-Biden Act is very ambitious. Look (takes a pamphlet out of the bookcase), its preamble says in so many words that the Act should be seen as a plan of investment into American economy and society as it enters the 21st century, in a new technological platform of competitiveness. That is why spending on science has been increased. The same, of course, is true of human capital.
The picture here is different. The Chamber of Commerce and Industry has polled 720 firms, and only a third of their CEOs said that launching new products would resolve the crisis. Others look to shedding jobs. If the ministries are told to cut costs at their discretion, research and development are the first to be sacrificed. Meanwhile R&D must be protected items in any budget.
As for "patching up of holes" I agree that when we give money to those hit by the crisis this is a palliate that is helpful only for a short time. But when we bail out enterprises in distress we should set tough conditions: we should demand growth, greater effectiveness and innovation, everything that is connected with the future.
"A sound measure has misfired"
Q.: Surviving a crisis usually means austerity. What does "belt-tightening" mean for the state?
A.: Cutting the bureaucratic staff is one productive move. But I am not sure that we will take drastic measures. When I was the Prime Minister I failed (or rather, did not have enough time) to dismiss many of the 320,000 federal officials (not including law enforcement bodies) sitting in the regions. Initially I called on the ministers to downsize their staffs. They were procrastinating. I then said I would do it myself. And I would have done it if I did not retire.
Q.: Are you suggesting that you would have taken the payrolls and crossed out names with your own hand?
A.: Yes, of course. But not at random. For example, I would hardly have touched the treasury. But in some other places I would have left fifty out of a thousand people. That is, if all the others are in their offices only in order to host their bosses.
Q.: That is "manual control" in its pure form. A very modern trend.
A.: That is logical. If a plane suffers distress, the autopilot will not cope with an unscripted situation. The same is true of the economy. The autopilot does not work in extreme conditions. When contradictions pile up and a crisis breaks out autopilots are switched off in all countries. It is not even that they are switched off, they simply don't work. Self-regulation in the economy disappears as a factor.
As for "belt-tightening" this often has to do with decency. You remember that several years ago there were massive power cuts in Moscow. Mr Chubais at the time justified himself by saying that the equipment at many substations was worn out. I have a positive view of Mr Chubais as a manager. I am not now talking about his views on privatisation. We do not see eye-to-eye on that. But when I was the Prime Minister and the Communists were urging me to remove Chubais from RAO UES, I said, "No, I won't touch him." But this is not what I am talking about now. In the spring when the accident happened did anyone compare Chubais's words about outdated equipment with the luxurious buildings of RAO UES, the huge salaries and bonuses of that state-owned company's executives?
Q.: The word "bonus" has become something of a dirty word... At the G20 summit in London President Medvedev, referring to the precedent of the American insurance giant AIG, promised to cancel the huge bonuses of the heads of Russian state-owned corporations.
A.: We have been tardy on that. But in the States it is really an embarrassing situation. The heads of a famous company used much of the federal support to pay bonuses to its executives. What did Congress do? It passed a bill which took away almost all that money in the shape of taxes. That was all.
Q.: Dmitry Medvedev's resolute mood was hardly welcomed by the Russian state-owned corporations. But - nothing doing - they had to obey the order. What about the private companies? Will our fat cats choose to "behave decently"?
A.: That is absolutely necessary. In time of crisis they must share the hardship with the whole society.
Q.: Will they be nudged to do so?
A.: They have already been nudged (laughs).
Q.: We have not heard that the authorities have really taken to task any of Russian bankers who have converted the multibillion rouble state bailout money into hard currency. What is behind this leniency of the top officials? Lack of will? Or some ulterior motives?
A.: It is hard for me to say. I am not one of those who come up with exposures without having the facts. This is not for me.
My opinion is that the Government did the right thing in giving a lot of money to the banking system. Otherwise it would have collapsed and the whole economy would have collapsed. At the same time nobody made it absolutely clear that the budget money was not given them to use the turbulent situation to speculate and gain staggering profits.
Q.: Is it something that they need to be reminded of?
A.: Apparently yes. The Government should have explained that the banks which get government support should use it as agents of the state and not as commercial structures. The authorities should have made sure that the government money did not mingle in the same accounts with other bank assets, that it should be marked out by a red line. That has not been done. Apparently somebody lobbied for the interests of banks at the time. The bankers hastened to turn roubles into currency, to take it abroad and increase their capitalisation... There is nothing wrong with increasing capitalisation, but the budget money was also given to banks so that they issue loans to the real sector of the economy. What was a sound anti-crisis measure had misfired.
"That somebody was skiing was not the cause of the crisis"
Q.: Another question to the authorities: why did they, while duly repaying the state debt, turn a blind eye to the unbridled growth of the external corporate debt?
A.: Many people were alarmed by the situation when, along with the laudable payment of 90 billion of the Soviet and Russian debt by Alexei Kudrin, there arose a corporate debt that was five times that amount. I remember that when the issue cropped up at a meeting of the Council on Competitiveness and Entrepreneurship, when Viktor Zubkov was the Prime Minister, I expressed my concern: our major companies were taking fabulous loans abroad which would be hard to pay back. Their own assets did not warrant taking such large loans. The Finance Minister spent about half an hour explaining it to me making me out as an opponent of foreign loans.
He distorted my position. My point was that the lack of a developed financial and credit system inside the country practically pushed big business out of the country and forced it to take loans from foreign banks where interest rates were much lower. The last thing I want to do is to reproach my opponents in hindsight: "I told you so". What worries me is the future. There was no awareness that the debts would have to be paid back. But the day of reckoning (in the direct and figurative sense) came and the "majors" went to the Government with a begging bowl. The Finance Ministry believes that the crisis justifies taking loans from abroad. I do not rule out that the state itself will seek a loan for the first time in ten years.
Q.: Yury Luzhkov has another chance to attack the reformers. In the Mayor's opinion, the sources of the Russian crisis should be traced to the 1990s when the liberal government "squandered and handed control of natural resources and major industries to those who proved to be unable to develop them". He was referring to would-be oligarchs who thought about yachts and not about promoting the domestic industry. So they "fell". But why did such giants as General Motors, Ford and Chrysler fall? We have not noticed that their managers had left their jobs to cavort at the skiing resort of Courchevel. Everybody enjoys kicking an oligarch.
A.: That somebody was skiing somewhere was not the cause of the crisis... The American car plants were hit by recession because consumption slumped. Cars are not bought because they are bad due to poor management, but because there is no money around.
There are many competent production managers among our oligarchs. It is another question that by buying enterprises (mainly extractive industries) for a song and earning fabulous profits many preferred to skim the cream off. There was no natural flow of huge revenues into processing industries. Why care about processing when commodities can bring huge profits even in the raw? The Government should long have filled that niche. It should have done everything to direct part of the petrodollars into science-intensive industries.
Q.: In periods of cataclysms the Government increases its presence in the economy. This should please you because you are a supporter of a bigger role of the state in the economy. But as somebody who supports the market you cannot but see the snags associated with the rapid increase of the government interference in the Russian economy. Where is the line that cannot be crossed?
A.: There is no one barrier that suits every situation. Look what is happening in the United States. They have imposed tough regulation, and nobody dares to object. In this country government presence in the economy is growing too. But did you pay attention to Vladimir Putin's words to the effect that even if the state enters the capital of companies by repaying their debts and giving them credits, the government, after holding their assets for several years would start privatizing them if the circumstances are favourable?
"The non-local crisis trap"
Q.: You became the Prime Minister at the height of the previous crisis. Can you compare the crushing blow of ten years ago and the one that has been inflicted today?
A.: Undoubtedly, it was a very deep crisis. The price of oil was $8-10 per barrel (it did not begin to rise until March 1999) and the country's sovereign wealth stood at just 2.5 billion. During my premiership Russia did not get a cent from abroad. The state was cash-strapped. Famine was threatening. Railways were coming to a standstill and enterprises were idle. But we did not panic. We had a good team... Within eight months we were able to please our fans and disappoint the ill-wishers. The trap of the current crisis is that it is not local but global. That diminishes Russia's chances of overcoming recession in a short space of time.
Q.: From your experience of anti-crisis management in the late 1990s, what is the best way to handle the current situation?
A.: We have touched upon several aspects during our conversation. I would like to add one simple but important thing: discipline. I think it cannot be tolerated when sound decisions made by the Government get stuck or distorted while working their way through the bureaucracy, as happened with the state support of banks.
I recall the Government meeting in the autumn of 1998. I said that tariffs for carrying agricultural produce by rail should be cut by half. Food imports had dropped dramatically and it was necessary to increase our own food production. Money was earmarked for the development of poultry and pig breeding, which produce "quick" meat. Obstacles in the way of getting products to the consumer quickly had to be removed. But the Railways Minister dug in his heels: "I cannot cut rail tariffs". "Well, I replied, tomorrow your place will be taken by another person who will sign the executive order". The Minister backed down.
Q.: The Chinese Prime Minister said that in 2009 China expected an economic growth of 8%. We would like to ask you what sort of phenomenon is the Celestial Kingdom?
A.: In the PRC, like in Russia, export accounts for a large part of GDP. The difference is that China exports finished products while we have traditionally funnelled our commodities abroad. What do the Chinese do? They switch most of the finished products to the domestic market. At the same time they are trying to boost people's paying capacity. Because of that the factories continue to run. We cannot do that. If we switch commodities to the domestic market there are no consumers for such huge amounts. Increasing paying capacity among the population? It will merely spur import. This is all because no structural changes are taking place in the economy.
Russia faces the difficult task of learning from its mistakes. As we scramble out of the crisis and address short-term tasks we should be mindful of tomorrow. Then the crisis will be not only a fever, but a catharsis. It is as if a person, after being sick, recovers and is filled with new strength.
An abridged version. The full text of the interview is available on our site www.izvestia.ru
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"What is behind the leniency of the top officials? Lack of will? Or some ulterior motives?"
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"It is hard for me to say because I am not one of those who come up with exposures without having the facts".
Marina Kulikova