Andrey Belousov, who is Russia’s Minister for Economic Development, candidly shared his views with the press at the International Economic Forum held at St. Petersburg.

No overheating

The International Monetary Fund and Anton Siluanov, the Finance Minister of Russia, have recently stated that the economy of Russia may be overheating. Economic Development Minister Andrey Belousov disagreed with this assessment, saying that the Russian economy was not suffering from overheating and that the IMF calculation was not accurate. He went on to say that Russia is now operating at 60 percent capacity utilization, which is less than the corresponding figure for the United States and the countries belonging to the European Union. Russia, nevertheless, still has resources to increase industrial efficiency.

The Minister also responded to some other allegations that had been made. He said that Russia had a very high employment rate, which was an indication of the fact that business was good and companies were hiring more individuals to increase their productivity. There were few terminations and the job market was stable.

Minister Belousov also told the media that the employee numbers in medium-size businesses and large enterprises decreased by 10 percent compared to where they were six years ago. For the processing industries, this figure went down by 20 percent. Despite the reductions, the fact that the unemployment rate in Russia is low cannot be denied. Minister Belousov stated that a probable reason for the trends observed is that Russia has a large shadow sector, which absorbs employment reductions. This shadow sector consists of almost 20 million individuals.

Separately, Minister Belousov stated that he did not mean that the IMF had made any wrong assumptions or followed incorrect procedures. The Monetary Fund’s analysis was right, but only for an economy, in which the shadow sector was comprised of a limited number of people. For Russia, this was not so, which means that the same logic could not be applied and would not produce correct results.

Minister Siluanov disagreed with this assessment. At the forum, he said that there were very obvious signs that the Russian economy was headed in the wrong direction. The high capacity load and the increased rates of unemployment could be taken as an example of this. Minister Siluanov also added that despite all these shortcomings, the situation could still be tactfully handled and solved without much difficulty. For instance, downsizing could increase worker productivity and the government’s large reserve funds could be utilized more efficiently.

Siluanov believed that many measures could be taken to improve the employment situation. However, he indicated that the decision on whether to take those measures was up to the government.

Decrease in investment

In recent times, investments in Russia have decreased. The prime reason behind the downward trend is that state investments and other investments that were made by state-run companies have gone down, but this is true for the government sector only. The private sector is witnessing a rise in investments, and is taking over the field. During a roundtable meeting at the St. Petersburg forum, Minister Belousov said that his assessment of the market environment highlighted these developments.

Minister Belousov noted that investments in the fixed asset sector were seeing a decline. While there had been an increase of about 16 percent in the first quarter of 2012, later on, that figure declined to 10 percent, and this year it held constant at 0 percent. Minister Belousov believed that if things were given a closer look, one could easily observe that the reduction happened because state investments rapidly went down to 15 percent. The same trends prevail among state-run companies, such as Gazprom, Transneft, and other state companies in the energy sector, as well as in other fields.

The situation for the private sector is quite the opposite, and the investment rate there is heading in a totally opposite direction. In fact, every year there is an impressive 10 percent increase in investment, which serves as a very good sign of the above par performance by the private sector. However, Minister Belousov said little about the way for improving the situation, noting only that it was a good thing that the situation was not becoming worse.

Capital outflows

Last year, Russia had a net capital outflow of almost USD54 billion. Minister Belousov believed that there was a high chance that in 2013 capital outflows would be lower than the figure seen last year.

Minister Belousov shared his thoughts on this issue with reporters and backed his opinion by stating that the Ministry had predicted capital outflows for 2013 to be USD30 billion.

Other state agencies have also forecasted similar scenarios, with only the numbers changing slightly. The Central Bank published a report that concluded that capital outflows in 2013 would be around USD26 billion. The Economic Development Ministry had a similar analysis to share, as it projected the outflows at around USD38 million by the end of 2013. Compared to the previous year, all of these values are fairly low.

Minister Belousov also shed light on the fact that if one considers the current situation, capital outflows are still less than what they had been at this same time in 2012. As such, by the end of the year, the overall value would also be lower. This analysis further substantiated his claim.

Andrei Klepach, who is the Deputy Economic Minster, made a statement to Interfax that Russia’s net capital outflows this year would possibly be more than the value predicted by the Ministry. As such, the Ministry scheduled a revision of its analysis by the end of August.

Minister Belousov told the media that Russian authorities had no plans for taking administrative measures to impede capital outflows. He went on to say that the very words “capital flight prevention” smelled of cannibalism and that it was the last thing that the Ministry would ever think of.

Russia has made several agreements with other foreign countries, all of which are aimed at encouraging and protecting investments. These agreements contain clauses regarding the freedom of investments and the transfer of revenues. They also set out procedures that govern the payment of compensation to be given to investors in case they have to suffer losses on account of government action.

Minister Belousov clarified that the freedom of capital movement is an issue that has already been resolved at an international level with all of Russia’s major partners. As such, there is no need for any debates on capital flight prevention. On the contrary, what should be the subject of discussion is the inflow of capital. Belousov said that already several measures had been taken with regards to the implementation of global accounting standards, the enhancements of the judicial system, the modifications of the arbitration process, and infrastructural improvements.

Fictitious imports

The government of Russia does not consider that there should be any legal limitations on imports that are made from Belarus and Kazakhstan.

One of the reporters brought up the subject of fictitious imports from Belarus and Kazakhstan and asked Minister Belousov as to how the government and the Central Bank were planning to address these abuses in order to deal with capital flight. Minister Belousov answered that as of now the Ministry did not discuss any legal restrictions primarily because almost all of the agreements had been signed at the Customs Union Level. This was why organizational issues were not being addressed.

The Central Bank has reported that fictitious imports were valued at USD25 billion, with the net amount of USD54 billion for the year 2012.

Minister Belousov also informed the media that Russia is particularly concerned about gray imports that come from China. The existing situation makes it obvious that customs protection methods at the borders suffer from serious flaws. These can be eliminated by placing uniformed Russian customs officials directly on the borders, including on the boundary that lies between Belarus and Kazakhstan. In fact, in the Minister’s assessment, this step would actually be extremely effective on the part of the government. Minister Belousov further said that consensus had been reached on this point in the past, but that the organizational issues involved had not yet been resolved. Ultimately, however, the solution has already been conceived before, but had yet to be implemented. There is no further need to consider other strategies because the main problem was with program administration and the ways in which information was exchanged between the Custom Union countries.

Natural monopolies

Minister Belousov also shared his views as to the slowdown in the indexation of rates for the services of natural resource monopolies. The Minister’s conclusion is that in the next five years, even if inflation were to rise, the effects would not be that much noticeable on the investment programs launched by these companies.

Minister Belousov also told the media that all commercial studies have already been made on the investment programs of major natural resource monopolies, and the results of those assessments indicated that the investment programs would go down only slightly.

When asked about his views as to the fact that inflation leads to a rise in service rates, Minister Belousov stated that the increased rate is calculated from inflation values that are observed in the month of December of the previous year. This component of the formula was the same for the rates on all types of services provided by the natural resource monopolies, such as gas companies, electricity generating concerns, and transportation services providers. Minister Belousov had no news as to what companies could be classified as natural monopolies, to which these pricing rules would apply. As of the present time, only industrial producers could benefit from fixed pricing rules, and the government has not yet decided if these special arrangements could be extended to the retail sector as well.

The Minister also informed the public that inflation-based pricing policies would not be reviewed again in the near future because there is simply no need for it. As of now, inflation is expected to rise by almost six percent by the end of 2013.

Minister Belousov said that whatever the situation will be, the Ministry would predict the rates of natural resource monopolies for the next three years, since inflation was also forecasted on a three year basis. Until the natural resource rates are reviewed alongside inflation, inflation predictions are never accurate. In conclusion, Minister Belousov added that there was a high chance that the rates of the natural resource monopolies could be subject to correction if the government’s predictions of the inflation levels prove inadequate.