– A considerable fall in GDP has been observed in Russia. What would be your comments on the matter? Could you tell us at what stage the Russian economy is at the moment?

– The Russian economy – first of all, I would like to start with it and say that it has suffered from the global financial crisis to the same degree as the economies of other countries. There are objective reasons for that, as well as subjective reasons associated with our economic environment and economic situation.

Indeed, we have been affected by the economic slump and the fall in GDP, which we anticipate to reach no less than 6 percent this year or maybe even more. As to certain indicators, such as the level of industrial production, the drop has been considerably deeper at about 14 percent in recent months. At the same time, we cannot but note some other alarming developments, such as the rise in the unemployment rate. Now over 2 million people in the country are unemployed and registered at job centers – 2.2 million to be exact. In fact, I think the figure is even bigger, as some unemployed people do not register there. The unemployment calculated using ILO [International Labor Organization] methods may be put at over 6 million people, or 7.5 to 8 percent of the economically-active population. These are alarming figures, to which the government must react.

There are other problems as well, such as the rouble exchange rate fluctuations. We had to weaken the rouble due to the decrease in currency inflows caused by the decline in exports. We face a problem of high inflation, too. Nevertheless, I should say that these negative trends have been suppressed if not reversed.

I believe we have come to a stage at which we should understand what comes next for both Russia and the global economy.

What actually has caused problems for us? It was the current structure of the Russian economy that caused problems, as it is no secret that the Russian economy was and still is to a considerable extent export-oriented. Such orientation toward raw materials export surely caused problems once oil and gas prices dropped. A range of other export commodities, such as products of the metallurgy industry that account for a significant share of national exports, also became much cheaper.

Therefore, we have in a way fallen victims to the economy structure that has developed for decades. The main task here, the goal for the future, is to change our economy’s structure.

I do not see the situation as a dramatic one, but it is complicated. It is in some way less, and in some way more complicated than in other countries, but in general it is the same as in most nations that are affected by the economic and financial crisis.

– Can I ask you to tell us about your economy diversification plans? How are you going to respond to this downturn? Could you please tell us about the situation with the Stabilization Fund accumulated by your predecessor Mr. Putin and yourself before the recession?

– The main task for us right now is to overcome the crisis consequences and to shape the new structure of the national economy.

Indeed, it took us quite a while to lay the foundations for an advanced economy in our country, but unfortunately its diversification degree remains extremely low.

In my opinion, we cannot be content with the current state of affairs. We have failed to create a high-tech economy, we are still highly dependent on raw materials exports; as I have just said, the innovative component in our economy is very weak, and we do lack immediate implementation of innovative technologies in our industries which is the main feature of a modern innovative economy. In other words, national economy diversification is probably one of the most urgent and important tasks for our country. Of course, we will strive to accomplish it, but in doing so, we need to design a new structure.

As for our Stabilization Fund, we indeed have spent much time and effort to accumulate certain reserves that now total billions of U.S. dollars. At some point, over USD 600 billion were accumulated in the Reserve Fund; some reserves have been spent now, but, nevertheless, the remaining reserves are still vast. It is still a lot of money and, of course, it helps us solve many problems at the moment, but development is impossible at the expense of reserves alone. Therefore, despite the fact that we continue to accumulate gold and currency reserves and strengthen the currency component as such, we will have to think about the diversification of the economy in general, about launching new industries and creating a high-tech innovative economy. This is probably the main task at the moment.

– Indeed, the world has witnessed unprecedented changes, and now we are having to ask questions that did not come up before. This includes issues of bank solvency and the global economy. Do you think the U.S. dollar will be able to get out of the recession? Do you think its status as the number one world currency will change?

– We, too, are very much concerned over this issue because the whole world depends on the position of the U.S. dollar. Although there are other reserve currencies, such as the euro, pound sterling, yen, a lot depends on the well-being of the U.S. dollar.

As you know, we have our own standpoint in this regard, which I expressed a year ago at the St. Petersburg International Economic Forum. Today the world requires more than just one reserve currency, and this is not because the U.S. dollar is bad or the euro is not sufficiently good. The current situation itself suggests that there should be several currencies, which banks, individuals, and whole countries could invest in. This will give options to react should any problems emerge in any economy. The problems, as we understand, initially occurred in the U.S. economy. Maybe if the United States government had countered these problems in some other way, the downturn would not have been so deep now. I am not going to elaborate on the subject at the moment; my point is that the crisis of the U.S. economy has naturally changed the general attitude to the U.S. dollar.

Therefore, our task for the nearest future, as I see it, is to create more reserve currencies. One of such reserve currencies could possibly be the Russian rouble – as a regional reserve currency, especially in view of the fact that there is a number of states that are genetically, historically, economically, and in many other regards linked with Russia. In this context I believe that at some stage the rouble too could become a regional reserve currency.

At the same time we do not exclude the possibility of creating in the future a so-called supranational currency, especially since the decisions of the G20 London Summit provide that the International Monetary Fund will issue various securities for the countries to invest in. Some instruments already used by the International Monetary Fund, such as special drawing rights, represent a prototype of such a supranational currency. What does it mean? It means that in any case we will need a universal payment instrument to lay a basis for a future international financial system. I do not think this will undermine seriously the U.S. dollar. But I consider it very important for the U.S. dollar and other reserve currencies (including, hopefully, at some moment the rouble too) to be in some ways interlinked at possibly the level of special drawing rights or some special currency unit – the interlink to be activated in crisis situations. That is why this idea, brought forward by Russia and supported by our Chinese colleagues, seems to be very promising. We purposefully did not discuss it in the G-20 format in London and agreed with our colleagues that this issue should be dealt with some time later. One of the reasons for that was our intention not to allow the destabilization of currency markets. However, in my view it should be done – sooner or later.

In general, we see the future of the international financial system in establishing modern rules of the game. Speaking of such rules, it has become rather common to talk about the fact that there is not enough regulation, and that we need to adopt a greater number of government decisions. As I see it, it is not the point. The point is not to adopt substantially more conventions to regulate one financial and economic process or another. The point is to make such decisions, international conventions, and international commitments more efficient and more transparent. In other words, we do not need more regulations, but rather better regulations.

Therefore, when we talk about the fate of the Bretton Woods financial and economic system, our country stands not for closing it down or crossing it out, but rather for modifying it in such a way that it would meet the needs of the 21st century, taking into account a greater number of successful economies and a greater number of regional reserve currencies. We would like for the fate of the financial system to be decided not in one place, but at forums where major economic players meet. In this sense we must admit that the Bretton Woods system was primarily focused on a few countries – the United States, Great Britain, and still less the European countries.

Today we need to create a modern universal framework that would unite American perceptions about a fair economic order and financial system, British perceptions, as well as the perceptions of other partners from Europe, Russian perceptions, Chinese perceptions, and Indian perceptions. Only then can we be sure that the modern regulations will prove effective. Otherwise we will have to confront a new financial crisis in five or ten years because we realize that due to the cyclicity of international economy sooner or later crises will come back. The question is only about the degree of their threat to or impact on the global situation. I believe that this approach is very important in general.

– You have made a very good comment. In fact, we already have a regulatory system, we need no further regulatory systems. The only problem is that it simply failed. I absolutely agree with you. But let me ask you something about what you said, the idea about reacting to what we saw in the United States.

Do you expect global inflation, given the situation with raw materials, the situation in the U.S., and the weakening of the U.S. currency? Can all this bring about global inflation that would be necessary to cover the expenses the United States has to face?

– You know, I would not rule out global inflation namely due to the problems that you have mentioned. We, I mean Russia, are in a very difficult situation when compared to other countries with regards to inflation. Unfortunately, we failed to cope with inflation earlier, before the crisis. It was about eight percent. After we had to devalue the rouble partially, certain processes accelerated. The overall amount of money in the economy increased. As a result, inflation pressure has grown. For this year we forecast an inflation rate of about 13 percent, which is naturally beyond the limits of what is possible, as it has a negative impact on the liquidity, as well as the banks’ discount rates, credit interest rates, and ultimately on those loans that are extended to companies and individuals because such loans are extended at unrealistic interest rates that we got rather unused to. These interest rates reach 18 to 20 percent per annum. That is way too high. Nobody wants to borrow money on such terms here, while foreign cash inflows – European cash resources and U.S. cash resources – considerably fell down due to the crisis.

Therefore, our task today in Russia is to reduce the inflation rate. The processes related to the situation surrounding the dollar and the need to resolve various problems in the U.S. economy, including measures to support a number of large manufacturers (the de facto nationalization of General Motors, for example) coupled with the decisions taken by other countries, may lead to a still greater volume of cash injections. As a result, inflation processes may gain momentum, which naturally will have to be offset by additional emissions. Such additional emissions will have a most negative impact on the global economic situation.

It would therefore be desirable to avoid such a scenario. I have initially told you about the economic situation in this country, but in terms of inflation we, of course, depend on the inflation situation in other countries. By the way, for us the last few months turned out to be more favorable. The inflation rate in Russia turned down, and by the year’s end it will most probably be lower than anticipated. Nevertheless, it is still a high rate because we have been pursuing the so-called policy of inflation rate targeting and expected to see inflation at some acceptable level of, say, 5 or 6 percent. This year, of course, it will not be like this, but we will strive to curb inflation by any means because this is a very important factor for our economy, as well as for the global economy.

Therefore, in our view, as well as in my personal view, the threat of an accelerated global inflation is present in the current situation, which may result in any sort of problems, including problems in the banking sector.

– Let me ask you a question about foreign capital. How can it be attracted back into the country? By the way, you have mentioned the situation with General Motors in your statement. How would you respond to a similar situation? It is a major manufacturer after all.

– No doubt the crisis has badly hit production in this country, as well as in Europe and the United States of America. These are the worst affected industries. And now all the governments are considering the ways to support them. We understand the decisions that the American government is taking to support its national producers. We are taking similar decisions with respect to a number of Russian car companies. The damage may be less substantial in this sector, but still it means loans and additional funds totaling billions of U.S. dollars. These processes are very painful for the economy, they really are. Talking about the consequences, this is probably the most important thing.

We should clearly understand what the so-called crisis exit strategy will involve. What are we now talking about? What are we thinking about? Where is the bottom of the crisis? This is the first question. Have we reached it yet or not? The second question is “How shall we recover from the crisis?” You definitely know the approaches and formulas suggested as the crisis recovery strategy. There are several options. The first option is the most favorable one: a V-like recovery, meaning a slump followed by an uplift. The second one is a less encouraging option and could be associated with an L-like pattern: a slump followed by a very slow recovery process. And the worst-case scenario would develop according to a W-like pattern: production would fall, then grow and then fall again. This is why I consider the issue of exit strategy so urgent. Why am I talking about it today? Because today we are making a decision to support our domestic producers. And this is the right step to take. But we need to look into the future. Say, for example, the American government nationalizes General Motors. What will it do next? Will it keep this basket of shares as public property? But this seems to run counter to the concept of a free market economy that was formed in America in the 20th century. Or should it be sold? And if it should be sold then to whom, who will venture to purchase it, especially when it involves enormous social responsibility as General Motors is a huge corporation with a great number of employees and immense debts even despite the U.S. government support?

Other countries face similar problems. Today we are talking about Opel. The company is indeed in a difficult situation. The decision has been made to sell the company’s basket of shares to a consortium with the participation of some Russian enterprises and Magna. This is a way out. But it is important to understand what will happen in general, what the future economy will look like, and primarily the real sector, since it has been worst affected.

We also take measures to help out our car and metallurgical industries, to protect the so-called strategic assets, even despite the fact that these decisions are not always strictly in line with the market economy concept. But now everyone has to act like this, and we actually have to grant soft loans.

I already told you that our lending rate is very high because of inflation, but to the giant corporations, the so-called local economic mainstay companies with a great number of employees, we grant soft loans at a low lending rate, and sometimes interest-free loans just to support them.

I believe that we are all concerned with the question of how we will tackle the situation, what our real sector will look like in the future, how we will be able to help out new owners that will enter it, what the government would do if it acquires a share in the capital of these companies. This is not just an idle inquiry. The global economic system should alter considerably after this crisis. And of course, we would hope that the recovery will be quite fast and follow the V-like pattern. But anyway, we should think this exit strategy over.

– Many people follow every change of oil and gas prices, and think that the recent spike testifies to economic recovery. How do you think this increase in oil and gas prices could be explained? Is this a positive economic development or just a short-term adjustment, after the prices fell dramatically from USD 147 to USD 30 at the end of last year?

– I would like to hope that this is a signal of an overall improvement. Before this interview I checked the oil price dynamics. The prices we are having now that vary from USD 60 to USD 70 per barrels were the same in 2006. We saw oil prices floating from USD 60 to USD 70 per barrel during the year, and the price seemed to us very high. Today, I think, the price is fair, mindful of the recent peak price of USD 140 – USD 150 per barrel.

What are the reasons of the soaring oil price? There are two points of view on this issue. The first one is that of the optimists. They think that the current oil price situation reflects fundamental changes in the global economy, including the leading economies, e.g. the United States. The money that was injected into the economy made the situation better. Economic recovery plans developed in the United States, Europe, China, Russia, and other countries were effective; the economy has shown signs of recovery. This has lead to increased oil consumption, and therefore this trend is already evident and will be fairly sustainable.

Pessimists take another view. This view is that the current increase in oil prices reflects random processes, which are influenced by the support programs but are not long-term in their nature. In other words, people saw that the American economy slightly warmed up, and this resulted in increased oil prices. But soon we will see another downturn. The oil price will go down and cool down the global economy in quite a dramatic manner.

Yet, I would like to believe that the changes in oil prices already reflect certain underlying patterns, which are taking place in the world economy. Let us not try to beat time itself, let us wait and see. Anyway, some processes that are taking place in our country make me feel positive like a moderate optimist since the inflation is slowing down, oil prices are growing, output decline has stopped in a number of industries, and the unemployment rate has declined. We hope that is not accidental.

– With your current knowledge of the economic downturn, the financial problems your country is facing now, do you plan to use oil revenues for the benefit of the Russian economy? Will the oil sector remain the leading industry in Russia? Or are there plans to use the oil revenues in other sectors and for other purposes?

– The crisis is not only an ordeal that befall us, but a challenge that life offers to us, and we should make good use of it. I have said that I am not satisfied with the structure of the Russian economy, it’s true. The structure is outdated, resource-based and not innovative, and perhaps we should have invested more funds in innovations, the IT, the so-called new economy. As we failed to do it before the crisis, I think it is very important to take advantage of the situation and try to change the structure of our economy. That is why, I think, additional revenues, including revenues from oil and gas should be spent for two main purposes.

The first is to safeguard our social programs, such as pensions, benefits, and healthcare, that must remain a priority of the state. The healthcare and education systems have been so structured some time ago that they remain within the government’s area of responsibility.

On the other hand, we should use additional opportunities from the exports of raw materials – gas, oil, etc. – to make a substantive change in our economic structure, that is to say, to invest additional revenues not only in the expansion of oil and gas capacities, which is quite natural, in developing our ongoing major projects (oil refining, petrochemical and gas chemical production, natural gas liquefaction), but also in developing cutting-edge technologies, namely the IT, up-to-date biotechnologies, i.e. green economy, energy saving, and energy efficiency, which are now at the forefront. If we succeed in finding a balance between social spending on the one hand and the development of new production facilities in our country on the other hand, we will ultimately achieve a new economy in Russia. Currently, this is the most important goal for us.

– What is, in your opinion, the main achievement that Russia should have in 10 years? What are your goals? Oil will be important for Russia even after 10 years, but if we take other industries, what would be important for Russia?

– In our country we are used to saying and hearing that people living in Russia are very creative and smart. And I would like to hope that our resource-based economy will be supplemented by an intellectual, knowledge-based economy.

Talking about my views and my dreams on how we will live in 10 years, I believe the introduction of a knowledge-based economy and knowledge-based production in the broadest sense of the word would be the best thing to do. We have just discussed this issue, but I would like to reiterate that this should be an investment of maximum efficiency in new technologies, such as energy efficiency, biotechnologies, and some modern “green” technologies. If we are capable of doing that, we will have quite a different economic structure.

Therefore, in 10 years I would like to see the Russian economy as something more than a simple strong natural resource economy. It should be an economy with strong production facilities, state-of-the-art equipment, and various modern technologies, including in the communications area – this is what the entire world is doing now. However, we will have to preserve our energy and machinery capabilities that were created during the Soviet period because this sphere is rather complex and we also have to invest seriously in it.

– I would now like to ask you about investments, including foreign direct investments. Many investors do not want to invest in Russia fearing that the country lacks the rule of law and will not protect their money. Examples are numerous, including TNK-BP and Shell – when they were pressed to sell their 51 percent stakes in the joint ventures and hand over control to Russia. How will future activities in this area be arranged?

– Apparently, I have a somewhat different view of the processes that took place in the previous period. I do not think that anyone sold their investments or their shares under whatever pressure or threats from someone. That has nothing to do with the truth, I believe.

However, concerning the issue of investments and the investment climate, I do believe that we should further develop our investment legislation. Recently, we have established a rather good set of laws on this subject that also cover judicial protection of investments.

As far as investments are concerned, Russia, like other developed countries, applies a so-called national investment regime that makes foreign investments equal to Russian investments, and there can be no difference in that regard.

As far as the right of ownership is concerned, the concept of ownership in our country is absolutely the same as in Europe. We may have differences, say, between the legal systems of Russia, England, and America, but we still have this truly developed modern concept.

You could say that I am not satisfied enough with how the judicial protection of investments functions, we do have problems there. Therefore, it is really quite important to improve Russia’s laws on judicial protection and laws on court organization in order to obtain prompt and fair decisions. Recently, we have made quite a long way towards this goal – and so far the principal codes governing the participation in judicial proceedings (the Civil Procedure Code, other codes and decisions relevant to economic disputes) have been adopted and have come into force. However, that does not mean that everything is fine.

Back to examples you have given. In my view, the TNK-BP situation has nothing to do with Russian legislation or somebody’s intentions. That was an ordinary conflict between the shareholders. I would like to point out that the shareholders concerned are private parties – a Russian private entity on one side and a British private entity on the other side. They have reached an agreement, created a new entity – a joint company owned in a 50/50 proportion. As a former lawyer, or let me put it in another way, as a former practicing lawyer, I can tell you that this form of business is, I believe, the least sustainable one, because the parties can pull the plug on each other for a very long time. Then, the companies began quite a long and lingering dispute. By now, they have almost settled the dispute without – I would like to highlight it – engaging the authorities. Although both our businessmen and the British side representatives contacted me on this issue, authorities never tried to intervene. My position was quite simple: this is a dispute between private companies. “So go to court and try to negotiate.” By the way, I would note that dispute we are discussing now was adjudicated, to a significant extent, without using Russian law, because the documents, as far as I remember, had been signed under foreign law and at a foreign court. So this example is not representative.

Another matter is that foreign businessmen that file an action against Russian parties or sometimes the Russian government should proceed on the assumption that they will obtain prompt and effective judicial protection. Or at least relatively prompt, because nowhere in the world are the courts truly quick. This is what we should take into account when making decisions for improving the existing corporate and judicial procedures. And this is what I am dealing with because the legal reform is very important for Russia; I directly address these problems as well as corruption issues.

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– Mr. President, thank you very much for your time.