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memri
June 21, 2016 No.
6487

Russian President Putin At The SPIEF Plenary Session: 'Our Goal Is To Achieve Economic Growth Rates Of No Less Than 4 Percent A Year' - Part II

The second part of Putin's speech at the SPIEF plenary session focused on the Russian economy and the investments that it made in research and development.[1] Putin was quite optimistic in describing Russian economic conditions, although the economy had been adversely affected by the decline in oil prices since 2014 and the sanctions imposed on Russia. Putin emphasized that Russia had managed to resolve its most urgent current economic problems in the economy. He also stated that Russia maintained reserves and substantially reduced capital outflow "by five times compared with the first quarter of 2016."

Putin said that the rate of inflation is "going down as well," and it was possible to reduce inflation to 4-5 percent even as early as the mid-term. Putin added that Russia currently seeks a minimum growth rate of four percent a year - admittedly a modest objective but a challenging one given the changed circumstances of the Russian economy and the entire global economy.

In a meeting with members of the Russian Direct Investment Fund International Expert Council and representatives of the international investment community, held on the SPIEF's sidelines, Putin also claimed that Russia is "out of recession" and that its economy has "adapted to the new conditions." Putin said: "We have created the basic conditions for setting our economy on a growth trajectory. We have ensured macroeconomic stability and substantially reduced inflation. The actions of the Bank of Russia have allowed us to keep gold and currency reserves at a high level. As you know, we have one of the lowest debt-to-GDP ratios." 

It is worth noting that on April 21, 2016, Russian Prime Minister Dmitry Medvedev spoke at a government meeting on 2017-2019 socioeconomic development scenarios and parameters for Russia, where he acknowledged that in 2016, the Russian economy would show either zero or slightly negative growth. According to the World Bank, the Russian economy will contract by 1.9% 2016, whereas the International Monetary Fund (IMF) forecasts a contraction of 1.8% and Moody's more optimistically predicts a 1.5%.contraction. Medvedev predicts that the Russian economy will grow by about 1%-2% in 2017-2019.[2]

Medvedev's predictions also appear optimistic considering that total foreign direct investment in Russia decreased by 92-94% in 2015,[3] foreign direct investments in Russia shrank in 2015 by 92-94%  while capital outflow from Russia increased. [4]   

According to Russia's Central Federal Statistics agency Rosstat in Q1 2016 the Russian GDP shrank by 1.2%. in comparison with Q1 2015 while in 2015 the Russian economy contracted by 3.8 %.[5]

Speaking in an interview with TASS ahead of May 25 session of the Economic Council Presidium, Russian presidential aide Andrei Belousov said that the Russian economy can achieve stable 4% growth in 2-3 years. Belousov said: "There is already an understanding among the elites that without the economic growth a host of issues will be impossible for us to resolve or they could be resolved at a high expense. At the same time it is still possible to achieve the economic growth, although the recipes vary greatly. The stable economic growth may be reached in two or three years."[6]  

In his speech, Putin also stressed Russia's need to "liberalize", improve the business climate and make investments in science, innovation and education. This last part of Putin's speech echoed Russian liberal economist and Sberbank CEO Herman Gref's address to the Sixth Gaidar Forum on January 13-15, 2016. On that occasion, Gref stated that Russia needed to reduce regulations and diversify extensively into   sectors that were not based on oil. Gref advocated reforming the Russian education system, to enable Russian citizens to join the "technological revolution."[7]   

Putin also announced the imminent formation of a presidential council for strategic development and priority projects that he himself will chair, while the council presidium will be led by Medvedev. The new council will be involved in key projects that will promote structural changes in the economic and social sectors, increase economic growth and productivity, improve the business environment, stimulate the growth of small and medium enterprises and sustain Russian exports. 

Below are excerpts of the second part of Putin's speech. To read the first part, see MEMRI Special Dispatch No. 6485, Russian President Putin At SPIEF Plenary Session: The 'Greater Eurasia' Project Is Open To Europe - Part I, June 20, 2016. Emphases in the text are added.

 
Russian President Vladimir Putin (Source: Brics-info.org)

Russia Has Managed To Resolve The Most Urgent Current Problems In The Economy

"...In formulating the strategy for Russia's economic development, we certainly consider the current trends in the world and intend to make use of global technological changes, the formation of new markets and the opportunities of integration and cooperation to advance our own development.

Russia has managed to resolve the most urgent current problems in the economy. We hope growth will resume in the near future. We have maintained reserves and substantially reduced capital drain - by five times compared with the first quarter of 2016. Inflation is going down as well. It has fallen almost in half if we compare several months in 2014-2015 with the same period in 2015-2016. I believe that it is possible to bring inflation down to 4-5 percent as early as in the mid-term perspective.

"In addition, it is necessary to gradually decrease the budget deficit and the dependence on revenues from hydrocarbons and other raw materials. This includes cutting our non-oil and gas deficit at least in half in the next 5 to 7 years.

"I am sure that the [Russian] Government and the [Russian] Central Bank will continue their balanced and responsible efforts to ensure macroeconomic stability. Our goal is to achieve economic growth rates of no less than 4 percent a year. Yes, of course, I remember what we were saying in previous years. Today, we are talking about far more modest targets. The objectives are not as high as were outlined only a few years ago, but, to reiterate, the situation has changed not only for Russia but for the entire global economy. The current slowdown is a global trend.

"A key factor that predetermines the overall competitiveness of the economy, market dynamics, GDP growth and higher wages is labor productivity. We need higher labor productivity at large and medium-sized enterprises: in industry, in the construction and the transport sectors and in agriculture - no less than 5 percent a year. This appears to be a challenging and even unattainable goal, if we look at what is happening here today. At the same time, the examples of numerous enterprises, as well as of entire manufacturing sectors, such as the aircraft industry, the chemical industry, pharmaceutics and agriculture, show that this goal is quite feasible and realistic.

"We will develop legislation, tax regulators and technical standards to incentivize companies to raise labor productivity and introduce labor and energy saving technology. Enterprises that are ready and willing to achieve such goals should receive broad access to financial resources, including through development institution mechanisms such as Vnesheconombank [a Russian state corporation performing functions of the Bank for Development] and the Industry Development Fund.

"With the growth of labor productivity, inefficient employment will inevitably shrink, which means we will need to substantially increase the labor market's flexibility, to offer people new opportunities. We will be able to resolve this problem primarily by creating more jobs at small and medium-sized businesses. The number of people (what I am going to say is very important) employed at small and medium-sized businesses should grow from today's 18 million by at least 1.4 million by 2020 and by more than 3 million by 2025. It will be difficult to increase support for small and medium-sized businesses, and still harder to consistently build a niche for its operation. But it needs to be done.

"We have already taken an important step toward that end, which has generated some initial results. For example, large companies co-owned by the government have tangibly increased their orders from small and medium-sized businesses. By the end of the year - and this is, I think, an achievement by the Government - large companies will place 1 trillion rubles worth of orders with small and medium-sized businesses, a nearly nine-fold increase on last year.

"High-tech industries could provide another niche for small and medium-sized businesses. It is important to create favorable conditions for small companies, start-ups entering the market with breakthrough products. Finally, there is yet another significant niche - services, the development of consumer services, essentially creating a comfortable, supportive environment for people living in the cities and towns of Russia...

We Will Continue To Further Liberalize And Improve The Business Climate

"Friends, we will continue to further liberalize and improve the business climate...We will tackle systemic problems, of which we still have plenty. This includes improving transparency and balancing relations between government agencies and businesses. These relations should be built on understanding and mutual responsibility, meticulous observance and compliance with laws and respect for the interests of the state and society, and the unconditional value of the institution of private property.

"It is essential to drastically reduce illegal criminal prosecutions. Furthermore, representatives of security and law enforcement agencies should be made personally liable for unjustified actions leading to the destruction of a business enterprise. I believe that this liability can be criminal.

"I realize that this is a very sensitive issue. We cannot and should not bind our law enforcement agencies hand and foot. However, without a doubt, there is a need for balance here, for a firm barrier to any abuses of power. The leadership of the Prosecutor General's Office, the Investigative Committee, the Interior Ministry and the Federal Security Service should continuously monitor the situation on the ground and, if necessary, take measures to improve legislation.

"I ask the working group on law enforcement in entrepreneurial activity, which is headed by Chief of Staff of the Presidential Executive Office Sergei Ivanov, to focus on these issues as well. I should add that I have already submitted to parliament a package of draft laws prepared by the working group, designed to humanize the so-called economic statutes [of the Criminal Code]. That said, it is also important to guarantee businesses and all citizens the right to fair and impartial defense in court.

"The Russian judicial community has done a good deal recently to improve the quality of the court system. The merging of the Supreme and the Higher Arbitration courts has played a positive role in ensuring the uniformity of law enforcement. I believe it is necessary to move further toward enhancing the responsibility of judges and making the judicial process more transparent... 

We Have A Core Advantage In Physics, Mathematics And Chemistry

Ladies and gentlemen, I have already talked about Russia's participation in cooperative scientific research projects, in particular with European countries. It is essential to add that we have a core advantages in physics, mathematics and chemistry. As you know, recently we honored scientists who won the National Award, who have made brilliant breakthroughs in biology, genetics and medicine. Russian microbiologists have developed, for example, an effective vaccine against Ebola. National companies are going to bring an entire line of unmanned vehicles to the market and are working on energy distribution and storage, and digital sea navigation systems. We have practically put in place a technological development management system. What does this entail and what would I like to say in this context?

First. The recently formed Technology Development Agency will help apply current research to real manufacturing and set up joint ventures with foreign partners.

Second. Another mechanism will be in use starting in 2019. Major manufacturers will be made legally bound to use the most advanced technologies meeting the highest environmental standards. Hopefully, this will give a serious boost to industrial modernization. Many neighboring countries introduced such requirements long ago. We have had to put off these changes due to problems in the real economic sectors, but we can't keep postponing it any more. Our business colleagues know this and must be prepared.

"And finally, third. The National Technology Initiative covers projects of the future based on technologies that will create fundamentally new markets in a decade or two. I would like to ask the Government to promptly remove administrative, legislative and other obstacles blocking the development of future markets. It is essential to back up technological development with financial resources. Therefore, the key task facing the overhauled Vnesheconombank will be to support long-term projects, attractive projects in this high-tech sector. 

"We clearly understand that it is people who create and use technologies. Talented researchers, qualified engineers and workers play a crucial role in making the national economy competitive. Therefore education is something we should pay particular attention to in the next few years.

"We are witnessing revived interest on the part of young people in engineering and natural sciences. Russia already holds a leading position in the world in the number of students training to become engineers. Professional training standards in engineering are improving. Universities and colleges are consolidating ties with the real economy, both state and private sectors, and the demand for future professionals is therefore growing.

"We have to continue to upgrade the material resources of universities and colleges, improve teachers' qualifications, work to improve university and college curricula in line with modern updated professional standards and use the expertise we received when working with the WorldSkills international movement.

"Beginning with school and extracurricular programs, we create conditions to enable children throughout the country to work on technical and scientific projects, learning to work creatively in a team from childhood. These skills are essential to a modern specialist in practically any sphere.

A Presidential Council For Strategic Development And Priority Projects Will Be Created In The Near Future

"Colleagues, obviously the issues that we are facing call for new approaches toward development management, and here we are determined to make active use of the project principle. A presidential council for strategic development and priority projects will be created in the near future. It will be headed by your humble servant, while the council presidium will be led by Prime Minister Dmitry Medvedev.

"The council will deal with key projects aimed at effecting structural changes in the economy and the social sphere, and increasing growth rates. I have spoken about some of these projects today: raising labor productivity, the business climate, support for small and medium-sized business, and export support, among others.

"These projects are comprehensive. They span various economic sectors and social spheres, go far beyond the competence of one agency and require the active participation of regions and municipalities. At the same time a project related segment will be singled out in socially oriented state programs, such as healthcare, education and housing, with clearly designated targets that we plan to achieve by 2020 and by 2025, and what measures need to be taken to achieve these results.

"By the middle of the next decade the world will obviously be a different place. To overlook, to ignore on-going processes means to fall by the wayside of development. To maintain leadership positions [we] should work to make these changes happen.

"This is the 20th time St Petersburg welcomes the forum guests. During these years Russia has made great progress, showing its ability to meet the challenges of the times and in certain respect remain ahead of the curve, while preserving its identity and spiritual roots, which I consider to be extremely important. We are confidently looking ahead, linking our future and our success to [our] openness to the world and wide-ranging cooperation in the interest of development..."

 

Endnotes: 

 

[1] Kremlin.ru, June 17, 2016.

[3] Kommersant.ru, February 26, 2016.

[4] Kommersant.ru/doc/2924262; Bbc.com/russian/news/2016/05/160527_direct_investments_russia.

[5] Lenta.ru, May 16, 2016.

[6] Tass.ru, June 25, 2016.