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lead blowing welcome to on the money with a business of russia is business i'm peter all about being elected for a third six year term as russian president vladimir putin returns to power in a very different country than only four years ago candidate putin around on a mostly populist platform can be elected politician deliver the goods and keep the economy growing as well as the interest of foreign investors. to discuss the economic and financial environment in russia and vladimir putin will face as returns office i'm joined by it is not releasable accuse the chief economist at deutsche bank and given chicago he is the chief economist for russia and c.i.s. at renaissance capital we also have been heiress he is the editor in chief of business new europe as well as come monday he is the chief strategist at oakridge here but first let's have a look at how russia's new president may transform the country's economy.

in four years time russia is expected to break into the ranks of the top five economies in the world with annual g.d.p. growth reaching up to seven percent however it's contingent on a thriving and innovative business sector the dimmer putin who is set to return to the post of russia's president this may winning more than sixty three percent of the votes has vowed to make this vision of economic transformation areality the foundations of basic economic policy have their roots in the shop royson will or will try. he says that coincided with the dhimmitude in its first presidential term however moves to stimulate private business and lessen the economy's dependence on commodities especially oil and gas became a challenge to in two thousand and four the current state of russian economy is the same as it used to be one year ago five years ago basically economies very abundant while. on commodities and their price. basically

we don't see any significant developments in the transformation of the economy towards higher value added in the is since two thousand and four there's certain things have changed in the russian political landscape gooden's determination to implement reforms and reduce the budgets reliance on high oil prices is still there and to give it to overlook sectors of the call me can be developed and the quantum a diversified one nagging threat to the country's fiscal health commodity price over till it's a risk will be reduced greatly and such risks were clearly demonstrated in the wake of the two thousand and eight two thousand and nine nomic crisis is written gave way to baird of his russian president russian industries primarily split between globally competitive commodity produces in two thousand and nine russia was the world's largest exporter of natural gas the second largest exporter of oil and the third largest exporter of steel and primary elim and other less competitive heavy

industries that remain dependent on the russian domestic market this reliance on commodity exports makes russia the rowboat to boom and bust cycles that follow the highly volatile swings in global commodity prices on the back of shrinking world demand for its prime moneymaking exploits as well as state mean global credit markets the russian economy's growth prospects started to contract in two thousand and nine since then lending to russian banks and firms. and economic growth is back on the positive side if you see from the point of view. g.d.p. decrease of forty per cent. presidencies the first when you reach forty percent ok you were. no your balanced or positive you are bankruptcy. no. it was a good group however the country still faced some short term challenges rose was

a prolonged recession which could trigger a global slowdown and that could lead to another commodity price russia's economy fails. but given the six year term ahead of him and halting state banks three hundred and twenty five dollars oil. ample time to implement the reforms and on the money. ok gentlemen start hashing out the next six years in russia itself is going to be a walk in the park for the returning president because let's. look at it this way let's compare the last four years when putin was president and his next six weeks the similarities one of the differences. yeah well clearly the biggest differences the external environment i mean the last four years of putin's presidency socially preceded the crisis in russia and were actually at times were quite

favorable in terms of including the foreign investment poor and to usher in a major scale in two thousand and six two thousand and seven so that is probably one of the differences another one i think is that certainly the degree of political capital that putin used to have during his first two terms was very significant now it's still very significant but lower and now the trend maybe not as one way and favorable all the time to to put in so in this more difficult environment. putin still has to have the courage to spend the political capital that he has to change the system because ultimately this system has to be changed even when you think about it i mean is it a walk in the park because you know we have a very different environment right now and when we have to talk about politics as

well on this program so what is the major challenges out there simply to not be a walk in the park but i think that the single most important difference for me is the incentives which you might hear from now to divorce of certain forms versus the incentives if you might my care before that before the great recession before the great recession russia was a country that was having significant fiscal and kind of the come surpluses this is changing right now and for need is probably the most important macroeconomic incentive for putin to do lever or some of that force or at least to surprise us at all if the expectations which i think we will all agree are a very high for the uk a. good e.u. are we going to be pleasantly surprised over the next few years remains to be seen i mean this reminds me a lot of two thousand when putin first came in and funny enough we were back in the same. position where we we really have no idea which way it's going to go i mean there's a lot of talk about reform but then you know the political situation he's been quite quite tough with the opposition and commentators looking at it and i'm sure

having said that though the strategy that they're drawing up the twenty twenty strategy has all the right things in it i mean i think the key here is in the first period of growth sort of finished with the crisis in two thousand and eight it was simply a question of state spending and that produced growth automatically catch up face and russia's economy has matured to the point where that doesn't work with state spending is actually detrimental to the old model is broken and has to be replaced with a model where the state steps back and nurtures private business so that's a complete change in mentality mindset completely changed the system and we're waiting to see them deliver and that's ok tom you know we've heard a lot about reform over the last twelve years ok is it implemented on the next administration to really follow through on a lot of those promises because i'm looking at corruption making it easier for businesses to get started more for our foreign investment friendly i mean is it incumbent upon an incoming president to be really serious about that now. well i

think the mindset is definitely changed. by the police in my incident two thousand and four was very much that this is a demonstration which didn't fund growth through states funding and about building up foreign exchange reserves fund russia isolate itself from fluctuations in global commodity markets and i think what's changed quite markedly is they've understood that that's no longer case and thought this is a government that will needs to do much more to encourage investment from abroad and in doing so to diversify the economy and reduce the reliance on the export of its resources and in that context you know i am quite encouraged by some of the rhetoric that has come out of the putin administration either as a prime minister in his future president which should do something to encourage investment and i've been a number of policies which have been proposed to help that have been the most notable that's been transparent in several companies in improving the relationship

between free cash flow and evident payments among state run companies i think that's a very positive step and i think you'll see that our financial services framework in russia driven by the my success yes merger that's something also that can help to drive inward investment and to catch more foreigners involved in rushing out to markets and that should be special that's not a good stat however i would be slightly questioning of whether or not this government is serious about real political liberalization there's been some moves and minos in world suits who were allow regional governors to be elected for example to lower the threshold to get into the duma and i think we need to wait a little bit longer because i'm still not so sure that this is an administration that wants to see a real debate. or it isn't within the duma i think that some of the foreign investment means is looking at might be disappointed it's not going to i think the new administration is actually interested in debate because they actually reacted to some of the protests of december and right before the presidential election that i think they get it now ok and i think it's also important. point out to our

viewers is a bit put in actually does what he says very very often ok he does have a core group of people he has to keep them happy he is a politician after all he also has to attract foreign investment how does he balance yeah in my view clearly one of the barriers for putin to actively pursue the economic agenda was the electoral cycle and clearly this was something that put off some of the difficult decisions by a certain period of time and will probably have to wait for real more tangible reforms to happen for another probably two or three months at least and then of course another issue is significant state spending budget spending a little promises that in the medium term do create. creates. problems that will necessitate additional sources of financing but in the end i

think yes he does get it and while he may have accumulated some political capital through this additional spending in the end well first still has a very strong sovereign balance sheet one of the lowest levels in the world and that does allow and i think to pursue quite active quite aggressive economic reform agenda that i think given some of the challengers in the medium term including in the first will feel will have to squarely focus on the efficiency of state spending and the efficiency of the whole apparatus so anti-corruption measures and that will guard will be absolutely crucial ok gentlemen we're going to go to a short break and after that break we'll continue our discussion on the new economic policy of russia regarding.

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we want to visit. something else. welcome back on the money on people about ok let's continue our discussion on the financial environment in this country after the presidential election ok ben you write before we went to the break you wanted to jump in there we were talking about political reform and fortunes agenda go right ahead. yeah i think we're skirting

around an issue here at the core of what's going to happen next and that is this putin actually believe in markets because he actually wants a free market a liberal open economy you know always he just going to carry on spending and have clicked ocracy as seen from the outside if you have an answer to that you know i didn't go ahead in so much as i think after the ninety eight crisis there was a never again moment how can we avoid that and the answer was to build up the reserve fund and then going into the two thousand and eight crisis they thought they had plenty of money enough to weather a crisis i mean russia had six hundred billion dollars in hand and then suddenly by february of the year of two thousand and nine they realized that that wasn't enough money and that you couldn't have a cash that would save you and i said wait she was tom said from the global economy and so this time around they realize now the fundamental level they have to do it they have to do the reforms and build an open economy because there's no alternative if you to run the country and provide for people one term ok tom no

alternative i like that i like that kind of talk from them what do you think but i think there's. certainly been a growing awareness of the economic necessity for reform of the one way to do you got is to provide investors with a long term stable good start on the capital the band vast and i think that's something that this administration over the years up to now have got really really wrong and sticky by messing around with tariffs are very starved changes by taxation in the audacity. by issues surrounding corruption by targeting specific industries and businesses with seeming randomness now that's something that they are absolutely have to tackle otherwise they'd be very few people who want to bring their money into russia but the very encouraging sort of area has been that the government seems to want to address this and gas up national mentioned corruption they seem to to want. corruption. talks i mentioned earlier this year about

dividends getting state owned companies to rush to provide the returns for investors so companies more efficient make projects mining more efficient certainly the rhetoric right now is very positive and i think it's tough and we know we will have to wait a little bit for we see any real changes but this issue about spending political capital is very very important i think and recognizes that he has a relatively short window post-election to make serious changes we saw that in two thousand and five and the monetization of social benefits which is very unpopular he has a window now he can spend his political capital and he can push through what should be some quite unpopular reforms and i think that could be very very close to for investors ok when you think about that i tend to agree that i mean we have a window of opportunity right here capital was there to be respected when western mainstream media was going to still very popular in this country did win the election here but there's a lot of high expectations right now and we saw again i don't want to forget about the protests that we saw in december i wanted my expectations are around sure i

think that putting to you at the numbers important speeches over the last couple of months three of them were on the economy i think it was one that was particularly important one that was delivered on twenty third of december i think it got lost a little bit in the christmas spirit within that particular speech making was looking about increasing the investments in this economy and i think sixteen really positive because for example if you take russia again as there is of the big economies there is the economist very favorable demographic they now mix so the only way for offsets you something demographic then i would say is to invest more of the higher rate of capital accumulation then there is to the greek economy sours personally very encourage this message about her investment was delivered from such a high level for the very first time to something i think it would be difficult if not arguably i mean it's a very you know capital and does investing the economy investing in people what about those slippery fingers that are always you know in the kill communicate going back corrupt to. in here ok it seems to me that's the make or make or break issue

it is completely agree it is the decisive normanton terms of tackling this issue it cannot be postponed for and actually one of the constraints on this system working as a before going forward one of the major constraints is capital flight but the fact that we have eighty four billion dollars worth of net outflows during a period of high oil prices is clearly a constraint on the whole system continuing to churn the before so i think that kind of economic factor the continuation of these capital flows since two thousand and ten is something that will force greater changes that need these changes really necessary and i think you know the improvement in the investment climate generally but especially tackling corruption tackling not just the macro level policies work russia has been quite good at in the past ten years but really the micro level of

companies really improving corporate governance that is the key issue right now this year ok term it looks like you read my article in the national interest was i i said that over the last twelve years that the ruling political has got the expensive growth under control now it's the intensive growth in it that's exactly what we just heard here are they up to it are they up to the to the market in tackling these very hard hard deep rooted issues. well i mean i've long argued that one of the issues in russia is there is no federal body image overseas issues of corruption and that's a big problem it's a big problem in any country i think we're going through positive steps that we made recently tackling this one is that russia is not a party to the o.e.c.d. unseen bribery convention which allows external oversight to make sure russia is to certain parameters and the second is this creation of financial crimes unit units under the prime ministers of course it's not enough in itself but he's you know

he's come out already quite aggressively in a couple of months the bits that this organization has been running mentioning capital flight it's going to be into the source of the problem right and i think that is quite encouraging i think they hate trying to get it back out the importance of problem down corruption but it's a major major systemic problems existed in russia care of the centuries whether they can do this and mediately you know that's a very very difficult thing but i think they need to give investors more confidence they're serious about it and they're serious about companies going up books in order. to look in what about corruption and it seems to me that this issue is a little bit blown out of proportion and usually people look at transparency international headline in the street ranks russia hundred fifty four out of hundred seventy eight countries it gets even more exciting than that because russia is a tree sandwiched between papua new guinea and egypt is that but the problem with the cynics is that it's not some expression perception and this perception is could

be influenced by media coverage of this country for example if you go to our expense international also goes to individual countries and ask people and people themselves gave you what a member of your family experienced corruption in the last year or so about twenty percent of russians say yes this is not something to be proud of but i think that given the level of income this is not out of proportion with the rest of the world so i think this is something that some people who i finally usually forget my most western countries have institutionalized corruption but that's a different topic it is not going go back to what. well if we're looking for one single driver to do to enhance grow the economy what would you would be looking at from a policy perspective from a policy perspective i would say investment world fixed investment growth and infrastructure development as the driving force for that so we've seen episodes during which in second term when investment was the main driver of economic wealth when it was driving significant part of tivoli growth this is really i think in terms of all fathomable economic models for russia this is the driver that will

take it to higher level in terms of the trajectory of russia's growth so in order for investment to to improve significantly you clearly need those capital outflows to cease to be reversed and you need more of the in order for of the i to come you probably also need better investment climate including for portfolio investment because previously the previous paradigm was we don't need portfolio investment we need only of the year as a result we didn't get a lot of the as well so this this kind of change this focus on improving the investment climate especially at the micro level i think is going to be critical for investment become even enjoy when you think about that then is that the right driver that you'd be looking at i think it's the key is getting people confidence about coming here and in that sense it's really. a public fight against

corruption would do a lot for russia's image and reassure people many investors who don't even look at russia i mean people are. and those kind of people they didn't even start to think about coming here because the image is so poor and making a dent in the corruption publicly i think would actually have a knock on effects i mean the things that the us that was talking about if cia and portfolio investment would follow on from there naturally i should say i'm talking to transparency international serves them in the head of the office here. she's actually very upbeat in so much as she thinks the kremlin's that the cat out of the bag with the public discussion of corruption and they have to do something about it i mean it's become public there's no going back on that and we're seeing the beginnings of some institutionalized. it's just lies ation of anti corruption in the form of you know the utility companies now are not allowed to do contracts with kind of parties where they don't know who beneficial owner is and stuff like

that that we need to see more of comedy but what about you what's the driver you're looking at what's the driver that putin should be giving you his most attention to over the next six years or maybe the first six months of his presidency. well the headlights are driving on full time position so you can fit the mustard gas prices and i think that is something that could help reduce the sub the subsidies that the government pays to to the consumer and in doing so would reduce the budgets reliance on your price that i could have a knock on offense of reducing some of the volatility in the acting market and one of the big issues for investors is that the actual market is a very hard to beat up on your price but would be very good stuff. i'd also like to see more progress on pension fund reform like see a more natural buyer of russian actions which is more which is locally based and i'm currently only seven cents of russian pension fund money is invested in the action market and that's clearly that's clearly not enough again i think more balance that i think the government is get gets this and i think we're seeing some

very positive steps but we'll have to wait and see what is the factors that i've seen you put in place if you can who do you want to see as prime minister you describe the person i think the name you give me the most difficult question what. i think that somebody that i did support the first person to work in units we could see obviously because this is something that will help the country go in the same in the same direction in terms of lives i would i would like to make commission aims but again we need a unique skill you want to. discuss names i want to thank my guests today for joining me here on the program and thanks to our viewers for watching on the money see you next time it's hard. to.

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