editor in chief of business new europe and you just laugh lisa volek he is the chief economist at deutsche bank russia all right gentlemen crossed out rules and i mean you can jump in anytime you want before we talk about the swat analysis of the russian economy ben i want to go to you i mean newsweek a few days ago a writer on matthew and we have ed lucas over at the economist he keep telling me for about a decade now that this economy is about to collapse now you're a journalist is well you don't say the same thing where's the disconnect. people tend to focus on the negative part of the story and the trouble at the russia story is that there are lots of problems and if you focus on those then you can forecastle source of gloom and doom the imminent collapse of the oil price that will bring the russian economy down in flames but the reality is that it continues to grind their way and make progress and. you're i mean look at the the situation in europe of the facts i mean russia at the moment although the economy has slowed considerably from about four percent stuff in the last year to about two point two

you said your external reasons or is it domestically. both i think the more the problems in europe than anything else has dragged russia yet it's still growing the fastest growing country in europe and will continue to be this year and depending on what happens in the second half of the a particularly it should pick up and you know it will do better than everyone else but will still perform below its potential to russia story are you big surprise to the economist when it comes to russia i know i think there is a there is a sort of deep rooted skepticism about russia among many commentators and i think it's not helps perhaps by some of the decisions that have been taken recently for instance about the the orphan adoption law but fundamentally you know i think russia is in a very strong position at the moment i think it ran a fiscal surplus last year had a current account surplus of about five percent. it's got full employment in

russian terms about five and a half percent last year was a bit disappointing we had a big fiscal expansion big increase in wages and pensions we also had a big credit expansion with very strong growth in russia similar but russia can afford to grow the hand it can afford if they are the other country could afford it but still growth slowed through the year despite this big expansion there i think that actually means that next year growth will be quite resilient because what happened i think is you have to show up for them all price back in the second quarter and that scared people they thought you know second wave of the crisis is coming so savings actually went up last year even though unemployment went down and i think that companies ran down their venture east and delayed investment because of political uncertainty because of this oil price shock but both of those things that increase in savings that run down of adventure ease actually means that next year consumption investment should be pretty resilient so i think growth will

probably slow a little bit from last year because we're full capacity now full employment you know manufacturing capacity back at pre-crisis levels but it'll be pretty resilient so russia looks to be quite comfortable for twenty thirteen and some jump in on this one yeah i agree that russia looks quite strong i would actually argue that we could accelerate next year it does depend this year are two thousand and thirteen in two thousand and thirteen yes because of the oil price outlook that we have we have a very comfortable level of oil prices for russia nearly one hundred thirteen dollars per barrel that should be support of but the key to growth really is investment and the answer to the question as to whether russia will excel away or not resides probably not even so much in the level of oil prices as with regard to capital flows with regard to russia's capability. to reverse the scouts on flight and to

finally register some that capital inflows that in turn i think necessitates a very targeted a very emphatic reform effort which is something that unfortunately we did not see in two thousand and twelve why didn't we and is rushing to is the kind i am sure regulation i have an explanation on the biggest explanation that i have is risks of global slowdown i think the perception within the government was so strong that the second wave of the crisis in europe and the global economy would hit russia again that the government really was mostly talking about and discussing anti-crisis measures defensive measures rather than proactive reform policy to be clear i mean there was clearly a panic hit the government in the middle of two thousand and twelve and the government sort of boring heavily and stuffing money into the reserve because they were anticipating a meltdown and they were getting ready and like jacob said that fell through to the

people and to the companies because they were panicking too and so everybody started hoarding people started saving the companies were burning to because of the nature of the russian economy the lack of reform or slow reform or do we is it still externally driven it's i mean there is a vulnerability there i mean again you have to remember as well that america is talking about a crisis nine hundred twenty nine one nine hundred thirty and the russians they went through this in ninety ninety eight so it's very clear to everyone that's why the panic that's why they're so nervous but it's that lack of confidence as. investment is the key to this that everybody sat on their hands in two thousand and twelve despite the fact they were making money they had to so what's the trigger to get your hands out confidence right yes i mean i think those two things which have changed quite so you know famously i think this time east if. you don't hold you to where you go we go to a new. economic policy framework so long that's

a long phrase but what i mean is we've got a floating ruble and that means that you know in russia you've got a very flexible external account people only. luxuries from abroad to accentuate the point they buy cars nice food capital goods but by and large things they can do with ales if you have a flexible ruble then when times are bad you can switch to a domestic source you don't have to buy your feel from abroad that all is produced in russia don't have to buy a basic food from abroad that's all produced in russia and so you have this very flexible extant kilt which means that now you have a crisis the ruble will move and rock the russian economy look at the signals that consumers in the company look at the signals they can adjust so i think that's a great source of additional stability going forward in the face of shocks is one of the ironies of russia. you know on the one hand it's vulnerable to workers on the rest of the world with their problems as well as on the other hand because of

the flexible ruble which is new and the fact that russia has no debt to speak of there is actually an incredibly strong position in so much as if europe does blow up of course it will hurt the russian economy but it has a lot of capacity to absorb the pain and it'll it'll slow down but it will be able to cope with it unlike many countries there were so many things that actually despite the strong will form the lack of strong reform effort that that happened w t o accession and you first school greater exchange rate flexibility as you mentioned yet the financial markets did not really were awarded russia for a lot of the achievements that happened why because of the predominance of these global risks and global problems especially emanating from europe so the key problem with russia is that structurally it's still so dependent on oil prices on every minor problem coming from the developed world that really what really is needed is to diversify. the economy to reduce the tendency on global capital

markets and i don't know if you guys for a long time i've heard this for a long time to that phrase but i think we i think that the government did also kind of scorn and go. because it took a lot of steps which were quite positive in a reform of our direction it's got a good strategy this investment led growth encouraging the private sector improving the business climate but then we had what i see is a real retrograde step on pension reform russia last year and a growing population life expectancy in this country is shooting up this is very good news there is a demographic we we've we've we've turned the corner that that's great but that also means that is there an issue about financing people in retirement and you have retirement for women at fifty for women at fifty five minutes sixty is probably you know more or less in line with life expectancy but women fifty five is very young and you also have people retiring early about a third of pensioners retire early that becomes an affordable if you want to pay

decent pensions going forward and unfortunately the government i think ducked the avoided the issue in his proposals on pension reform and i think that was a bad signal because where is the domestic source of funding going to come from which will reduce russia's dependence on external funding and the volatility of the stock market not a sort of you want to look at you don't know i think that's absolutely the right point but again emphasizes the fact that there are a lot of reserves that russia has to reduce the dependency on oil prices first and foremost to develop the mess the capital markets and in order to develop them as the capital markets what you need is partly pension reform because pension reform will allow for longer term funding to be available in russia's markets and it will in turn render russia's markets less volatile less. less controlled by short term speculative capital flows. so i think certainly on the pension reform that was

a step back perhaps it could be still were addressed in two thousand and thirteen we will have to address it eventually about the nature of pension reform yes but i mean the decision that was taken i think was a step in the wrong direction what you need is to actually bolster the fully funded component in order to provide you know the basis for the longer term development of capital markets domestic capital markets they want to create an international financial center in russia this is a very noble goal it is a possible feasible goal but pension reform should be in the direction that we're going to break you know financial capital in the world real estate well it's linked to the pension reform and so much as you know the capital markets have been a key focus for the government forms and i think they are talking about making one must compete with london and you know what they're talking about is having

a functioning capital market hopefully it's a good wrestler here gentlemen we're going to go to a short break and after that short break we'll continue our discussion of the russian economy say to. leave the. technology innovation all the developments around russia. the future of coverage. deadly rivals so. if you had fifteen thousand people killing each other in any other country there would be so.

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made in america. secret laboratory was able to build the most sophisticated robots which fortunately dorna found anything tim's mission to teach me. to care about humans and. this is why you should care only. welcome back to cross talk i'm peter lavelle to remind you we're talking about the prospects for the russian economy in two thousand and thirteen ok and my other guest let's let's let me use a swat analysis here i mean let's look at the russian economy this year what's its

greatest strength. i think the room resources i mean the fact that it's making money and that it isn't any money it's got no debts and that puts it in a very comfortable position because you know despite the failures of reform or the lack of reform and some areas russia can afford to get it wrong to make mistakes restraint can also turn into a threat ok take up what do you think its greatest strength. well i think it's got a good strategy at the moment you need to implement that strategy but that's a lot better than most countries have around the world so you know i think that's a big step i think that's often forgotten because i always you know i watch on television the competitors of our team and i you know the economists you know and it's always say to myself you know well compared to other countries this place is doing very well if you travel around europe and you look at some the prospects of the fiscal cliff still in the united states i mean in a comparative sense we don't have a lot to worry about no i think it's a very it's

a very look at the early worrying thing about that is that they reduced some of the draw if the difficult reforms in the face of vested interest of you know i've talked about this for at least five years ok or when things are going well you know why you know shake the cart ok what's the greatest strength of the economy the greatest strength of the russian economy it's sovereign balance sheet it's one of the best in the world again sovereign debt is very low due to prepayments of the before. the household in russia is not encumbered with so much as is the case with consumers in the developed economy so there is tremendous alene way for russia to grow not just through the development of infrastructure building roads bridges etc but also this. growth in household consumption that has been quite strong in the past ten years but can still support russia's growth going forward i'm quite optimistic about russia's long term.

growth prospects the issue however is that even when they have a good strategy as you said they probably do have a good strategy they need to be better at presenting it at formulating at and then capsule later this year in the form of a full fledged reform program this is what markets want this is what they want to see i think. this is what i wanted to say actually exact is the crimean doesn't i mean you know you only notice it doesn't do it very well i will they keep shooting themselves in the foot i mean you know things like the adoption or this going on at the moment which is a tit for tat for the magnitsky you know in the states and you know and they put these things out of course everyone jumps on it but then you know people make these libelous or you know sometimes flat wrong statements about russia or and there's nothing back from from the from the kremlin side so you know you're talking rubbish and you know this is where the situation is and then it makes it very difficult

everyone wonders why russia has a bad investment image because you know they don't invest anything into their image and that's actually russia's biggest problem and as we keep saying you know the economy's doing well we've got one of the best balance sheets in the world but if you look in the international press rusher is in the talk as it's it's the prior of the emerging markets where is it shouldn't be and in some cases even the strengths that russia has it is not presenting these strengths to the outside world for example the fact that russia is the only brics country without capital controls actually a lot of the russian policymakers for some reason believe that this is a drawback and this is not something that should be presented to the outside world as a major strength but when you have outflows that are so significant you need to show to foreign investors that this is an investor friendly country generally in terms of so i think you're getting into opportunity to do a bit here you've. got strong balance sheet you have a reform program and yet you know i find when i talk to investors. in the world

a significant proportion to say to me things like russia is an investible you know russia is a place we don't want to invest and i think the thing that would really counteract that would be a launch a number of competitive firms i think that what russia really lacks given it's got such talented people such a big market it's been growing so fast it doesn't have a large enough population of dynamic firms firms such as you know make me to yandex that are creating new markets in russia and driving change there is going to those companies actually have a good reputation as a thing to take those you know there are success stories there significances story there was a paper out recently on foreign direct investment in russia and although it's very low one of the lowest in the region per capita basis it's also the most profitable so in a quite country to being no known investor bill is actually one of the most profitable investments you can do in this form the equity markets and you know there are some

great success stories here this is a huge market hundred forty three million people this journey growing it's growing actually last year two thousand and twelve was quite illustrate of of this in the sense that yes there was a lot of gloom and doom around the equity market but for example the fixed income market was probably one of the most dynamic one of the most profitable in the world in russia the same for the ruble the ruble tremendously outperformed most of its peers in the emerging markets so when you hear things like washers on investable you have to take it with a grain of salt usually some and some segments of the national market you know lock me up you're actually was very very strong in two thousand and twelve and some segments i mean that's key you can put your money in on tuesday and you can take it out and take it home on wednesday and no one will stop you and there's almost no other emerging market where that's true and the profits big to be able to take them home again this is a key part of that which again is forgotten let's look at threat. two thousand and

thirteen the greatest threat to the russian economy in this year is it external or is it from within to me i think it's. nature of the growth i mean we mentioned before that the companies have been very nervous and sitting on their hands running down their inventory holding off investment and on the other side we've got consumer borrowing running at forty percent plus for most of last year which is a default rate on consumer borrowing but it's tiny and yeah no it's more than manageable in the bank so provisioning for it but the trouble is you've got this very lopsided growth and the government is pumping money into the consumer in order to drive growth and you know that's necessary however the rate of boring is very high. nature of the growth is putting pressure on the banking system and again i am confident the central bank has put in lots of new prevention rules and is watching it very carefully however is a rather uncomfortable position to be in and we need a much more balanced growth we need companies and to come up and actually step up

to the mark and invest and you know i think it's rather boring there's no big threats to russia in twenty thirty. years we tells me there's going to collapse this year yeah right ok so but oil the oil price is always going to be the biggest threat for russia because that's two thirds of exports that's whole federal budget revenues but we're in a world in which saudi is committed to one hundred dollars and is support that oil price one hundred dollars is comfortable for russia and in a moment you know we seem to be above that or complacent for russia i mean this is the discussion you and i have been having for eight years or so this is the big problem here is there any way out of that it's a vicious circle. well look i think that i think that the great opportunity for russia this year is i would say kind of represents it for me kelly makes it make a success of turning roles there into an internationally competitive oil company

that works in partnership with audio c.d.'s and if they can make that sort of work in rosneft much as we've seen the transformation in spirit of buying some extent in russian railways if you can take some of these giants of the russian economy inject a little bit of international expertise and organization and improve their productivity that seems to me the greatest opportunity to make progress so i can certainly say spare bankers cleaned up it's like a lot i mean really i used to hate going to that place ok we are better is far i am of the positive bank and yeah i have to say. it's quite impressive of the turnaround that we've had in the past several years but talking about threats i think there are threats again mostly external i would agree would have to do. with the european crisis but the domestic threat is precisely this issue of the reform momentum complacency all of these issues because so far things are

relatively good and there doesn't to be a strong enough impulse from within to generate painful reforms do we need painful reforms to some degree yes i think certainly administrative reform certainly on the day we're talking about the economy let's talk about politics too i mean is this one of the reasons too because you know we were looking at political risk to one degree or another we had in the beach at the end of two thousand and eleven we had a protest movement started in russia kind of fizzled out in two thousand and twelve but you know our economic decisions being made now in light of those protests and that protest movement well i think certainly the political risks associated with this movement have moderated significantly in the course of two thousand and and twelve. this is not as much of a risk factor for the markets i think at this stage for sure it's going to be no kind of a kind of revolution you know. and that was really the fear when they first appeared you know the thing was going to control the movement of a scenario that was happening in north africa and that clearly is not going to happen now i agree i think you know that on the one hand the protest movement is

good because. but in politics in general for me it's i think we're looking at a new era we had two terms from two thousand to two thousand and eight of putin and then we had this sort of into regular and now he's back and so the politics sort of been reset and now we're looking at the next period the sort of next phase and what reforms there are there's these twenty two road maps that they're putting together which is a strategy that's going to be implemented over eight years and this is russia or it not there's never any dramatic progress and you know we have a few credits like a spade a bank you know i mean it took them a long time to take a bribe but that's the threat it's a death by a thousand cuts they put the reforms in the right ideas but the important meeting from intentions very shoddy and the whole thing slowly sort of grinds on and you can do that in extent but you're talking about stagnation in the long term almost out of time gentlemen i mean isn't stability under rated for russian. looks to

billet is crucial in all sorts of ways you know in order to have confidence to invest in order to have you know the willingness to work take on risk and so on but the danger is i think when you don't have for instance enough social mobility you know opportunity for people to rise up through society are on the basis of their merits and not to have it decided by connections and so i think that you know the stability that you're seeing which is turning into as you know a reduction in social mobility is i think a threat to your prosperity and going forward so the certain types of stability that are racist in gentlemen thank you very much for a fascinating discussion and thanks to our viewers for watching us here at r.t. and remember topples. thank you.

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