Ksenia Yudaeva: A critical moment for the G20
Russia-24 commentator Tatiana Naumova spoke with the Chief of the Presidential Experts' Directorate and Russian G20 Sherpa Ksenia Yudaeva about risks faced by Russia and by the global economy in 2013 and the goals which Russia will set for the G20 during its Presidency.
Tatiana Naumova: Good afternoon, Ms. Yudaeva. Let's begin our conversation starting with Russia. The Russian economy has grown by about 3.5% in 2012, which is lower by almost 1% compared with 2011. What caused this decline?
Ksenia Yudaeva: As is well known, in 2012 economic growth paced down in almost all major economies, in particular in recession-plagued Europe. China's economy has slowed down as well. Russia was additionally affected by weather conditions, suffering from drought. I believe that a slowdown of one percentage point is at least understandable. In this sense, the situation is normal.
On the other hand, a structural shift in Russia's economy has become self-evident, not just visible, this year, which, among other things, can affect its growth in the nearest future. This is particularly true if the economic agents fail to adapt to this "new normal", as is nowadays referred to. What I'm implying here is the new equilibrium in the macroeconomic sphere and lower inflation rates, which is generally good. However, this goes hand in hand with slower rates for all monetary aggregates. There's another process that is not directly related to what I mentioned earlier. It's not just high interest rates, but positive interest rates meaning that they are higher than inflation. Such interest rates are applied to a wide range of deposits, loans and even government bonds. This happened (with the exception of a short period in late 2008-early 2009) for the first time in the 20 years of the history of post-Soviet Russia.
This was caused also by the trends of the global marke. In fact, it is quite normal. I would rather say that negative interest rates in Russia were abnormal. In the 2000s, there was a bubble at global markets, and a lot of cheap capital made its way to Russia and helped the Russian economy to grow. The Russian financial system was rapidly developing owing to cheap foreign capital. I often hear people say that there are lots of investors to the bond market. However, the syndicated loan market, for instance, is completely dead, while the syndicated loan market was one of the main sources of funding in the 2000s, if we look at the statistics for capital inflow and outflow in Russia. That is why, our financial system can now rely on outside sources to a much more moderate extent than earlier. It should start producing more of its domestic sources. This triggered the transition to real interest rates. These are the systemic shifts, to which the economy has yet to adapt.
Tatiana Naumova: What does this "new normal" with low inflation rates mean for us in 2013? What will this lead to? A new influx of money? Does this mean that investing in Russia is now profitable?
Ksenia Yudaeva: Of course this means that investing in Russia is becoming profitable. I hope that this is also due to institutional changes that are taking place at the Russian financial market. There will be a large inflow of foreign investment, and a central depository will be created. There will be further measures that will also enhance Russia's attractiveness from the investors' point of view. However, we can see that the global markets have re-evaluated risks. The risk premium for interest rates has increased significantly in countries with heightened risks. Arguably, Russia has been hit by these developments harder than any other country. Let's hope that high interest rates will make up for this. We'll see more foreign capital coming to Russia.
However, what I meant to say was that this inflow of foreign capital will in no way meet all our needs, due to reasons that we can't affect. The interest rates will remain high so as to encourage depositors. Borrowers will have to actually pay to take loans. This applies to both corporate and individual borrowers. I believe that in the mid-2000s, people who took out any loan, such as a car loan, realized that the interest rates that they were paying were offset by increases in their salaries during the same period. Those days are long gone, probably we should thoroughly consider this situation. Now the old saying that a loan is when you borrow other people's money and pay it back with your own is becoming a reality. However, this creates greater incentives for saving, which can be a good thing.
Tatiana Naumova: And enjoy high interest rates.
Ksenia Yudaeva: Exactly.
Tatiana Naumova: What should we be most concerned with? What are the main risks in 2013? A collapsing Europe? Greece?
Ksenia Yudaeva: Europe obviously remains one of the major risks. Though we have to hand it to Europe. Much has been done this year to mitigate these risks, including the latest agreement on Greece and the decisions on the banking union, which, I believe, are quite notable. Not only is it aimed to tackle the current problems, but also to create new practices for the future. After all, the global economy is now dealing with regional and global financial institutions that are regulated at the national level. The oversight and bailout systems of these financial institutions also used to exist only at the national level. Therefore, there was a contradiction between the bank support and regulation system and the nature of the banking system. Europe is the first region that went ahead and changed this situation by moving bank oversight to the supranational level. I understand that this was the necessity for Europe, because there are more such kind of institutions in Europe than anywhere else. However, this is a good precedent. Personally, as an economist, I believe that the global economy should be headed in that direction. Unfortunately, what we see now is rather an opposite trend of fragmentation and financial protectionism at the national level. I believe that the solution lies in the sphere of creation of supranational mechanisms that would monitor and support the liquidity of global banks.
Tatiana Naumova: Can Russian presidency of the G20 help create a supranational structure of this kind?
Ksenia Yudaeva: We are discussing these issues at the moment. Honestly speaking, I don't think that we will be able to resolve this issue during our Presidency's year, since the G20 is a complex mechanism for coordinating interests and making consensus-based decisions. I hope that we'll achieve the goals that we are pursuing on the track of ministries of finance and central banks. I'm doing my best trying to persuade them to have this issue at least raised, and to have this issue discussed at the expert level. I also know that these issues will be raised at their conference in February. The issue of the fragmentation of the global financial markets has already been raised by the Financial Stability Board. This is the topic that is being discussed quite often now. As a Sherpa, my goal is to encourage the process by which experts find solutions and to promote general discussion of this issue. We believe that experts should review this issue and come up with some solutions. This is also part of the G20's responsibilities.
Therefore, in anticipation of your question on what the G20 is all about, the G20 is a multi-format forum. On the one hand, there is Leaders' summit with real decision-making. There's also a Sherpas' track. There's a track at the level of finance ministers, who prepare the decisions. There's a process at the level of specific working groups, where experts discuss the proposed solutions. In addition, the G20 often orders expert analytical products in many areas. For example, the issue of the new nature of international trade was raised during the Mexican Presidency last year. Both in theory and in policymaking, when we talk about international trade, we are subconsciously referring to the arrangements, which are obviously outdated, whereby goods are manufactured entirely in one country and then the countries proceed to trade in such goods. In reality, this is no longer the case and each more or less advanced product migrates through a manufacturing value chain spanning across a broad range of countries.
Not to mention the fact that goods simultaneously represent services, because products come with a service system. Mexico has ordered a new survey on trade, which is based in its calculations on added value, not total value, as previously. This database should become available soon. I believe it will give much food for thought to experts, and later to politicians.
Tatiana Naumova: You are the Russian G20 Sherpa. The term "sherpa" is unfamiliar to many people. Could you please tell us more about your responsibilities? What is a Sherpa, above all?
Ksenia Yudaeva: Sherpas represent their respective Leaders. Sherpas oversee the preparatory process of the summit and the activities of the working groups, along with and coordinating relations with relevant external stakeholders, because the G20 is a public process. There are external communities, who have a stake in the G20, such as Business 20, Civil 20,Youth 20, Think 20, and Labour 20 in a word, all those who put together proposals for the G20. Sherpas interact with them and consider their proposals.
Sherpas' work includes preparations for summits, negotiating coordinating, and matching various documents, primarily, summits' final communiqués. We have already held the first Sherpas' meeting and revealed our core approaches to the issues that we will look into later in this year. We have held very successful meeting of world's leading expert groups (Think 20), first meetings of Civil 20 and Business 20. We have also proposed an innovation which everyone supported. The preliminary ideas can already be offered for consideration by the Group of Twenty.
Tatiana Naumova: Let me quickly summarize our talk on the G20. It is commonly believed, especially in foreign media, that the G20 is losing its status and that no breakthrough decisions were made in Mexico, and none are expected to be made in Russia. How would you respond to that?
Ksenia Yudaeva: I would say that the G20 is currently facing a critical moment where it can prove its high status. Well, what originally happened when the G20 was created in the form in which it exists now? By 2008, it had already been in existence for about ten years at the level of finance ministers and central bank governors. At that level there have been formulated certain decisions that were adopted during the first G20 meetings. However, it's clear that it wasn't the leaders who came up with the reform of financial institutions, which is now considered to be one of the greatest achievements of the G20. Gordon Brown, as the former finance minister, was the one who developed it. Other leaders didn't even fully understand what they were discussing. Still, these decisions were proposed for adoption.
The G20 in its current format emerged at the peak of the crisis. Its role wasn't even about the decisions it had taken during the first phase of the crisis. Most importantly, the G20 showed the unity of the countries in combating the crisis. As we can remember, the main decisions regarding the financial system included refraining from introducing protectionist measures and providing state support at the height of the crisis. These are the most memorable steps taken by the G20, as well as certain measures to control offshore companies. This unity certainly played a major role in merging the efforts of different countries on combating the crisis. Then, more and more disagreements between the G20 members have come to the surface, and there was a need to find consensus. I admit that on some issues, for which there were quite high expectations, no mutually satisfying solutions have been found. At the same time, it does not mean that all the possible mechanism of new coordination have been put in place yet.
From my point of view, the G20 is facing two tasks. Firstly, as far as dealing with the global crisis is concerned, it is our joint anti-crisis measures. The second task is developing a new system of global institutions. By that I don't mean creation of a new or another International Monetary Fund. This could be some agreements between countries, for instance, on harmonizing approaches to the banking system regulation mechanisms. On the other hand, in my opinion, the expert role of the G20 seems to become even more important than the actual decision-making. There are several decisions which could be taken straightaway. Nevertheless, I believe that in the preparatory process of the decision-making and in formulating the best ways to address the global challenges, in case of many of which we only start to become aware of, for a considerable period of time the expert work is also very important.
Tatiana Naumova: Let us take a sneak preview of 2013 and see whether it's going to be any easier for the global economy, or, we should look at it from different perspectives, or it might turn out even harder than 2012?
Ksenia Yudaeva: I don't know anything about it being easier or harder. I think that the period from 2008 to early 2009 was fairly difficult. All subsequent years were fairly even. Perhaps the Greek economy experienced peaks and troughs. However, even in Greece and Spain the decline was fairly smooth. Thus I don't think we should expect any major changes. What I could personally anticipate? The situation in Europe will probably become more stable after all the breakthroughs that have been made. However, other problems in other countries may come to the forefront. Now everybody is discussing the fiscal cliff. However, the U.S. debt problem is an even more important issue that will have to be dealt with over the next ten years. There are numerous examples of countries where debt and economic growth are the most important problems.
Tatiana Naumova: Japan, for example.
Ksenia Yudaeva: True. I would also draw the attention to the current slowdown in China. We have got used to the pattern that the developing economies grow faster. They have pulled the global economy out of the crisis. That's all correct. But there are also global imbalances which are not being discussed. It is believed that trade imbalances are not improving. In fact, the restructuring of the global economy is underway, but it is very slow. Structural economic reforms are needed in order to overcome this situation completely. Ironically enough, it's already being undertaken by the United States. We even know in which areas. The United States is now becoming a leading oil and gas producer and a leader in all kinds of energy- and oil-intensive industries. Most likely, the United States will further move heavily into the chemical and other industries. But China needs to adjust to this trend halfway. All the talk about the need to start growing through increased consumption rather than exports is not just an empty talk. In fact, very serious changes in the internal structure of the Chinese economy are underway. The tasks faced by China are no less important than the challenges faced by other countries. The same is true for Europe.
The rise and stabilization of Greece and other peripheral economies represent a double challenge to Germany. The Germans do not want to subsidize these expenses. On the other hand, the German model is clearly built on exports, including exports to the peripheral countries. There's a need for rebalancing and adjustment of the existing models. Certain signs of the overall imbalance, such as high debt, instability and so on, keep coming to the surface. I believe that these deep-rooted problems should receive more attention.
That is why we consider the issue of investments extremely important and that is why we will promote it while presiding in the G20 Investments is an important tool for rebalancing the global economy. The development of the financial markets in the developing countries is a related topic. The share of the developing countries in the global economy is already over 50% in terms of GDP, while their share in financial markets is considerably smaller. This is one of the key imbalances that, according to many leading economists, caused the bubble and its bursting. This is an issue that requires thorough attention. Therefore, I believe that there will probably be not much news attracting inclusive attention. Economic growth is unlikely to change significantly in the near future, but will increasingly become the focus of public attention.
By the way, for Russia it certainly poses a very serious challenge. How could we modify our policies? From my point of view, first of all we should focus on institutional reforms, in order to maintain and boost economic growth in the abovementioned new financial environment. We have other challenges as well, such as demography, unemployment and so on.
Tatiana Naumova: Let us hope that the global economy will exit from this restructuring phase in a stronger and invigorated condition.
Ksenia Yudaeva: That's the only way to go. We will go down this path no matter what it takes. However, we all want this to happen as quickly as possible. That's what we all need, and sooner or later the economy will come out of this situation.