EM: You have often expressed publicly your concern about Russia’s dependence on raw materials export revenues. How do you see the situation now?
AK: The economy is now less dependent than previously on the price of oil, even though the price has risen. In 2000, a price increase of $1 per barrel of oil produced approximately a 0.2% annual rise in GDP. In 2005, a $1 price increase produced a 0.04% increase. Among the reasons for this is the setting up of the stabilization fund, which has taken some of the revenues out of the money supply.
Our aim was to put together a long-term stable and balanced budget. We wanted to achieve a situation where it would be not only oil and gas production that is attractive in Russia – so we increased the tax burden on production, and reduced taxes on oil and gas processing. Now we can say with confidence that taxes on the processing sector are among the lowest in Europe.
But we have other problems in the Russian economy: costs in many industrial sectors are high, and growing. The ruble is strengthening rapidly; energy tariffs on the domestic market are growing; and wages are rising rapidly as attempts are made to pay rates comparable to those in the oil sector or to those in neighbouring countries.
Wages are rising faster than productivity is. So we cannot call our economy competitive, notwithstanding the low tax rates. And there are substantial administrative overheads in industry caused by the bureaucratism and corruption that result from the excessive influence of the state.
Nevertheless, we are reducing our dependence on oil. The main means for achieving this are the stabilization fund and judicious government policy.
EM: Is the tax regime on oil production satisfactory?
AK: Yes. Only the tax rate on gas production should be higher.
EM: Is the level of investment in new fields sufficient?
AK: Investments have been held back because a new law on mineral resources is being prepared. But this law should be adopted this year, and then we will be able substantially to speed up the development of new deposits. We will limit foreign investment in the most important fields, where we will only allow joint consortia, or joint ventures, of international and Russian companies.
EM: About the budget. You often warn your colleagues in the government about unnecessary expenditures. Are your warnings heeded? And are you happy with the preparation of the budget for 2007-08?
AK: Now, it’s going well. But it’s work in progress. And so, even though the government has laid down the main parameters, many ministries and the Duma and individual deputies come up with proposals to increase expenditure of various kinds. We are put under great pressure.
EM: What are the most serious temptations that need to be avoided?
AK: The process of agreeing the budget raises a number of issues. The first is that of investment in infrastructure – the power sector, road transport, ports, airports – where for many years there has been underinvestment. Then there are our national projects, on education, on health, and now on demographic development, which require substantial resources. It’s also clear that state sector pay is not so high: it is increasing at a slower rate than in the market as a whole. And in the run-up to the elections we can expect a great deal of political pressure to be put on us.
The most important thing is that, knowing that all these problems have to be solved, we can’t allow ourselves to use up all the resources we have on them. We must stay within definite limits, to prevent any sharp increase in inflation or further strengthening of the ruble. It will be hard to explain these things to parliament, on the eve of elections – but the effectiveness of our budget spending must be improved. We are trying to introduce the most up-to-date methods of monitoring expenditure, of budget planning, of tenders. The budget must be used according to a programme, directed towards specific results. I can’t yet say that all such instruments for managing the budget are in place and working properly, or that every ruble is being spent as effectively as it should be.
EM: What should be done to keep inflation in check?
AK: Right now we just need to keep expenditure in line with economic growth. We won’t be able to keep strictly within these parameters, because our expenditure is slightly higher than the percentage growth in the economy. Next year, in real terms, our budget expenditure will increase by 14%. This means that it’s a little higher than we’d like it to be, but for 2008 and 2009 we plan increases somewhere in the region of 2–4%. This should be enough for us to keep inflation down and provide for a stable exchange rate.
EM: Last year in Washington – and not only then – you said that it was undesirable to increase the role of the state in the oil and gas sector. How do you look at that now?
AK: The Rosneft IPO is a reduction in the role of the state in the oil and gas sector. So the view I expressed coincides exactly with what Russia is doing in this regard. The measures that were taken in the last two years – when Sibneft was bought by Gazprom, and Rosneft received some of the assets that used to belong to Yukos – caused a great deal of concern. But no one regards state ownership of such assets as an end in itself. These measures were taken at a particular stage of the restructuring of the sector. But we are not going to see a continuous strengthening of the state’s position.
EM: But the strategy seems unclear. The independent gas sector, for example, is being reduced in size.
AK: I think there should be an independent gas sector in Russia, and a reduction in its size is not desirable. But that doesn’t mean that one or another deal might not increase the level of state ownership. There are many private companies – including, for example, the international participants in the Sakhalin projects – expressing interest in investing in the gas sector, and they will do so, I am sure. The output of the privately-owned gas sector as an absolute figure is therefore likely to increase.
EM: The paying off of Russia’s Paris Club debt is no doubt a cause of great satisfaction for you.
AK: This is absolutely beneficial for Russia. We will save a huge amount on interest payments, which we will use on infrastructure investment in the coming years. It will also reduce Russia’s risk profile and impact on credit ratings.