A discussion is underway world-wide on the global economy and the risks involved in it. All the leading economies and all other countries are working on their development strategies. Responsible governments are considering further actions and potential instruments of economic development. Russia is one such country; it is no exception to the general rule. We are part of the global economy and so will obviously encounter the same problems (what am I saying? We have already encountered them) as other countries, while at the same time trying to resolve our own problems amid global transformation and against the backdrop of new trends in global economy, technology and civilisation.

In our view, the current period of turbulence and instability in the global economy will not come to an end soon, and many international experts share this view. None of the reasons for the continued financial upheavals has been eliminated. Moreover, the 2008 crisis, which our respected guest, Mr Paul Krugman, predicted (Paul Krugman, a US economist and winner of the 2008 Nobel Memorial Prize in Economic Sciences) has obviously entered a new stage, revealing such large-scale in-depth problems as the debt crisis of corporations and entire governments, and the imbalances of the financial sector, which has swelled out of proportion and has become largely speculative and far removed from economic realities. By the way, this is not only my own opinion or the opinion of my colleagues from the Russian government or our economists – I regularly meet with business leaders, the chief executives and major shareholders of large corporations, and top managers of both American and European companies. All of them point to a swollen financial sector that is removed from economic realities. It is a destructive process of de-industrialisation and a loss of quality jobs in the leading economies of the eurozone and the United States.

It's obvious that the world will never be the same. Considering the change in terms of historical categories, we believe that the issue at hand represents the end of a period of political, economic and financial domination of a number of states, which has lasted nearly five centuries. The main global growth centres are shifting out of the so-called historical (relatively historical) West, and the importance of the Asia-Pacific region and, certainly, BRICS countries, is growing.

Coming to terms with this reality is sure to be difficult and rather unpleasant, in particular because for 20 years before the crisis many experts and politicians predicted a completely different, much more positive future for the traditional world leaders. It seemed that the Western economies would continue to grow and that nothing was threatening, or in principle could threaten, savings that had been converted into hard currency, as we once called it – that is, US dollars, Deutsche Marks, and later, euros. The Western economy seemed especially stable against the backdrop of the chaos that swept across Russia in the 1990s. There was a persistent illusion that one can accumulate wealth while fostering consumption, without being concerned with efficiency and competitiveness, that growth is possible without further development, growth on credit. And in fact, that is how it was.

Now, we have sobered up. The eurozone’s consolidated sovereign debt is equal to nearly 90% of the GDP. Figures differ from country to country, from 80%-85% in some countries to 124% in Italy and Greece. Taken together, the figure is around 90%. The structural problems of the US economy have also become obvious: the US sovereign debt has reached $15.3 trillion or more than the country’s GDP. The United States is living on credit. Tensions in the financial systems of Europe and the United States persist… I must say that this is not good news for us. Let me be straightforward about it – I will largely repeat what our colleagues and experts from the United States and Europe have already said – this is not good news to us. I’m not excited to say what I have to say. We just have to admit and duly note it. This is not good news, primarily because these systemic risks jeopardise the global economy and the dynamic growth of new leaders, such as China, whose economic welfare is likewise dependent on developed economies.

It is becoming increasingly clear that the risks of another global recession remain unchanged whereas the recovery and the emergence of a new growth model may take a long time. There are two scenarios available. Under the worst-case scenario, all current problems will worsen, and authorities won’t be able to make any crucial decisions either at the national or international level. Such a scenario may lead us to continue gobbling up future resources, debt accumulation, increased protectionism and trade wars leading to political instability and the weakening of the middle class in many developed nations. The best-case scenario calls for the rejection of bubble economies and returning to the economy of real entities, values and assets, an economy that can be measured in human values, an economy that creates jobs instead of derivatives. Many of our colleagues here are experts and have vast economic knowledge. Nevertheless, I’ll allow myself to say that, according to expert estimates, current global real assets are estimated at about $60 trillion, whereas financial derivatives are estimated at $600 trillion. That’s ten times more!

We believe that the driving force behind development includes access to another level of technology, which is not exclusively about technical innovations. This is rather about different approaches to culture, business, work, consumption, investment and education. The technical breakthrough in itself will present major challenges to many countries. For example, the potential energy revolution, that is, transitioning to hydrogen fuel or other alternative fuels, may, or likely will, result in a drop of prices for oil and other hydrocarbons, which are Russia’s main export items. This is a real challenge for us. On the other hand, according to the same estimates, including by UN and international experts, consumption will grow in the next 15-20 years, and the fuel structure will change slowly. Russia has a historical chance to use its natural advantages to modernise its economy.

In a word, the upcoming decades will be a time of great challenges, risks and transformations that will inevitably lead to the emergence of new global economic centres. I would like, and I very much hope, to see Russia, which has all it takes to do so, become one such centre.

What are our basic premises? Without a doubt we have completed the post-Soviet period of development. Russia is internationally recognised as a market economy. This year we are joining the WTO. Our partners have made their decisions, and now it’s our turn to make one, which we will do within the next few months. The Common Economic Space of Russia, Kazakhstan and Belarus came into existence on January 1, 2012. In this regard, I’d like to express my gratitude to top government officials of these countries for their professional and pragmatic approaches to integration in the post-Soviet space. We are on our way to a deeper form of integration – the Eurasian Union. Already today, the shared market of the Common Economic Space includes 170 million people. The GDP of the participating countries, calculated by purchasing power parity, exceeds $3 trillion, outperforming Germany and placing fourth after the United States, China, India and Japan.

Russia is the world’s sixth largest economy and has all it takes to become a top five economy. I’m confident that this will happen. We ended last year with good results if you look at the aggregate economic outcome. Without exaggeration, this is one of the world’s best results. Economic growth over 4% is one of the best rates among G8 members. No, not just one of the best, it actually is the best result among other large European economies.

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Comments and answers to Vladimir Putin’s questions

Regarding the speech by Paul Krugman, Professor of Economics and International Affairs at Princeton University

Vladimir Putin: We are discussing the crisis linked with the debts in the U.S. and the eurozone. But if we look at the global consumption market, the world’s solvent demand on the one hand and its productive capacities on the other, and the reserves stockpiled by major economies and biggest global companies, it seems that we are simply having another fit of economic glut. This issue certainly requires precise calculations. A number of specialists (I have talked with them many times) believe that this is the root of all evil. It is possible to pay off debts step by step but the main problem lies in excess production.

Moreover, some experts believe the global crisis came to a head in the late 1980s but was delayed by the Soviet Union’s disintegration. It opened new segments of the global market – the former USSR and its spheres of influence, which began to consume everything in large quantities. In this sense the global crisis of overproduction was delayed whereas now it occupied its rightful place. What do you think about this thesis?

Paul Krugman (via interpreter): I have heard this opinion and I don’t share it at all. I have never understood what global overproduction means. It does not mean that there aren’t people in the world who don’t want to buy any more. And it does not mean that the world produces too many cars. When we reach the stage when every person in China will be able to buy a car, the potential demand will be enormous. We do not have a crisis with workers or inadequate production. I think we must invest in infrastructure, not in real estate. We must train unskilled workers.

I don’t think this is a crisis of excessive production. This is a crisis of debt and a decline in demand. Demand had been steadily growing but we cannot rely on it at all times – there are other problems as well. In the 1930s everyone said that the crisis was deep and structural and that we would never be able to fully use production capacity, that we would never need workers. People said the same things in 1945-1946. And then we had a period of economic recovery that started with a major government spending programme and it appeared that there was no lack of demand for products or workforce. As John Keynes used to say, we have a problem not with the crisis but with fuel because cars need fuel to keep moving.

Vladimir Putin: The Great Depression ended with WWII, the mass destruction and the need for economic recovery practically throughout Europe. New products were required and new markets opened. But you have just acknowledged the problem with solvent demand. Yes, people want to buy things, probably they would like to get them for free – I understand them and I would probably also like to get something for free but the question is whether they can pay for these things. I think I understood your position. It was important for me to hear your opinion. Thank you very much.

Regarding the speech by Prof. Raghuram Rajan of the University of Chicago

Vladimir Putin: There are objective indicators showing which people live below the poverty line and which do not. We and, say, the Europeans have different ways of calculating this. By the European yardstick, the number of people living below the poverty line in Russia is about 26% and by ours 12.5%. But both show that the number of these people has been cut almost in half in the last 10 or 11 years. By the Western yardstick we had about 52% living below the poverty line and now it is 26%. By our estimates, we had 25% of such people and now their number dropped to 12.5%. During the last year the incomes of our citizens grew less than in the year before. Their salaries went up by about 3.7% and the total real income of the population increased by a mere 0.4%-0.5% because pensions and social benefits were growing at a slower pace than in 2010. This is why we did not reduce substantially the number of people living below the poverty line last year. In previous years the dynamics were much better. I hope we will continue the positive dynamics this year as well.

Why did I ask? One of your theses is that inequality is growing. This is why I asked – do you mean the number of people below the poverty line is growing? I think the answer is yes – their numbers are increasing in the United States, no matter how you calculate it. But I think this is not even the point.

Was the number of people feeling this inequality smaller in past decades or centuries? Not at all! I think they were even more numerous. The question lies elsewhere – now people no longer wish to put up with this. This is what it is all about, but the roots of the problem are different. You have quite rightly pointed to the middle class, its well-being and so on. But let me make one quick remark about the idea that one cannot feel happy having accumulated debt. This depends. Many in this country and the United States feel happy regardless of their debt. The consequences may be grave but this is true. This inequality did not become more or less pronounced between different states either. It was even worse before but people in the world are no longer willing to tolerate this – the attitude has changed.

As for… Sorry, I can’t even make it out myself – I’ve scribbled something in chicken scratch. I was in a rush because it was listening intently. There is strong dependence on consumption in the United States. So what? Dependence on consumption is strong everywhere. There was not enough regulation. The only point I’d like to make is that when we talk about reducing government regulation we primarily mean ineffective regulation because in this country we do not have civilised market regulation – we have only crude administrative pressure. These are slightly different things. I simply think that it is important to mention this to the audience here, in Russia. Thank you very much.

…What are we talking about? What has Mr Gref said? That we must adopt a decision to cut social spending? Which of the deputies will vote for this? Those who do will be identified, their names will be published online, and they will not be elected next time. This is a problem. They must vote for very painful but nevertheless necessary decisions. At least we are doing it when necessary. Some countries don’t do it at all. And if they do, the opposition immediately stokes protests against what are obviously necessary decisions, urging people to rally and inciting them to smash shop windows and the like. We will not talk here about the countries where the situation is really turbulent – I wish them courage and political health. Take Argentina. What was the situation there? Instead of consolidating forces to resolve problems that were clear to experts, society and political parties, they led people into the streets, inciting them to smash shop windows and to blow up banks. My question is: Does this system have a future or not? If its foundations are retained, what other elements should be changed to lead the economy out of the dead-end? And not push countries from… This forces countries to lose their leading positions in the global economy, which ultimately leads to the degradation of society and social institutions. This is clear. And it means that there is a glitch in the system. This is what we wanted to say.

Regarding the speech by Michael Milken, chairman of the Milken Institute

Vladimir Putin: At one time Alexander the Great decided to conquer Persia in order to resolve these economic issues. Now Greece is no longer able to conquer anyone. It has even been deprived of an opportunity to devaluate its own currency because it doesn’t have a national currency. It has no emission either, for lack of an emission centre. There is only one way out – to directly reduce social spending and increase competitiveness on this basis. It is impossible to make a big move forward to reequip the entire economy, industries, practically without any investment, and attracting investment is impossible under the circumstances. Greece has found itself in a vicious circle.

However, I believe that in general many countries (not only Greece) are experiencing difficult times. The issue (Michael was absolutely right and I fully agree with him) is that Greece has been deprived of any possibility for domestic development. At any rate, this possibility has been reduced and Greece has not received effective assistance from the outside. It is being given small amounts of aid, as if being encouraged to make further cuts. And some of the limitations are politically based. We spoke about this. German Gref mentioned them. What remains to be done? Direct cuts in social spending – a crude, direct decision on the part of parliament and the government.

When it comes to devaluation, people are suffering as well, but this is not direct reduction in social spending. However in this case it is direct and abrupt. The government is to blame, the party that has won the election is to blame. Making a decision in these circumstances is impossible, and the instrument that they could have used to resolve the issue, a more precise instrument, has been taken away from them. I have a question for Michael and our esteemed colleagues, in this connection. What do you think (there are different opinions when it comes to resolving the issues of problematic countries): should the Central European Bank buy these liabilities directly or through the fund? And if it should be done through the fund, who should capitalise it – some mythical private investors or the state?

…In fact, the nature of the problems is one and the same. Greece has been deprived of certain instruments that you mentioned – an opportunity to devaluate its own currency – while the Argentine government at some point bound its national currency too closely to the dollar and deprived its economy of flexibility. These are probably very similar reasons.

I’d like to say a few words about what Michael said in the beginning – about the launch of the Soviet satellite that encouraged competition from the United States, taking the Soviet Union to new frontiers and that eventually resulting in its collapse. I must allow myself to disagree here. First, the United States has always been involved in this competition, let's say, even before the Great Depression and after World War II. At one point it left everyone else behind and then simply saw… It became obvious that it was lagging behind at some stage and began to lose this competition, and this certainly provided an incentive for innovation and development. This is obviously the case.

As for the Soviet Union, its decline began with the introduction of an ineffective and uncompetitive political and economic system. At one stage of the global crisis when the regulatory role of the state increased, the United States was going through the difficult period of the Great Depression. Many people present here may know as well as our American friends that at that time many specialists left the United States for the Soviet Union. They received jobs here and they were great specialists. I have acquaintances and friends whose families moved to the Soviet Union and remained here. They were good engineers, good specialists.

However, the state’s inflexible planning system began to malfunction under the impact of the technological revolution, which ultimately resulted in collapse. I think this was the reason – not because the United States had awakened to competition. The United States was always involved in this. True, it lagged behind at some stage.

As for Greece, I think the problem is not that Greeks do not want to or are unable to work. Either Greece has not created technological opportunities to effectively employ its highly qualified workforce, or these opportunities are insufficient. The same thing happens in Russia. This explains mishaps, but mishaps are possible everywhere. Gref mentioned how many medical institutions Michael has. How many are there?

German Gref: 2,200.

Vladimir Putin: 2,200 of the most modern institutions, but Professor Krugman arrived sick.

German Gref: Mr Putin, he has 2,200 schools. They teach students there.

Vladimir Putin: But he has practiced medicine his whole life.

German Gref: This is true.

Vladimir Putin: There you go. Speaking about education, I have already cited these figures – half of our young people between the ages of 25 and 35 (50%!) receive higher education. And young people between the ages of 15 and 25 years are either receiving a higher education, or intend to receive it – this figure amounts to 80%. It is perfectly obvious that the educational drive exists in this country, which is a very good indicator, one that inspires optimism.

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Question: I have a question for Mr Prime Minister. I am the head of a venture fund. This is a high-tech company. I liked your remarks very much. I read your article earlier this week where you wrote that it is necessary to invest in high-tech sectors to develop the economy. And I liked what you said. I would like to ask you to comment in more detail on, notably, who will implement these ideas and how, so as to achieve a real effect?

Vladimir Putin: I wrote about this in great detail. I can repeat it in general terms, keeping in mind today’s format. We believe that the government will, of course, have to continue creating conditions in terms of financing and, first and foremost, by investing in infrastructure. Therefore, we have made a tough decision. Ahead of the forthcoming parliamentary and presidential elections, we raised excise taxes on motor fuel – not by much, by one rouble this year, but this is still a certain burden for the people. However, this has been done to improve Russia's roads. Even though we spoke about the downsides of the democratic political system and we understand that this is a supra-political burden, we nevertheless act responsibly. We are actually setting the task of reducing the gap between highly paid citizens, citizens with high incomes and those who live below the poverty line. This is, by the way, one of the most pressing problems in the social sphere, but we will continue investing in infrastructure. We have adopted a railway transportation development programme through 2030 – a development programme for the airport network, and aircraft, railway and car transportation. We will continue developing power generation – not only traditional hydrocarbon power generation, but also nuclear power generation. We have decided to double it in the next 10 years. Today, nuclear power generation accounts for 16% of the total, and we plan to increase its share to 25%. And we will have to build as many large generating units as were built during the entire Soviet era.

Most importantly, we will continue improving the investment climate. I mentioned specific steps in this regard even today in my opening remarks. I want to repeat that the most important thing is to create conditions for the inflow of private investment, so government investment will be directed mainly to infrastructure. This is the way to attract private investment. We will gradually – and I want to emphasise gradually – withdraw from the assets of state-owned corporations. We set up these corporations not to increase the state's role in the economy, but rather to provide support to investment-intensive sectors where private investors had not yet arrived or where they had arrived with apprehension given the long-term payoff on investments – 10-15 years. I am referring to shipbuilding, aircraft building, space and rocket engineering. We set up these corporations. However, gradually, as these corporations grow stronger, we will be bringing these assets to the market. That's it...

Question: Mr Prime Minister, we specialise in emerging markets. President Medvedev said that he wants to make Moscow a major financial centre. What do you think about that, and what will be done specifically toward this end?

Vladimir Putin: As you probably know, we all come from St Petersburg. Years ago, the idea to make St Petersburg a global financial centre was voiced by the city’s former mayor Anatoly Sobchak (first mayor of St Petersburg). It was a very nice and interesting idea, but back then nobody took it seriously. Mr Sobchak was a very intelligent and educated person, and he was able to look into the future. He was a daring man.

And now that we are making plans to establish a global financial centre in Moscow, it is very hard not to take these plans seriously. And let me explain why. First, we are very realistic about our goals. We are not expecting that in the near future Moscow will become a financial centre on par with London or financial centres in Switzerland or elsewhere. That’s not the point. The point is that Moscow is naturally evolving into a financial centre, at least for our closest neighbours.

I have already mentioned this and will say it again:  about 70% of our non-cash settlements with Belarus are conducted in roubles, and the volume of cash settlements in roubles is also constantly increasing. The rouble zone is expanding naturally. The same can be said for settlements with Kazakhstan.

And we all understand very well (since most of you here are business people and economic specialists) that we will be extending and deepening integration processes. Naturally, the Russian currency, which is fully convertible, as we did not forsake the rouble’s convertibility even during the economic downturn of 2008-2010, despite the fact that many people advised us to the contrary…

As you know, we decided to make our currency fully convertible on July 1, 2007. The yuan, for example, is not a fully convertible currency, as you know, but the rouble is. And even in the conditions of economic downturn, I am specifically referring to capital flight (which was quite substantial initially), we refrained from limiting the movement of capital. We were hoping that the business community and investors would appreciate the fact that we did not change the rules of the game even in the most difficult situation.

And on the whole, we were proved right, as ultimately everything returned to normal. We even managed to restore our currency reserves. And it is this consistent financial and economic policy, as well as the naturally evolving integration projects in the post-Soviet and Eurasian space that give us reason to believe that Moscow will become first a regional and then hopefully a global financial centre.

Granted, these hopes will be realised only if we create a favourable environment. We are working on that, mulling things over, and will be consulting with you and other market players. We do not differentiate between Russian and foreign investors, and we will consult with you to select the best practices.

Question: At the forum, we discussed the importance of attracting domestic capital. Some years ago, everybody enthusiastically supported the so-called people’s IPO of VTB bank. Over 100,000 people became shareholders of the bank. Due to the global financial crisis, the shares have significantly depreciated, despite the fact that the bank’s economic indicators have been improving. Do you think it possible to protect these minority investors in the conditions of global crisis? And how important is it for the future of privatisation in Russia? Thank you.

Vladimir Putin: The best way to protect the interests of minority investors is to strengthen the Russian economy and increase the capitalisation of those institutions where you have invested your funds. As you rightly noted, VTB’s economic indicators have been improving.

As you probably know, VTB purchased the Bank of Moscow and has been facing some economic difficulties (I am not going to talk about the criminal circumstances here, as this is the purview of law enforcement agencies), but economic problems did emerge. And you are probably aware that we took active steps to protect the interests of the bank and its shareholders, including the minority shareholders.

In general, I would like to say that if the investments you made have unfortunately lost value (due to the global financial crisis, as you rightly said), this is objectively part of the process, and the Russian authorities can hardly have any influence over it.

Therefore, I don’t think you should rush to dispose of these assets. Considering the positive trends at VTB, there is every reason to believe that they will appreciate again and you will make a profit.

But if for any reason you believe that you will be better off selling the shares, we can do the following. I can assign the bank’s management to work out an arrangement to buy back the shares owned by minority investors, so that you do not incur any losses.

In general, this is a very serious issue, and I want Nadya (the person who asked the question) and other shareholders to know that the government owns the controlling stake in VTB, and we will make every effort to ensure that they incur no losses. We are ready to allocate the funds required for that. Mr Kostin, how much money is needed for that?

Andrei Kostin: Mr Putin, we have various categories of clients, including minority shareholders and smaller clients, in all about 115,000. It is not going to be a large amount, and if you give me three days to study the matter thoroughly, I will report back on Monday about all possible ways to resolve this issue.

Vladimir Putin: But how much do you think it will cost approximately”

Andrei Kostin: To buy back the shares?

Vladimir Putin: Yes.

Andrei Kostin: To buy back the shares from say 100,000 to 110,000 clients will cost some 15-18 billion roubles.

Vladimir Putin: I see, alright then. Please discuss this with your colleagues and report back.