Igor Yurgens: "We are in a recession now, and soon we’ll be in a free fall"

November 19, 2014

Chairman of the Management Board of INSOR Igor Yurgens was interviewed by the newspaper Novaya Gazeta, responding to questions about the problems facing the Russian economy in light of the sanctions and plummeting oil prices.

— For the economy and business – what hurts most under the sanctions?

— The sectoral and financial sanctions. The cheap money we used to have is gone. To top it all — and it’s either another tool or pure circumstance — oil prices are dropping… The lack of options to borrow money to service debts, and the budget cuts resulting from almost a 30% oil price drop — that’s the heaviest blow to be dealt to both the budget and business. How do we get out of that? – That’s an interesting question.

— How long can we last?

— Let’s go with the simple arithmetic — two years, granted there will be no other major shocks. Because the under-investment and disinvestment this year is at about $200 billion. We have a reserve of $450 billion more. So, it’s 2-2.5 years. Naturally, this is not a very correct calculation — it is linear. And yet, I believe it is fairly accurate.

— When there’s no money, investments are cut. Does no investments mean no development?

— Yes, but that’s just one of the three major problems. There is the problem of the lack of a qualified labor force (primarily managerial) and of its drying inflow from abroad under the new conditions. Rosneft, for one, was headed by American financial directors among others. Now such super-managers will grow fewer and fewer. Thus, the investment rate is falling, firstly, under order from the West. And secondly, to add to the fact that we are practically cut off from new long-term money, financial markets themselves raise the standard for Russian risks substantively. So this means no staff, no investment and no technologies, since some of technologies are also banned.

— And then there is another important source for development – domestic consumption. It’s dropping too.

— Yes it is, in part because of the cuts in the social programs. Minister of Finance Anton Siluanov outlined the backup budget as a ten-percent sequester of the current one. Naturally, the hardest hit are healthcare and culture, and also the wages of the sprawling bureaucracy. In combination with increasing prices, all that will lead to a contraction in domestic consumption. Those in the West who calculated the impact of the sanctions know this to an extent: we have the examples of Iran and other countries. Sanctions rarely if ever work politically though – instead they mobilize the nation, but economically they do work very well.

— In the current conditions, how can the state bring liquidity into the economy? That is the blood system of the economy, isn’t it?

— There is absolutely no way to do it. When the barrel sold at $120, the liquidity, including in foreign currency, flew in torrents into the country. Now it sells at $80, you feel the difference. Anything under $70 is huge problems for the budget, compressing everything that can be compressed, consolidation of the budget, minimization of state expenditures – and there are some high expectations there. I’m afraid the only way that will still be open is further state regulation.

— We can skip the question on the wellbeing of business: everybody knows it’s bad.

— I would say it is very bad. Although, none of the large owners would speak of that, since they have to demonstrate maximal loyalty now or otherwise lose their business. But of course internally they have long done their private hedging, I am absolutely confident of that. That’s to say the money has been disinvested, re-invested into real estate, some serious deposits, etc. Oil, metals and the rest can’t be taken out of the ground, so the production will stay here. Besides, doubtlessly there are patriots among the oligarchs, who’ll grind their teeth and try hard to do something. But the economic wellbeing is B-A-D. And the Russian Union of Industrialists and Entrepreneurs, to give them their due, declares that quite clearly. Either you give us some special fiscal regime while under sanctions, at least do not strangle us for good, or it’s the end of the model.

But the understanding of the need to preserve business is not omnipresent. Recently, in a top meeting one prominent regional banker was telling us: “70% of my bank’s work is reporting to the law enforcement and the regulator, and it is only 30% that is indeed finance. So, whose sanctions are we actually under?”

— Don’t you think that what is going on now is a generous gift, an unexpected bonus for the dirigists and isolationists – ideological and practical alike? And that the crisis in relations with the West has become somewhat a skeleton key for the various state funds — the pension fund, development funds, and maybe even the FX reserves?

— Yes. In this regard, no doubt, the liberal part of the Russian society was dealt a heavy blow. Because, in the conditions when effective assets are being put in a bind, they are going to be transferred to greater and yet greater extent into the hands of the state, since the state has to go on, pay pensions, salaries to civil servants and maintain healthcare and education somehow. And the new Russians supporting the free market, democracy, and links with the West today are indirectly subjected by the sanctioning regime to even greater pressure.

And I do agree with you: the ones speaking for restoration of the centralized planning in the economy, for an updated Soviet model so to speak, the so-called dirigists – today they definitely are getting a large bonus, saying: “We have always warned you of the impending punishment for your openness, your entry into the WTO and the likes. So there, have your consequences”. And that is not true, because the open model is in fact the most sustainable. It is not true, because when Russia was guided by the open, free, market-oriented model, it was growing the national economy by 9% annually; and now we are in a recession, and soon we’ll be in a free fall.

— I understand it so that if there is no money, they start ripping off business. And I think, the Evtushenko affair will end right when…

— It has already ended in fact.

— I see: the transfer of assets of Bashneft has been documented, the business is wrestled away — now he can be released.

— When all of the stakeholders are satisfied, he can be released — something like that.

— They say a new wave of repressions against private entrepreneurs is on the horizon – with that very purpose of wrestling away business and replenishing assets; and that these kinds of local initiatives are already flourishing: a signal comes from the center stating the West is bad, and that one needs to consolidate resources, and arbitrary repressions follow.

— I can’t be sure – I don’t have the statistics. We met with the president within the Council for Human Rights – no such signals came in. But on the part of the council’s dealings with elections there were signals of a decline in political competition, there were signs that the elections are not going to be your standard expression of the free political will of the people. I think that when ‘the Motherland is in danger’ and when ‘Russia is a besieged fortress’, no one cares about democracy, entrepreneurship and the like. In that respect, I think the prevailing attitudes are favoring overcautious handling of all these free-market perceptions and tools rather than loose. I guess this wave is going to be hard to withstand.

I have to admit: the leaders are constantly saying to Western entrepreneurs that all of their rights will be guaranteed. And, by the way, some Western entrepreneurs working here say that from the point of view of licensing, regulations and so on things have gotten somewhat easier.

— That is – in the formal and legal procedures?

— Yes. At the top, they do understand the need to preserve an open model, because there is nowhere else from where you can get vital juices for the economy. But I agree with you with regard to local regulators getting swept up by this patriotic wave, and possibly acting in a totally different way.

— How would you define it: where are the major economic decisions made today? Because what we see is this kind of weird anti-market Izborsk-Glazyev, State Corporate or Duma-driven initiative. The government and some of its institutions negatively respond to these initiatives. But time passes, and it becomes clear that these negative responses are either replaced with positive ones or disregarded altogether. So, where is the decision-making center in this case?

— The mechanism is rather complex, and requires a lot of approval procedures. In that sense, the machine works and it is operational. In the top-down economic operation, it is quite hard for a completely incompetent decision to go through. There is the zero reading; there is the consent of the government. When it comes to something really complicated, it is being decided at the level of First Deputy Prime Minister Igor Shuvalov, who still is a very well educated and a serious filter for such things. Then there is the legal and other departments of the presidential administration with people who really care not to let through reactionary and obscurantist initiatives – at least with regard to economic decisions. But there is the pressure, and it will remain.

— It is growing.

— The pressure from the ones saying things like ‘at any cost’, ‘open up the nation’s pantry, we’ll set up wonderful projects for you all to see the West humiliated’ – in the present conditions – is growing.

— What are their pressure points? They probably need to get to the top decision maker — the president?

— There is the party top-down structure and there are high-level lobbyists. When the government, Kudrin, Shuvalov, Nabiullina and a number of others were standing guard of the interests of development, people supported by Putin who realized that the nation’s coffers can be depleted in no time, it was one thing. Then Kudrin was sent off. There are still competent people fighting. But with the sanctions, and the ever-shrinking toolkit at hand, I think, the pressure on them is tremendous.

— Is there any motivation remaining with the Western business to work in or with Russia? A lot was pledged, many things were working well, and now a few things are still working well.

— We still are the sixth economy of the world, a market of 146 million consumers, a potential gateway to enormous China, a transit corridor to the 17-million Kazakh market, and the 9-million market of Belarus. In general, for such companies like Siemens or Bosch – the German giants – the revenues they were receiving in the territory of the Russian Federation and the Eurasian Union before the crisis were more than at least the Central and Eastern European countries combined but perhaps of all European nations. This is why they valued the market, they set up business here, and they all built beautiful headquarters here. Naturally, now they understand the risks involved. Companies dealing with energy and raw materials are surely interested in cooperation. Our role should not be exaggerated, but Russia is an interesting and good market, where the raw-material cost component is low, with the prices for electricity and energy being quite low until recently, where the labor force is fairly qualified – although it is becoming more expensive in contrast to the Chinese for instance. Nonetheless, there are benefits in working in the Russian market, which today unfortunately is under pressure from the Western sanctions, and is starting to see the impact from reduced consumption. But the Association of European Business was one in saying they were against the sanctions and in favor of the continued cooperation at their recent meeting with Sergei Lavrov. And I think most of the entrepreneurial communities abroad are ready to say the following: “Deal with your politics, but lift your sanctions – that’s important for us”.

Of course, there are financial institutes that see more risks than benefits here, and they withdraw capital from Russia.

— The issue of sanctions is complex. Where do you think is the balance of what is attainable by the sanctions and their destructive role?

— Here my answer has several components. The Peterson Institute for International Economics researched the effectiveness of sanctions imposed against various countries within, I recall, the post-war period. It so happens that sanctions worked in 34% of the cases.

But mainly the effect did not trigger change in the political course of the country. Indeed, in Iran it did lead to the change of the regime; though it was not due to the growth in anti-government sentiments but rather due to the economic hardships the entire country went through (60% drop in the rial, cut off from SWIFT and so on). This is why it is known sanctions will only work so far politically. More so in Russia, a country controlled from the inside, where 86% of the populace state they support the president. It is hard to imagine these sanctions provoking change in the domestic policy of the Russian Federation. That is one aspect.

On the other hand, we see that sanctions lead to growth in social tension. That can be seen through the inner-clan chasms, or some top officials leaving the government and expressing discontent, the Evtushenko case or other things. The ones who have planned these sanctions are probably reporting: “See here, we have intensified the tension in Russia, and this tension leads to the increase in the risk of political mistakes and wrong decisions”. Perhaps.

As a liberal I am bitter that our cohort is coming under powerful pressure and a cut in its capabilities. I am not even speaking of the Medvedev era, when one could speak freer, or pursue modernization and Europeanization lawfully, using all sorts of opportunities, including the mass media. But even the pre-sanction regime provided a chance to observe the situation and discuss it (that’s what my friends and I have been doing), to form the liberal state cohort – the liberals that would lead their country towards freedom and developed market, never rejecting our history or values. Now, we’re in a bind for sure. And this creative caste, the educated and ambitious youth — they flee more readily than fight. Sure, there are a number of kamikazes, but we cannot expect the entire educated class to fight to the death for their convictions. Guys have families, children, work and the tempers – they differ. Probably the ones designing these sanctions do not have the aim of provoking the persecution of people who think Russia and the West should have friendly relations – to have the free-market forces, entrepreneurship aiming for global economy on principle, to have them suppressed and forced into chaebols dictated nowadays. Maybe their aim is to demonstrate to the Russian leadership their discontent with its Ukrainian policy and avoid the described consequences? That is something between a science and an art – and it is difficulty to hit that edge methodologically.

— That’s why you need artful politicians. There’s deficit of those today.

— I am really worried that our intellectual forces which propose solutions as alternatives to their solutions are outnumbered. All these special services and analytical centers of the West analyzing the ‘cold peace’ we have today are of course more powerful, and are financed hundreds of times better; and all sorts of Harvard and Oxford graduates are working there every day — they are many, and better educated. And I am afraid we could take some serious hits in this war.

— All the more so that the Western sanctions are a very good argument for isolationists to team up around…

— …Some slogans contrary to progress… And which in the final analysis work against, as it was in 1914, the unity and wellbeing of the nation. God forbid, yet the analogies do manifest themselves…