C. Peter McColough Series on International Economics: A Conversation with Anton G. Siluanov

(Note: The finance minister's remarks are provided through interpreter.)

PETER FISHER: All right. Good morning. Good morning. Welcome to the council. My name is Peter Fisher. I'm with -- the senior managing director at BlackRock and formerly of the U.S. Treasury. I'm pleased to invite you here today to the council's meeting with the Russian finance minister, Antal -- Anton Siluanov. This is a part of the C. Peter McColough Series on International Economics.

We're now at the part of the program where I implore you to turn off your electronic devices so they do not especially impede with the acoustic system and your headphones throughout our conversation this morning; also remind you and our guest this meeting is on the record, so the information is the public domain once uttered.

And let me explain how events will unfold. In a moment, the minister will give a few remarks, which you'll have the simultaneous translation of, and then he and I will have a conversation onstage for a few minutes and then we'll open it up to your questions.

So you have the minister's biography in your packets. He was appointed interim acting minister in September of 2011. He's had a long and distinguished career in the Russian Finance Ministry. And without further ado, let me welcome Minister Siluanov. (Applause.)

MINISTER ANTON SILUANOV: Good morning, dear colleagues. Unfortunately, I'll be speaking in Russian. I do not speak English well, so far. But I'll be trying to learn English by our next meeting.

I would like to say a few words about the situation in the Russian economy, the situation with the budget, fiscal policies, debt policies, probably everything that is of interest today to those who are dealing with Russia.

Well, in general the situation is, Russia is quite well. Last year we have reached a rather good level of economic growth, 4.3 percent of the GDP. We are seeing the slowdown of inflation. The lowest level, 6.1 percent of inflation, was achieved last year, the lowest in 20 years. The jobless rate -- the unemployment rate is going down. We -- it is within the range of 6 percent. So in general the situation is quite well.

We have really small debt, and given the background of Europe and some other countries in the world, it looks quite good, 9.8 percent of the GDP. That is the debt level of Russia. If we have a look at that debt and include corporate debts into that, then the amount will not be higher than 30 percent of the GDP. So it's fully covered by the golden currency reserves that as of today exceed US$500 billion. Also, we have a very solid surplus in trade turnover and current account surplus -- in 2011, 10.7, 5.3 percent of the GDP, accordingly.

There are some points, but I would not go into the details of the positive aspects. I'll just tell you about the risks that we are seeing and what our intentions are in terms of actions to act against those risks. Last year there was a negative point when we saw huge capital flight, significant outflow, more than US$80 billion of capital flight from Russia last year alone. And it was a net outflow. Of course it is worrisome and of great concern to us.

Here we see some explanations for this situation. First of all, there is significant inflow of monetary cash as a result of high oil prices, and this money didn't find any application in Russia, and so this money left to more developed -- for more developed markets.

In addition to that, the consequences of the crisis impacted us as well. Last year not only Russia but other emerging markets saw their capital flight.

And the third point, probably: Some of our investors preferred to invest into foreign assets since a number of assets became cheaper in developed nations or developed markets. This year we are expecting a slowdown of the capital flight, even though the first months of the year show that still capital flight is at high levels.

As for the growth -- economic growth for this year, in general we expected to have a growth rate of 3.7 percent of the GDP. That was our forecast. The first months of the year showed that the economic growth would be -- is at the same level as last year, 4.3 percent of the GDP. We have a rather good situation with the influx of foreign direct investments, which is -- we're very happy about -- this year, 11.2 percent. And we also see an active growth of consumption, retail, trade turnover -- growth rate is more than 7 percent. So the (situation ?) seems to be quite good. But, as a minister of finance, I will always be speaking about the risks that we see in our economy and our budget.

Once again, you are all well familiar with the positive aspects of Russian economy and budget. But as for the risks, we believe that one of the major risks is the huge dependency of budget from the oil prices. Fifty percent of all revenues are formed from the -- or are received from the oil and gas revenues. It's a huge amount, a very significant figure, and the oil price this year -- well, the break-even oil price for the budgetary purposes for this year is $100 per barrel; next year, $97 per barrel. So the volatility of oil price on world markets naturally affects the budgetary sustainability of Russia. In essence -- so we have an opposite picture compared to the European countries and other developed nations. Our debt is really small, but a huge problem of dependency on oil prices. So here we see the need to curb this risks -- price-related risks and continue to create the safety cushion so that any price volatility could be smoothed somehow by this.

So what are we to do in this regard? First of all, we'll continue saving the revenues (and ?) the reserve funds that we have established. Those are the Reserve Fund and the National Well-Being Fund. This year alone we are receiving additional revenues due to higher oil prices and due to higher economic growth rates. This year we expect to receive 800 billion rubles in accordance with our estimates of additional revenues, oil- and gas-related revenues, and we won't be spending all of those revenues. We'll send them to lower -- (inaudible) -- reducing borrowings on the domestic markets, and we'll also direct that money to the reserve funds. And the smaller part, which we get from the economic growth, so-called nonoil and -gas revenues, will be directed to additional spendings in the budget. From our viewpoint, such an approach helps us, on the one hand, increase our reserves and build up our safety cushions and -- on the one hand and, on the other hand, thus we will not be increasing our spending commitments and will not worsen the budgetary situation through the creation of risks of nonexecution of commitments. So this is the policy we are to adhere to in the future.

Now we want to elaborate budgetary rules in order to stipulate them by the law so that the oil and gas revenues go to the Reserve Fund by the law. I think that this is the right position for us. Contrary to the Western European countries that are now involved into budgetary consolidation, we shouldn't be relaxed about it in Russia as well and we need to go on with such consolidation as well, but not due to the fact that we're having high level of debt, but simply due to the fact that after the crisis, we have increased the federal spending so -- within the four months of anti-crisis actions and now we need to cut on those and reduce those spendings gradually. This is a very difficult undertaking, and indeed as we discussed at the IMF and World Bank session just last weekend, quite often budget consolidation is linked to unpopular actions by the government and quite often result in the resignation of the whole government.

So in any case -- in any case, we have to carry out so-called budget maneuver through the improvement of the quality of budgetary spendings, cutting the ineffective spendings, carrying out structural reforms, redistributing the resources that help us receive -- well, to get better use and effect from the budgetary resources.

Which are priority areas? First of all, the pension reform: Approximate 10 percent of all spendings of the federal budget (stands ?) to balance the pension system. This is the result of the fact that during the crisis, we did not optimize the spendings within the pension system, but on the contrary, we increased the pension payments. And the issue of the right pension reform, which, in the period of a few years, gradually -- we focused 15-year period, so gradually, we need to set ourselves a task to bring the pension system to a well-balanced state. It's a very difficult reform.

The next task that we are having is to carry out measures in such areas of budget as health care, education, where we still see quite a lot of ineffective spending patterns. And the World Bank told us about that as well. Thirty percent of all spendings in these areas are ineffective in Russia. That's the data of the World Bank. So this is our advantage, actually, because we have -- we can work in this area a lot and improve a lot.

A few words about the taxation system, the fiscal system: Today we have a rather sustainable tax system. Probably we don't want to change our approach towards taxation. The overall level, the consolidated level of tax burden is a bit over 35 percent. And if we exclude oil and gas from here, because oil and gas sector is taxed at a very high level, then the tax burden is at the level -- a bit -- a bit more than 24 percent. So it's a rather acceptable level of taxation.

Now, we know that the most important thing during the period of preparation of reforms, or rather the changes of the taxation system in the coming five years: We need to ensure the stability and predictability of this reform.

Our actions that we envisage are as follows: We don't want to increase the burden on the non-oil-and-gas sector, non-oil-and-gas enterprises; on the contrary, we will be lowering the tax burden there. In terms of property tax, we want to exempt real estate from this. We'll be increasing the excises on alcohol and tobacco products, but it will not touch most of the businesses. We are not going to change the volumes of the insurance payments to -- well, we want to, you know, have a list of the exemptions, and we don't want to have any changes after that for about five years. We know that one of the major remarks by investors who work in Russia is that we quite often change the taxation rules. So our task -- and it received the support of the government -- is not to change the rules of the games from the viewpoint of the taxation system, and if we do introduce some changes, that it's only through reducing the level of taxation. That's the only change that is acceptable. And I believe that's the right direction for our activities.

A few words about the debt policies of Russia. Even though we have a small level of debt, we have no intention of increasing it significantly in the near future. Within the budgetary rules, we will try to be getting a well-balanced budget. This year we -- our plan is 1 1/2 percent of a deficit -- budgetary deficit. We expect that with the current situation, we will have a nondeficit year. Maybe we'll get even some surplus should we have a favorable foreign economic situation.

As for the debt, the major borrowings will be -- major part will be refinanced through the borrowings on domestic markets. We have significant borrowing levels envisaged for this year on the domestic market. But when we receive these extra revenues, we'll be reducing the borrowing so that not to create the tension on the domestic market and to have more liquidity in the economy.

As for the foreign markets, then, we probably -- well, in the draft budget, we have the forecast for the borrowing of the level of this year, approximately 7 billion U.S. dollars. You know, we had a really good (issue ?) this year, high demand. Our 10-year bonds have the yield of 4.5 percent, and our 30-year maturity bonds were in the highest demand.

We have no intention of seriously increasing the foreign borrowing levels. And I repeat once again, we'll probably preserve it at the level of this year even though the conditions around foreign markets are quite good. We will be creating a specialized agency that will be managing our resources. We have significant volumes of reserve funds, (initial well-being ?) funds that is invested. These funds are mainly invested very conservatively, with a low fixed income. But at the same time, those securities are highly liquid. So we want to create a specialized agency to make sure that the return on our investment is high in these funds so that we get more revenues and thus will have more possibilities for maneuvers.

I think my time is up. I don't know. We have agreed that I'll be speaking for 10, 15 minutes. So I don't know, now I'm ready to answer the questions. Or how should we proceed?

FISHER: I'll sit over here. (Off-mic exchange.) All right. All right. Thank you. I don't think we'll be wearing -- no, he's joined us on the dais, so here we are. We go consecutive translation now.

So thank you very much for your remarks, and we'll have a brief conversation before I open it up to questions from the members.

The Russian economy is now -- can be thought of as European, as oil dependent and as an emerging market. And all of those have been problematic in the last year and present challenges for you. You mentioned the capital flight. So I wonder if you could reflect on what you would like investors to think of the Russian economy in future years. What's the aspiration so that Russia is not put in a box as either emerging market or an oil-dependent economy or a little cousin of the European economy? What's your aspiration for the Russian economy and how investors see it?

SILUANOV: Well, I think probably this is the most important question for any economy in the world. We -- any economy wants to be attractive and interesting for the investors. And we believe that if should have resolved this issue beforehand, those -- (inaudible) -- would have stayed in Russia last year.

Well, unfortunately, I believe that we can achieve this through the implementation not of just the economic reform and changing the economic policies, but rather we need to tackle other areas, like ensuring proper functioning of the law enforcement, the judiciary, so that the business community feels that its rights are protected that way in Russia. So in this area we see significant problems and we see the need to resolve them as soon as possible.

Secondly, we still have rather underdeveloped financial markets. And at the moment, we are passing through the parliament a number of legal acts to change this situation and to resolve this issue as well. That is the law on central depository clearing and a number of other decisions that will allow the investors to feel more comfortable in Russia and invest easier in Russia.

So the next point, taxation. I think that as regards our taxation system, here we are quite competitive with other countries and other systems. But should you have any different ideas, then please let us know.

As for the issue of budget and finance, it seems to me that the policies that we have been carrying out recently under the leadership of the former minister, Mr. Kudrin, will be continued. I am his student. So, you know, those norms or those rules and the foundations that we applied there and towards the budgetary policies in the past will be continued and we'll be following these rules.

I don't really know who is going to be the next finance minister in the next government, but I hope that those ideas that we included in our internal ministerial rules will be continued and will carry -- will be moved to the next government as well.

FISHER: As you look at the European debt crisis and it unfolds, and given your participation in the meetings in Washington over the weekend, I wonder if you just have any observations on your hopes and fears about the next act in the European drama, especially given the presidential first-round election in France over the weekend. Do you have any observations you're willing to make?

SILUANOV: Yes, indeed the European matter was discussed at the IMF session, and I had a chance to state my position at that meeting as well. So it is as follows.

The reasons for the crisis and what triggered the crisis are still there and not removed from the scene. First of all, here we're talking about the debt problem that is really tough for many European countries at the moment. The average debt rate of the European countries is 19 percent of that budget. And yesterday we heard some suggestions that maybe we need to somehow soften or slow down the budgetary consolidation process that many countries have committed to but some countries haven't yet. And so why force the governments to carry out unpopular measures? Because it seems that for the time being, the situation kind of got easier with the huge liquidity influx on the market, so it's a bit softer now. But our position is that we need to resolve the debt issue and we shouldn't be delaying the resolution of it.

Also today we see really low interest rates on the markets, and if, you know, this monetary influx, the liquidity influx continues, so then we can assume that the interest rates will not stay so long at such levels. And then immediately we run into the questions of the costs for serving the debt, and also then issues will arise as regards the volume of loans that various commercial banks received or provided.

So but in any case, the debt burden continues to be the major issue, major problem for Europe. And this is of concern to Russia and to other countries of the world because we have strong links with that part of the world. So we have expressed these concerns of ours, so we'll see what the reaction will be and what the Europeans will do next.

So I think that the budgetary consolidation measures and the measures to cut high debt rate are very important for Europe, but also for us. Even though our debt is relatively small, we want to carry out budgetary reforms and go on with the budgetary consolidation. And if all of us jointly and simultaneously carry out these measures, then it will be easier for individual governments to explain these unpopular measures to their own citizens, and thus we could get really good results.

FISHER: You mentioned the low interest rate environment, and we can observe that the major central banks of the world are all providing extraordinary accommodative monetary policy, giving us negative real rates in almost every major economy. That's obviously had a very powerful impact on commodity prices, energy prices, but it's something of an unnatural state of affairs to have all the major economies running negative real rates.

When you look out at the constellation of monetary forces and these very easy rates, but it's providing the energy boom that has helped the Russian finances, how do you think about the path of the exit of these major central banks from their easing policies and what influence it might have on the Russian economy?

SILUANOV: It's really difficult to give forecasts in this area. I already mentioned that I don't believe that low interest rate periods will continue for a really long time. So as for the exit strategies for central banks, it's very difficult for me to guess. I think that at the moment, the European central banks, through this huge instance of -- influx of liquidity in the market worth 1 trillion euros, was -- kind of softened the sharpness of most problems that exist there.

But the debt issue is still there, and so it's a big question how Spain, Portugal and some other European Union member states will be settling their debt or refinancing their debt; where are they going to get the liquidity, at what price, and what will be the price offered by the ECB to the economies of the eurozone. So all these are major questions.

Well, frankly, I wouldn't really make any forecasts in this area.

FISHER: All right.

SILUANOV: Wouldn't even try.

FISHER: Let me open it up now to questions from our members, and let me remind you to introduce yourself and then allow a few moments for the -- for the translation to come through.

So let's begin right here.

QUESTIONER: I'm --

FISHER: There's a -- wait for the microphone as well, forgive me.

QUESTIONER: I'm -- (inaudible) -- not working.

FISHER: Yep, now it is.

QUESTIONER: Is it? I'm Kenneth Bialkin of Skadden Arps. At various times in recent world history, the Russian government or the Soviet government was very active in providing funding and assistance to various countries in the Arab world, Egypt being the prime example. But Syria, Iran, Iraq and elsewhere at various times have turned to the Russians or the Soviet Union for their primary sources of support, politically and economically.

Given what's going on in the Arab world today, where all the countries are in trouble and everybody is uncertain and money is going to be in short supply, to what extent do you anticipate that Russia will be involved, either politically and economically, in supporting and sustaining or taking a role in the formation and development of whatever government comes out of the morass that presently exists in the Middle East?

SILUANOV: Well, you know, this matter of the Middle East was actually discussed during the IMF and World Bank sessions last weekend within the framework of the Deauville Partnership or Deauville dialogue. And so, within this G-20 format, we were talking of -- talking of providing this assistance and support to the countries that saw the changes through the Arab Spring events. They're discussing an option to create a trust fund worth $250 million.

So far it is at the initial stage, and they're discussing this project, but Russia will be participating in this trust fund as one of the donors. So our preference would be to support and provide assistance to these countries through some international structures. Well, in addition to that -- (inaudible) -- they have bilateral links and relations with a number of those countries on various areas of cooperation. You know, in some of those countries, Russian companies are involved in railway construction or hydropower plant construction. But as for the volume and kinds of support that were provided back in the time, back in the day by the Soviet Union like, you know, direct support of the regimes and so on, we don't see that, and we don't want to do that.

FISHER: All right.

QUESTIONER: Thank you, Minister. Let me take you back to the area that you've considered a vulnerability for the Russian economy, namely the dependence on petroleum revenue. If you had to take a snapshot of where you are today in the process of diversification, creating the conditions that would enable you to reduce that dependence, ranging all the way from, let's say, creating industries where intellectual contribution is important to, let's say, mobility of labor, how would you assess where you are, and what else needs to be done in order to achieve that objective?

SILUANOV: It's a very difficult question. Of course we are at the initial stages of resolving these issues and, you know, reaching this goal. You know, in recent years we saw the economic growth in the country that was mainly related to the growing consumption and consumer demand. So, you know, the increased levels of domestic trade and consumption contribute significantly to the growth. So the task for us today is to make sure that Russia receives more direct investment so that both domestic and foreign investors could feel comfortable when investing in the country.

Well, therefore, the problem of diversification of the economy is really acute and topical for us even though we have had lots of undertakings and initiatives in that area. You know, and we tried also to create various institutions that would promote inflowing of investment into Russia. And we tried that with the creation of specialized economic areas, special tax regimes in these areas. And also, we have created direct investment funds worth 2 billion U.S. dollars at our development bank. The -- so we're trying to create these institutions to attract investments. We really want to see the results from these efforts and really wanted to enjoy the trust of the investors. But so far this whole system hasn't started working yet at the scale that we would want to have.

It is -- you know, I think consideration of the real -- (inaudible) -- on the individual regions and provinces in Russia -- let's take the Kaluga area, for example. This is the area of major investors, activities. Samsung, Volvo, Volkswagen -- they built their plants there, start their production there, simply because in that particular region, that particular province, they have created good environments for the work of the investors. Maybe throughout the country, the environment is rather uneven, so maybe our task is to create a greater number of these kind of good territories that are worth making business with.

So if you think that we fail in some areas, we would be -- would really appreciate your comments and maybe some suggestions where -- whether we need to adopt additional legislation or change (succession ?) regime somehow. We would really appreciate all the comments and all the input from all of you.

So if you give here this advice, we'll be really grateful.

QUESTIONER: Thank you. Merit Janow, Columbia University. Thank you for joining us today. I'm reading in the newspaper that Russia, along with both China and Brazil, have chosen not to contribute at this moment to the IMF firewall effort but is considering doing so in the context, perhaps, of June meetings and further governance reforms at the IMF. And I'm wondering if you could comment on what kind of governance reforms you would like to see. And perhaps more broadly, what kind of role do you see for the IMF in the European challenges? I mean, what do you think the IMF can do other than being a short-term liquidity backstop?

SILUANOV: Well, actually, we never said that we were not contributing to the replenishment of the resources of the fund. I just -- I'm not aware whether -- where you see this information from, and -- is it through the -- somebody reported like that? It's not true. (Laughter.) I'll just go into detail, and I'll tell you what the truth is like.

So the truth is that the IMF announced that it needs to replenish its resources with 420 billion U.S. dollars. The IMF has already found the sources for 362 billion (dollars). During the IMF session last weekend, some of the countries announced the volumes of their contributions that they will be making to this effort.

Russia, along with the BRICS countries and some other countries, said that all of us were going to participate in this exercise. But as for the exact amounts and the share of participation and involvement in this effort, that will be announced at the June summit. (Why ?) we decided like this -- before that, we were mentioning Russia's involvement in a form of contribution of $10 billion. So we are not declining that; on the contrary, our participation could be greater.

But now we'll have a new president coming into office. So he'll have a look at the situation and, once again, analyze this whole deal. And I personally believe that such key decisions of, you know, these volumes should be made not by the ministers of finance, but rather by the heads of states and governments. And I think that by the June summit of G-20, we'll be able to collect even more money than the IMF requested.

As for the reform of the governance within the IMF, we can talk forever about it. But I must tell you that the issue of the formula to calculate the share of the (voices ?) was raised at the meeting. We believe that certain (rivals ?) and like the openness notion that are included in this formula do not have any clear definition. I think that the volume of GDP and the volume of foreign currency reserves are better indices to -- (inaudible) -- formula, but a number of smaller European nations are quite unhappy about this suggestion. As a result, Luxembourg has the quarter of the size of Pakistan or one-fourth of that of India; so it's kind of ridiculous. So we have raised this matter during the meeting, but we haven't received a positive reaction from smaller European nations.

Well, as for the IMF's role in solving the European problem, the European crisis, I think that if through joint efforts, if the additional resources are provided to the IMF, together with the governments of European countries and pan-European institutions that this -- that the Fund will be working and the main effect here would be that through this joint effort, they show the intentions and the desire of the authorities and the institutions to find a solid and credible solution which will really help.

FISHER: Yes.

QUESTIONER: Thanks, Minister, for your presentation. I am Lucio Vinhas de Souza. I am the sovereign chief economist of Moody's Investors Services. In a previous life, I was for seven years the head of the Russia desk at the Directorate General for Economic and Financial Affairs of the European Commission. My question about Belarus. You currently have a support program to the Republic of Belarus via EurAsEC anti-crisis fund. You still have not disbursed the last tranche of this particular support program. On the particular subjects which you are discussing with your Belarusian counterparts that have so far prevented you from disbursing the next tranche of the loan --

SILUANOV: Yes, indeed, probably you're talking about the Anti-Crisis Fund. If I remember correctly, the amount there is 440 million U.S. dollars probably. Well, actually, when we had the last meeting of this Anti-Crisis Fund, we really went through the program and the measures that Belarus had to implement in order to receive the next tranche. When I had a new look at the lessons of the program and the industries there, I made a proposal to clarify this program. And even if we take the current parameters that are included in the program, the performance is not good so far by Belarus.

Well, first of all, I'm talking about the -- such parameter as the volume of credit that the national bank, the central bank is providing to its own economy. There are also a number of other points and performance indicators that are not implemented or are not met by Belarus. But at the moment Belarus has no problems with, you know, settlements, including in foreign currencies, and they understand the commitments. They have received a sufficient amount of currency through the -- (inaudible) -- exercise of some of their facilities.

So at the moment the problem of insufficiency of (gold and ?) currency reserves is not there for Belarus. And I want to say that on the part of Belarus, there were no moves, you know, to ask Russia -- to request Russia to accelerate their decision-making process in order to issue the next tranche of -- (inaudible).

So we'll be considering in -- this matter in accordance with our rules and procedures and within the time frame that was set before. But once again, I just want to say that as for this program, I really -- I would want to adjust some performance indicators and correct the program a little bit.

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THIS IS A RUSH TRANSCRIPT.

(Note: The finance minister's remarks are provided through interpreter.)

PETER FISHER: All right. Good morning. Good morning. Welcome to the council. My name is Peter Fisher. I'm with -- the senior managing director at BlackRock and formerly of the U.S. Treasury. I'm pleased to invite you here today to the council's meeting with the Russian finance minister, Antal -- Anton Siluanov. This is a part of the C. Peter McColough Series on International Economics.

We're now at the part of the program where I implore you to turn off your electronic devices so they do not especially impede with the acoustic system and your headphones throughout our conversation this morning; also remind you and our guest this meeting is on the record, so the information is the public domain once uttered.

And let me explain how events will unfold. In a moment, the minister will give a few remarks, which you'll have the simultaneous translation of, and then he and I will have a conversation onstage for a few minutes and then we'll open it up to your questions.

So you have the minister's biography in your packets. He was appointed interim acting minister in September of 2011. He's had a long and distinguished career in the Russian Finance Ministry. And without further ado, let me welcome Minister Siluanov. (Applause.)

MINISTER ANTON SILUANOV: Good morning, dear colleagues. Unfortunately, I'll be speaking in Russian. I do not speak English well, so far. But I'll be trying to learn English by our next meeting.

I would like to say a few words about the situation in the Russian economy, the situation with the budget, fiscal policies, debt policies, probably everything that is of interest today to those who are dealing with Russia.

Well, in general the situation is, Russia is quite well. Last year we have reached a rather good level of economic growth, 4.3 percent of the GDP. We are seeing the slowdown of inflation. The lowest level, 6.1 percent of inflation, was achieved last year, the lowest in 20 years. The jobless rate -- the unemployment rate is going down. We -- it is within the range of 6 percent. So in general the situation is quite well.

We have really small debt, and given the background of Europe and some other countries in the world, it looks quite good, 9.8 percent of the GDP. That is the debt level of Russia. If we have a look at that debt and include corporate debts into that, then the amount will not be higher than 30 percent of the GDP. So it's fully covered by the golden currency reserves that as of today exceed US$500 billion. Also, we have a very solid surplus in trade turnover and current account surplus -- in 2011, 10.7, 5.3 percent of the GDP, accordingly.

There are some points, but I would not go into the details of the positive aspects. I'll just tell you about the risks that we are seeing and what our intentions are in terms of actions to act against those risks. Last year there was a negative point when we saw huge capital flight, significant outflow, more than US$80 billion of capital flight from Russia last year alone. And it was a net outflow. Of course it is worrisome and of great concern to us.

Here we see some explanations for this situation. First of all, there is significant inflow of monetary cash as a result of high oil prices, and this money didn't find any application in Russia, and so this money left to more developed -- for more developed markets.

In addition to that, the consequences of the crisis impacted us as well. Last year not only Russia but other emerging markets saw their capital flight.

And the third point, probably: Some of our investors preferred to invest into foreign assets since a number of assets became cheaper in developed nations or developed markets. This year we are expecting a slowdown of the capital flight, even though the first months of the year show that still capital flight is at high levels.

As for the growth -- economic growth for this year, in general we expected to have a growth rate of 3.7 percent of the GDP. That was our forecast. The first months of the year showed that the economic growth would be -- is at the same level as last year, 4.3 percent of the GDP. We have a rather good situation with the influx of foreign direct investments, which is -- we're very happy about -- this year, 11.2 percent. And we also see an active growth of consumption, retail, trade turnover -- growth rate is more than 7 percent. So the (situation ?) seems to be quite good. But, as a minister of finance, I will always be speaking about the risks that we see in our economy and our budget.

Once again, you are all well familiar with the positive aspects of Russian economy and budget. But as for the risks, we believe that one of the major risks is the huge dependency of budget from the oil prices. Fifty percent of all revenues are formed from the -- or are received from the oil and gas revenues. It's a huge amount, a very significant figure, and the oil price this year -- well, the break-even oil price for the budgetary purposes for this year is $100 per barrel; next year, $97 per barrel. So the volatility of oil price on world markets naturally affects the budgetary sustainability of Russia. In essence -- so we have an opposite picture compared to the European countries and other developed nations. Our debt is really small, but a huge problem of dependency on oil prices. So here we see the need to curb this risks -- price-related risks and continue to create the safety cushion so that any price volatility could be smoothed somehow by this.

So what are we to do in this regard? First of all, we'll continue saving the revenues (and ?) the reserve funds that we have established. Those are the Reserve Fund and the National Well-Being Fund. This year alone we are receiving additional revenues due to higher oil prices and due to higher economic growth rates. This year we expect to receive 800 billion rubles in accordance with our estimates of additional revenues, oil- and gas-related revenues, and we won't be spending all of those revenues. We'll send them to lower -- (inaudible) -- reducing borrowings on the domestic markets, and we'll also direct that money to the reserve funds. And the smaller part, which we get from the economic growth, so-called nonoil and -gas revenues, will be directed to additional spendings in the budget. From our viewpoint, such an approach helps us, on the one hand, increase our reserves and build up our safety cushions and -- on the one hand and, on the other hand, thus we will not be increasing our spending commitments and will not worsen the budgetary situation through the creation of risks of nonexecution of commitments. So this is the policy we are to adhere to in the future.

Now we want to elaborate budgetary rules in order to stipulate them by the law so that the oil and gas revenues go to the Reserve Fund by the law. I think that this is the right position for us. Contrary to the Western European countries that are now involved into budgetary consolidation, we shouldn't be relaxed about it in Russia as well and we need to go on with such consolidation as well, but not due to the fact that we're having high level of debt, but simply due to the fact that after the crisis, we have increased the federal spending so -- within the four months of anti-crisis actions and now we need to cut on those and reduce those spendings gradually. This is a very difficult undertaking, and indeed as we discussed at the IMF and World Bank session just last weekend, quite often budget consolidation is linked to unpopular actions by the government and quite often result in the resignation of the whole government.

So in any case -- in any case, we have to carry out so-called budget maneuver through the improvement of the quality of budgetary spendings, cutting the ineffective spendings, carrying out structural reforms, redistributing the resources that help us receive -- well, to get better use and effect from the budgetary resources.

Which are priority areas? First of all, the pension reform: Approximate 10 percent of all spendings of the federal budget (stands ?) to balance the pension system. This is the result of the fact that during the crisis, we did not optimize the spendings within the pension system, but on the contrary, we increased the pension payments. And the issue of the right pension reform, which, in the period of a few years, gradually -- we focused 15-year period, so gradually, we need to set ourselves a task to bring the pension system to a well-balanced state. It's a very difficult reform.

The next task that we are having is to carry out measures in such areas of budget as health care, education, where we still see quite a lot of ineffective spending patterns. And the World Bank told us about that as well. Thirty percent of all spendings in these areas are ineffective in Russia. That's the data of the World Bank. So this is our advantage, actually, because we have -- we can work in this area a lot and improve a lot.

A few words about the taxation system, the fiscal system: Today we have a rather sustainable tax system. Probably we don't want to change our approach towards taxation. The overall level, the consolidated level of tax burden is a bit over 35 percent. And if we exclude oil and gas from here, because oil and gas sector is taxed at a very high level, then the tax burden is at the level -- a bit -- a bit more than 24 percent. So it's a rather acceptable level of taxation.

Now, we know that the most important thing during the period of preparation of reforms, or rather the changes of the taxation system in the coming five years: We need to ensure the stability and predictability of this reform.

Our actions that we envisage are as follows: We don't want to increase the burden on the non-oil-and-gas sector, non-oil-and-gas enterprises; on the contrary, we will be lowering the tax burden there. In terms of property tax, we want to exempt real estate from this. We'll be increasing the excises on alcohol and tobacco products, but it will not touch most of the businesses. We are not going to change the volumes of the insurance payments to -- well, we want to, you know, have a list of the exemptions, and we don't want to have any changes after that for about five years. We know that one of the major remarks by investors who work in Russia is that we quite often change the taxation rules. So our task -- and it received the support of the government -- is not to change the rules of the games from the viewpoint of the taxation system, and if we do introduce some changes, that it's only through reducing the level of taxation. That's the only change that is acceptable. And I believe that's the right direction for our activities.

A few words about the debt policies of Russia. Even though we have a small level of debt, we have no intention of increasing it significantly in the near future. Within the budgetary rules, we will try to be getting a well-balanced budget. This year we -- our plan is 1 1/2 percent of a deficit -- budgetary deficit. We expect that with the current situation, we will have a nondeficit year. Maybe we'll get even some surplus should we have a favorable foreign economic situation.

As for the debt, the major borrowings will be -- major part will be refinanced through the borrowings on domestic markets. We have significant borrowing levels envisaged for this year on the domestic market. But when we receive these extra revenues, we'll be reducing the borrowing so that not to create the tension on the domestic market and to have more liquidity in the economy.

As for the foreign markets, then, we probably -- well, in the draft budget, we have the forecast for the borrowing of the level of this year, approximately 7 billion U.S. dollars. You know, we had a really good (issue ?) this year, high demand. Our 10-year bonds have the yield of 4.5 percent, and our 30-year maturity bonds were in the highest demand.

We have no intention of seriously increasing the foreign borrowing levels. And I repeat once again, we'll probably preserve it at the level of this year even though the conditions around foreign markets are quite good. We will be creating a specialized agency that will be managing our resources. We have significant volumes of reserve funds, (initial well-being ?) funds that is invested. These funds are mainly invested very conservatively, with a low fixed income. But at the same time, those securities are highly liquid. So we want to create a specialized agency to make sure that the return on our investment is high in these funds so that we get more revenues and thus will have more possibilities for maneuvers.

I think my time is up. I don't know. We have agreed that I'll be speaking for 10, 15 minutes. So I don't know, now I'm ready to answer the questions. Or how should we proceed?

FISHER: I'll sit over here. (Off-mic exchange.) All right. All right. Thank you. I don't think we'll be wearing -- no, he's joined us on the dais, so here we are. We go consecutive translation now.

So thank you very much for your remarks, and we'll have a brief conversation before I open it up to questions from the members.

The Russian economy is now -- can be thought of as European, as oil dependent and as an emerging market. And all of those have been problematic in the last year and present challenges for you. You mentioned the capital flight. So I wonder if you could reflect on what you would like investors to think of the Russian economy in future years. What's the aspiration so that Russia is not put in a box as either emerging market or an oil-dependent economy or a little cousin of the European economy? What's your aspiration for the Russian economy and how investors see it?

SILUANOV: Well, I think probably this is the most important question for any economy in the world. We -- any economy wants to be attractive and interesting for the investors. And we believe that if should have resolved this issue beforehand, those -- (inaudible) -- would have stayed in Russia last year.

Well, unfortunately, I believe that we can achieve this through the implementation not of just the economic reform and changing the economic policies, but rather we need to tackle other areas, like ensuring proper functioning of the law enforcement, the judiciary, so that the business community feels that its rights are protected that way in Russia. So in this area we see significant problems and we see the need to resolve them as soon as possible.

Secondly, we still have rather underdeveloped financial markets. And at the moment, we are passing through the parliament a number of legal acts to change this situation and to resolve this issue as well. That is the law on central depository clearing and a number of other decisions that will allow the investors to feel more comfortable in Russia and invest easier in Russia.

So the next point, taxation. I think that as regards our taxation system, here we are quite competitive with other countries and other systems. But should you have any different ideas, then please let us know.

As for the issue of budget and finance, it seems to me that the policies that we have been carrying out recently under the leadership of the former minister, Mr. Kudrin, will be continued. I am his student. So, you know, those norms or those rules and the foundations that we applied there and towards the budgetary policies in the past will be continued and we'll be following these rules.

I don't really know who is going to be the next finance minister in the next government, but I hope that those ideas that we included in our internal ministerial rules will be continued and will carry -- will be moved to the next government as well.

FISHER: As you look at the European debt crisis and it unfolds, and given your participation in the meetings in Washington over the weekend, I wonder if you just have any observations on your hopes and fears about the next act in the European drama, especially given the presidential first-round election in France over the weekend. Do you have any observations you're willing to make?

SILUANOV: Yes, indeed the European matter was discussed at the IMF session, and I had a chance to state my position at that meeting as well. So it is as follows.

The reasons for the crisis and what triggered the crisis are still there and not removed from the scene. First of all, here we're talking about the debt problem that is really tough for many European countries at the moment. The average debt rate of the European countries is 19 percent of that budget. And yesterday we heard some suggestions that maybe we need to somehow soften or slow down the budgetary consolidation process that many countries have committed to but some countries haven't yet. And so why force the governments to carry out unpopular measures? Because it seems that for the time being, the situation kind of got easier with the huge liquidity influx on the market, so it's a bit softer now. But our position is that we need to resolve the debt issue and we shouldn't be delaying the resolution of it.

Also today we see really low interest rates on the markets, and if, you know, this monetary influx, the liquidity influx continues, so then we can assume that the interest rates will not stay so long at such levels. And then immediately we run into the questions of the costs for serving the debt, and also then issues will arise as regards the volume of loans that various commercial banks received or provided.

So but in any case, the debt burden continues to be the major issue, major problem for Europe. And this is of concern to Russia and to other countries of the world because we have strong links with that part of the world. So we have expressed these concerns of ours, so we'll see what the reaction will be and what the Europeans will do next.

So I think that the budgetary consolidation measures and the measures to cut high debt rate are very important for Europe, but also for us. Even though our debt is relatively small, we want to carry out budgetary reforms and go on with the budgetary consolidation. And if all of us jointly and simultaneously carry out these measures, then it will be easier for individual governments to explain these unpopular measures to their own citizens, and thus we could get really good results.

FISHER: You mentioned the low interest rate environment, and we can observe that the major central banks of the world are all providing extraordinary accommodative monetary policy, giving us negative real rates in almost every major economy. That's obviously had a very powerful impact on commodity prices, energy prices, but it's something of an unnatural state of affairs to have all the major economies running negative real rates.

When you look out at the constellation of monetary forces and these very easy rates, but it's providing the energy boom that has helped the Russian finances, how do you think about the path of the exit of these major central banks from their easing policies and what influence it might have on the Russian economy?

SILUANOV: It's really difficult to give forecasts in this area. I already mentioned that I don't believe that low interest rate periods will continue for a really long time. So as for the exit strategies for central banks, it's very difficult for me to guess. I think that at the moment, the European central banks, through this huge instance of -- influx of liquidity in the market worth 1 trillion euros, was -- kind of softened the sharpness of most problems that exist there.

But the debt issue is still there, and so it's a big question how Spain, Portugal and some other European Union member states will be settling their debt or refinancing their debt; where are they going to get the liquidity, at what price, and what will be the price offered by the ECB to the economies of the eurozone. So all these are major questions.

Well, frankly, I wouldn't really make any forecasts in this area.

FISHER: All right.

SILUANOV: Wouldn't even try.

FISHER: Let me open it up now to questions from our members, and let me remind you to introduce yourself and then allow a few moments for the -- for the translation to come through.

So let's begin right here.

QUESTIONER: I'm --

FISHER: There's a -- wait for the microphone as well, forgive me.

QUESTIONER: I'm -- (inaudible) -- not working.

FISHER: Yep, now it is.

QUESTIONER: Is it? I'm Kenneth Bialkin of Skadden Arps. At various times in recent world history, the Russian government or the Soviet government was very active in providing funding and assistance to various countries in the Arab world, Egypt being the prime example. But Syria, Iran, Iraq and elsewhere at various times have turned to the Russians or the Soviet Union for their primary sources of support, politically and economically.

Given what's going on in the Arab world today, where all the countries are in trouble and everybody is uncertain and money is going to be in short supply, to what extent do you anticipate that Russia will be involved, either politically and economically, in supporting and sustaining or taking a role in the formation and development of whatever government comes out of the morass that presently exists in the Middle East?

SILUANOV: Well, you know, this matter of the Middle East was actually discussed during the IMF and World Bank sessions last weekend within the framework of the Deauville Partnership or Deauville dialogue. And so, within this G-20 format, we were talking of -- talking of providing this assistance and support to the countries that saw the changes through the Arab Spring events. They're discussing an option to create a trust fund worth $250 million.

So far it is at the initial stage, and they're discussing this project, but Russia will be participating in this trust fund as one of the donors. So our preference would be to support and provide assistance to these countries through some international structures. Well, in addition to that -- (inaudible) -- they have bilateral links and relations with a number of those countries on various areas of cooperation. You know, in some of those countries, Russian companies are involved in railway construction or hydropower plant construction. But as for the volume and kinds of support that were provided back in the time, back in the day by the Soviet Union like, you know, direct support of the regimes and so on, we don't see that, and we don't want to do that.

FISHER: All right.

QUESTIONER: Thank you, Minister. Let me take you back to the area that you've considered a vulnerability for the Russian economy, namely the dependence on petroleum revenue. If you had to take a snapshot of where you are today in the process of diversification, creating the conditions that would enable you to reduce that dependence, ranging all the way from, let's say, creating industries where intellectual contribution is important to, let's say, mobility of labor, how would you assess where you are, and what else needs to be done in order to achieve that objective?

SILUANOV: It's a very difficult question. Of course we are at the initial stages of resolving these issues and, you know, reaching this goal. You know, in recent years we saw the economic growth in the country that was mainly related to the growing consumption and consumer demand. So, you know, the increased levels of domestic trade and consumption contribute significantly to the growth. So the task for us today is to make sure that Russia receives more direct investment so that both domestic and foreign investors could feel comfortable when investing in the country.

Well, therefore, the problem of diversification of the economy is really acute and topical for us even though we have had lots of undertakings and initiatives in that area. You know, and we tried also to create various institutions that would promote inflowing of investment into Russia. And we tried that with the creation of specialized economic areas, special tax regimes in these areas. And also, we have created direct investment funds worth 2 billion U.S. dollars at our development bank. The -- so we're trying to create these institutions to attract investments. We really want to see the results from these efforts and really wanted to enjoy the trust of the investors. But so far this whole system hasn't started working yet at the scale that we would want to have.

It is -- you know, I think consideration of the real -- (inaudible) -- on the individual regions and provinces in Russia -- let's take the Kaluga area, for example. This is the area of major investors, activities. Samsung, Volvo, Volkswagen -- they built their plants there, start their production there, simply because in that particular region, that particular province, they have created good environments for the work of the investors. Maybe throughout the country, the environment is rather uneven, so maybe our task is to create a greater number of these kind of good territories that are worth making business with.

So if you think that we fail in some areas, we would be -- would really appreciate your comments and maybe some suggestions where -- whether we need to adopt additional legislation or change (succession ?) regime somehow. We would really appreciate all the comments and all the input from all of you.

So if you give here this advice, we'll be really grateful.

QUESTIONER: Thank you. Merit Janow, Columbia University. Thank you for joining us today. I'm reading in the newspaper that Russia, along with both China and Brazil, have chosen not to contribute at this moment to the IMF firewall effort but is considering doing so in the context, perhaps, of June meetings and further governance reforms at the IMF. And I'm wondering if you could comment on what kind of governance reforms you would like to see. And perhaps more broadly, what kind of role do you see for the IMF in the European challenges? I mean, what do you think the IMF can do other than being a short-term liquidity backstop?

SILUANOV: Well, actually, we never said that we were not contributing to the replenishment of the resources of the fund. I just -- I'm not aware whether -- where you see this information from, and -- is it through the -- somebody reported like that? It's not true. (Laughter.) I'll just go into detail, and I'll tell you what the truth is like.

So the truth is that the IMF announced that it needs to replenish its resources with 420 billion U.S. dollars. The IMF has already found the sources for 362 billion (dollars). During the IMF session last weekend, some of the countries announced the volumes of their contributions that they will be making to this effort.

Russia, along with the BRICS countries and some other countries, said that all of us were going to participate in this exercise. But as for the exact amounts and the share of participation and involvement in this effort, that will be announced at the June summit. (Why ?) we decided like this -- before that, we were mentioning Russia's involvement in a form of contribution of $10 billion. So we are not declining that; on the contrary, our participation could be greater.

But now we'll have a new president coming into office. So he'll have a look at the situation and, once again, analyze this whole deal. And I personally believe that such key decisions of, you know, these volumes should be made not by the ministers of finance, but rather by the heads of states and governments. And I think that by the June summit of G-20, we'll be able to collect even more money than the IMF requested.

As for the reform of the governance within the IMF, we can talk forever about it. But I must tell you that the issue of the formula to calculate the share of the (voices ?) was raised at the meeting. We believe that certain (rivals ?) and like the openness notion that are included in this formula do not have any clear definition. I think that the volume of GDP and the volume of foreign currency reserves are better indices to -- (inaudible) -- formula, but a number of smaller European nations are quite unhappy about this suggestion. As a result, Luxembourg has the quarter of the size of Pakistan or one-fourth of that of India; so it's kind of ridiculous. So we have raised this matter during the meeting, but we haven't received a positive reaction from smaller European nations.

Well, as for the IMF's role in solving the European problem, the European crisis, I think that if through joint efforts, if the additional resources are provided to the IMF, together with the governments of European countries and pan-European institutions that this -- that the Fund will be working and the main effect here would be that through this joint effort, they show the intentions and the desire of the authorities and the institutions to find a solid and credible solution which will really help.

FISHER: Yes.

QUESTIONER: Thanks, Minister, for your presentation. I am Lucio Vinhas de Souza. I am the sovereign chief economist of Moody's Investors Services. In a previous life, I was for seven years the head of the Russia desk at the Directorate General for Economic and Financial Affairs of the European Commission. My question about Belarus. You currently have a support program to the Republic of Belarus via EurAsEC anti-crisis fund. You still have not disbursed the last tranche of this particular support program. On the particular subjects which you are discussing with your Belarusian counterparts that have so far prevented you from disbursing the next tranche of the loan --

SILUANOV: Yes, indeed, probably you're talking about the Anti-Crisis Fund. If I remember correctly, the amount there is 440 million U.S. dollars probably. Well, actually, when we had the last meeting of this Anti-Crisis Fund, we really went through the program and the measures that Belarus had to implement in order to receive the next tranche. When I had a new look at the lessons of the program and the industries there, I made a proposal to clarify this program. And even if we take the current parameters that are included in the program, the performance is not good so far by Belarus.

Well, first of all, I'm talking about the -- such parameter as the volume of credit that the national bank, the central bank is providing to its own economy. There are also a number of other points and performance indicators that are not implemented or are not met by Belarus. But at the moment Belarus has no problems with, you know, settlements, including in foreign currencies, and they understand the commitments. They have received a sufficient amount of currency through the -- (inaudible) -- exercise of some of their facilities.

So at the moment the problem of insufficiency of (gold and ?) currency reserves is not there for Belarus. And I want to say that on the part of Belarus, there were no moves, you know, to ask Russia -- to request Russia to accelerate their decision-making process in order to issue the next tranche of -- (inaudible).

So we'll be considering in -- this matter in accordance with our rules and procedures and within the time frame that was set before. But once again, I just want to say that as for this program, I really -- I would want to adjust some performance indicators and correct the program a little bit.

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