STEPHEN SACKUR: Does Russia really deserve its status as a BRIC, one of the newly powerful global economies alongside Brazil, India and China? In the words of one respected economist, Russia is «more sick than BRIC», and it’s unclear whether another dose of Putinism is going to provide the boost in Russia’s economy needs. My guest is Andrey Kostin, head of Russia’s second biggest bank, VTB. He is a Putin loyalist and an advocate of economic reform, but aren’t the two mutually exclusive? Andrey Kostin, welcome to Hardtalk.
ANDREY KOSTIN: How do you do.
STEPHEN SACKUR: Let me start with that quotation, memorable quotation from Nouriel Roubini, a leading economist and analyst in the United States. He said Russia is «more sick than BRIC», and he said Russia doesn’t really deserve to be classified with China, India and Brazil. Do you agree with him?
ANDREY KOSTIN: Not at all. Of course, Mr. Roubini has the right to have his own opinion on the subject, but Russia is showing quite strong growth, it is definitely growing higher than the other G-8 countries. It also provides very good macroeconomic data, this year we expect the growth of GDP at around 4-5%. We have decreased inflation, in 2009 it was 13%, this year, up till now it’s 4%, it might grow up to 6%. And Russia has one of the best situations with debt, state debt, and I think, it is going quite well.
STEPHEN SACKUR: Yes, well, you give me a lot of data there, and there is no doubt Russia is still growing, but why is it then that confidence from the outside in the future of the Russian economy seems to be so lacking? You know better than I that in the last year, 2011, more than $80 billion worth of outward investment was pulled away, back, from Russia, and in the first quarter of the year the figures were even worse. Why are outside investors running scared of Russia?
ANDREY KOSTIN: Well, I think Russia is still very vulnerable from the external factors. For example, Russian stock market is very much dependent on foreign investments, and that probably explains the volatility of Russian markets.
STEPHEN SACKUR: You would accept there’s a lack of confidence from outsiders.
ANDREY KOSTIN: I think it’s a lack of confidence, but I think it’s exaggerated, I think Russia represents quite a good case for investment and for development, and actually the direct investment in Russia is growing, foreign investors, and investments are growing. I think, from this point of view the new period that you mention, Mr. Putin’s tenure for the next 6 years might represent political stability, as well as a good economic environment for investments.
STEPHEN SACKUR: Well, it’s interesting; you see it in a positive light, the fact that Vladimir Putin has at least another 6 years in power, in the Kremlin. If you look at the Russian economy, it’s based on two things more than anything else, isn’t it? It’s based on Vladimir Putin and his approach to economic management, and it’s based upon the price of oil. And I would put it to you that both those factors, as seen from the outside, leave Russia very vulnerable.
ANDREY KOSTIN: Well, it’s true to a certain extent, but also it’s based probably on a good economic policy which the Russian government was conducting over the last few years. If you look at the situation in Europe, for example, Russia last year had a surplus budget and this year the maximum, even though the oil prices are weaker, we might have no more than 1.5% budget deficit. If you look at Europe, if you look not only on Greece or Spain, if you look at Germany, or if you look at the United States, you will see it’s quite a different economic policy.
STEPHEN SACKUR: Yes, but none of those countries are as reliant on energy as Russia, and if, I’ve just looked at the figures, if oil consistently over the next few years dips below, significantly below $100 a barrel , the Russian economy is going to be in terribly difficult shape.
ANDREY KOSTIN: Absolutely right. I mean, if you ask me what the major challenges are for Russia and for Russian economy, it’s definitely structural changes, structural reforms, and that’s what Russia needs, and that’s what Russia is planning to do actually, with a particular focus on innovative economy and privatization.
STEPHEN SACKUR: Well, we’ll talk a lot about that, we’ll just see how serious Putin’s commitments to reform are. But just a final thought on where Russia is today. You’re sounding determinedly upbeat, I wonder why Ivan Chakarov of Renaissance Capital, another important financial institution in Moscow, says that he sees halfway through Putin’s term the economy may well hit a wall. The current account will turn negative, and Russia will be forced to borrow, devalue or spend less.
ANDREY KOSTIN: Well I think the Russian government and Mr. Putin understand quite well the problem which Russian economy might face.
STEPHEN SACKUR: You accept that analysis, particularly if the oil price continues in the trend it’s on now?
ANDREY KOSTIN: I will not, because we went through the first crisis at least quite successfully, I think, though we lost a lot of GDP growth. We remain stable, our financial sector remains stable, and basic economic and macroeconomic data remains quite stable. So, I think, Russia is quite prepared for the new wave of crisis if it happens, but having said this, of course we will always be vulnerable, unless we restructure our economy, and that’s very high on the agenda for any leader or any government in Russia.
STEPHEN SACKUR: Well, it’s high on my agenda for this conversation, but one more point before we get there, to this sort of internal argument over reform, and that is one other external factor. We’ve talked about the oil price, the other factor, it seems to me that’s unknowable, but leaves Russia vulnerable potentially, is the fallout from the Euro crisis. No doubt, Russia has Europe as a major trading partner and a source of investment. You yourself and your bank have often looked to Europe for major investment. The fact is, right now it is very difficult to imagine you finding fresh new sources of capital, venture capital in Europe, isn’t it, because the credit markets are tightening.
ANDREY KOSTIN: Well, the answer is yes, definitely, the major problem which might be for Russia is the general recession or deep recession in Europe. We are not so much exposed to the problems of financial sector, for example, but if the commodity prices go down because of the recession, then we will be in trouble. So for us it is very important that Europe stays with growth, it’s important that America and China will continue to grow and the global, we are part of the global economy nowadays…
STEPHEN SACKUR: And here you are in London, looking pretty cheerful with me, but surely there is no much ground to be cheerful, heading up a very big Russian bank right now. Because when you look around the world, things are not looking good, and you’ve just explained to me that you do acknowledge a vulnerability to the global situation. I mean, how are you going to deal with not just a slowdown, but possibly something much worse than that in Europe, and persistent lack of growth in North America as well?
ANDREY KOSTIN: You see, we were living through a very optimistic and good period of 2005-2007, then we had a very sharp crisis in 2008-2009, which we survived. And now, I think we expect quite a long and protracted period of uncertainty, but we just have to accept it, we just have to continue. May be we will be saying that low oil price is good for Russia, because it will make Russian government to think more about restructuring the economy and innovative economy. So I don’t see the departure of Greece or even other problems as the end of the world. I mean, we just have to accept this and just to change your mind, to focus on different things, to become more conservative, maybe, to become less ambitious, but still work very hard in order to protect your company and to develop further.
STEPHEN SACKUR: When you are briefing your colleagues and shareholders about the situation in Europe, do you tell them that they should plan, Russia’s banking system should plan for the breakup of the Euro? Do you believe that Greece, maybe even a few other peripheral states in the South of Europe as well, may have to leave the Eurozone?
ANDREY KOSTIN: Well, it still has to be seen. I am not so much critical on West European politicians, like many others. I understand how it is difficult for politicians to make decisions they already made.
STEPHEN SACKUR: But I am asking you what you planned for?
ANDREY KOSTIN: Well, at the moment, our basic scenario is that Greece will stay as part of the European Union, as well as other countries, but I expect that there will be not only a problem with Greece, there will be a chain reaction, we will have a problem, we might have a problem with Spain, with Portugal, maybe with some other European countries. So there will be no easy solution.
STEPHEN SACKUR: No easy solution, which brings us then to what we’ve already alluded to, which is the reform situation in Russia today. It just struck me as amazing that you, a man who for some time has made the case for significant, fundamental reform in your country, should during the recent election campaign for president in Russia, come out as such a loyal strong supporter of Putin, describing him as the father of the nation, and this is a quote, «a man who has always conducted a liberal economic policy». I mean, that’s just not true, is it?
ANDREY KOSTIN: It is, because you know, you started with BRICS countries, Russia has the most liberal currency regime, for example, among all the BRICS countries. You know, any investors could come and leave Russia without any restrictions, and many other things. I mean, basically, Mr. Putin was always listening to what was called a liberal economic part of the government was telling him, like Mr. Kudrin, like other advisors to him. And I think, our economic policy was quite liberal.
STEPHEN SACKUR: Let me get this straight, you think it is economically liberal to have the most extraordinarily centralized state-managed economy, riddled, of course, with corruption, as well, but an economy, where the state owns what, 75% of your own bank, more than half of the other biggest bank, but more particularly, dominates the energy sector, which you have acknowledged, is absolutely core to Russia’s economic health. The state is the only hugely important actor in the Russian economy.
ANDREY KOSTIN: There was no ideological target to keep it as it is. I mean, if you look at VTB, you mentioned the restructuring or reforms in Russia, if you look at my institution, for example, which I became the chairman of 10 years ago, from that time we not only grew by 35 times in our assets. We also had IPO and SPO in London, and the thing is that during…
STEPHEN SACKUR: Mr. Kostin, but you are 75% owned by the Russian state.
ANDREY KOSTIN: With the government claiming that they want to sell 100% of the subject.
STEPHEN SACKUR: Yes, claiming being the word, because they’ve been claiming that for some time, and it is now mostly unclear whether they are going to divest themselves of your bank by the end of this year.
ANDREY KOSTIN: But it is difficult to sell nowadays at this market, sorry to say. I mean, I was telling last year, 10% of this, we managed to do it, we sold shares for $3 bln, but it’s not easy today to sell shares. I think the government is quite sincere in actually privatizing institutions like VTB.
STEPHEN SACKUR: Do you?
ANDREY KOSTIN: Absolutely. But it’s not easy.
STEPHEN SACKUR: Why in that case in May, I mean, he just won the presidency, did Putin issue a decree, canceling the planned privatizations that were going to be a key symbol in the energy sector? He canceled the privatization of FSK, which runs the power grid, of MRSK, another power company, the hydroelectric giant Rushydro. All of them were supposed to be privatized, Putin canceled it by decree, and across Russia it was seen as a signal that this man is rolling back all of the promises he made about privatization.
ANDREY KOSTIN: No, I spoke to Putin myself on a number of occasions about privatization, and I found him, he considered that private investors would probably be better managers than the state ones, I think he is quite sincerely.
STEPHEN SACKUR: So why did he roll it all back, why did he recall those promises?
ANDREY KOSTIN: I think, everything should be done properly. You know, I was working in London, when Mrs. Thatcher was privatizing. I think, it took years to make major privatizations and probably decrees of the parliament on each privatization. So I think, in Russia we always come to extremes, one day it’s having the economy all public, and then we were going to sell everything at once.
STEPHEN SACKUR: I don’t think we are asking for the world here, Mr. Kostin, I mean, let’s face it, realistically. Putin’s been in power for 12 years, 8 as president, 4 as prime-minister with Medvedev above him. Putin has had every opportunity to prove himself to be the economic liberal that you claim he is in his heart. He has consistently refused, in practical terms, to show that he really does want to deregulate, to privatize, to change the Russian economy. Why do you believe he wants to do it now?
ANDREY KOSTIN: Well, I mean, Putin, of course, had a number of tasks in Russia since he came to power. One of the major tasks was definitely to change the nature of the Russian economy, which was not only economy, but society, which was dominated by oligarchs. And I think his achievement is that he definitely managed to separate the economic power from the political.
STEPHEN SACKUR: But now it is dominated by the siloviki, the former KGB cronies of Putin. You may not call them oligarchs anymore, but the people who dominate the economy now are friends of Putin from way back, people who have KGB associations, this is not an open economy.
ANDREY KOSTIN: You know, in my life never ever Mr. Putin called me, for example, and asked to help one of his buddies, I can assure you, absolutely. I mean, so I don’t know, I mean there is nothing wrong with having friends who are doing business.
STEPHEN SACKUR: Why do you think he has appointed Igor Sechin, for example, a former KGB colleague, to be the head of the energy commission, also to run Rosneft, and also the man, who has essentially put his thumb on top of this privatizations and says they will not happen. Why is this man?
ANDREY KOSTIN: Because Sechin was for sometime a chairman of the supervising board, the board of directors, because he is quite experienced, he was a deputy prime-minster for many years.
STEPHEN SACKUR: Even you surely would know that he isn’t an economic liberal.
ANDREY KOSTIN: He is not, no. But he is not defining any economic policy nowadays, he is defining the policy of one corporation, and I think he will be quite an able manager for this.
STEPHEN SACKUR: Here is what one banker, and I am guessing it wasn’t you, given what you’ve told me, but one banker, anonymous, told the Financial Times the other day «Privatization was going to be the Lithmus test of the new government and its reform program, and it looks like they’ve been neutered».
ANDREY KOSTIN: Well, if you ask me, whether everybody in Russian Government or in Russian elite wants privatization, the answer is probably no, or everybody understands the difference in how it should be done. But I am quite sure that the trend in Russia for the next 5 years will be massive privatization of big companies, not only of the small, SMEs and something like this, companies like VTB, like Sberbank. Even energy sector will be privatized.
STEPHEN SACKUR: Really?
ANDREY KOSTIN: Absolutely.
STEPHEN SACKUR: When? When you will be the boss of the fully privatized bank?
ANDREY KOSTIN: Well, it depends on the market completely. There are no other political restrictions. The government said 100% of VTB could be sold, it’s now the task of the management team and the government team to see, whether the market can eat so much shares, what’s the appetite of the market.
STEPHEN SACKUR: Talking about eating stuff in the economy, what really eats stuff in the Russian economy is corruption, of course. Leaving aside privatization, maybe more important is to clean out the stable when it comes to all of the corruption that we see from top to bottom in the Russian economy. The newly appointed ombudsman for business rights in Russia, Boris Titov, says that in the last decade, let’s not forget, that’s Putin’s decade, Russia has locked up nearly 3 million entrepreneurs. What do you make of that?
ANDREY KOSTIN: Well, you know, I am seeing, maybe, life from the other side.
STEPHEN SACKUR: What do you mean, that you are not in prison?
ANDREY KOSTIN: No, but I am seeing a businessman who is borrowing money from the bank and cheating, and making frauds, and never receiving…
STEPHEN SACKUR: Did you think all of these nearly three million entrepreneurs were guilty?
ANDREY KOSTIN: No. What I am saying is that in Russia, of course, now there is liberalization of the court, criminal court, particularly in regard to economic crimes, and that’s what Mr. Medvedev started as the prime-minister, as the president, and this process will be continued, and the appointment of an ombudsman is very important, I think, and Mr. Titov is well known as a person who actually protects the rights of, particularly, small and medium-sized businesses.
STEPHEN SACKUR: Right, but we will see, won’t we, whether he is allowed to deliver a gap of the business and legal systems. I mean, for example, just, I believe, only a matter of months ago a senior judge in Volgograd, Sergei Zlobin, he resigned and he has since said, and I am quoting him “Many innocent people are locked up in our system”. He says judges come under enormous pressure from the state security apparatus and the prosecutors. Would you not accept, as a man at the very top of the Russian business, a figure head in the Russian economy, that this is a massive problem for Russia, actually improving its economic performance and competitiveness?
ANDREY KOSTIN: On the one hand, I agree with you, I think there should be a more liberal criminal court for economic crimes, though we have different situations. 7 criminal cases were raised against Mr. Borodin, the former chairman of Bank of Moscow, who is now living a multi-billion lavish style in London, and you know, many people argue why, you know, and because $5 bln disappeared from the bank, still we can’t find them. But liberalization of the economic court is very much on the agenda, and I think that is going to happen. On the other hand, I personally may be a little bit on the conservative side here, I think criminal cases should be punished, maybe not so severe, but still there should be, you know, some punishment for criminal cases, like it happens all around the world.
STEPHEN SACKUR: I just want your thought on one other aspect of this. I think, you would agree with me that the case of Mikhail Khodorkovsky was incredibly symbolically important in Russia, it sent a signal. I was fascinated, when I had Oleg Deripaska, one of the biggest Russian billionaires, in that chair in HardTalk recently. He said that he thought Khodorkovsky was punished too much. Do you agree?
ANDREY KOSTIN: Well, it’s a difficult question, of course.
STEPHEN SACKUR: Why, it’s a pretty simple question. Are you happy to see Khodorkovsky serving a second, I believe at least 6-year sentence on top of his first sentence?
ANDREY KOSTIN: No, I think that probably enough is enough, yes.
STEPHEN SACKUR: Enough is enough. Should he be released? Should Putin release him?
ANDREY KOSTIN: Though you never forget the Godfather book, which starts with «Behind every great fortune there is crime». So I am not arguing now whether it was right or wrong to put Mr. Khodorkovsky.
STEPHEN SACKUR: No, it was a clear signal from you, enough is enough. You are saying Mr. Putin should now.
ANDREY KOSTIN: Personally, I think it would be useful for the President to release him.
STEPHEN SACKUR: Now?
ANDREY KOSTIN: Now, probably now, yes. Why not?
STEPHEN SACKUR: Have you told him, personally? Just to change the climate in Russia?
ANDREY KOSTIN: No
STEPHEN SACKUR: Why not? Because you know, it’s important, isn’t it? If you want, as we’ve discussed in the very beginning of this interview, you want to give a sign that Russia is changing, and you also want to bring back the foreign investment to Russia, it would be a very important symbol.
ANDREY KOSTIN: I think you concentrate too much on the Khodorkovsky case, each country has to deal with this issue. And I think there was a criminal case. You know, when you talk about Britain, you are always saying the court is independent from the government. Your government officials will never say “yes, we’ll try this or we’ll try that”, they say there’s court, it’s a court decision, you know, we are not intervening. So Mr. Putin is probably saying the same, as I understand.
STEPHEN SACKUR: A quick final thought on Putin. You wrote in Kommersant back in February that you wanted Putin to declare that he would only run for this current 6-year presidency, that he should not run for another term afterwards, as he is allowed to do. Do you still believe that Putin must make this his last term?
ANDREY KOSTIN: That was not exactly what I was writing. I was writing that Mr. Putin has a special ace in his pocket, that if he would like to strengthen his position, he can declare that he will stay only for 6 years and receive a mandate.
STEPHEN SACKUR: Should he?
ANDREY KOSTIN: One has to see, because it’s important to see …
STEPHEN SACKUR: What do you think, as one of the most important economic plans for Russia.
ANDREY KOSTIN: I don’t know.
STEPHEN SACKUR: Would it be better for Russia if Putin said that «I will only serve this term, no more»?
ANDREY KOSTIN: Not at all. What I am thinking is that only life will show us. I mean, if Mr. Putin in his 3rd term manages to bring country, or give the country a new drive, then I think, he will have good chances to stay for another term.
STEPHEN SACKUR: Do you?
ANDREY KOSTIN: Yes.
STEPHEN SACKUR: A final thought, and this takes us to foreign affairs. You’ve spoken out against America’s efforts to impose financial isolation on Iran. Do you think it’s really good, given what we’ve discussed about the state of the Russian economy, for Russia to be seen internationally to be on the side of Ahmadinejad and Iran, and Bashar al-Assad and Syria? Does that work well in Russia’s interests?
ANDREY KOSTIN: You know, we are not talking about taking sides. What happened to Iran, for example, when the American congress adopted the legislation at the end of last year, we had to obey, for example. For example, we stopped all relationships with any Iranian banks, even the companies in Russia, who were selling figs from Iran to Russia, we stopped servicing them, though it had nothing to do with high politics or nuclear...
STEPHEN SACKUR: And you bitterly resent that?
ANDREY KOSTIN: I am resenting, you know, or the Russian government as well, we are resenting that one country decided to use its currency as a major settlement currency in the world. It does not very much coincide with the IMF or World Bank Charter, by the way, is imposing these restrictions for political reasons, using the financial instruments. I think that is, because tomorrow there will be another country, tomorrow then the 3-rd one, the 4-th. I think there should be international efforts, I think all such measures, like sanctions, should be adopted based on international efforts and decisions, like the United Nations. I am not a fan of Iranian regime at all, but I think it’s not quite fair to use such instruments.
STEPHEN SACKUR: I wish we had more time, but we are out of time. Andrey Kostin, thank you very much for being on HardTalk.