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Andrey Kostin: “For Russia it’s vital to put our focus on the Asian side”


SOPHIE SHEVARDNADZE: Andrey Kostin, president of VTB Bank, Russia’s second largest bank. It is really great, sir, to have you with us today.

ANDREY KOSTIN: Good afternoon.

SOPHIE SHEVARDNADZE: So, you’ve headed VTB for the last 10 years, and you’ve been there in 2008, and you saw everything when the financial crisis broke out. Now, the global economy at this point is really not much better off, I mean, you have the Eurozone crisis, unemployment in the United States is still really high, and even China is really headed for a hard landing. If you compare things today to 4 years ago, how bad are they?

ANDREY KOSTIN: I think we have to accept that the word ‘volatility’ has become a part of our life. Of course, the world economy is passing the period of the cycle, and we expect that the next 2–3 years will be quite difficult for the global economy, and would not be very easy for the Russian one. For example, this year we think that the global economy will not grow for more than 2–2.5%, so the economic growth is slowing down, but we don’t expect any problems like we experienced in 2008, and the world economy experienced in 2007.

SOPHIE SHEVARDNADZE: So you are not expecting any hard blows anymore?

ANDREY KOSTIN: No, there will be no second wave of the crisis, I think, there will be quite a long period of recovery, which will not be an easy one. You’ve just mentioned the problems which should be resolved. One of the key issues, of course, is the crisis in Europe, and there is still a lot that should be done, and it is still not very clear how this crisis will be resolved. But at the end of the day I really do not expect any sharp decline in the economy.

SOPHIE SHEVARDNADZE: You’ve just mentioned the European crisis, which is really sharp at this point. Are you concerned about a possible impact on your business, because of that?

ANDREY KOSTIN: Well, to a certain extent. Of course, there is no direct exposure of the Russian banking sector to European banking or financial sector. But our concern, of course, is that if the European recession will lead, and it is happening already, to a weaker demand for Russian export goods, such as what we are seeing now, metals, and in the future, if it can lead to a drop in oil prices, that will affect our clients. And through the clients, the Russian banking sector will be affected as well.

SOPHIE SHEVARDNADZE: I want to focus a little bit about the recession fears that you’ve mentioned. Spain’s banking system, obviously, being the biggest problem at this point, cause you have all the depositors pulling their money out of the banks, and everyone’s fearing that something really bad is going to happen. Do you think that something like Lehman story could repeat itself, or even worse, because America then injected a lot of money unconditionally to their banking system. Europeans aren’t ready to do that.

ANDREY KOSTIN: I think, the Lehman case was a good lesson for everybody, and I think that no one wants to repeat this experience, because Lehman’s collapse led to a chain reaction all around the world, and particularly in America. So, I think that the European Union will try it’s very best to protect the Spanish banking sector. But of course, you are quite right, I mean, if we take Europe, there’s one problem after another. We have problems in Spain, Portugal, Italy, not only in Greece. So, by resolving one problem, we will have to face another one immediately. And that is why, I think, the crisis in Europe will be quite protracted, and of course, it will require even more political will on the part of the leading European governments in order to resolve it.

SOPHIE SHEVARDNADZE: So what it is like, growth versus austerity, what do you think is the better?

ANDREY KOSTIN: Well, this year Europe will produce negative growth, and of course, austerity is another problem, because austerity will not help to resolve the question of growth. And that’s to a certain extent is a catch-22 situation, so I think there should be a reasonable approach to austerity plans. But we still, on the other hand, have a very high budget deficit of around 3,5% of GDP on the part of South European countries. So, I think, there will be a moderate approach, there will be definitely a much more severe discipline on spending in Southern Europe. But on the other hand, I think, that government support for demand will still be required in order to guarantee reasonable growth and positive growth, hopefully, in Europe next year.

SOPHIE SHEVARDNADZE: What’s going to happen to euro, let’s say, in one year’s time, in your opinion?

ANDREY KOSTIN: My personal opinion and my analysts’ is that vis-à-vis dollar, for example, euro will weaken a little bit as a currency. On the other hand, I still believe that there’ll be enough political will on behalf of the united Europe to keep all countries within the monetary union, within the Eurozone, and that the issue of Greece will be resolved at the end of the day.

SOPHIE SHEVARDNADZE: You mentioned recently that the Swiss frank was the safest currency to keep your money at, why is that?

ANDREY KOSTIN: Well, there is a number of reasons for this, there’s tightening up of the Swiss frank to other currencies, there is performance of Switzerland, and the track record of Swiss frank over the last few years. Swiss frank is still a quite reliable instrument. I still believe that, of course, if we talk about currencies, dollar and euro will continue to be the major reserve currencies in the world with the potential opportunity for Chinese yuan to become another one, and I think, with the possibility of Russian ruble to become a regional currency for settlements and may even a reserve currency for post-Soviet Union territory.

SOPHIE SHEVARDNADZE: That was going to be my next question, actually. But we’ve been hearing about the possibility of Russian ruble becoming a regional currency for quite a while now, maybe for 5 or 6 years. What exactly needs to be done for that, what time limits are we talking about?

ANDREY KOSTIN: I think, it is happening to a certain extent, it’s already nearly half of the bilateral trade, it is channeled through the ruble mechanism, a very simple thing. Both exporters and importers should accept that they are ready to trade in roubles, and for this, I think, ruble should show a good track record of being a stable currency or a predictable currency, and I think, what the Central Bank is doing now to provide a more flexible exchange rate for ruble, it is a good thing, and provide more flexibility, on the other hand, is more predictability for the ruble.

SOPHIE SHEVARDNADZE: If we talk about the United States a little bit, people still look at it and expect for it to contribute greatly to the global economy, forgetting that it really is still suffering from enormous national debt and that unemployment is really high. At this point, in regard to the global economy, is the US economic performance part of the problem or a solution?

ANDREY KOSTIN: At the moment it’s none of these. I mean, the US economy is developing better than Europe, for example, with some positive growth this year. On the other hand, it does not provide us with any engine for growth, like China, no matter the slowdown of its growth, China still provides the major impetus for the global growth. So, America, of course, has its own problems, and the major one is the great budget deficit, partly based on growing medical care expenditures, but what seems to me for sure, America will not contribute more to rescue the European economy.

«We have to accept that the word ‘volatility’ has become a part of our life. Of course, the world economy is passing the period of the cycle, and we expect that the next 2–3 years will be quite difficult for the global economy, and would not be very easy for the Russian one.»
Andrey Kostin, President and Chairman of the Management Board

SOPHIE SHEVARDNADZE: You’ve just mentioned China slowing down a little bit, also along with China, some key economies that kept the global economy expanding, like Germany and Brazil, they are also slowing down. So, where will the much-needed growth come, at this point?

ANDREY KOSTIN: Still from emerging markets. I think, this year the growth in the emerging market area will be four times higher than in the advanced world. So’ it’s still there, I think, that’s the main area, and that’s, for example, VTB, where we are focused on for the next 5 years, for example.

SOPHIE SHEVARDNADZE: Now you, of course, for the VTB, also chair the Asia-Pacific Economic Cooperation CEO summit, and the member countries of that organization, accounting for more than a half, actually, of the global GDP, but how is the APEC, especially the upcoming APEC in Russia, going to help find sources for new global growth, because if you compare it, for example, with last year’s APEC — yes, there were some deals signed on company level, on government level. But has it really changed anything on the global scale?

ANDREY KOSTIN: It’s a process. I mean, it does not happen overnight, it’s a process. You need to work on specific things, and one of the key issues for APEC meetings is liberalization of trade and investment in the region, and of course, this is the region with a very different level of countries, countries with very different levels of development, for example, and different structures of economy. But still, as I mentioned before, I mean, that’s one of the fastest-growing regions from the economic point of view. We have China, we have Singapore, we have Indonesia, we have the United States and Russia, by the way, which is also, I think, in future, one of the leading members of APEC region. And for Russia, I think, it’s absolutely vital to put our focus on the Asian side, because we’ve always been looking for Europe, and we have very tight relationships in economy with Europe. But taking into account what we discussed before, I think, for Russia it’s vital that we will focus on our Far East. There is huge potential in resources, in energy, in global cooperation with neighboring countries like China, South Korea, Japan and others, which can bring investments, which can bring growth for Russia. So, I think, for us this meeting is extremely important.

SOPHIE SHEVARDNADZE: Let’s look a little bit at Russian economy, because up to $100 billion dollars are expected to outflow out of Russia. I mean, I know that investors could be uncertain about the Russian investment climate before the elections, but it’s already been 3 months. What’s going on? The money is still going out.

ANDREY KOSTIN: Well, I think, partly that is the general concerns and anxiety on the global markets. Investors today are not investing very much, they prefer to sit in cash and to wait and see, because as I started our interview with the word ‘volatility’, that’s the key word for the recent period of our economic growth. On the other hand, I think, we know only too well the problems which exist in Russia from the point of view of the investment climate. But I am still optimistic, I think we just have to focus on this issue, and if you take, for example, Far East, there is a good opportunity for bringing a lot of investment there, but we really need a clear-cut government policy. I think there is nothing in the Russian legislation on in the investment climate, which can prevent us from doing this. And definitely the number 1 task for Russia is to change the nature of economy, to make it focus on investment-based growth, rather than resources growth. Because again, we can talk about the prospects of the overall economy, but we always come to the conclusion that if the oil price for Urals will go below $95 per barrel, Russian economy will be in trouble.

SOPHIE SHEVARDNADZE: So, is this the main and major risk for Russia’s economy — lower oil prices?

ANDREY KOSTIN: Yes, the oil prices still remain the major risk for the Russian economy today.

SOPHIE SHEVARDNADZE: Andrey Kostin, head of VTB Bank, thank you very much for this interview.


Sophie Shevardnadze , Russia Today

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