Guy Johnson: Good morning. Your 20th Davos, I understand. Was it a good party last night?
Andrey Kostin: I hope so.
Francine Lacqua: Andrey, it is amazing. 20th. So, the first time you were here was back in ’96, you were telling us, the situation now is so different. What is one thing that people ask you the most? I guess, what is Russia going to go through? How is growth going to pick up? And, what you are most worried about?
Andrey Kostin: People are mostly asking whether we feel isolated or how do we feel under the circumstances. First of all, we don’t feel isolated. We have our partners, we have our friends.
That is why we come here to discuss business relationships, to discuss what is happening in the world and how we can go further.
Francine Lacqua: But you are taking a lot of pain in business, even if you don’t feel isolated.
Andrey Kostin: We are.
Francine Lacqua: You are taking the big hits. It’s tough.
Andrey Kostin: We have to adjust our business to new conditions, yes, but that is life. Under the circumstances, we have to change our strategy, or rather to change strategy to tactics, I would say.
Guy Johnson: Did you think twice about coming?
Andrey Kostin: Not at all.
Guy Johnson: Did it even cross your mind?
Andrey Kostin: You know, in Russia, starting from the very top and back down to the business community, we are all saying we are not going to be isolated. We want to be part of the world. For us it is vital to continue our relationship with our partners.
Francine Lacqua: What, to sign deals, to look for investors? I mean, this is a conversation that we have had. If you are a Russian sanctioned bank, what is the benefit of coming to Davos?
Andrey Kostin: Well, first of all, it is important for us to conduct business with other banks. Not only investment banks, but just regular business. To see investors as well. We see a lot of our, existing shareholders — large shareholders over in France, private investors — and we’re meeting with press as well, explaining our position and what we are willing to do and explaining what is happening in the Russian economy and so and so forth.
Guy Johnson: Is the expectation amongst the people that you are talking to that Russia is going to stay in a tough place for a long time? There is a sense that Russia is going to be an issue for business not just in 2015 but in 2016 — this is a new normal — or is there as sense that this is something that is going to be temporary and it is going to pass and the political situation will alleviate itself.
Andrey Kostin: I think economy is like a human body. Sometimes you are healthy, sometimes you are ill. When there is illness, sometimes it is a virus which will end sooner or later — hopefully sooner rather than later — yet, some of them are chronic diseases. Russia and its economy has both. Such things as the sanctions for example, or oil prices, I think they will end. Maybe one year, two years. Some, which are structural changes, we will have to do. That is the more chronic disease, I would say. We have to tackle both issues. But the situation will improve sooner or later. Everything has an end. I think there will be another cycle so we are just working to protect our economy from the most negative effects or the latest developments.
Francine Lacqua: And of course, the problem depends on how much of a bottom you touch. Give us a sense. First of all, the sanctions were imposed in July of last year. They are up for review again this summer. Do you think that they will be lifted and what is your prediction for the price of oil?
Andrey Kostin: It is difficult for me to say when they will be lifted, but we definitely see no reason why they should be strengthened or why they should be kept. I’m not a politician, and there are definitely geopolitical reasons for this, but there is no economic reason for this. We will very much hope that they will loosen or they will soften and they will allow banks like us to come back to the capital markets and the bond markets, and that will be very important for financial institutions. What about the oil price? Again, it is difficult to say, but I think if the price of oil will fluctuate between 60–80 dollars, that will be acceptable for the Russian economy. I don’t think we should always expect that the prices will be above 100 dollars. That is probably another extreme. The Russian economy should accept a certain level of prices and try to adjust to the new reality.
Guy Johnson: You talk about the bond market; you talk about the capital requirements. You received, it was 100 billion roubles in December. I think that there is another 150 billion coming in the first quarter.
Andrey Kostin: Probably 300 billion roubles more.
Guy Johnson: Probably another 300 billion more. Okay, has that number gone up recently and is that going to be sufficient capital for the time being?
Andrey Kostin: It will definitely be enough capital. There will definitely be enough liquidity; the problem is that this all comes from government sources, Central Bank sources. Sanctions have led to a place where our process of prioritization, our process of going to the open national markets has been stopped. We have to reverse now to only one source, which is the Russian Government or the Russian Central Bank. Of course, this is not something we are dreaming about, but we have no choice at the moment.
Francine Lacqua: What forecasts do you have for economic contraction? How long is the recession going to be? How much of a contraction are we going to see in 2015?
Andrey Kostin: It seems that this year might be the most difficult for the Russian economy. We definitely expect negative growth. Maybe, around -3% GDP growth. Inflation might exceed 10%, and definitely will be
Guy Johnson: SNP. Let’s talk about the possibility of a downgrade to junk that could come by the end of this month. I think everybody is on tenterhooks waiting to see whether or not that is delivered. Have you been
Andrey Kostin: Only speaking for us, it is not a very big concern because, as I said, international markets closed for us and we don’t have any covenants for previous borrowing which led to a situation where we have to pay back our debt early. In any case, I am quite sure that Russian companies will pay all their external debt. For example, VTB, this year, has to repay only 4.3 billion dollars of external debt. That is only 2.5% of our liabilities. We have no problems. The Central Bank will help other private Russian companies with hard currency if necessary. We feel that Russia’s reserves allow Russian companies to repay debt and it is definitely the intention of the Russian Government to provide support. There is no discussion that we will not repay the West to punish the West. That is not the issue, of course.
Francine Lacqua: Andrey, you seem very optimistic that this, I guess, is a cycle that you will get out of. What do you worry about the most though? There must be something, if there is escalation in Ukraine, is there something that you say, is completely out of my control, like most of the situation and that you are concerned about?
Andrey Kostin: You see, there should still be a voice of reason because, yes, there is a political situation, a political problem. Every war in history has eventually ended. There definitely should be some reason for optimism and, at the end of the day, we should overcome this crisis.