A Choice of Models: Stability, Stagnation, or Growth

February 6, 2012

 

The subject of the discussion panels of the second day of The Russia Forum 2012 touched upon a wide range of issues, both Russian and global. The eurozone’s cloudy future, the impact of imbalances in Europe on the development of the economy and developing markets, sovereign debt and the systemic banking crisis: economists have more than enough things to worry about at the moment. The main task for the global community is to build a more effective system for coordinating financial and economic policy. The main task for Russia is to maintain its economic growth rate and find a stable foundation for a breakthrough.

Discussion was preceded by a speech given by Moscow Mayor Sergey Sobyanin in which he assured Forum participants that the Russian capital is entering a period of upward long-term investment growth. “This is a city of big opportunities, and it welcomes plans and investments,” remarked the city’s mayor, admitting that Moscow must become a comfortable and convenient city to live and do business in. According to Mr Sobyanin, despite the fact that the capital has already managed to recover from the turbulent 2008-2009 period, the current strained situation in the eurozone is taking its toll on the city’s economy, particularly with regard to the banking sector and investment projects.

Famous economists and politicians, the speakers of the session entitled “The Future of the Global Economy and Financial System” talked about the possible ways the crisis in the eurozone might develop. Former British Prime Minister Gordon Brown proposed that Russia should be more active in joining the efforts of other G20 leaders directed towards improving international financial institutes and creating a type of “early warning monitoring system”. He elaborated that in future such a system will warn about impending “tsunamis” in the global financial sphere.

Gordon Brown does not believe that the eurozone will collapse, unlike William R. White, Chairman of the Economic Development and Review Committee, OECD. He is certain that there is still a long way to go until the end of the crisis: “All the imbalances that we have created via our credit policy have survived.” Jean-Michel Six, Managing Director, Chief EMEA Economist, Standard & Poor’s, considers that the EU’s fundamental problem is not the sovereign debt of its member states, but instead the gap between countries in terms of competitiveness. One of conclusions from the discussion was that politicians will have to make a choice between state capitalism and the free market.

Participants of the panel “Developed and Emerging Banks: A Case of Irreversible Decline vs. Irrepressible Rise?” commented that the banking sector remains vulnerable to threats of a new wave of the crisis. Nouriel Roubini, professor of economics at New York University, sees excessive lending, ineffective regulation of the financial system and the appearance of shadowy banks as the reasons for this: “Europe is stuck in a vicious cycle of bank defaults and sovereign debt crisis. We must increase bank liquidity and decrease credit leveraging”.

The current condition and prospects of the financial sector were discussed as part of the panel “Developed and Emerging Banks: A Case of Irreversible Decline vs. Irrepressible Rise?” In the opinion of the moderator of the discussion, Anton Karamzin, Deputy Chairman of the Management Board of Sberbank of Russia, large banks from emerging markets know how to manage risks better than the rest. “In the retail sector, banks cannot avoid competition and therefore the quality of services in takes on much more significance than closeness to the government”, stated the banker. Petr Aven, Chairman of the Board of Directors at Alfa Banking Group, does not expect the Russian banking sector to grow rapidly. “It would be better for things to fall heavily so that they can then grow rapidly. In Russia we haven’t seen any significant decline. Here we’ve experienced stagnation, and this means that we shouldn’t expect rapid growth in the next few years. Russia is currently following a pattern of stability, and not a pattern of growth,” considers the banker.

The participants of the discussion “Interest Rates, Exchange Rate and Liquidity: are there Resources for Investment?” came to the conclusions that currency and exchange rate fluctuations greatly complicate long-term planning, and that exchange rate turbulence is a negative factor for the majority of investors who want to work with Russia. Ksenia Yudaeva, Director, Centre for Economic Research, Sberbank of Russia, set a question about whether a reduction of interest rates is possible. In reply to this, Alexey Ulyukaev, First Deputy Chairman of the Bank of Russia, said that capital inflow will provide Russian banks with the opportunity to lower interest rates on loans. He explained this as follows “Our rates are the direct consequence of global rates and the situation on foreign markets, where demand for risk will be higher this year than it was last year.”

The creation in Russia of a central depositary as the most important aspect of the stock market was one of the key topics of the panel discussion “Creating a Domestic Capital Base”. Bella Zlatkis, Deputy Chairman of the Management Board, Sberbank of Russia, agreed that it is indeed difficult to build stock exchange infrastructure, and pointed out that it is vital for Russia to create a domestic capital base and improve its logistical and regulatory framework so that Russian and foreign companies will more actively consider Russian stock exchange as a primary platform for attracting capital. Xavier Rolet, CEO, London Stock Exchange Group, expressed the opinion that Moscow could become a strong financial centre. “As an intermediate link between Europe and Asia, Moscow has the ideal location to become a major financial centre,” he remarked, and added that London plans to enhance its partnership with the Russian capital market.

In-depth professional discussions featuring CEOs of the largest Russian companies, leading foreign investors and industry experts took place as part of the thematic panels “A New Era in Mobile: Opportunity Knocks”, “Retail: Stabilisation Period”, “Russia’s Gas Exports to Europe”, “Transport and Infrastructure: Reform at a Crossroads?” and a session dedicated to investing in art. The second day of the Forum was closed by a discussion about investment policy’s role in the modernisation of Russia, a process that is essential for overcoming the country’s technological gap between developed countries.