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WHEN: Today, Wednesday, October 15th
WHERE: CNBC's Business Day programming
Following is the unofficial transcript of a CNBC interview with Russian Prime Minister Dmitry Medvedev on CNBC today. Excerpts of the interview are running on CNBC's "Squawk Box Europe" and will run throughout CNBC's Business Day programming. Clips of the interview are available on CNBC.com at the following link: http://www.cnbc.com/id/100004035
All references must be sourced to CNBC.
Question: Prime Minister, thank you very much for joining me and for giving me time for this interview. I wanted to start off by talking about the deals that you're doing with the Chinese currently. Some western analysts are looking at the deals, especially the large oil and gas deal you did earlier in the year. And they are saying that these are political deals not economic deals that are in the best interests of Russia over the long term.
Dmitry Medvedev: You see, our relations with the People's Republic of China are long-term in nature, and don't depend on the political situation, which, as you know, is far from simple right now. But we have been actively developing relations with China for nearly 25 years. China is our largest trading partner. Our trade currently stands at $90 billion. I'm sure that next year we'll hit $100 billion, and we plan to reach $200 billion by 2020. I believe this is completely feasible. In short, these are not political considerations, it is our choice. What is it based on? Russia is both a European and an Asian country, which is why we trade with Europe and are willing to continue to do so - our trade with the European Union reached about $420 billion last year. And we also trade with Asia, where China is our largest partner. So, once again, these are not political deals but an informed choice. At the same time, we need to take note of everything that happens around Russia. If some of our projects with Europe, America or others are put on ice (I'm not talking about the reasons behind this), we logically move these projects to other destinations.
Question: The size and the numbers that you talk about sound very impressive. But the history of Russia's trade relationships over the last two decades has been one of deepening flows between Western Europe, the United States and Russia. Again, I come back to this. People look at the pivot east, as it's been announced by you and the President, and they say these deals are about showing President Obama and Chancellor Merkel that Russia intends to reduce its dependence on both western goods and western capital. Is that wrong?
Dmitry Medvedev: Yes, it's absolutely wrong. We are pragmatic people, and I believe that everyone should be aware of this, including our partners such as President Obama, Chancellor Merkel, and any others. The idea is to trade lucratively and to secure profitable contracts. Our market should be properly stocked with quality goods, both from Europe, Asia and other parts of the world. Again, this is not a political choice. If you are referring to the current situation, which we did not provoke in the first place, we had to take certain decisions. For example, when our largest energy companies are told: "Sorry guys, we won't supply anything to you because of the sanctions," we interpret this as a serious signal. Not that we are willing to destroy our relations with partners in America and Europe. Not at all. But we need to implement our projects, including offshore projects, and to develop gas fields. As such, we'll have to reorient towards other producers.
Frankly, after certain decisions were taken (some of them were public and others were not), our largest energy companies started talks with equipment producers in other regions, including China, which produces equipment for energy companies, including pipe-layers and other complicated systems. Of course, we can achieve our goals in cooperation with China. But the question is, who is this hurting? I think the country that gets these contracts will definitely gain.
Regarding your first question about China, I'd like to remind you that yesterday when I met with my colleague, Premier of China Li Keqiang, we signed 38 agreements, which was unprecedented. We were worn out after signing all these documents. The ceremony lasted 40 minutes. These agreements concern all aspects of life and development in our countries, from large energy projects such as the Power of Siberia, under which we will build a pipeline to China - a $50 billion, 30-year project - to smaller projects in agriculture, manufacturing and banking, which are especially important to us. Our partners - at least those who are imposing sanctions - aim to sever Russian banks from the money market, from financing. I don't think they will succeed, first, because we can handle these issues ourselves, and second, because there are other markets with which we can work.
Yesterday we signed several banking agreements with China, including a rouble-yuan currency swap deal between our national banks, which will allow us to make settlements in the national currency, and it won't be tied to the dollar, the euro or any other currency, which is very convenient. China has long made such deals with other large countries, for example Germany and Asian countries. We have signed an agreement on settling foreign exchange deals in roubles and yuans. We have also signed agreements on loans, on the opening of loan facilities for Russian banks. I see this as clear proof that, as we say, if there is a gap, something will fill it. If someone leaves, others will take his place.
Question: You've given me a very long and comprehensive answer to the question. But you've also raised a very interesting question with your answer, which is one about America's position in the global economy and the importance of the dollar going forward. Do you see the action that you're taking here alongside China as a way of trying to reduce the dollar's significance globally and to try to marginalize America's power economically in the world?
Dmitry Medvedev: This is really an interesting topic, which came to the fore back in 2008. I remember the G8 summit and the first G20 meeting, which President Bush chaired after the financial crisis hit. This is when we started wondering whether the Bretton Woods system was enough, whether one powerful currency - the US dollar - and several reserve currencies such as the euro, the pound and others can support the entire global financial system.
Mind you, we have nothing against the dollar, and I don't think China has anything against it either. But we believe that a modern currency system should be better balanced, so that when one of the currencies is sagging, this should be compensated by other global reserve currencies. In this sense - I'm only talking about my impressions, which have not changed since 2008 - I believe that we need six or seven reserve currencies to create the required level of financial stability, and they should include the dollar, the euro, the pound and possibly in the near future, the yuan. We also considered the rouble, but this is a goal for a more distant future.
We believe that this would be a much fairer financial structure, which doesn't mean that we have a negative view of keeping our savings in US dollars. The dollar is the main reserve currency; it's a fact, no one can deny it. Moreover, as you know, we have substantial gold and foreign currency reserves which we keep in securities. And the bulk of these securities are denominated in dollars, simply because the market of dollar-denominated securities is the largest in the world. I'm not sure this is a good thing - not because we don't like the dollar, but because it makes us very dependent on the US economy.
The US economy has started growing again, which is good, but we don't have confidence that it won't enter another recession, which would be bad for everyone. This is the kind of dependence that we should avoid in the global economic system, as I see it. And I believe that many rapidly growing economies share this view, such as the economies that are often identified by the abbreviation BRICS, namely Brazil, Russia, India, China and South Africa, but not only them. I think this would benefit the global economy.
Question: I want to ask you a delicate question. And I think as prime minister you are used to having difficult questions asked to you. So I won't shy away from this. Recently in China, we've seen a number of corruption-related scandals. You have been a great champion against corruption in your various posts in government. As you deal with Chinese state companies, do you feel that you need to look extra hard at who stands behind those businesses? Is there a highest stress test required before you do business with Chinese companies?
Dmitry Medvedev: Corruption is a global problem. But it is more widespread in rapidly developing countries. It is a growth problem. There are many corruption-related problems in Russia too. So, regarding stress tests, I think that such tests should be applied to all companies. Of course, there are public companies with a solid reputation, which can be tested quite easily. On the other hand, the case of Lehman Brothers' bankruptcy has taught us an important lesson. No one doubted for a second that the group was completely solid, but what happened, happened.
If you want to ask if state companies are more susceptible to corruption than private companies, my answer is no. Rather, the problem lies in the system set up to expose corruption. State companies can be highly successful and also transparent. I'm loath to praise a rival, but take Statoil, a state company… No one seems to question its operations and conditions, even though it is a state company. In other words, state companies are not inherently good or bad. They should be evaluated just like any other company… In my legal practice which I had in the 1990s I had, on numerous occasions had a procedure with my colleagues a checking procedures with my colleagues, so I believe that would be the answer to your question.
Question: Can I pick up on President Obama? There's been some suggestion that there is a possibility for a reset of the relationship. Foreign Minister Lavrov suggested this could happen. Can it happen while sanctions are still in place?
Dmitry Medvedev: No, of course not. It's absolutely impossible. Let's be clear: we did not come up with these sanctions. Our international partners did. As we say in Russia, let God be their judge. Of course, we will overcome these sanctions. I have no doubt that after a while these sanctions will dissipate; there will be no more sanctions, but we can't deny the fact that they have damaged our relations. I understand the concerns that our partners may have regarding the international situation and the developments in Europe and Ukraine, although clearly Ukraine is closer to us than anyone else, because people of Ukraine are very close to us. But when the foundations of international relations, which we have worked so hard for, are being sacrificed to impose all sorts of restrictions just to show how cool we are, just to show that somebody can punish someone... well, in my opinion, it's an absolutely destructive, and I would even go as far as saying, a stupid position. It's sad to hear President Obama say in an address at the UN that the threats and challenges facing humanity are, in this particular order, the Ebola virus, the Russian Federation, and only then the Islamic State. I don't want to dignify it with a response. It's sad, it's like some kind of mental aberration. We need to come back to a normal position, and only after that we can elaborate on how we are going to elaborate our positions in the future. Here's my last point. We are not closing any doors. All that we want is a constructive and friendly dialogue with all civilised nations, including, of course, our partners in Europe and the United States. But to do so, we must bring the situation back to normal.
Question: At that UN speech, President Obama said that the sanctions would only be lifted if quote: "Russia changes course on Ukraine." Is the pullback of troops from the border meant to signal to Washington a change? Is that a change, the kind of change that the President is looking for? And if so, what do you want from President Obama now?
Dmitry Medvedev: We don't want anything from him. Only the American people can want things from President Obama. The American people elected President Obama, not the Russian people. And he is accountable to the American people, not the Russian leadership or the Russian people.
I understand that there's political phraseology, and then there's real life. Real life is as follows: we are deeply concerned about the events in Ukraine. We would like the civil war unleashed by the coup earlier this year to end and Ukraine to return to calm and stability.
Ukraine can make any choice it likes: join the European Union or go the other way. Let it decide for itself. We believe that the risks faced by Ukraine if it pursues economic relations with the European Union are quite high (I'm referring to advanced economic relations, because we also work with EU and quite well). But it is the responsibility of the Ukrainian leadership.
Our current goal is to help restore peace in Ukraine. We can do so only through negotiations. Central Ukraine, the central government must listen to eastern Ukraine. Whether or not they like these people, whatever they choose to call them, they must sit down and agree on how they will live together, if they want to. That's the most important thing. All sorts of decisions that Russia takes, including decisions on our armed forces, are the responsibility of our government and the President of the Russian Federation, and are in no way related to the situation in Ukraine, although it is, of course, our major concern.
Question: So very briefly, that pulling back of troops to bases is not a signal to Washington? I just want to be very clear.
Dmitry Medvedev: It's not a signal to Washington. This decision is part of Russia's domestic policy. It can be construed any way you like, but it's not a signal.
Question: Obviously, in that UN meeting a number of other issues were talked about and the Russian Federation gave its support to an American-led motion against terrorism, which perhaps many who look at the way international relations are carried out would have thought was surprising given what the President had said previously in the meeting. But you gave your support. So let me ask you: can you imagine being part of an alliance against ISIS in the Middle East? We know that a Chechen leader has tried to draw you into the conflict by threatening Russia directly. Could you be involved in an alliance that involved Western European countries and the United States in spite of the difference of opinion over who governs Syria?
Dmitry Medvedev: As a matter of fact, we have a long and reasonably good history of counter-terrorism cooperation with other countries, including the United States. We are aware of our responsibility as a country with certain capabilities that is also threatened by terrorists and is under pressure from terrorist forces, much of which are formed in the Middle East. This is absolutely clear. But as for specific measures and solutions – I'm just speculating, because the President is responsible for Russia's foreign policy – I'd like to say that in such situations it is imperative to seek common solutions to combat the terrorist threat. We've never backed off from counter-terrorism cooperation, and we have examples of successful cooperation. However, the mandate for counter-terrorism operations must be obtained in accordance with international law, that is, the UN Charter, and on the basis of a consensus. It's always bad when this is done on the basis of decisions taken by individual governments, even if they have good intentions.This is bad.
This has happened on many occasions in Iraq and Afghanistan, and is happening now in Syria. And there may be only one legitimate question: if this kind of action is really needed, then it's essential to achieve a common position and get the go-ahead from the legitimate government of Syria. Again, some may not like it, or may dislike Assad and wish to see him go, but until that happens, the central government of Syria is the sole bearer of the sovereignty of the Syrian people. That's what needs to be kept in mind when discussing any kind of action.
Question: So again, just to clarify. There will be no military support on the ground or in lieu against ISIS as long as the United States continues to insist that Assad leaves office.
Dmitry Medvedev: It's not that the United States insists on Assad leaving office, although as far as I know, they went beyond insisting and are, in fact, trying to establish separate contacts within the leadership of the Syrian Republic, to tell you the truth. But that's not the point. The point is for all decisions on combating terrorist activities to be based on international consensus. Not on a decision taken by one country, even a highly respected one, but international consensus. That's my first point. My second point, and I'm positive about it, is that the solution for Syria must come from Syria and its neighbouring countries, just like in any other part of the world. The Syrians have a very multi-layered society composed of people of different faiths, including Alawites, Shiites, Sunnis, Druze, and Christians. They all need to sit down and try to come to terms. I'm not talking about the terrorist groups, I'm talking about achieving a solution to the Syrian problem in general.
Question: I want to move you on because I'd like to understand from you what damage is being done in relations between Western European capitals and Moscow currently. Chancellor Merkel has been in a leadership role in terms of Europe's sanctions against Russia. Has it damaged the long-term relationships with Berlin and with German business that might want to be involved here in Russia?
Dmitry Medvedev: I don't think any significant damage has been done, but only because we haven't taken any countermeasures toward German businesses. Our only restriction in accordance with the presidential executive order and the Government resolution, which I signed, was to restrict imports of certain foods from the countries that have imposed sanctions on Russia. It may have affected the interests of certain German entrepreneurs, but I don't think this is a huge problem. Currently, there's no damage whatsoever. But frankly, it will materialise sooner or later, and we are not interested in seeing that happen. We are interested in good trade relations and good investment projects, but, as I've already mentioned, if one person leaves, another always takes his place. I can tell you the following (you are well versed in economic relations yourself, having worked in Hong Kong, and you are familiar with how the Asia-Pacific region works): of course, businesses will keep these sanctions in mind, but eventually pragmatic considerations and the opportunity to make money will prevail, and the niches that become vacant after European manufacturers leave will be filled by other suppliers. I'd like to reiterate that we don't want to see this happen, and the situation can still be turned around. But to do so, we need to have both feet planted firmly on the ground and to act reasonably.
Question: ...because what I wanted to ask is, in the past, I think Chancellor Merkel has been in your corner, if I can use that phrase. And we've seen very strong integration of the Western European and US economies over the last two decades. Has what has happened now damaged personal relationships between the President and Chancellor Merkel, and you, Prime Minister, with Chancellor Merkel?
Dmitry Medvedev: I'm on good terms with everyone. And I know that President Putin also has good relationships with everyone. But it's not an issue of personal relationships – we may call each other every other day or send each other cards on New Year's. These are real economic issues, and so they present real political issues as well. I'd like to repeat that so far nothing dramatic has happened to our economy or the EU economy, to say nothing of the US economy, which doesn't depend in any way on Russian economy. However, it is obvious that if these trends persist, the negative potential will start growing. At present our trade is about $400 billion, a figure I've already mentioned. Germany is our second biggest trade partner after China, but some time ago it was first. China is developing rapidly and has already become the world's largest economy in terms of purchasing power parity. At any rate, as you know, on 8 October China was recognised as such, but naturally the US economy is much bigger overall for the time being.
So if this potential starts to accumulate, our relations will suffer. We'd like to avoid this very much. I hope Europeans don't want this either. In any event, I'm absolutely certain that European businesses are categorically against this because it's contrary to their interests.
I've also talked with US business representatives. Naturally, they also say that they are opposed. They whisper: "Well, you know that this is the decision of the government and we have to comply, but we consider it completely destructive."
Sanctions have never produced a positive effect. Let's recall a little history. When sanctions were imposed on the Soviet Union in 1925, we could not pay with gold for various imported products but we survived somehow.
A list of sanctions was imposed on the USSR after the end of World War II. They banned exports of some goods to the Soviet Union, but the country continued developing nonetheless. There were attempts to introduce sanctions on the Urengoy-Pomary-Uzhgorod gas pipeline after events in Afghanistan. They didn't lead anywhere either. There were attempts to introduce sanctions in the 1990s but with zero result.
Have sanctions on Iran produced any result? I don't think they've had a serious impact. Sanctions on the People's Republic of China were adopted after the political events of 1989. I believe China went on to substantially speed up economic development. It's time to return to reality.
Question: I think you made the point very clearly about how effective you feel the sanctions have been. We have some opportunities coming up in the diary for some progress, it seems to me. The President is going to meet with President Poroshenko in Europe, in Milan on the 17th. We also have elections in Ukraine coming up towards the end of the month here. Let me ask you, is the way to deescalate this, and put our relationships back on track, take the sanctions away, for there to be an outcome in these Ukrainian elections that leads to federalism in Ukraine that will then allow the Russian minorities to feel protected? Is that the bottom line, is that ultimately what the Kremlin wants?
Dmitry Medvedev: Ukraine is an independent country and Ukrainians should decide for themselves where to live. Ukraine's problem is that its society is deeply divided and people have different values. Some people want to be part of Europe and want closer relations with the European Union, whereas others think Ukraine should pursue ties with the Eurasian Economic Union we've established. Some people want to speak Ukrainian only, whereas others say they want to speak Russian because they've spoken it their whole life. This is the root of the problems that have been growing in Ukraine in the past 20 years.
In addition, past Ukrainian leaders unfortunately pursued an extremely ineffective economic policy – extremely ineffective. Ukraine is bankrupt. It is on the verge of financial collapse. It does not service its debts or pay for gas or other supplies. We would very much like to see Ukraine become a normal, modern and solvent country with which we'll develop relations.
As for the form of political arrangement, this is up to Ukrainians and their authorities. If they want to live in a unitary state, go right ahead. However, it seems to me that they have reached an impasse, because part of Ukraine has said they cannot live like that. If they agree on a federation, that could facilitate Ukraine's development. But this decision must come from within Ukraine – by the Ukrainian authorities and those people in the east of the country who have different views. This is the only possibility.
Question: I understand you perfectly, which then... Let's dismiss this next issue very quickly here, because there are those in the West who look at what's happened over the last year, and they say, this is about rebuilding some former Soviet Union, and that the Estonian government should worry that President Putin and Prime Minister Medvedev will be coming for their Russians at some point. How do you respond to this?
Dmitry Medvedev: Do we want to restore the Soviet Union? It is impossible to restore what is gone, obviously. I was born in the Soviet Union at about the same time as you (although we lived under different systems, we still listened to the same music, as we found out) but the world has changed since then, and the Soviet Union no longer exists. We have the Russian Federation, which is based on a Constitution adopted by our people. This Constitution proclaims the same set of values that is accepted by the absolute majority of humankind, notably, the supremacy of human rights, democracy, the protection of private property, market-based development and so on and so forth. I won't list all of them because these are universal values. So nobody wants to go back. There is no returning to the past.
Question: So the Estonians can feel safe that you're not coming after their Russians?
Dmitry Medvedev: Regrettably, for some countries, including small ones, this is simply a way of consolidating elites. We all remember how it works: the Russians are coming, so we must unite, and under this banner hold parliamentary elections… Well, if they find this helpful, let them have fun.
Question: President Putin will be going to the G20 meeting. The prime minister of Australia has used this very peculiar term, which we're all trying to understand. He says he's going to "shirtfront" the President, apparently, which is a sporting reference to a kind of tackle they do in Australian rules football. I wonder if he's aware of the President's prowess on the judo mat.
Dmitry Medvedev: This is a question for the Australian prime minister. I don't have the honour of being acquainted with him, but I knew two of his predecessors and had good relationships with them. If he likes to use sports terms, let him go ahead. Mr Putin is quite adept at sports and they could have forceful debates. That said, serious politicians should choose their words carefully.
Question: This was obviously a reference to the Australians still feeling that not enough has been done to investigate the cause of the MH17 crash, and this is a serious subject. Can I ask you, do you feel that there is unfinished business as far as the Russian Federation is concerned, that you could at this point be offering more cooperation and support for the investigation into what happened to MH17?
Dmitry Medvedev: I'm not an expert on air crash investigations but I can say a few things. Responsibility for every air crash lies with the state over whose territory it occurred. This rule follows simply from international legal norms. I don't know what happened. Again, this is a question for the experts. I'd only like to say that it was a horrible tragedy. But let the experts hold all the necessary hearings and investigations. Nobody has the right to blame any side. As for Russia, it has absolutely nothing to do with it.
But if you want to know my opinion not only as the prime minister but as a lawyer, let me say that Ukraine is fully responsible for all accidents in its skies. If it wasn't in control of part of its territory at some point, the Ukrainian government should have mustered up the courage to say: guys, we don't control these areas, there are ongoing hostilities there, so please change your flight paths. They didn't do this, which is a serious violation of international aviation law.
Question: Do I have one last question? Okay, let me move on. I want to come back to the Russian economy. We've been to a lot of places, but I want to bring you back to where we started, really, and it's about innovation. And you said something very interesting in the course of this interview about... State companies don't necessarily have to be judged differently from private companies. What we've seen from the rapid privatizations of the late '90s was a big expansion of the private sector in Russia. Now we're seeing state companies again take up more responsibilities in the economy, and especially in the energy sector. And this morning, as I read my newspaper, I saw that there was a plan to build a new state oil services business. Can I ask you, is there a point at which it becomes harder to generate innovation in the vast energy industry if you focus resources too heavily into one or two businesses? Gazprom and Rosneft, I'm sure, are very efficient at what they do, but Western technologies leaving because of the sanctions, and you're giving Mr Miller and Mr Sechin more and more control over this whole part of the Russian economy... Does that not raise any concerns about the ability to innovate and be as efficient and as nimble as Western companies? Is it the right direction for Russia to be going over the longer term?
Dmitry Medvedev: Let's divide the answer into two parts. Frankly, the sanctions are obstructing normal innovation activities. This is true. I won't pretend that they aren't affecting anything. And while they may provide motivation to be more active in launching innovations, in reality (as I've just discussed with Premier Li Keqiang) innovation comes from the continuous exchange of ideas. If someone stops the flow of ideas, innovative development slows down.
As for state-owned companies, I can tell you the following. First, the term "state-owned company" is a convention. Under any legal system Gazprom is a joint-stock company that is controlled both by the state and private investors. Moreover, the latter own 45% of its shares and have a considerable free float. So it's a regular joint-stock company. Rosneft is an ordinary joint-stock company as well, but its share of private investment is smaller, so they should operate under normal corporate laws and they have an interest in heavily investing in innovation.
Incidentally, we ourselves often lament how much the oil or gas sector dominates our economy. This is probably bad and we need a somewhat different economic structure, but we shouldn't forget that it is these large companies that are the main customers of high-tech solutions. True, they aren't supposed to buy everything abroad, however good some foreign innovations are; they are also supposed to pay our innovators, our small companies and to create start-ups to address these issues.
This happens all the time. Small private innovative companies are sprouting up around Gazprom, Rosneft, Russian Railways and Rostelecom. The entire world has followed this road, and I hope we'll manage to as well.
Question: It's been a real pleasure, sir. Thank you so much.