Following are excerpts from the transcript of a CNBC interview by Geoff Cutmore with Anton Siluanov, Russian Finance Minister.
Geoff Cutmore: Minister if I can start by asking you about the economic conditions currently in Russia. We've seen some improving data on the inflation front and on the PMI's. Do you think that we're starting to turn a corner now on the economic slowdown?
Anton Siluanov: Well indeed our economy encountered certain difficulties this year, including changes to external economic conditions. We experienced a slowdown in growth this year, we estimate it to be minus 3.8% in 2015, but the 3rd quarter and the end of the year are proof that we are turning the corner. In 2016, we expect positive growth of around 0.7%. The economy has started to adapt to the conditions, new economic conditions. We still have very strong balance of payments. The current account surplus is 6% of GDP. Yes the exchange rate weakened over past few months of this year, but this was mainly a reaction to external conditions, and currently our main task is to balance the budget -- adapt the budget to the new economic conditions.
It is not easy. In 2015 the budget deficit will be a little bit lower than 3% of GDP. In 2016 it will be almost the same. But we need to cut expenditures in order to adapt the budget to the new economic conditions. To achieve this goal, the government has elaborated a number of measures. We need to make financial support to certain companies and industries more targeted. We need to cut spending on some state programs. We need to change indexation, including pension indexation. And it shows we are adapting budgetary policy to reflect these new economic conditions.
Geoff Cutmore: The oil price has been trending back towards $50 a barrel. Given your dependence on oil revenue, can I ask you do you feel that this is going to be a recovery now in the price and that we're unlikely to see a further collapse? I'd be interested in how you see the development of the energy price from here and what that means for your funding.
Anton Siluanov: Like I said, our current goal is to make the economy less dependent on the price of oil. Our fiscal projections for next year are based on the assumption of 50 US dollars per barrel - the level we have today - and we have this year experienced a significant reduction in oil and gas revenues within the budget, and next year we estimate this revenue at 43% out of all budget revenue. It was around 52% a while ago.
With the depreciating rouble, coupled with sanctions imposed on Russia, we will have to develop other industries in order to promote import substitution to replace the goods that have become either expensive or restricted in reaching Russia. Under these conditions export industries, so-called trade-based sectors of the economy started growing and there are some significant results in this field. I can name a few: I can mention the agriculture sector and some industrial sectors exporting goods, and step by step we think that the 3rd and 4th quarters of this year to be the turning point for the Russian economy.
Geoff Cutmore: And yet here we are --- in Lima and the IMF is concerned that there is a risk of some kind of credit even in emerging economies or a dramatic slowdown perhaps in Chinese growth which you've increasingly been engaged in or an economy you've been engaged in more recently. Are you worried at all about the recovery you've described in Russia at the end of this year and into 2016 could actually be set back by problems in other emerging economies?
Anton Siluanov: We of course are dependent on the situation in the global economy and recently while preparing the budget we considered economic forecasts for 2016, and of course we took into account the situation in the global economy and we are concerned about the situation in China. However, our Chinese colleagues at the G20 finance ministers meeting said that they expected good growth; they expect it to be around closer to 7% this next year. But no doubt the general the situation in the global economy will affect the situation in Russia, and that is why we need to focus on the development of internal demand, internal consumption, and as I said, the tasks set by the government: the promotion of exports, interest rate subsidies to obtain export loans and create conditions to create competitive goods for internal and external markets. We face very complex tasks but I hope next year we will achieve positive growth rates.
Geoff Cutmore: The key for Russia is still trade it seems it's incredibly – for you to grow the economy both in domestic and external demand. One barrier to that have been the sanctions. But we've seen some Russian companies tapping the capital markets and the mood towards those companies and Russia in general seems to be improving in financial markets, perhaps indicating markets believe those sanctions will come to an end next year. Are you optimistic?
Anton Siluanov: You are right saying that in years past the Russian economy grew mainly because of growing oil prices. On the other hand, the economy grew because of the expanding consumer demand. This was because high oil prices increased opportunities for companies to pay higher wages, so consumer demand grew. Now the situation is different. We need to reorient the growth the economy from consumption to investment. The devaluation of the rouble contributed to the increased corporate revenues – revenues are the main source of investment. We need a completely new type of economic growth based on the investment-led demand. Therefore our task now is to support this.
Geoff Cutmore: So I take it you'd rather not speculate as to what happens with the sanctions.
Anton Siluanov: We are not optimistic concerning the sanctions; we don't anticipate they'll be lifted next year, though of course we would want it to happen as soon as possible.
Geoff Cutmore: You said company profits are growing. One area where we're really not seeing that happening is the banking sector. Are you comfortable about the health of Sberbank and VTB at this time?
Anton Siluanov: Well this year we are not expecting any significant growth of banking sector profits though during previous years the banking sector has been generating roughly 1 trillion roubles of profit. But now for banks and the financial sector -- for the so-called non-trading sectors -- it's a different situation because of the reduction of capital inflows, and the fall in the oil prices.
Taking this into account, last year the government decided to issue 1 trillion treasury bonds in order to inject this money into the capital banking system of the Russian Federation which allowed many of the banks to make necessary provisions toward non-performing loans without creating further pressure on their capital and to help them to promote credit financing which is a very important thing in this point in time for the Russian economy.
Geoff Cutmore: So you don't see any particular problems with those banks?
Anton Siluanov: So there is no problem with the banks you have mentioned – these are our state owned banks. VTB has received a significant amount of state money into its capital from the Federal Budget. Sberbank hasn't gotten that support, but in the current conditions by reducing costs and restructuring their business, Sberbank has achieved a positive financial result. It's less than in previous years, but nevertheless these banks will make a profit this year.
Geoff Cutmore: And just one question to finish off, we see the currency has fallen against the dollar some 30% over the last 12 months. Do you see it steadily regaining that lost ground into 2016? What are your expectations about the volatility of the rubble and where we might see it settle?
Anton Siluanov: The trouble is currently a floating free-market currency and it depends on the situation with the country's balance of payments. During the period of falling oil prices, the rouble depreciated, and now over the last months the rouble has been quite stable, and in the past few days' oil prices have risen a little bit, resulting in the rouble appreciating. That is why the central bank from the beginning of this year purchased US dollars on the market to replenish the gold and currency reserves. And over 6 months the central bank increased the gold-and-currency reserves by 10 billion USD.
I think that the central bank in recent days of rising oil prices might also have carried out some market operations but I repeat that the rouble rate is in a free floatation and the central bank doesn't have any anchor concerning the exchange rate. The exchange rate will depend on the balance of payments situation, and balance of payments situation depends a lot on the prices of the goods that the country is exporting on one hand, and on the other hand on the outflow and inflow of capital. In the 3rd quarter of 2015, according to the central bank, the first time we saw a net inflow of capital in the Russian economy which amounted to 5 billion US dollars.
That is why our estimates concerning capital outflows for this year fell; we expect at most around 65 billion in outflows. Estimates at the beginning of this year were double that figure. We see a regaining of trust towards the rouble among the population and companies, and we have witnessed an increase in rouble deposits in banks of 11% from the beginning of this year – so a gradual decrease in capital outflows is taking place and it as a whole will positively affect the economy.