Following are excerpts from a CNBC interview with Anton Siluanov, Minister of Finance for Russia and Geoff Cutmore.
GC: Minister, it has been just over 3 years since sanctions. This SPIEF looks like it will have quite large foreign business representation once again. Can you tell me, what is your message to foreign investors as they come to attend the International forum this year?
AS: Without a doubt sanctions are [not]* good for business as they limit trade and limit investment, however we see that many foreign investors are investing in Russia with pleasure. Of course we would want more but we see that there is significant interest from investors in Russia's financial instruments, in our bonds which we release on to the internal financial market. There is a range of projects which Western businessmen are continuing to invest in. There are projects like Yamal LNG –there we have a whole consortium of investors in this massive project in Siberia.
So, of course, weighing up all the pros and cons, the limitations which exist and at the same time the good investments and yields which can be attained in Russia, investors make the choice for themselves about whether they continue to invest in Russia or withhold their investments. I want to say that, of course, the yields and the conditions of interest in Russia which is there and which we see among investors especially when we talk with them are largely based on the earnings, on the margin which investors receive by investing in Russian assets. I am sure that the St Petersburg Forum will allow us to make our position clear, it will allow us to make the economic policy of Russia clear. This will give extra confidence to investors who want to work here, who want to invest in the Russian economy.
GC: The St Petersburg City Mayor has described this year's event as a revival in US – Russia business relations. Is that how you see it too?
AS: We are interested in joint investments and partnership with all our Western colleagues and partners, including with American business. We see that the Russian economy has started to develop at a higher rate. It has come out of recession this year and we anticipate annual growth of around 2%. We also see, as we said, the inflow of investment both direct and financial investment, including from American investors. So, we welcome any investors in Russia and we are sure that these investments in Russia, these investments from business in Russia will let them attain good yields, strong, reliable yields. So we are interested in the development of our relations with business in any country, including of course with American business.
GC: You look more relaxed and happier than I've seen you in the last 3 years. Does that mean that government finances are now heading in the right direction, the deficit is coming down and you feel much more comfortable about the direction your ministry is going in?
AS: Well, the Ministry of Finance probably can't always feel relaxed even in this period when we really are seeing the situation with budget revenues is better. They have grown in all by 25% in the current year in comparison with the same period last year. We see that this year we anticipate the budget deficit to be around 2% of GDP which is much lower than we originally planned. We see that we have started to fill our reserves by accumulating extra revenues from oil and gas in the budget. These are all positive factors. Our key task now is to prepare a new budget plan for the next 3 years. It will be no less important or difficult as we have to further reduce the dependence of the budget on the price of oil. We have already achieved some results with this, we have reduced the dependence and balanced the budget from the basis of an oil price $100 per barrel to $60, and we have to continue with this trend, so that our commitments are sustainable whatever the external conditions may be, whatever the price of oil, whatever the regime of sanctions. We should not depend on external factors. That's the task in hand. It's no easy one and so we have to be under pressure for a few years to come to get the budget in to a balanced position and not dependent on external factors.
GC: So briefly, do you think sanctions could run for another decade?
AS: Well, that's clearly not a question for the Ministry of Finance. However, in our forecasts we factor in the current regime being maintained. Nevertheless, I repeat once again that is in our interest in a number of ways that any limitation on the flow of capital or trade be lifted. This would give the opportunity for higher rates of investment, higher rates in the economy and correspondingly in the replenishment of the budget.
GC: On the oil price, how high do you think it might go as a result of the extension of this current deal?
AS: With this issue we take our lead from the views of analysts. The OPEC countries have undertaken to maintain a range of limiting measures. One the one hand, this should keep prices at the levels they are at present, and on the other it gives a signal to those companies which are extracting shale oil, particularly in the USA, by increasing levels of drilling, by increasing the levels of extraction, and in the final reckoning by the growth of offers on the oil market. Therefore, we think that the decisions taken by OPEC countries will give the opportunity for prices on the oil market to stay at present levels, it will give the opportunity for extra revenues to go in to the budgets of OPEC member countries on the one hand, but all the same it is necessary to be very attentive, it is necessary to be ready for the fact that the possible surplus offers of oil will put pressure to lower the price. Our task as the Ministry of Finance is to be prepared for any such changes, to create extra reserves as we have talked about, and hedge our budget from any fluctuations on external commodities markets.
GC: Is there a price or a level of non-compliance at which you would advise the government to pull out of the agreement?
AS: We did not consider these options and our colleagues at the Energy Ministry like the government think it prudent at this stage to cooperate with oil-producing countries to control the volume of extraction and the volume of sale of oil, and in this way to control the prices on the world market. In our view, the most important thing is for the prices to be predictable. And this has a corresponding effect on how predictably economic agents and governments behave when budget policy is being drawn up.
GC: Clearly things are improving with the economic outlook, the government budgeting seems to be improving as well, but there are some challenges. The rouble has strengthened. How concerned are you by the recent strength we've seen in the Russian currency? What challenges does that throw up to the exporting side of your economy here?
AS: Yes the rouble is genuinely floating. It depends on supply and demand and the Central Bank does not interfere with its exchange rate. You are right, in the period from the start of the year we have been seeing the rouble exchange rate strengthen and in the first quarter this enabled a frequent inflow of speculative capital in to Russian assets on the one hand. Here the Central Bank started actively to engage in monetary policy. Its key rates were reduced and we now see that the inflow of speculative capital in to our country has come down. As far as export and import are concerned, in the last few months we have in fact been seeing a growth in imports, however the growth of exports has stayed the at the same level as it was before. And linked with this, we see a certain increase in the outflow of capital in the balance of payments. But this is due to the fact that our export companies have accumulated foreign currency earnings and are holding them in their accounts, so that is also one of the factors in the outlow of capital. Nevertheless, our balance of payments is quite stable. We see a current account surplus and we see a growth in gold in the foreign currency reserves of the Central Bank. So, we don't see the need to speak of some kind of risk to the country in terms of changes in currency exchange rates or changes in reserves, and we don't have to talk about them.
GC: The market is expecting you to issue Eurobonds imminently. I wonder if you can update me on the timing and details and also whether the expectation of a Fed interest rate hike in the US, whether that will be a factor at all in making up your mind as to when you will be going to market?
AC: That's right, in line with our plans, this year we are going to enter the external financial markets. The volume of borrowing is small – it's about US$3 billion. If you look at the level of borrowing on our internal market in its dollar equivalent, then it would be a bit less than US$30 billion. So we are going in to the market to emphasize that we have a presence there, to show the earning power of our bonds in plain view. And in consultation with our foreign investors, including American ones – our colleagues met and actively engaged with American investors – they all emphasise their interest in these bonds as they understand the good rate of return and the sustainability of these investments.
Of course, the change in the Fed Reserve's interest rates has an influence on the yields of emerging markets. Without doubt, it could have an indirect effect on the yields of Russian Federation bonds. However, the hikes in the Fed Reserve's rates which have already happened had a minimal effect on the bonds market which is in Russia's sights. We think that now when we enter the external markets, the change in the Fed Reserve's rates will have a minimal impact on the yields of our bonds. We are in fact now looking at the timeframe for entering the market. I think it will be of interest to our investors to invest in Russian bonds.
*while independently validating the translation [not] was added as a true representation of the Minister's meaning.