Vyugin VS Kovarsky

"To judge what is happening with the economy, not by GDP figures, but by what we have with unemployment"

At the start of the crisis, The New Times had a discussion about its possible scenario and consequences * ** See No. 42, October 20, 2008 . , chairman of the board of directors of MDM Bank To assess which forecasts came true and which did not, and what will happen next, The New Times invited the same opponents - Nikolai Kovarsky, co-chairman of the Club-2015, and Oleg Vyugin *

Have we reached the bottom?
Nikolai Kovarsky: The crisis will continue. The negative that has accumulated over the past decades has not been exhausted.
Oleg Vyugin: We have adapted to the situation, and I hope that we are ready for the worst.
Is there a contradiction here?
Vyugin: The fact is that all the stabilization both in our country and in the world is connected solely with the fact that many states have poured a lot of money into the economy. A year ago we had a debt crisis. What it is? Imagine that someone borrowed money from you and says: I can’t give it back now, I’ll give it back later, when the money is available. You immediately have a liquidity problem. You expected that there would be money, but they did not come. This is exactly what companies and people are facing. The states gave them this liquidity, and everything seems to have calmed down in half a year - in the sense that there is no serious drop anywhere. But this does not yet mean a way out of the crisis. The economy should restart, the process of life should be adjusted without the participation of the state, but this has not yet happened.
Why?
Vyugin: Because there is no demand. People and companies do not want to build up debt. Meanwhile, the entire world economy is in debt: investments were made on account of debt. In America, perhaps half of the consumption was debt.
Do you mean credit cards and mortgages?
Vyugin: Yes. And now this mechanism does not work, many are trying to reduce debts. This means that everyone is preparing for the worst: when you know what will be better, it is more profitable to get into debt - based on future income.
So, we are at the bottom and lie down on it for some time. And then - will it be better, worse? What are the probabilities?
Vyugin: I bet 20-30% on the fact that I will be able to keep the situation. 70% - which will be worse, because the economy cannot develop without a debt financing mechanism.
Kovarsky: I don't like the terms "worse", "better". Governments took the simplest path: they decided to pump money into the economy. This means that we are getting more and more into the future. As individuals, we climbed into the future when we took loans that we are not able to repay today. The same is happening with business and with governments. Now consumption is declining. People began to realize: climbing into the future, we went over a little.
Political optimism
Last week, Economic Development Minister Elvira Nabiullina said that starting from the second quarter of next year, we will see GDP growth of 1.6%. Where does it come from?
Kovarsky: First of all, for political reasons. Ministers must inspire optimism in the people.
Vyugin: When specific numbers are called in such a situation, these are reporting games. But now they are happening all over the world: Americans are talking about growth of 2.2%, Germans of 1.1% ... Kovarsky: Governments have a passionate desire to embellish the picture to please the electorate, and the electorate, in my deep conviction, doesn't really need it. He needs something completely different: radical decisions in the investment sphere, banking, and the cost of money and projects. All this will inevitably have to be done, but governments postpone painful decisions for later.
What do you mean by drastic measures?
Kovarsky: You know, in order to lose weight and be healthier, you have to eat less. The same is true in the economy: to reduce the percentage of profits, to tighten the rules for issuing loans, to reduce public spending. But these should be universal rules that the leading countries of the world will agree on. There is a lot of speculative money in the world and various people who use it poorly: they strive for very large earnings and are not ready to cut them. In addition, these people are very influential and can set the rules for themselves. Everyone suffers from this. Distortions will certainly be eliminated. And the only way, unfortunately, is the gradual flow of this money towards governments. And this means more and more nationalization of the economy. The states will distribute these funds very inefficiently: with a small margin and a very long-term payback. But there is hope that it will really be investments in global infrastructure projects, and I mean not only, say, roads, but also something intangible - education, for example. Mechanical engineering ... As it turns out, we have a huge problem finding specialists for large-scale projects like the construction of a hydroelectric power station. The state has a chance to eliminate such distortions.
gold reserve
Why are the prices of oil, nickel, gold and raw materials in general rising now?
Vyugin: Banks and investment funds have money, they must work. But they do not give or take loans, hence the growth of stocks and bonds in the stock markets. The same with the purchase of oil and some metals - these are futures, that is, investments for the future. Bought a gallon of oil or a bar of gold, the price of it went up, sold it, and you made money. In a situation where the dollar goes down, all currencies are unstable, investing in raw materials is one form of risk insurance. For example, China buys raw materials in reserve. The logic is simple: oil and copper will always be needed, and $2 trillion of reserves, of which half is invested in the US currency, may depreciate.
That is, they invest in raw materials, although the economy does not need it?
Vyugin: They invest not in the purchase of raw materials, but in their resale.
Kovarsky: Ever since the middle of spring, China, as if undermined, began to buy up various goods: in fact, it set up storage facilities for everything and everyone on its territory.
Vyugin: There is another factor: when the crisis began, the demand for primary raw materials fell sharply - for example, the demand for aluminum fell 5 times. Everyone began to get rid of stocks, they did not buy new ones, because no one understood what demand and price would be. Stocks were consumed until the middle of summer - both in Russia and in other countries. We ate. There was a demand for primary raw materials, hence prices went up.
Will the price increase continue?
Vyugin: At least until the second quarter of next year. Maybe Nabiullina's optimistic forecast is also based on this.
And what will happen to the economy after the second quarter of 2010?
Vyugin: Either the world will restart the debt financing mechanism, as I mentioned, or the search for a different model of economic development will continue. Oleg Deripaska has already stated that Rusal will move away from debt financing altogether within a few years and will build a business based on partnerships, joint ventures, asset swaps, and so on. Maybe these are just words, but they express a certain upheaval in the mind of the owner of a large international company. He's hardly the only one who thinks the same way.
Kovarsky: Many businessmen have become very thoughtful about what and how they do, what is the cost price, etc. In their heads, there is a transition from the capitalization development model (when the abbreviation IPO suddenly became the most popular in the business environment) to the dividend one. This is a fairer mechanism - when not the money that is borrowed, but the money that is directly earned is distributed.
Russia has experienced perhaps the biggest industrial decline among all the leading economies. What will happen to the real sector next?
Kovarsky: If there is a general decline in the economy, then the decline in the real sector will continue. But in contrast to August 1998, I do not see panic among businessmen now. On the contrary, many have an ardent desire to do something new, to look for some new demand. For example, in mechanical engineering, agriculture. Entrepreneurs with fresh ideas rushed to the agricultural sector. If this continues, in ten years our agricultural sector will turn into an industry free from subsidies, built on a high technological level, meeting international standards. Of course, everything is not so simple: there are a lot of problems with the land, with the local authorities who sit on it, but the trend is obvious.
So, the crisis can be beneficial?
Kovarsky: Business is in a difficult position. Now we can talk about a wave of business emigration: quite a few people have decided to give up everything and leave the country, because the easy money is over, and life here from different points of view - politics, pressure from law enforcement, the state - is not very comfortable.
Vyugin: But those who do business under the umbrella of the state feel good even in times of crisis. And there are those who are not under an umbrella, but are engaged in something real: they bake bread or cut their nails ... These people have nowhere to go and they don’t have that kind of money to live beautifully abroad. This business is struggling. And the fact that such people continue to work is probably the only positive from the crisis. It would be nice if the authorities realized that they also need to work.
As long as there is money
What will happen to the Reserve Fund? It was predicted that it would be exhausted by the end of 2009.
Vyugin: I don't think it will be exhausted, it's just that some items of expenditure planned in the 2009 budget will be sequestered: at the end of the year there are such large expenditures that if the government agrees to them, it will lead to economic destabilization, inflation... It is not publicly discussed says, but I think the government will save about a trillion rubles. Common sense dictates that it is better to postpone expenses for the future.
A year ago, you predicted that we would have 200 banks and most of them would become state-owned.
Vyugin: The story is not over yet. State banks have strengthened in terms of their share in the market, in the capital of the banking system and in general in the economy. Private banks have given up their positions. Although a radical reduction in the number has not yet occurred.
Kovarsky: It was I who called the number 200 and, in principle, I do not refuse it. I think that the number of banks will gradually decrease. It's just that since last October, the state has carried out massive financial injections, which greatly distorted the picture. But these injections will not last forever.
You also said that the toxic assets of the largest banks could reach 15-20% by autumn. While the percentage is less.
Vyugin: In fact, it is very difficult to correctly measure it: we do not have mandatory reporting in accordance with international standards, and reporting in accordance with RAS (Russian Accounting System) allows banks to show any figure they need. An amazing thing: in the first 6 months of the year, GDP fell, demand fell, and banks showed 900 billion rubles in profit. This means that the entire reporting system is a piece of paper. If we objectively evaluate, then 15-20% of bad debts should be, but we will never see this.
Can a banking crisis still happen? Vyugin: In conditions when 50% of the credit market belongs to state-owned banks, a massive banking crisis is basically out of the question. Moreover, out of the remaining 25%, these are banks with foreign participation, which value their reputation very much and, I believe, will not allow “holes” either. There are several other large non-state banks, but the problem will most likely be solved with them - there are mechanisms for state participation there. There are a number of small banks left, but even if they suddenly all fail, this cannot cause a large-scale banking crisis. Should we wait for a new devaluation of the ruble?
Vyugin: If you look at the dynamics of the reserves of the Central Bank since February, when the devaluation stopped, they have not changed much. This means that the current exchange rate of the ruble is absolutely market. Therefore, devaluation can now be carried out not out of necessity, but only by the decision of the monetary authorities. But, in my opinion, the people who are engaged in this, finally had the sense to refuse such actions. In the next six months, commodity prices will most likely be stable, there is a chance that the movement of capital in relation to Russia will be positive, so in the short term the ruble exchange rate should be more or less stable.
How will we live
Do you believe in favorable forecasts for the development of the economy, as predicted by the authorities?
Vyugin: I would prefer to judge what is happening with the economy, not by GDP figures, but by what we have with unemployment. The unemployment rate, if measured correctly, is a very important indicator. And the second is the movement of capital. If it flows into the country, this is a serious argument in favor of the fact that Russia is benefiting from the crisis. Last autumn, a strong capital outflow began, but now, fortunately, oil and metal prices have gone up - and in the second quarter we already have a positive balance. This saved the country from serious social consequences.
Kovarsky: Unemployment must be calculated correctly. In our country, many people are simply kept at their workplaces without really paying salaries. But what happens if you stop curbing unemployment in such ways for the sake of good statistics?
What is its real level in the country?
Vyugin: 10 percent of the economically active population, about 7.5 million people.
Kovarsky: 10% or more, but clearly not the 2.5 million reported by the government. Familiar businessmen say that the number of unemployed will grow: simply because in a number of industries from 15% to 40% of the capacities are not needed. These factories will still have to close and decide what to do with people. Another thing is that the process can be delayed ...
A year ago you predicted a social explosion as a result of unemployment. Now?
Kovarsky: I don't see the potential for riots. Unemployment is creeping in our country, our country is class-based, and no matter how hard it is for the authorities, they care about the people. As long as there is money, it can demonstrate this concern. Of course, the people who are in power do not want to rock the boat. But the boat is still rocking: more and more people who, belonging to the system, want to work for themselves. And there is no oversight from above behind them, except for some individual cases. In order to avoid unrest, it is necessary to create some kind of more just life - even under the authoritarian system that has developed in our country.

Oleg Vyugin is Chairman of the Board of Directors of MDM Bank.

1996–1999 — Deputy, First Deputy Minister of Finance of the Russian Federation.
2002-2004 - First Deputy Chairman of the Central Bank.
2004–2007 — Head of the Federal Service for Financial Markets.

Nikolay Kovarsky is co-chairman of the Association of Managers and Entrepreneurs "Club-2015".

Business consultant, one of the pioneers of domestic entrepreneurship.

Member of the Board of Directors of Promstroygroup.