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PRESS CONFERENCE WITH FIRST DEPUTY MANAGING DIRECTOR OF THE INTERNATIONAL MONETARY FUND ANNE KRUEGER
[INTERFAX, 11:00, SEPTEMBER 14, 2004]
SOURCE: FEDERAL NEWS SERVICE (http://www.fednews.ru/)

Moderator: Good morning, esteemed colleagues. I have the honor to open this press conference of First Deputy Managing Director of the International Monetary Fund Ms. Anne Krueger, the head of the IMF's mission in Russia, Mr. Paul Thompson and Graham Ingham of the IMF's external relations department.

I am pleased to give the floor to Ms. Krueger.

Krueger: Thank you. Good morning, ladies and gentlemen. Thank you for coming. I know you have many questions you would like to ask and I'll be happy to answer as many as I can in about half an hour that we have available.

I would like to make just a few opening remarks. I want first to say that the directors and staff of the International Monetary Fund join me in extending our deepest sympathy to the people of Russia and in particular the citizens of Beslan in the wake of the terrible events in the past few weeks. The terrorist attacks that took place were deplorable and beyond comprehension. They have cast a really unfortunate shadow over what would otherwise have been a very enjoyable visit. IMF staff have initiated a fund raising campaign, collecting from staff throughout this week. And the funds that are raised will be given to the Russian Red Cross to help the victims and their families.

I wish that my visit could have taken place in happier circumstances. But nonetheless the visit has been productive, it's brief. I had a number of discussions with the authorities including Mr. Kudrin, Mr. Illarionov and Mr. Vyugin. And I will after this meeting be meeting with Chairman Ignatyev and his colleagues at the Central Bank. Yesterday, as you may know, I spoke at the conference on transition economies, organized by the Institute for the Economy in Transition and the Academy of National Economy.

As many of you probably know, we recently completed our annual article for consultations with Russia. These took place against the backdrop in Russia that is in many ways very encouraging. Growth has accelerated and there is every reason to believe that it will remain robust in the short run. The balance of payments is strong. Oil prices are high and have had a significant beneficial impact in the short run although they do make macroeconomic management more difficult.

This backdrop provides the opportunity and the means for Russia to consolidate in advance what has already been achieved in the past few years. But labor markets are tightening and there are emerging capacity constraints. And in themselves these are clear signals of a relatively buoyant economy. But they also suggest that stronger inflationary pressures could be building up.

This is not a moment to relax fiscal policy and in so doing add to the burdens of those in charge of monetary policy whose aim is something approaching price stability. So, in our staff report we warned against any further fiscal relaxation however good the current figures look. Extra spending would only add to strengthening inflationary pressures.

It's also important to tackle problems in the banking system some of which have emerged recently. Postponing reform in the financial sector will only make it far more difficult and costly to deal with later.

And structural reform should be advanced. The job which was started 15 years ago is still not complete. Many projected and needed reforms have yet to be implemented. And it would be a real pity if high oil prices offered an excuse for inaction. After the experience of the 1990s it would be understandable if the current breathing space were used to justify delay, that would have considerable costs over the longer term. But that would reduce growth potential and lead to the need for these reforms to be made against the backdrop of slower growth later on.

In fact, the impact of higher oil prices underlines the importance of diversification all way from too great a reliance on oil and gas production. The more rapidly the Russian economy can diversify the less vulnerable it will be to the consequences of rising and falling oil prices. And diversification would result more rapidly from an acceleration of structural reform. Diversification will be an outcome of structural reforms that remove obstacles to investment and improve the overall investment climate.

Now ladies and gentlemen, I am happy to take your questions.

Q: Bloomberg. I wanted to ask you on your last remarks. Two general questions. Your opinion on the pace of structural reform in Russia since Mr. Putin changed the government. And the second question. Do you see any changes in Russia's investment climate over the past year? If yes, what was the overall trend? For the worse or for the better? What are the reasons?

Krueger: In terms of the pace in structural reforms right along there have been activities that were under way and continuing. And there is the question of new measures. It's my understanding that the government is currently preparing a set of proposals which would advance structural reforms, but in fact that last year I don't think we've seen so much new as we see an implementation of some of the things that were earlier under way.

And some needed things that were there had been started. I have in mind, for example, the monetization of in-kind benefits earlier on which is clearly necessary for good budgetary practices for transparency and for moving ahead with getting a more efficient delivery of these services.

As for the second question on the investment climate, again, I think the answer is mixed. On the other hand, there is evidence of investment, of inward foreign investment, and otherwise people taking advantage of some of the opportunities that have been created by the past and ongoing structural reforms.

On the other hand, there does seem to be some hesitation, capital outflows appear to have exceeded capital inflows again, and foreign investors, at least, are concerned by what's happening to Yukos and raise some questions, I think, going forward as to what the environment in which they may invest could be.

Q: Reuters news agency. You are very critical about fiscal loosening, but the Russian economy had a pretty substantial budget surplus this year, over 3 percent of the GDP, and if my memory serves me correctly, they originally budgeted for a surplus of over 1 percent of GDP. Their budgeting proved higher with a conservative oil price forecast. So, one could reasonably expect a repeat if there are no dramatic changes in international market, one could reasonably expect an overshoot in budget surplus. So, I am wondering whether this is founded on dogma ... (inaudible)... And indeed Russia is accumulating money at a very rapid pace in its stabilization fund. It's going to be around 20 billion dollars already at the end of this year. This creates opportunities to pay down foreign debt early. We've heard suggestions that there could be some kind of bilateral substitution of Paris Club debts. And I just wonder what your position on that might be, whether you would think it is good move for Russia to take this chance to lower its foreign debt burden.

Krueger: As to the fiscal position, the answer, I think, has several parts. As I am sure you are aware most economists think that over the so-called business cycle the idea would be to run a balanced budget and to do that you would run a surplus in good times and a deficit in bad times.

In fact, one of the problems around the world has been that many countries have run instead of the counter-cyclical policies that are advocated pro-cyclical policies increasing spending in good times and in bad times, which accentuates the problem. And it is absolutely no question but that the oil price right now is high. I think there is no forecaster who expects it to stay at that level over the medium term. And in fact, it's a reasonable guess that the longer it stays high now, the lower it may fall later.

Meanwhile, over the past two years when in fact the oil price has been rising the increase in expenditures and deficit relative to a normal oil price has gone up by 3 or 4 percent. So, in that sense we are simply saying that you know right now there is no need for stimulus, there is plenty coming into the system from the good oil price and other things anyway. And meanwhile, the correction that would have to come when the oil price goes down would be negative as contrasted with the increase in resources in the stabilization fund to offset the falling oil price.

As to pre-paying debt, that can be a good use of accumulated reserves.

Q: Several questions, if you may. How did the government officials you met react to the threats and fears expressed by the International Monetary Fund? I mean Kudrin and Vyugin, for example. And the second question, what do you think about Russia's proposal to issue euro bonds against the Russian debt to the Paris Club? And the third question. What are the prospects for the continuation of the stand-by preemptive program with the Ukrainian government? As far as I know, you are going to discuss it at the board of directors meeting on the 20th. Perhaps, you could express your position.

Krueger: Well, on the reaction of the authorities, I think there is a general understanding and a general agreement with the view that indeed any further relaxation at this time is not wise in putting too much weight on monetary policy. As to Russia's plans, much of that does concern inter-creditor equity and issues that are currently under discussion at the Paris Club. So, that's an issue that goes through their minds and through ours. And the third one I didn't understand.

Q: It's about the continuation of the stand-by program with Ukraine. It's currently on hold. The Ukrainian government is expected to hold additional consultations with IMF on this issue on September 20. How likely is the resumption of the stand-by program with Ukraine?

Krueger: The Ukrainian authorities know a lot more about that than I do and I've been gone from Washington for a week. But on the other hand, its staff are going to Ukraine. There is a reasonable prospect that there is some basis for an agreement because as you know, we have a stand-by arrangement with Ukraine.

And the reason that there need to be more discussions is because some of the targets that were agreed in the program apparently have not as yet been sorted out in terms of the government's plans.

Q: Are there plans to publish the IMF staff report on Russia that was presented to the executive board on September 1?

Krueger: The normal IMF policy is that there is a presumption of publication, but we wait for the authorities to say so and as of now, I believe they are going to take a look at it within the next few days and let us know.

Moderator: Thank you very much.