Russia’s finance minister sees no prospect of relief from international sanctions in the near future, he has told Handelsblatt.
In an interview, Anton Siluanov said: “We have no expectation of any lifting of sanctions.” But while there has been no recent substantial improvement in relations with the West, he added that frosty relations “could not last forever. Pragmatism will win out sooner or later.”
The minister was speaking ahead of German Chancellor Angela Merkel's firs visit to Russia in two years. On Tuesday, she is set to meet President Vladimir Putin at his Black Sea residence in Sochi. Officially, the meeting will focus on preparations for July’s G20 summit, which Germany will host, but talks are likely to touch on economic issues and the continuing conflicts in Syria and the Ukraine.
We are doing everything to improve the investment climate in Russia and increase trust in our political system. Anton Siluanov, Russian finance minister
Mr. Siluanov linked continuing sanctions with a recent upsurge in protectionism, saying their existence contradicted the dialogue within the G20 on maintaining free trade. “Sanctions lead to a reduction in capital flows to Russia. So we are concentrating on our strengths and doing everything to improve the investment climate and trust in our political system,” he added.
He said recent meetings with American colleagues gave him hope that Russian-American relations may improve: “Although we have recently seen an opposite tendency, poor relations cannot last forever,” he said, calling for greater dialogue and pragmatic engagement to improve ties.
Mr. Siluanov’s hopes for renewed dialog are shared within the German business community. Wolfgang Büchele, the chairman of the German Committee on Eastern European Economic Relations, echoed Mr. Siluanow’s calls. “It is time to reactivate suspended bilateral and European dialogues with Russia,” said Mr. Büchele. “Permanent confrontation will cost us dearly in Europe,” he added.
The Russian finance minister was at pains to emphasize Russia’s improved economic climate. For the last four years, Mr. Siluanov has overseen sweeping cuts in public spending, with the country’s economy and public finances hit hard by falling oil prices, international isolation and increased military spending obligations. But with presidential elections due next year, it appears that the days of belt-tightening may be numbered.
Mr. Siluanov said Russia’s budget deficit was now being sharply reduced. Original forecasts had been for a deficit of 3.2 percent of GDP in 2017, falling to 1.2 percent by 2019. But better than expected economic growth meant a 2 percent growth figure was now expected this year. In part thanks to tight monetary policy, inflation was also falling – the 5.4 percent rate in 2016 was the lowest in Russian history, he said. This year’s figure would be around 4 percent, he added.
Higher world oil prices had helped considerably, said the 54-year-old economist. “We planned for 0.6 percent growth and oil at 40 dollars a barrel. But now we expect 2 percent GDP growth and oil well above that level,” he said. “But the most important thing is that any oil receipts over $40 will not be spent but go to our reserve fund.”
In recent years, Russia has dipped heavily into its strategic reserve fund to cover its ballooning deficits. This year, said Mr. Siluanov, the country had taken about €29 billion ($31.5 billion) from the fund, but this should sink to €16 billion next year. As the economy gradually improves in the years to come, the fund would be topped up again, he added.
Capital flight had been a substantial problem, he said, but it reached a new low in 2016 when it is estimated that $19 billion left the country – with hopes of a further drop in 2017. “Foreign investors are buying stocks and bonds in Russia. There is a lot of interest, as Russia looks very good on fiscal and monetary policy compared to other emerging markets," Mr. Siluanov said. He added that the first quarter of 2017 had even seen net capital inflows.
Russia’s efforts to improve its fiscal situation had not gone unnoticed by ratings agencies, said the finance minister. “Standard & Poor’s just changed its outlook on Russian bonds from stable to positive. We have BB+, which is not investment grade, of course. But the markets view us positively,” he said.
Moscow’s borrowing plans were focused on domestic investors, Mr. Siluanov explained, with plans to raise around €29 billion there this year. But the government would also look to raise around €3 billion on the international markets. “That is not a lot of money for a country of our size. We could raise it at home. But our new euro-denominated bonds are meant to show our presence on the international markets.”
According to Mr. Siluanov, Moscow plans to push ahead with a tax reform that will see direct taxation lowered, while indirect taxes increase, leaving overall taxation within the economy at around 32 percent of GDP. “The reduction of direct taxation should encourage domestic investors, help exporting firms and fight the shadow economy,” he said.
However, caution in fiscal policy will continue to have an impact on spending priorities, above all affecting infrastructure investment. “In the current financial conditions, we cannot consider new large projects,” the minister said. But plans to build bridges to the Crimea as well as infrastructure associated with the 2018 soccer World Cup would be unaffected, he confirmed.
Mathias Brüggmann is the head of Handelsblatt's foreign affairs desk. To contact the author: [email protected]