OREANDA-NEWS. June 03, 2009. The President of Russia answered questions from CNBC business news anchor Maria Bartiromo. Excerpts from Transcript of Interview with CNBC TV channel: 

MARIA BARTIROMO: Mr President, thank you for finding time for the interview.

A certain fall in GDP has been observed in Russia. What would be your comments on the matter? Could you tell us at what stage the Russian economy is at the moment, after the global economic slump?

DMITRY MEDVEDEV: The Russian economy – first of all, I would like to start with it and say that it has suffered from the global financial crisis to the same degree as other countries. There are objective reasons for that, as well as subjective reasons associated with our economic environment and economic situation.

Indeed, we have been affected by the economic slump and the fall in GDP, which we anticipate to reach no less than 6 percent this year or maybe even more. As to certain indicators, such as the level of industrial production, the drop has been considerably deeper at about 14 percent in recent months. At the same time, we cannot but note some other alarming developments, such as the rise in unemployment rate. Now over 2 million people in the country, somewhat 2.2 million are unemployed and registered at job centers. In fact, I think the figure is even bigger, as some unemployed people do not register there. If assessed under the International Labour Organisation methodology, the unemployment may be put at over 6 million people, or 7.5 to 8 percent of the national labour force. These are alarming figures to which the Government must react.

There are other problems as well, such as the ruble exchange rate fluctuations. We had to weaken the ruble due to decrease in currency inflows caused by decline in exports. We face a problem of high inflation, too. Nevertheless, I should say that these negative trends have been suppressed if not reversed.

I believe we have come to a stage at which we should understand what comes next for both Russia and the global economy.

What actually has caused problems for us? It was the current structure of the Russian economy that caused problems, as it is no secret that the Russian economy was, and still is, to a considerable extent export-oriented. Such orientation toward raw materials export surely caused problems once oil and gas prices dropped. A range of other export commodities, such major products as, for example, products of metallurgy industry which account for a significant share of national exports, also became essentially cheaper.

Therefore, we have in a way fallen victims to the economy structure which has developed for decades. The main task here, the goal for the future, is just to change our economy's structure.

I do not see the situation as a dramatic one, but it is complicated. It is in some way less, and in some way more complicated than in other countries, but in general it is, probably, the same as in most nations that are affected by the economic and financial crisis.

MARIA BARTIROMO: Can I ask you to tell us about your economy diversification plans? How are you going to respond to this downturn? For example, could you, please, tell us about the situation with the Stabilisation Fund accumulated by your predecessor Mr Putin and yourself before the recession?

DMITRY MEDVEDEV: The main task for us right now is to overcome the crisis consequences and to shape the new structure of national economy.

Indeed, it took us quite a while to lay foundations for advanced economy in our country, but unfortunately its diversification degree remains extremely low.

In my opinion, we can not accept the general situation and the current state of affairs. We have failed to create a high-tech economy, we are still highly dependent on the raw materials exports, as I have just said, the innovative component in our economy is very weak, and we do lack immediate implementation of innovative technologies in our industries which is the main feature of a modern innovative economy. In other words, national economy diversification is probably one of the most urgent and important tasks for our country. Of course, we will strive to accomplish it, but in doing so, we need to design a new structure.

As for our Stabilisation Fund, we indeed have spent much time and effort to accumulate certain reserves which now account for billions of US dollars. At some point, over \\$600 billion were accrued in the Reserve Fund, some reserves have been spent now, but nevertheless, the remaining reserves are still vast, it is still a lot of money and of course, it helps us solve many problems at the moment, but development is impossible at expense of reserves alone. Therefore, despite the fact that we continue to accumulate gold and currency reserves and strengthen the currency component as such, we will have to think about the diversification of economy in general, about launching new industries and creating a high-tech innovative economy. This is probably the main task at the moment.

MARIA BARTIROMO: Indeed, the world has witnessed unprecedented changes, and now we are questioning many topics that have never come up before. This includes both bank solvency and the global economy.

Do you think the US dollar will be able to get out of the recession? Do you think its status as the number one world currency will change?

DMITRY MEDVEDEV: We, too, are very much concerned over this issue since the whole world depends on the situation with the US dollar. Although there are other reserve currencies such as the euro, pound sterling, yen, still a lot depends on the well-being of the US dollar.

As you know, we have our own standpoint in this regard, which Iexpressed a year ago, by the way, at the Saint-Petersburg International Economic Forum. Today the world requires more than just one reserve currency and this is not because the US dollar is bad or the euro is not sufficiently good. The current situation itself suggests that there should be several currencies, which banks, individuals and whole countries could invest in. This will give options to react should any problem emerge in any economy. The problems, as we understand, initially occurred in the US economy, it is evident now. May be in case the United States Government had countered these problems in some other way, the downturn, the crisis would not have been so deep now. I am not going to elaborate on the subject at the moment, my point is that the US economy crisis has naturally changed the general attitude to the US dollar.

Therefore, our task for the nearest future, as I see it, is to create more reserve currencies. One of such reserve currencies could possibly be the Russian ruble – as a regional reserve currency, especially taking into account the fact that there is a number of states which are genetically, historically, economically and in many other regards linked with Russia. In this context I believe that at some stage the ruble too could become a regional reserve currency.

At the same time we do not exclude the possibility of creating in the future a so-called supranational currency, especially since the decisions of the G20 London Summit provide that the International Monetary Fund will issue various securities for the countries to invest in. Some instruments already used by the International Monetary Fund, such as special drawing rights, for example, represent in fact a prototype of such a supranational currency. What does it mean? It means that in any case we will need a universal payment instrument to lay a basis for a future international financial system. I do not think this will undermine seriously the US dollar. But I consider it very important for the US dollar and other reserve currencies (including, hopefully, at some moment the ruble too) to have additional possibility to react, some interlink at possibly the level of special drawing rights or some special currency unit, the interlink to be activated in crisis situations. That is why this idea, brought forward by Russia and supported by our Chinese colleagues, seems to be very productive. We purposefully did not discuss it in the G20 format in London and agreed with our colleagues, that this issue should be dealt with some time later. One of the reasons for that was our intention not to allow currency markets destabilisation. However, in my view it should be done - sooner or later.

In general, we see the future of the international financial system in establishing modern rules of the game. Speaking of such rules, it has become rather common to talk about the fact that there is not enough regulation, and that we need to adopt a greater number of decisions. As I see it, it is not the point. The point is not in adopting substantially more conventions to regulate one financial and economic process or another. The point is in making such decisions, international conventions and international commitments more efficient and more transparent. In other words, we do not need more regulation, but rather a better one.

Therefore, when we talk about the fate of the Bretton Woods financial and economic system, our country stands not for closing it down, or cross it out, but rather for modifying it in such a way that it would meet the needs of the 21st century, take account of a greater number of successful economies, and a greater number of regional reserve currencies. We would like, of course, that ultimately the fate of the financial system is decided not in one place, but, say, at the forums where major economic players meet. In this sense we must admit that nevertheless the Bretton Woods system was primarily focused on a few countries only – the United States, Great Britain, and still less the European states. Today we need to create a modern universal framework that would unite American perceptions about a fair economic order and financial system, British perceptions as well as the perceptions of other partners from Europe, Russian perceptions, Chinese perceptions, and Indian perceptions as well. Only then can we be sure that the modern regulation will prove effective. Otherwise we will have to confront a new financial crisis in five or ten years because we realise that due to the cyclicity of international economy sooner or later crises will come back. The question is only about the degree of their threat to or impact on the global situation. Such approach Ibelieve to be very important in general and in the context of world currencies' prospects.

MARIA BARTIROMO: You have made a very good comment. In fact, we already have a regulatory system, we need no further regulatory systems. The only problem is that it simply failed. I absolutely agree with you.

You have made, Mr President, a very important comment. Indeed we already have a regulatory system, and we had it before. But let me ask you something about what you said, the idea about reacting to what we saw in the Untied States, in particular.

Do you expect global inflation, in particular, given the situation with raw materials, the situation in the US, the weakening of US currency, the dollar - can it bring about global inflation that would be necessary to cover the expenses the United States have to face? Can we expect a global inflation?

DMITRY MEDVEDEV: You know, I would not exclude global inflation namely due to the problems that you have mentioned. We, I mean Russia, if compared to other countries, are in a very difficult situation as concerns inflation. Unfortunately, we failed to cope with inflation earlier, before the crisis. It was about something like eight percent. After we had to partially devalue the ruble, certain processes accelerated. The overall amount of money in the economy increased. As a result, inflation pressure has grown. For this year we forecast an inflation rate of about 13 percent, which is naturally beyond the limits of possible as it has a negative impact on the liquidity, as well as the banks’ discount rates, credit interest rates, and ultimately on those loans that are extended to companies and individuals, because such loans are extended at unrealistic interest rates that we got rather unused to. These interest rates reach 18 to 20 percent per annum. That is way too high. Nobody wants to borrow money on such terms here, while foreign cash inflows - European cash recourses, and US cash resources - naturally, considerably fell down due to the crisis.

Therefore, our task today in Russia is to seriously reduce the inflation rate. But the processes that you have mentioned, related to the situation around the dollar, the need to resolve various problems in the US economy, including measures to support a number of large manufacturers (as far as I understand a decision will be made in the immediate future about the de facto nationalisation of the General Motors, a decision worth huge money, dozens of billions of dollars, not to mention the fact that the overall program in the United States aimed to support the national economy actually runs into trillions of dollars) coupled with the decisions taken by other countries, may lead to a still greater volume of cash injections. As a result, inflation processes may gain momentum, which naturally will have to be offset by additional emissions. Such additional emissions will have a most negative impact on the global economic situation.

It would therefore be desirable to avoid such a scenario. I have initially told you about the economic situation in this country, but in terms of inflation we, of course, depend on the inflation situation in other countries. By the way, for us, the last few months turned out to be more favorable, the inflation rate in Russia turned down and by the year end it will most probably be lower than anticipated. Nevertheless, it is still a high rate because we have been pursuing the so-called policy of inflation rate targeting and expected to see inflation at some acceptable level of, say, 5 or 6 percent. This year, of course, it will not be like this, but we will strive to curb by any means the inflation because this is a very important factor for our economy, as well as for the global economy.

Therefore, in our view, as well as in my personal view, the threat of an accelerated global inflation is nevertheless present in the current situation, which may result in any sort of problems, including problems in the banking sector.