SPIEGEL Interview with Russia's Economics & Trade Minister "A Free Market is Indispensable"
Russian Minister of Economic Development and Trade German Gref discusses the destruction of Russia's Yukos oil company, fears of the return of an authoritarian state and his relationship with Russian President Vladimir Putin.
He's close with Putin, but German Gref says he's also not shy about speaking his mind and telling the Russian president when he's wrong.
The president of the European Bank for Reconstruction and Development, Jean Lemierre, recently said that Russia finds itself at a crossroads, and that the country could face re-nationalization and the resurgence of an all-powerful state. In which direction is your country headed?
Gref: It's headed in the same direction as all of civilized society -- to where Europe is now. But we are taking a more circuitous route.
SPIEGEL: It seems, in fact, that you are making a backward somersault in the direction of a state-controlled economy.
Gref: This is not a transformation that has been completed yet. We continue to follow a course of privatization. The president established Russia's economic course in 2000. It is directed toward open, diversified competition, and is based on the principle of economic freedom for Russian citizens. The state must privatize any businesses that are meant to produce a profit. Then the state's responsibility will be to focus on setting understandable conditions and rules of play that will apply to everyone.
I share Ludwig Erhard's view, which is that there should be as much free market as possible and as much government as necessary.
SPIEGEL: But exactly the opposite is happening now. The Yukos oil corporation is only the most publicized of cases in which the government has taken over private property. Another example is VimpelCom, a wireless provider that's being stripped of its powers by the Russian tax authorities.
Gref: There was once a time when companies simply did not pay the bulk of their tax liability. A real tax culture has only gradually developed in recent times. But now we are embarking on the third stage: The state is beginning to monitor companies' taxpaying behavior more carefully. In my opinion, this isn't always done very effectively. We must curtail the tax authorities' ability to interpret the law as they see fit.
SPIEGEL: The problem is that an impression of government capriciousness remains. Yukos Oil CEO Mikhail Khodorkovsky was put in prison practically at gunpoint. But Roman Abramovich, the owner of the Sibneft Oil Company and also a billionaire, the man who in fact invented the tax minimization model, continues to spend his millions -- to the benefit of his London soccer team, FC Chelsea.
Gref: Well, I would certainly place Khodorkovsky at the top of the list. He has surpassed all others. But I am not familiar with the details. You must admit that it isn't always possible to catch everyone. Some are luckier than others.
SPIEGEL: But why doesn't the president simply stand up and say to those who benefited from the privatization of the 1990s: You will get your money back, and we will start from the beginning; we'll sell at the true value -- instead of fabricating these tax evasion charges retroactively and then, as the European Council has criticized, exerting pressure on lawyers and influencing witnesses.
Gref: We already had the problem of expropriation in 1917, and everyone knows what the outcome was. Up to the end of the last century, our country was still trying to find a way out of this distorted economic system. If we were to take away people's property once again today, we would have a revolution on our hands. This not the correct approach.
SPIEGEL: Are you saying that the Russian government will not conduct a sweeping review of the billions in assets that were privatized in the Yeltsin era?
Gref: We have 13 major oil companies, and we cannot simply take away their assets. This is not the correct approach. But we have changed our tax laws, making tax evasion twice as difficult today. Those who refuse to abide by the new rules will be breaking the law, and they'll be punished accordingly.
SPIEGEL: Did you predict the negative consequences of the Yukos affair? The decline in investments, the increase in the exodus of capital to at least $9 billion?
Gref: The latter is only partly attributable to the Yukos affair. But there were clearly other negative consequences.
SPIEGEL: And you took that into account?
Gref: I did, yes. But I couldn't do anything about it. After all, the government had to bring the affair to a logical conclusion. It may be that the approach it chose to take was not ideal. The investment climate should not have been damaged to such an extent. This was beyond my control or scope of responsibility.
SPIEGEL: Perhaps the president is thinking: Why do we need a certain investment climate when everyone is clamoring for our oil?
Gref: No, the president knows full well that that would not be sufficient. But I'm not entirely certain that our tax officials understand this.
SPIEGEL: In the case of Juganskneftegas, the core of the Yukos Corporation, you had actually argued that it be acquired by a private investor. But the crown jewel of the western Siberian oil industry was re-nationalized, after all. Does this decision send a message?
Gref: I hope not. I will do everything I can to make sure that it does not become a model case. I believe that it's a mistake to increase the state's share of competitive industries. The state doesn't do a very good job operating businesses in an efficient manner. However, the Russian private sector has proven its effectiveness. We have seen productivity increase in those sectors in which the government has established competitive conditions.
SPIEGEL: But the giant, state-owned electricity utility, JES, still exists, and Gazprom is in the process of being transformed into the world's largest energy company, even though you were trying to achieve exactly the opposite. To what extent do you perceive this as a slap in the face?
Gref: Well, I can't exactly give you a figure. But it's obviously a setback for me. Reforms usually don't begin until companies start running out of money, and I think this certainly applies to the Gazprom situation.
SPIEGEL: Do the high prices for oil and natural gas spell the end of Russian reforms?
Gref: Well, the whole thing has its positive side, of course. The revenues provide the state with the necessary funds to enact relatively painless social reforms. Of course, companies that have accumulated too much money aren't particularly motivated to reform. They don't need transparency. The less transparency there is, the more latitude they have to do whatever they wish with their money.
SPIEGEL: While we're on the subject of painless social reforms -- Your retirees are still demonstrating against the legislation enacted at the beginning of the year to do away of social benefits. Was that necessary, given the fact that Russia currently has $120 billion in gold and currency reserves?
Gref: This was an extremely difficult reform. Forty million people were receiving benefits. People were already entitled to the status of "eligible employee" after having worked for only 15 years. This meant that they qualified for 50 percent reductions in their rent. All retirees were entitled to use public transportation for free. It was an untenable situation. Now they are being paid instead. People living in villages are happy with the system, but those who live in cities are not, because they are now forced to pay more to use public transportation than they receive in compensation. This is one of reasons the program has generated so much public dissatisfaction.
SPIEGEL: You took part of the blame for the fact that the entire scheme isn't working. Why?
Gref: These reforms should have been accompanied by a tremendous amount of research, something that did not happen -- this was the government's fault.
SPIEGEL: Was it asking too much of the former KGB officers working at the Kremlin? After all, they were trained to take more of a conspiratorial approach to things.
Gref: No, that's not true. Actually, the opposite is the case. The program should have been introduced the way things used to happen -- with plenty of propaganda. The whole thing started with hysteria, and it was doomed to fail from the onset. Our second mistake was not to get all regions on board. Sixteen regions opted to retain the old system. This didn't sit well with people in the regions that did enact the reforms, which essentially triggered the explosion in public sentiment.
SPIEGEL: And now you have promised far more in compensation than the government was actually saving, and inflation is rampant.
Gref: No, things don't happen that quickly in our country. Today's expenditures don't turn into tomorrow's inflation. It doesn't work that way. The effects only become apparent later on. The real reason is that in order to raise the money the regions need to pay compensation and have simply increased municipal taxes and prices for public transportation. That's why inflation was at 2.5 percent in January alone. But this is not monetary inflation.
SPIEGEL: Nevertheless, the benefits are gone, everything has become more expensive, and the people are angry because they don't understand the purpose of the reforms.
Gref: You're right. The regions should have been more conservative with their price hikes. The government monopolies on local public transportation had to be dismantled. One governor raised prices for public transportation by 50 percent. I told him that he should have cut fares instead.
SPIEGEL: Effective immediately, Russia's governors will be appointed by the president. Will this make them more cooperative?
Gref: It's certainly advantageous when it comes to implementing reforms.
SPIEGEL: Are you saying that you accept Putin's "controlled democracy" as a means to an end, and if so, for how long?
Gref: I can't say for how long. It will destroy the direct relationship between the governors and the population, not to mention the obvious detrimental effects it will have on democracy. It will also harm the economy in the long run.
SPIEGEL: In late 2004, you met with the Americans in Zurich to negotiate Russia's joining the World Trade Organization. Is this going to happen?
Gref: I hope so. Aside from oil and natural gas, we have a lot of things we could sell. A one-sided economy is a clay giant. This cannot continue for very long. In the future, we will have to abide more stringently to the rules of the global economy. We have tremendous potential, even when it comes to innovation in such areas as information technology. We also have some very talented young people, but the problem is that many of our teachers are part of the older generation. They still associate contact with other countries with conspiracy and espionage, and they're injecting this garbage into the heads of our young people.
SPIEGEL: Russia's economic growth has slowed down. Isn't it about time to tell the president that his goal of doubling GDP within ten years is unrealistic?
Gref: I have already said this on several occasions, even though our economy was still growing at 7.1 percent in 2004. The Russian economy must become diversified; this is the objective of the medium-term program I just presented to the Federation Council. We estimate that a doubling of GDP can at best be achieved in 2012 or 2013. I've been criticized for not encouraging growth at a pace that would be necessary to achieve the same objective by 2010. But this is simply unrealistic, given all the current scenarios. If anyone knows how to do this, I'd be happy to give him my job.
SPIEGEL: Presidential advisor Illarionov voiced his support for your views, saying that the nationalization of key industries sends the wrong signal. He was subsequently replaced as Putin's representative to the G8. Has your president become unadvisable?
Gref: Illarionov was just assigned to a different position. He has been speaking his mind for the past five years. I don't know of many presidents in other countries who would stand for such contrary advisors. Igor Shuvalov is now the Russian envoy to the G8, and he isn't any less liberal than Illarionov.
SPIEGEL: But not as bold.
Gref: Yes, that's right. I'm also someone who speaks his mind. But I wouldn't express myself quite as directly as Illarionov does.
SPIEGEL: Although you do make it clear that you favor privatization over nationalization -- and that you are against the appointment of governors. Why haven't you resigned long ago and said that everything is going in the wrong direction?
Gref: I make my opinions known to the president. He listens to me, he does. And he follows our advice.
SPIEGEL: In what respect, for example?
Gref: Putin does not support tendencies toward total nationalization, as you suggest. We have just approved a privatization program that provides for eliminating monopolies on 2,000 companies, including a few large ones. For example, 75 percent of shares in Svjasinvest, the company that controls the country's telephone system, are to be sold. Putin approved the plan.
SPIEGEL: After the charade in which Juganskneftegas was essentially handed over to Rosneft, a state-owned corporation, you must have been thinking about resigning.
Gref: Perhaps you'd allow me to keep my thoughts to myself on that issue? And perhaps you recall our former prime minister, Victor Chernomyrdin, who said something that's very typical for Russia: "We wanted to do it better this time, but the status quo prevailed." Our executive branch has a knack for transforming the best of ideas into something those who came up with the ideas can no longer recognize.
SPIEGEL: What else do you intend to accomplish?
Gref: All I can do is continue to promote my position and present the logical arguments behind my actions, explain why I believe that privatization is necessary, that a free market and freedom in general are indispensable and that only a free person can be effective in a market economy.
SPIEGEL: Have you drawn a line for yourself, beyond which you would no longer be willing to remain in your position?
Gref: My line is our president. I believe in Putin.
SPIEGEL: German Oskarovich Gref, thank you for speaking with us.
The interview was conducted by SPIEGEL editors Walter Mayr and Joachim Preuß.
Translated from the German by Christopher Sultan