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President of Russia Vladimir Putin: Mr Ulyukayev, we are summing up last year’s results. Though it may yet be early to speak of final results, the numbers at the disposal of your Ministry are very close to what we will see in the final report.

It was not an easy year; nevertheless, we have reasons to feel somewhat optimistic regarding the current and future periods. What is the reason for this optimism?

Minister of Economic Development Alexei Ulyukayev: Mr President, it is true, the year was economically unique in terms of the combination of unfavourable objective and subjective circumstances, starting with the situation on the market of raw materials. An unprecedented four-fold drop in oil prices and a similar drop in prices of non-primary goods, turbulence on the financial markets plus the geopolitical actions by our partners – all this created a very nervous atmosphere, of course.

Vladimir Putin: And a world economic slump.

Alexei Ulyukayev: Absolutely. Global demand dropped sharply, serious risk hotbeds appeared where nobody expected to see them, and I mean the former leaders – Southeast Asia.

It was against this backdrop, as you may remember, that last January, exactly a year ago we were adjusting our forecast in a rather nervous atmosphere, practically in an atmosphere of panic among certain market players and analysts. The expectations were most unfavourable, but nevertheless, I want to look at the forecasts and the reality.

It turns out that our forecast was very close to the actual situation.

We expected the price of oil to be at $50 per barrel, the actual figure was $51. We expected the consumer price index to be 12.2, it was 12.9 – a difference of less than 1 percent. We estimated the dollar exchange rate at 61.5, the annual average was 60.

Vladimir Putin: This is the annual average, for all of last year?

Alexei Ulyukayev: That’s right, for all of 2015. We expected a 3 percent GDP decline, and it ended up being a little higher, at 3.7 percent. On the other hand, the decline rate for investments in fixed capital turned out to be significantly lower – 8.4 percent instead of 13.7 percent. But this is after adjustments, because investments are always adjusted at the end of the year.

I want to particularly point out the situation with private capital and the movement of private capital. We all expected a very high outflow, around $115 billion, but in fact, we had an outflow of $57 million, just half of what we expected. Capital outflow is a business assessment of internal and external factors, an assessment of future working conditions.

Why did this happen? I think the most important factor was the high adaptability of the Russian economy. In just a few months, the market participants, companies and whole sectors were able to find their niches and adjust to the changing circumstances.

This is illustrated by two shock waves, in the second half of 2014 and the second half of 2015 – I am referring to the objective shocks in the raw materials markets. Just look, the base indicator changed in almost the same way; the oil price dropped to $45, a 60 percent decrease.

In the second case, during the second half of 2015, there was a 62 percent drop. How did Russian markets and Russian sectors respond to this? In the first case, we had the same level of currency devaluation – more than twofold, from 33 to 69 [rubles per dollar]. Consumer prices more than doubled, the rate went up from 7.8 to 16.9. The Bank of Russia’s key interest rate, more than doubled, from 7.5 to 17 percent: it was forced to respond to these circumstances. As a result, the GDP decreased by an additional 2.4 percent.

In the second half of 2015, we had the same Russian economy, the same level of shock. We had 70 percent devaluation. It was enormous, but significantly less than during the first episode. Consumer prices decelerated, rather than accelerating. We started this period at negative 15.5 percent, and ended the year at about 10 percent. Not only did the key rate not increase, but it even decreased slightly during this period, because the inflation risks had been assessed correctly.

Finally, GDP dropped slightly in November, but the overall decline was 0.4 percent, which is incommensurate with what we had before. This is very important. It means that apparently, market participants have worked properly and, perhaps, the Government even helped make the right decisions through its actions.

Vladimir Putin: Has the debt decreased?

Alexei Ulyukayev: The debt has decreased very significantly. Our sovereign debt has always been low, but the corporate foreign debt was reduced enormously. Incidentally, we had $130 billion worth of external debt repayment on our schedule last year, while the outflow of capital during the same period decreased by 57 billion. It turned out that companies know how to work in this situation. They find opportunities to refinance, and although our partners’ options became much more complicated, this was done nevertheless.

Part of the debt was internal corporate debt, which also needed to be resolved. And it is very important that the public and businesses have stopped being sensitive to currency exchange rate fluctuations. They are used to the fact that exchange rates fluctuate, so there is no need to run and exchange currency, there is no need to immediately change the structure of one’s investment portfolio. This is also very important.

Vladimir Putin: In conjunction with the budget deficit, and with a deficit that is lower than expected as well as good reserves, a low level of debt – in conjunction with what frankly turned out to be a small budget deficit, will we see favourable conditions so we can count on improving the current situation?

Alexei Ulyukayev: Absolutely. The budget takes into account a deficit of 2.6 percent GDP; last year’s budget had a deficit of more than 3 percent. The Bank of Russia reserves remain at a fairly high historical level. All this has created a situation of macroeconomic stability that market participants are responding to it correctly.

We have already talked many times about the fact that the deepest part of the recession, when the adaptation was taking place, was somewhere toward the end of the second quarter. Starting in the third quarter, we observed movement in the right direction. We saw the emergence of what may be the foundation for growth – perhaps not very significant or confident, but growth nevertheless. While we had some GDP decline in the first quarter (2.2 percent), we saw the greatest decline in the second quarter (4.6 percent), and then had 4.1 percent and 3.8 percent decreases in the third and fourth quarters, respectively. We had a cumulative decline of 3.7 percent for the year.

We are seeing similar figures in manufacturing, construction, and freight transportation, and in all of these industries, the lowest point was in the second quarter, and after that there was some stabilisation, uncertain, perhaps, but stabilisation with elements of growth. In November, we had a slight wave downward, as a response to that second shock. Since December, we are once again entering a periodwhere the situation is becoming relatively favourable.

Vladimir Putin: Has there been growth in agriculture?

Alexei Ulyukayev: We had 3 percent growth in agriculture. Particularly with cattle breeding – we had over 4 percent growth for cattle. While the grain harvest depends significantly on the weather, cattle remains much more stable. This indicator shows the results of economic activity and investments, with growth of over 4 percent.

Thus, the food industry had growth of over 3 percent. Overall, I want to say that this is very important, that it is a very good financial result for Russian companies. This happened in part because costs declined, in part because exchange rates changed, and in part because the salary policy became more adequate, there was more attention toward increasing labour productivity, in part to better control the rates of natural monopolies. All this led to the fact that last year, Russian companies’ income increased by 48 percent, or 1.5-fold. That is over eight trillion rubles in additional funds that can be invested and that can serve as a foundation for development.

In some areas, the situation is simply amazing. Incidentally, it is good that these are not extractive industries, but rather, processing industries. The processing sectors of manufacturing increased profitability nearly threefold – 2.9-fold. Chemicals held the record, with a 15-fold increase in profitability. And what is very interesting is that we saw a real increase in profitability in the science sector.

Research and development became a profitable activity, which means they are in demand. Businesses are seeking opportunities to use scientific research to reduce their spending and move forward. Profits from research and development have increased 2.1-fold. I think this is an exceedingly important element of development. In this area, we truly have a very good foundation; now we just need to be smart about using it. I think we can move into this year with measured, careful optimism.

Vladimir Putin: We have a positive trade balance. Taking into account the drop in prices for our main export goods, including raw materials, what caused this positive trade balance?

Alexei Ulyukayev: We have a positive trade balance and balance for current operations.This is what is most important. In 2015, we had a trade surplus of about 145 billion rubles. This is slightly less than we had before. First and foremost, this is due to the drop in our export prices. Physical volumes have not declined, and the fourfold oil market drop, as well as the drop in the markets for gas and ferrous and non-ferrous metals, have led to a serious decrease in the price of exported goods. But the cost of imports has also declined.

As a result of this, as a result of the import substitution policy, we have an increase in Russian retail trade: the share of Russian goods has become much higher. Thus, the trade balance has decreased slightly, but remains strongly positive, while the position of the current balance of payments has not decreased at all, and in fact has increased slightly.

Why is that? It turned out much better than our forecasts. Because our services bill has decreased significantly. In essence, our citizens no longer leave their money in Turkey, Egypt and many other countries, and have begun to spend it in Sochi, Crimea and other Russian regions for tourism and recreation.

Because of our reduced corporate debt, the sums for servicing this debt have decreased well. So our current account is in good shape, and as I already said, and our capital account outflow turned out to be much lower. The overall net position of the payment balance is positive. We have 66 for the current account, and negative 57 for the capital account, with a net result of 9. This means that we do not need to use our reserves, and we may even be able to increase them. All of this adds stability to the economy.

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