Klepach: it’s time to cut a window into China

Interview given by Vnesheconombank Deputy Chairman (Chief Economist) – Member of the Board Andrei Klepach to TV Channel Russia 24 in the course of the Gaidar Forum

HOST: We are again getting back to the venue of the Gaidar Forum. Now my female colleague Alexandra Suvorova is in direct communication with us with the latest details and exclusive commentaries. Sasha it’s your turn to speak now.

Alexandra Suvorova’s reporting

CORR: Sergei, hullo once more. Our guest Andrei Klepach is now with me in our studio. He is Vnesheconombank’s Deputy Chairman. Good afternoon Andrei.

Andrei KLEPACH, Vnesheconombank’s Deputy Chairman (Chief Economist) – Member of the Board: Good afternoon.

CORR: My first question is related to the agenda which is being actively discussed at the Forum. You took part in a session devoted to the latest developments in China. I’d like to remind you that that China saw the lowest GDP growth of 7 percent in 2015. What in your opinion should China do to restore its position in the world’s market and how should Russia interact with this country in the current situation? We can see that lately the emphasis has been on the Asia-Pacific region.

Andrei KLEPACH: In fact, China is going through a sort of economic adjustment or as they say economic rebalancing. Growth rates have slowed down. They expect economic growth this year to be about 6.8 or 6.9 percent. Experts expect economic growth to be even lower and I’d rather agree with their estimates. The reason for it is that China is forced to undertake such a serious structural restructuring. Their old model is not able to generate previous growth rates. And the main reason for it is a general slowdown in global trade growth. It shrank substantially in all countries and above all in OECD countries where main Chinese markets are. So, China’s exports shrank by more than 2 percent in 2015. And in 2016, significant economic growth is not likely to be possible. So, as Chinese people say themselves God forbid to live in a time of change. Now China is living in a time of change. But I don’t think that it will mean a hard landing of the Chinese economy this is not a slump and this is not a stagnation. China will maintain economic growth but the growth will be complicated and it is likely to be lower than they expect.

CORR: What sectorial markets in your opinion will be of interest for Russian players in China? And are there any chances for Russia to raise the capital that is now fleeing China?

Andrei KLEPACH: In fact, it’s very difficult for us to tap into Chinese markets because our presence there is rather insignificant. I think that besides the traditional market related to supplies of nuclear power equipment and construction of nuclear power stations there are important and potential niches in aviation industry including those related to joint projects on developing and manufacturing wide-body aircraft and to a potential project on launching the production of regional Sukhoi Superjet 100 aircraft. But these projects are very complex and they are being discussed so far. I think risks that they will be left on paper or in plans are great. We made a significant headway on foodstuffs because exports of Russian foodstuffs are starting to grow as their quality is better than Chinese ones. And many middle-income consumers start to prefer Russian food products. I think we can also cooperate in supplying our instruments to China. But Russian enterprises need to make a technological breakthrough to expand a range of products we are ready to supply to China. It’s very important for us not only to supply products to China but also to raise Chinese investments. Money has started to flee China but at the state’s level it has been purchasing assets abroad for a long time and above all raw materials. It’s important that private Chinese investors have started to invest in Russian projects for example in the Bystrinsky Mining and Processing Plant of Nornickel. We are now discussing issues of securing Chinese credits to fund projects related to Yamal LNG and the construction of the Moscow-Kazan High-Speed Motorway. So, we have a potential for raising Chinese investments. But China is a difficult partner and we need much time to put plans under discussion now into effect. Nevertheless, I believe that there is a large window of opportunity and it might be a matter of billions of dollars and not only in the raw materials sector but also in infrastructure projects. In the past China extended credits to Rosneft too.

CORR: As to China, many experts share the opinion that we can see China’s influence on trading floors all over the world. What factors in your opinion influenced oil price quotations and is there a speculative component in it?

Andrei KLEPACH: This issue is being discussed actively every day almost every hour. But a key role here is being played by Saudi Arabia which is struggling to restore its position on the oil market. It competes with shale oil producers from the United States and other countries. And in this case we act as an active competitor too. I think that this process will continue. In my opinion, speculative components are not playing a major role here as was the case in the past when there was a financial bubble caused by investments made by various funds in oil financial instruments. This resulted then in bringing oil prices to more than a hundred dollars per barrel. This is not the case now. But I think that the situation in the oil sector will have to change for restoring oil price quotations because Saudi Arabia’s margin of safety is not limitless. According to various estimates Saudi Arabia’s financial system will withstand for 1.5-2 years because the country’s budget deficit is about 20 percent. On the other hand, oil production is bound to fall both in the United States and in a whole number of OPEC countries as well as independent countries. So, the world could face a high volatility of oil prices. But in general, we have entered a period when an average level of oil prices will be a lot lower than in the last years. And I believe that estimates from 50 to 70 dollars per barrel are realistic and probable in the mid-term.

CORR: Let’ get back to the Russian agenda. Do you think that the Central Bank is likely to reduce the key interest rate?

Andrei KLEPACH: As the ruble is weakening because of the fall in oil prices the key interest rate is unlikely to go down. There are risks that it will go up to keep the ruble from falling further. If oil prices go up in the second half of the year, inflow of foreign currency will increase and the ruble is likely to strengthen and the key interest rate is likely to go down. Due to limited consumer demand and limited consumer incomes inflation will slow down, especially in the second half of the year.

CORR: You predict that inflation won’t reach double digits.

Andrei KLEPACH: I think that we won’t have double-digit inflation.

CORR: And now my last question. Do you believe that a devaluation of the ruble is possible or not?

Andrei KLEPACH: We can already see the ruble devaluation at the beginning of the year.

CORR: Is the ruble going to fall further?

Andrei KLEPACH: No, it is not if oil prices do not collapse and I don’t think that oil prices will fall further. In the first half of the year oil prices are likely to be about 30 dollars per barrel. I do not rule the possibility that oil prices will go up and strengthen the ruble. The more so, capital outflow has diminished.

CORR: I’m sorry but our time is running out. Thank you very much for finding the time for this interview here at the Gaidar Forum.