Andrey Kostin - President and chairman, VTB Bank HARDtalk

that. Now, it is time for hard.. Does Russia deserves its status as

one of the newly powerful global economy is, alongside Brazil, India

and China? One respected economists said that Russia is more sick than

brick and it is unclear whether Vladimir Putin will provide the

boost that the Russian economy needs. My guest is the head of

Russia's second biggest bank. Andrey Kostin, welcome to HARDtalk.

Let me start with that memorable quotation. It is a leading

economist. He said Russia is more sick than BRIC. And he said that

Russia does not deserve to be classified with China, India and

Brazil. Do you agree with that? at all. He has the right to have

his own opinion. But Russia is showing strong growth. It is

growing higher than the other countries. It also provides very

good macroeconomic data. We are expecting growth of 45% of GDP. We

have decreased inflation in 2008. Up till now, it is 4%. Russia has

one of the best situations with debt. It is going quite well. You

have given me a lot of data and there is no doubt that Russia is

still growing. But why is it that confidence from the outside, in the

future of the Russian economy, seems to be so lacking? In the last

year, more than $80 billion of investment was pulled away, back

from Russia, and in the first quarter of this year, the figures

were even worse. Why are outside investors running scared of Russia?

Russia is still very vulnerable from external factors. For example,

the stock market is very dependent on foreign investment. This

probably explains the volatility of the markets. You would accept there

is a lack of confidence from outsiders. I think it is overrated.

Russia represents quite a good case for investment and development.

Investment in Russia is growing. I think from think from the

new breed, you mentioned Mr Putin's tenure, it represents political

stability as well as a good economic environment. It is

interesting that you see it in a positive light, that Vladimir Putin

has another six years in power. If you look at the Russian economy,

it is based on two things, it is based on Vladimir Putin and his

approach to economic management, and the price of oil. Both those

factors, as seen from the outside, leave Russia very vulnerable. It is

true to a certain extent. But it is also based on good economic policy.

If you look at the situation in Europe, Russia has a surplus budget,

and this year, even though the oil price is weaker, we have had a 1.5%

budget deficit. If you look at Europe, not only Greece or Spain,

but Germany and the US, it is quite a different economic policy. But

none of those countries are quite as reliant on oil. If oil

consistently dips below $100 a barrel, the Russian economy is

going to be in terrible difficulty. If you ask me what the major

challenge is, it definitely is a need for structural reform. That is

what Russia needs and what it is planning to do, with particular

focus on innovation. We will talk a lot about that. We will see how

serious Putin's commitments to reform are. You are sounding upbeat.

I wonder why somebody from Renaissance Capital, another

important financial institution in Moscow, he said that halfway

through Putin's term, the economy will hit a wall. Russia will be

forced to borrow. I think the Russian government understands

quite well the problem with the economy. You accept the analysis,

particularly if the oil price continues on the trend. We went

through the first crisis quite successfully, although we lost a

lot of GDP growth, we remained stable. Our financial sector

remained stable, and basic macroeconomic data remained quite

stable. I think that Russia is quite prepared for the new wave if

it happens. Having said this, of course we will be vulnerable unless

we structure our economy and that is high on the agenda for any

leader. It is high on my agenda for this conversation. But one more

point before we get to the internal argument for reform. There is

another external factor. It is the fall-out from the euro crisis. No

doubt that Russia has Europe as a major trading partner and a source

of investment. You yourself in your bank has often looked for major

investment in Europe. The fact is right now, it is difficult to

imagine you finding fresh new sources of venture capital in

Europe, because the credit markets are tightening. The answer is yes.

The major problem which might be for Russia is the general recession,

the recession in Europe. We are not so much exposed to the problem in

the financial sector, but if the commodity prices move down because

of the recession, then we will be in trouble. For us, it is very

important that Europe goes for growth, it is as important for

America and China to continue to grow. We are part of the global

economy. You are looking pretty cheerful, but there is not very

much ground to be cheerful, heading up a big Russian bank at the moment.

If you look around the world, things do not look good. How are

you going to deal with not just a slowdown, but something much worse

than that in Europe, and a persistent lack of growth in North

America as well? We are living through a very optimistic and good

period from 2005-2007. Then we had a very sharp crisis in 2008. But I

think we expect quite a long and protracted period of uncertainty,

but we just have to accept it. Maybe low oil prices are good for

Russia because it will make the government think more about

restructuring the economy, so I do not see the departure of Greece or

even other problems as the end of the world. We have to accept this,

and we have to change our mind in order to focus on different things,

to become more conservative maybe, to become less ambitious, but still

work very hard in order to protect the company and to develop further.

When you are briefing your colleagues and shareholders about

the situation in Europe, do you tell them that they should plan,

Russia's banking system should plan for the break-up of the euro? Do

you believe that Greece, maybe even a few other peripheral states, will

have to leave the eurozone? It still has to be seen. I understand

how it is difficult for politicians to make decisions that they have

already made. I am asking whether you plan for it. At the moment, our

basic scenario is that Greece will stay as part of the European Union,

but there will not only be a problem with Greece, there will be

a chain reaction, there may be a problem with Spain, Portugal, other

European countries. So there is no easy solution. It brings us to what

we have already alluded to. reform situation in Russia. It

struck me as amazing, that you, a man who has for some time made the

case for significant fundamental reform in your country, should in

the recent election campaign, come out as such a loyal and strong

supporter of Putin, describing him as the father of the nation. You

said he has had a liberal economic policy. That is just not true.

Russia has the most liberal current regime. Investors can come and live

in Russia without any restrictions. Mr Putin was always listening to

what was called the liberal economic part of the government.

They were advising him. I think our economic policy is liberal. You

think it is a economically liberal to have the most extraordinary

centralised, state-managed economy, riddled with corruption as well, an

economy where the state owns 75% of your own bank, more than half of

the other biggest bank, and it dominates the energy sector.

state is the only hugely important actor in the Russian economy. If

you look at the bank, you mention the restructuring reforms, if you

look at my situation, where I became a chairman ten years ago, in

that time, we not only grew by 45%, sorry, 45 times, and we also had an

IPO in London. But you are 75% owned by the Russian state. It is

most unclear whether they are going to divest themselves... 10%, we

sold shares for $3 billion. But it is not easy today to sell shares.

Why in that case, in May, did Putin issue a decree cancelling the

planned privatisations that were going to be a key symbol in the

energy sector? He cancelled the privatisations of a few giant

He cancelled the privatisations of a few giant energy companies. I

spoke to Mr Putin myself about privatisation and I found he

considered that private investors probably would be better managers

than the state ones. Why did he roll it all back? Everything should

be done properly. I was working in London in Margaret Thatcher's time.

It took a long time to make major privatisations. We are a country of

extremes in Russia. One day, the economy is all public and then we

are going to sell everything at once. But we are not asking for the

world. Realistically, Vladimir Putin has been in power for 12

years. Eight as president, four as prime minister. He has had every

opportunity to prove himself to be the economic liberal that you claim

he is. He has consistently refused in practical terms to show that he

really does want to deregulate, to privatise and change the Russian

economy. Why do you believe he wants to do it now? He had a number

of tests in Russia since he came to power. One of the major tests was

to change the Russian economy, which was not only economic but

society dominated by oligarchs. He managed to separate the economic

power from the political. You may not call them oligarchs any more

but the people who dominate the economy now are friends of Mr Putin

from way back, people who have KGB associations. This is not an open

economy. In my life, never has Mr Putin called me and asked me to

help one of his friends. I can assure you. There is nothing wrong

with having friends who are doing business. Why has he appointed a

former KGB colleague to be the head of energy - the man who has

essentially put his thumb on top of the privatisations and says they

will not happen? Because he was, for some time, chairman of the

supervising board of directors because he is experienced. He was

deputy prime minister for many years. But he does not believe in

economic... Even you would say he is not an economic liberal. He is

not. But he is not defining the economic policy. He is defining the

policy of one corporation and he will be quite a good manager for

that. One banker, and I am guessing it was not you, anonymously told

the Financial Times the other day that privatisation was going to be

the litmus test of the new government in its reform programme

and it looks like it has been muted. If you asked me about whether

everybody in Russian government in Russia wants privatisation, the

answer is probably no. Or if everybody understands the

difference. But I am sure the trend in Russia for the next five years

will be massive privatisation of the big companies, not only the

small. Small companies, even the energy sector, will be privatised.

When? When will you be the boss of a fully privatised bank? It depends

on the market completely. There are no other political restrictions.

The government said 100% it can be sold. It is now the management team,

together with the government team, to see whether the market can eat

so many shares. Talking about eating things in the economy, what

really eats stuff in the Russian economy is corruption, of course.

Leaving aside privatisation, maybe more important is to clean up the

stable when it comes to all the corruption we see from top to

bottom in the Russian economy. The newly appointed ombudsmen for

business rights in Russia says that in the last decade, let's not

forget that it's Mr Putin's decade, Russia has locked up nearly 3

million entrepreneurs. What do you make of that? I am seeing life from

the other side. Meaning, you are not in prison? No, a businessman

who is borrowing money from the bank and then cheating and making

frauds. Nearly 3 million entrepreneurs, you believe they

cheated? No, there is a problem with economic crimes in the

criminal court. This process will be continued and the Ombudsman is

very important. He is well known as a person who protects the rights of

particular small and medium-sized businesses. But we will see whether

he is allowed to deliver a clean-up of the business and legal systems.

For example, I believe, only a matter of months ago, a senior

judge resigned and has since said, "Many innocent people are locked up

in our system". He says judges come under enormous pressure from the

state security apparatus and from prosecutors. Would you not accept,

as a man at the top of Russian business, a figurehead in the

Russian economy, that this is a massive problem for Russia actually

improving its economic performance and combativeness? On the one hand,

I agree. There should be more liberal criminal courts for

economic crime. But we have a different situation. I have seen

seven criminal cases raised against the former chairman of the Bank of

Moscow, now living a multi-billion dollar lifestyle in London. $5

billion disappeared from the bank. We still cannot find that. But

liberalisation of the economic court is very much on the agenda. I

personally am on the conservative side. The criminal cases should be

punished. Maybe not so severe but still there should be some

punishment for criminal cases, as all around the world. I just want

your thoughts on one other aspect of this. I am sure you would agree

that the case of Mikhail Khodorkovsky was important in

Russia. It sent a signal. I was fascinated when I had one of the

biggest Russian billionaire's on HARDtalk recently. He said he

thought Mikhail Khodorkovsky was punished too much. Do you agree?

is a difficult question. It is a pretty simple question. Are you

happy to see him serving a second six-year, I believe, sentence on

top of his first? Probably enough is enough, yes. Should he be

released? You can never forget the Godfather Book which says that

behind every great fortune is a crime. I'm not sure whether it was

right or wrong. But enough is enough? I think it will be useful

for the President to release him. Now? Probably now, yes. Have you

told him personally? No. It is important. As we discussed, you

want to give a sign that Russia is changing and bring back foreign

investment to Russia, it would be an important symbol. Each country

has to deal with this issue. It was a criminal case. When you talk

about Britain, you say the courts are independent from the government.

Your government officials will never say, yes, we will try that.

It is a court decision. We are not intervening. Mr Putin probably says

the same. A quick final thought on Vladimir Putin. You wrote back in

February that you wanted him to declare that he would only run for

this current six-year presidency, that he should not run for another

term afterwards, as he is allowed to do. Do you still believe he must

make this his last term? That is not exactly what I was writing. I

wrote that Mr Putin has a special ease in his pocket, that he can

declare that he will only stay for six years if he wants to strengthen

his position. What do you think? As one of the most important economic

figures, would it be better if the said he would only serve this term?

Not at all. Only life will show us. If Mr Putin, in his third term,

managed to give a country new drive, then he would have a good chance to

stay for another term. A final thought, and this takes us to

foreign affairs. You have spoken out against America's efforts to

impose financial isolation on Iran. Do you think it is good, given what

we have discussed about the state of the Russian economy, for Russia

to be seen internationally to be on the side of Ahmadinejad? We are not

talking about taking sides. When the American Congress adopted the

legislation at the end of last year, we had to obey, for example. We

stopped all relationship with any Iranian banks. Even the companies

in Russia who were selling figs from Iran to Russia, we stopped

services. Even though it had nothing to do with high politics.

And you bitterly resent that? resenting the Russian government as

well. That one government uses its currency, a major settlement

currency in the world, but that doesn't really coincide with the

World Bank Charter and that it imposes these restrictions for

political reasons, using the financial instruments. Because

tomorrow, there will be another country, then the third one, the

fourth. All such measures, like sanctions, should be adopted based

on the international efforts and decisions, like the United Nations,