Putin on sanctions: West leaders must have something switched off in their brains

Though Russia has a right to demand an early repayment of its $3 billion loan to Kiev if its total debt exceeds 60 percent of GDP, Moscow has already decided against it, as it wants Ukraine to get on its feet, Vladimir Putin told German ARD channel.

Vladimir Putin answered questions from ARD's Hubert Seipel.

Hubert Seipel:

Vladimir Putin: You mean the Ukrainian crisis?

Hubert Seipel:

Vladimir Putin: Of course, who could benefit from it? You wanted to know how the situation is evolving and what our expectations are. Of course we expect the situation to change for the better. Of course we expect the Ukrainian crisis to end. Of course we want to have normal relations with our partners, including in the United States and Europe. Of course, the situation with the so-called sanctions is damaging for the global economy (it is damaging for us and it is damaging for global economy as well) and it is damaging for the Russian EU relations most of all. In this case it contradicts international law, which governs economic relations, the WTO principles and the agreements we will try to reach during the G20summit. It comes into direct collision.

By the way, according to the European Commission data, the losses from Russia's counter-measures aimed at protecting our economy are estimated as 5 - 6 billion euro. Can we estimate the losses that these sanctions have caused Russia? It is rather difficult. To some extent, these are virtual losses. Although we have really sustained losses, it is true. However, there are some advantages as well: the restrictions imposed on some Russian companies on purchasing certain goods from Western countries, from Europe and the United States, have induced us to produce these goods ourselves. The comfortable life, when all we had to do was produce more oil and gas, and to buy everything else, is a thing of the past. Now we must think about producing goods ourselves, not just oil and gas. We have solid science and technology resources, which makes us fully confident of our ability to address any technology issues independently, including in the defence sphere.

With regard to growth, we should note that this year growth was modest but it was present nevertheless at about 0.5 - 0.6 percent. Next year we are planning to achieve 1.2 percent growth, the year after that 2.3 percent and 3 percent in three years. Generally, these are not the figures we would like to have but nevertheless it is growth and we are confident that we will achieve these figures.

© Reuters / Shamil Zhumato

A man walks past shops damaged by recent shellings in Donetsk, eastern Ukraine, October 21, 2014

Hubert Seipel:

Vladimir Putin: I expect to have frank discussion with my colleagues and not to beat about the bush. In general, such venues, the decisions made there and the discussions at these venues are not binding and unfortunately are often not implemented, for example the decision to change the configuration of the international monetary system, to enhance the role of developing economies due to their changing position in the world economy as a whole. For example, we adopted a decision at a G20 summit to enhance the role of developing economies in the IMF. But the US Congress blocked the decision and everything came to a standstill. The Congress does not endorse the decision, and that's it. We see what is happening but, of course, we hope to have frank and unbiased discussions.

As for the international financial architecture, the current problem is not new; it concerns the fact that developed economies have a surplus of capital that the Western economies do not know where to invest efficiently and reliably. The developing economies have commodity imbalance because they produce and sell goods using low-cost labour and some other production instruments that are cheaper than in Europe and the United States. So, there is a capital imbalance on one side and a commodity imbalance on the other side. It is difficult to agree on joint efforts in this area because the developing economies are always uncertain about the rules of the game concerning the allocation of this capital. The sanctions you have mentioned are a vivid negative example of our partners' behaviour.

By the way, you have mentioned Ukraine, which is a striking example of the current situation in this sphere. Russian banks have currently extended a $25 billion loan to the Ukrainian economy. If our European and American partners want to help Ukraine, how can they undermine the financial base limiting our financial institutions' access to world capital markets? Do they want to bankrupt our banks? In that case they will bankrupt Ukraine. Have they thought about what they are doing at all or not? Or has politics blinded them? As we know eyes constitute a peripheral part of brain. Was something switched off in their brains?

The bank that I mentioned is Gazprombank, which only this year, this calendar year, has extended a loan of $1.4 plus $1.8 billion to the Ukrainian energy sector. How much is that in total? $3.2 billion. This is the sum it has allocated. In one case, it issued a loan to Ukrainian Naftogaz, which is a public company; in the other case, it allocated $1.4 billion to a private company in order to support Ukraine's chemical industry. In both cases, today this bank has the right to demand early repayment because the Ukrainian partners have violated their loan agreement. As for Naftogaz...

Hubert Seipel:

Vladimir Putin: (In German) They are paying at the moment. (Continues in Russian) They are servicing the loan. Naftogaz is servicing one of the loans. However, there are some conditions that are being violated. Therefore, the bank has the formal right to demand early repayment.

In the second case they are doing nothing to repay the $1.4 billion. The government is holding the gas in an underground storage facility and does not give it to its industry. It is their own business that they are crippling their chemical industry. It is also not good to leave people without jobs, but it is their business. However, as the gas does not reach the consumer, as it is not paid for, our bank does not get the money back. It has the right to demand an early repayment. But if we do it, the whole Ukrainian financial system will collapse. And if we don't do it, our bank may collapse. What should we do?

Moreover, when we extended a $3 billion loan a year ago, there was a condition that if Ukraine's total debt exceeded 60 percent of GDP, we, the Russian Ministry of Finance, would be entitled to demand an early repayment. Again, if we do it, the whole financial system will collapse. We have already decided that we will not do it. We do not want to aggravate the situation. We want Ukraine to get on its feet at last. As for the bank, it is a financial institution, a joint-stock company whose shareholders include foreigners.

This is basically an answer to your question: any restrictions are counterproductive and in the long run cause damage to all international economic or financial actors.

Hubert Seipel:

Vladimir Putin: No, you should not see it like that. The issue is as follows. Indeed, the decision was made at the last BRICS summit in Brazil to create several financial instruments, to be more precise, two instruments - the BRICS Development Bank and the Contingent Reserve Arrangement. This Contingent Reserve Arrangement is being established along the same principles as the IMF and in a sense it may be considered its analogue, but it is being created for completely different purposes. It is being created to promote development in the BRICS countries only, or primarily development in the BRICS countries, and it is not going to replace such global institutions as the IMF.

What is the danger, in my opinion? It is to start separate international economic relationships. This concerns not only the monetary component but also trade.

As you know, the negotiations within the WTO, the so-called Doha Round, have come to a deadlock. Developed and developing economies cannot agree on the rules of the game in the agriculture sector and on some other issues. Today we hear some hints from our partners, first of all from the United States, concerning the creation of an Atlantic Alliance on the one side and a Pacific Alliance on the other, with those who meet certain requirements, as our partners see it. And the WTO does not seem to be such an important organisation anymore. I believe this is quite dangerous because the developing economies play an increasingly important role in the global economy as a whole and it is dangerous to ignore this.

© Reuters / Paulo Whitaker

(L-R) Russia's President Vladimir Putin, India's Prime Minister Narendra Modi, Brazil's President Dilma Rousseff and China's President Xi Jinping pose for a group picture during the VI BRICS Summit in Fortaleza July 15, 2014

Incidentally, the combined GDP of the BRICS countries calculated using purchasing power parity is already bigger than that of the so-called G7 countries. As far as I know, the BRICS countries have more than $37 trillion calculated using purchasing power parity, while the G7 has $34.5 trillion. And this upwards trend is in favour of the BRICS, not vice versa. That is why I think we should not follow the way of creating powerful but local associations but try to reach consensus within global organisations.

We spoke about what is happening in trade, how harmful what is currently happening is or isn't. You know, if our banks are even partly cut off from international financing, they receive fewer resources. This means that our economic entities can purchase fewer goods from you. After all, our cooperation, say, between the Federal Republic of Germany and the Russian Federation, provides hundreds, thousands of jobs in Germany. Some experts believe that nearly 300,000 jobs are maintained through our commercial and economic relations, through large quantities of Russian orders, through joint ventures. If the resources of our financial institutions are cut off, they can extend fewer loans to the Russian companies that work with German partners. Sooner or later, it will begin to affect you as much as us.