Cutting offshore businesses key to reviving global economy - Putin

Putting a lid on speculative and often illegal financial schemes developed through offshore zones is one the keys to a more stable global economy, according to President Putin talking to RIA Novosti.

The need to ammend the IMF structure and learn to live by ones means were among other remedies the President suggested for the struggling economies across the globe.

Ahead of the two key economic events – G8 meeting in Great Britain at the start of the next week and St. Petersburg International Economic Forum later on June 20-23 – Russia’s President Vladimir Putin gave a broad interview to the RIA Novosti information service.

QUESTION: Increasing transparency of the global economy and abandoning the active use of offshore zones was declared by Great Britain as one of the priorities of its G8 Presidency. What tools for global economy deoffshorisation will be proposed by Russia? In this regard, will Russia make a proposal at the summit to examine the problem of the British Virgin Islands, which are under the jurisdiction of Great Britain, more thoroughly?

VLADIMIR PUTIN: Deoffshorisation is an important condition for eliminating structural imbalances in the global economy. It is no secret that it is in offshore zones that considerable amounts of speculative and sometimes blatantly criminal capital are accumulated. And the countries and territories where it is registered often have very little understanding of the money owners or its origin. Sudden emergence and uncontrolled movement of these funds has an extremely negative effect on the global financial system.

The outflow of capitals to offshore zones reduces tax base, decreases tax revenues and threatens national fiscal sovereignty. Against such a background, it is difficult to talk about building a fair taxation system. We have all seen not so long ago the head of Apple answer awkward questions from senators about the fact that his company keeps tens of billions of dollars earned in the United States outside the American tax boundaries.

The fight against tax evasion through offshore zones is a very difficult and laborious task. To that end, it is important to use not only national, but also international regulatory tools.

As one of deoffshorisation measures, Russia proposes to conclude bilateral agreements with offshore and low-tax jurisdictions. Such documents should be aimed at countering illegal schemes of minimising taxation, involve the exchange of tax information and implementation of universal recommendations developed within the framework of the OECD.

Strengthening international cooperation on tax issues has become a priority for the G20 after the onset of the global financial crisis. The OECD Global Forum on Transparency and Exchange of Information for Tax Purposes is engaged in active and useful work. It assesses the legislation of this forum’s member states in order to identify whether it complies with international information disclosure standards.

Regarding the situation with offshore zones on territories under the jurisdiction of Great Britain, the host of the G8 summit David Cameron was among those who drew attention to this problem. The British prime minister has been consistently working to increase transparency in taxation (including the issues of tax evasion and aggressive optimisation) not only in the world as a whole, but also at home. I hope that his call to enhance interaction on exchanging tax information and facilitating access of supervisory authorities to the data on ultimate beneficiaries will be heard.

QUESTION : The issue of IMF reform has been already discussed for several years during the meetings of both G8 and G20. However, these discussions come to nothing due to unwillingness of the Fund’s "founding fathers" to share power and influence. Do you think it’s time to take some more radical steps, for instance, to dissolve the IMF, start from scratch and establish a new organisation taking into account modern financial and political realities?

VLADIMIR PUTIN: The IMF needs a thorough reform. This view is shared by all the shareholders of the Fund. The problem is that the IMF frequently fails to keep pace with the rapidly changing situation in global financial markets, first of all, when making efficient and timely decisions. Their implementation leaves much to be desired as well. A good example is the global financial crisis, which the IMF system failed to prevent.

I believe it is a wrong approach to think that the new councils, funds or other international institutions will become a panacea for all the problems. It is important, drawing upon the unique experience of co-operation within the IMF, to take further action to improve its work. We should be talking about the Fund’s overall reorganisation, ways to adjust it to current economic realities. And here it is most important to revise the existing IMF quota and voting system, to enhance the role of developing countries, including our BRICS partners.

It is true that negotiations on these tracks are not going smoothly. I would say that they have actually come to a standstill since 2010. We will make maximum effort to persuade our partners to reach a compromise and find mutually acceptable solutions in the run-up to the G20 Summit in St Petersburg.

I would like to stress that changes in the IMF represent only a part of the global financial architecture reform. Its other priorities include lending and public debt management policy, as well as enhanced collaboration between regional financial mechanisms and the IMF.

QUESTION : Another priority announced by Great Britain for its G8 Presidency is the revitalisation of international trade. How urgent is the problem of trade barriers, in your opinion? How reasonable are the efforts of the states with radically different economic environments to find a common ground for their countries in order to revitalise international trade?

VLADIMIR PUTIN: The development of international trade is one of the key sources of economic growth. That is why we cannot help being concerned about the negative trend in the growth rates for world trade which declined to 2% in 2012. Estimates for this year (a 3.3% growth) do not seem very optimistic either.

This means that in spite of the crisis we should focus our joint efforts on developing trade and not on introducing protectionist measures. Protectionist lobbies within some countries have become more active which is the evidence that this threat persists.

It was in the spirit of joint actions that we proposed to our G20 partners to extend the moratorium on protectionist measures in trade and continue monitoring the implementation of such measures.

In this respect, I would like to emphasise that we consider the WTO to be the foundation on which the whole system of world trade rules is based. Unfortunately, we can see that there is certain stagnation right now within the WTO. However, this is not the reason to tear this structure down. We need to work to strengthen and develop it. We are actively trying to persuade our partners to conclude as soon as possible the Doha Round that has already been going on for 12 years. We hope that some progress will be made on this matter during the Ministerial Meeting scheduled for this December.

Now about the differences in the economic environments of the countries. They necessitate the establishment of common and clear for all market “rules of the game” in trade which would allow the countries to avoid biased approaches and protectionist barriers. The WTO creates a common legal framework and provides effective leverage against offenders. All this serves to make the world trade predictable and stable and ensure its more rapid development.

At the same time we have to look at the issue of liberalisation of trade and investment in a broader perspective. Integrated associations are becoming ever more important and free trade zones are being established. We are actively promoting the project of the Eurasian Economic Union that includes Kazakhstan and Belarus. This is a good example of barriers really lifted and trade revitalised. It is important that integration agreements correspond to the WTO requirements and regulations. We ensure this within our Customs Union, even though Kazakhstan and Belarus have not yet joined the organisation.

QUESTION:Russia has been a WTO member for a year now. One of the arguments in favour of the WTO accession was our intention to assure that Russia plays by the “rules of the game” same as for therest of the world. In your opinion, wasthis goalachieved?

VLADIMIR PUTIN: Last yearwe completed theWTO accession. Our domestic legislation and hundreds oftariff lines were agreed on andbrought in linewith WTO rulesin the course ofa long and uneasy negotiation process. This does not mean that afterRussia's accessionto the WTO rapid changes and new “rules of the game” will be introduced. We have been using the WTO norms and standards for quite a long time now. And the fact that all WTO members approved Russia’s accession to the organisation confirms that Russianeconomy is ready forthe new working conditions.

Russia's accession to the WTO allows it to fully participate in the development and improvement of international trade rules.We are yet to learn how to take full advantage of the acceptable instruments to support domestic producers, resolve trade disputes and protect Russian goods in foreign markets.

Russia has one of the highest legislative transparency standards among WTO participants, as well as detailed external trade regulations.Of course, some claim that Russia does not fully comply with its WTO obligations.However, I would like to stress that we can make the same claims regarding our partners.We believe that Russian goods are unreasonably denied access to the domestic markets of mineral fertilisers, chemicals, petrochemicals and automotive fuel, as well as to pipe and metal industry in a number of countries.Nevertheless, it is a normal working process:the US, China, India, the EU and other international trade participants are settling the same disputes.

I would like to point out once again that we must take full advantage of WTO instruments to protect our trade and economic interests and prevent our partners from using unfair competition practices.

QUESTION: One of the issues to be discussed at the upcoming SPIEF is whether the welfare state can be economically competitive in the modern world. In your view, does the European model of a welfare state have a future? Does it bother you that Russia can repeat the path of Europe that is affected by economic inefficiency?

VLADIMIR PUTIN: I think the question is incorrect. How can we link economic efficiency of a state, its competitiveness with the renunciation of all its social obligations? One of the main functions of the state is to take care of its population and ensure its social protection. A potential refusal from this function would endanger the existence of the institution of state as such.

The problem has a different nature, which was clearly shown by the crisis in certain European countries. The key word here is inefficiency. It is not the social policy that leads to the consequences Europe is facing today, but rather living beyond the means, losing control of the general economic situation and structural distortions. Moreover, many European countries are witnessing a rise of dependency mentality when not working is often much more beneficial than working. This type of mentality endangers not only the economy but also the moral basics of the society. It is not a secret that many citizens of less developed countries come to Europe intentionally to live off welfare, like they call it in Germany.

For Russia, such approach is unacceptable. A social state is not something that we simply want. It is a necessity. We are working on striking a balance between decent salaries in the budgetary field, an appropriate pension system, quality public services, including medical and educational services, and a reasonable budgetary policy and measures to stimulate the economy. Otherwise, people cannot be confident in the future, cannot trust the government, while it is essential for stable economic growth and national development. We can easily recall such a situation in the 1990s when many social obligations were not fulfilled and poverty was growing at a threatening pace.

We made our choice long ago. We will not renounce our social obligations. Today, the main economy stimulating factors in our country are income growth, consumer spending growth and growth of bank lending. The government allocates large funds for raising employment, creating jobs and implementing employment programs. And the real wage is constantly growing. Pensions and social benefits are adjusted in time; the pension system as a whole is being modernised. As a result, for the first four months of 2013 the unemployment rate in Russia remained rather low at 5.7%.

We pay a lot of attention to improving the demographic situation and developing the healthcare system. We are implementing the corresponding projects and programs.

As for Europe, we see that leading European countries carry out structural reforms to raise the competitiveness of their economies, and fight unemployment. At the same time, due to stronger coordination between budgetary and economic policies, the approach to budgetary discipline is getting more flexible. And these countries recorded their obligations in the EU strategy of social and economic development up to 2020. Therefore, we should not reject the European social model.

QUESTION: This year the SPIEF traditionally provides an opportunity to focus on the issues of sustainable economic growth and Russia’s role in global affairs. What does Russia see as new sources of global economic growth and what will Russia itself use as catalysts for changes?

VLADIMIR PUTIN: Today, it is important to evaluate the internal reserves of each country carefully and look for new sources of growth there. First of all, it is essential to improve public administration, develop human capital and competition, as well as increase investments in social sector, education, science and infrastructure. These are the keys to economic growth, innovative technology and job creation.

Therefore, the issue of financing long-term investments has been put at the top of agenda under Russia’s G20 presidency this year. Before the summit in St Petersburg we are going to propose specific actions aimed at creating conditions for enhancing investment in real economy and increasing the number of effective tools for co-financing investment projects.

Booming international trade is yet another significant source of growth. Modern situation clearly illustrates that certain states or groups of states, no matter how big they are, have reached their potential in regulating economies and financial systems. We need to adopt a unifying agenda. Global challenges and threats can only be countered through consolidated efforts of all States.

Further progressive and sustainable economic growth, apparently, requires harmonisation of economic policies on a global scale, transformation of international monetary and financial system and financial regulation and supervision system, investment promotion, higher level of trust and enhancement of transparency and predictability of markets, including energy ones.

Such work has already begun. It is important to accomplish it and to complement the steps already taken with full-fledged universal agreements. Russia which has assumed the G20 presidency for this year will actively promote such agenda at the forthcoming summit in St Petersburg.