Mikhail Zadornov: “Money is taken from the economy, but the country doesn’t spend it”

Unprecedented budget surplus — 3,2% of GDP

Mr Zadornov, you stand up for reducing the tax burden on businesses. In particular you have recently called the hike in VAT to 20% a mistake. What rate of key taxes and duties (VAT, property and corporate taxes, payroll and income tax) would you consider reasonable nowadays?

When the new government of Russia came to power, after the presidential election in 2018, some increase in costs on national projects became one of the key tasks in the mid-term budget policy. There wasn’t enough money for them in the budget. They sought to fill this gap with the help of two actions. About 10-11 trillion rubles were considered precisely to finance the federal government’s investment programme for three years. It was supposed to annually mobilise 1,5 trillion rubles from the domestic market and have a slight surplus in the budget financed by domestic borrowings. And the raised VAT was to fill another 640 billion rubles.

But the government didn’t take into account that tax collection had been actively growing in the last years. Thanks to the tax service’s management, the collected sum grew by about 17% without any tax increase.

Technocrat Mishustin did a good job…

Yes. In other words, even without any rise in VAT, the budget would have anyway had significant additional money. Now, over the first 10 months of the year, we’ve had an absolutely unprecedented level of surplus, that’s to say, incomes outstrip costs. It accounts for 3,2% of GDP. It is a very high level for Russia as well as for any other country in general. To put it simply, the federal budget has a lot of money in surplus now. Moreover, not only the federal one. 15 Russians regions do. Tyumen Oblast, Khanty-Mansi Autonomous Okrug, Sakhalin Oblast and even some regions whose budget didn’t have a surplus.

Now if the tendency of the budget surplus is stable, one should be thinking about some reduction in taxes. It is necessary to discuss, analyse. But it is clear that with such a weak economic growth we see today is one of the stimulating measures

On the one hand, as a result, money is taken from the economy, the tax burden increases. But at the same the country doesn’t spend this money in fact, it is on the Treasury’s accounts or on accounts in banks. About 20% of the whole portfolio of legal entities in banks are already the country’s money in the banking system. This also implies that it is their surplus. The conclusion is that the rise in VAT in this situation was excessive. This led to additional tax pressure with the already weak growth of the economy and created an additional negative factor for enterprises, first of all, for enterprises of the domestic consumer sector. Now if the tendency of the budget surplus is stable, one should be thinking about some reduction in taxes. It is necessary to discuss, analyse. But it is clear that with such a weak economic growth we see today is one of the stimulating measures.

Should we then be talking about a reduction, not cancellation of some taxes?

There can be several options here. They are known. It is necessary to calculate with the understanding of how the situation will unfold next year. But with today’s level of duties and scheduled costs, while the budget for 2020 has recently been adopted in the Federation Council, it is clear that the tendency for surplus growth we are talking about will stay next year too.

“There must be a desire of people themselves and the enterprise to develop production”

How do you assess the tool of investment tax deductions (incentives in income tax) for upgraded enterprises in the Russian regions? Such ways of support for investors are applied in several regions, now they are offered in Tatarstan. What supporting measures for Russian producers would you offer to introduce?

Enterprises have enough different measures of state support now. I can talk about what our bank and Otkritie Group work with. About 200 billion rubles are annually allocated only from the federal budget to support the agro-industrial complex. It is subsidisation of the interest rate in loans when the rate, in fact, approaches 1,5-3%. It is full compensation for investment costs in some sectors that are relatively not developed, for instance, dairy farming, greenhouses, production of vegetables. There is a number of programmes that fully compensate for investors’ capital costs.

One should think why our economic growth in the last 10 months of the year has been just 1,2% with such an abundance of tools of budget support. It turns out that, first of all, there must be not all state supporting measures but a desire of people themselves and the enterprise to develop production or service, invest in it

There are serious mechanisms of support that we also offer our clients through the bank. It is support for exports, from transportation of goods, compensation for the interest rate in loans to produce the exported good with some processing. Then there is a number of programmes to support small and medium-sized enterprises.

So the investment incentive you are talking about is only one of the tools that we have enough. But one should think why our economic growth in the last 10 months of the year has been just 1,2% with such an abundance of tools of budget support. It turns out that, first of all, there must be not all state supporting measures but a desire of people themselves and the enterprise to develop production or service, invest in it. And state support is added to it, but it can’t substitute a person or an enterprise’s natural desire.

So what’s your opinion about the investment tax deduction? Rather yes or rather no?

Yes, of course.

Enterprises in economically developed industrial regions note that they feel competition with foreign companies that launch the latest plants in special economic zones with numerous preferences and have access to cheaper and longer money than Russian. How do you think banks can and should support Russian producers not only legally but also by origin?

One should understand that banks don’t have to support enterprises. Banks grant loans for working capital or participate in investment projects. For instance, we grant loans for five and seven years precisely for investment projects including state supporting measures there I talked about.

Consumer lending boom

Is Otkritie Bank an active player in this sphere?

At Otkritie in general we expect the portfolio of legal entities in the bank to be about a trillion rubles by the end of the year. It is 70% growth. As a new player in this market, we quickly augment our portfolio. Investment loans account for a considerable share here. We finance a number of projects in different spheres.

One should understand that banks don’t have to support enterprises. Banks grant loans for working capital or participate in investment projects

Is it the projects of affiliated groups of borrowers or market borrowers?

No. We almost don’t have borrowers affiliated with Otkritie FC. We, of course, grant money to market players and augment their number in all regions.

What is your objective when it comes to the volume of the portfolio of loans granted to juridical persons?

The portfolio of Russian banks in loans given to juridical persons in general is about 35-38 trillion rubles. Our goal is to get about 2-3% of the market by the end of the year and move forward, increase our share. Generally speaking, our goal is about 5% of the market in different segments if we are talking about 2020-early 2021. It is 1,5 trillion rubles by late 2020.

In your interview to RBK, you said that the financial sector of Russia “develops quite fast” despite the absence of economic growth in the country. What helps the financial sector develop?

The financial market really grows, outrunning the economic growth in the country manifolds. In 2018, the whole financial sector including banks, insurance, broker services showed about 6% of growth. It turns out to be three times faster than the economy itself grows.

What are the reasons? First of all, the boom in consumer lending. The growth pace of the portfolio in all retail loans and mortgages is 20% higher. The same will happen this year, the same happened in 2018 too. People almost didn’t borrow in 2015-2016. In 2017, there were just the first attempts at changing consumers’ behaviour. Why didn’t they borrow? The crisis in 2014-2015 made an impact: the sudden fall of the ruble, uncertainty, very high rates — the Central Bank’s rate was about 18% then. Consequently, people waited, lived on some reserves. They didn’t change cars and flats.

But this can’t last for long. Three years have passed, people see that anyway they have a job, nominal salaries grow, loan rates have fallen. And it became possible to refinance old loans, take out new loans to maintain their quality of life, get medical services, find a school, an institute for their children. Loan is a powerful engine of consumption.

The second factor is that the stock market is developing very fast in Russia this year. The growth of RTS, that’s to say, the dollar index of the Russian exchange, has been approximately 30% since the beginning of the year. It is the best result among all developing and developed markets around the world. If the market grows, additional money comes in. The number of private investors in the stock market in Russia has remained unchanged for long — about 600,000 people, of whom only 300-400,000 were active.

Now some 150-200,000 new accounts open at the exchange every month. Deposit rates in banks fell, and people began to purchase shares and bonds. It significantly supports the whole financial market because the whole infrastructure of the financial market works thanks to it.

Another important factor is that there is stiff competition between banks, insurers. We all invest in new products and technologies. This year, as a bank, not the whole group of Otkritie, we are investing some 19 billion rubles in different areas. Next year our investments will total around 15 billion rubles. Of course, all this is investments in developing the financial market in general. And if we are talking about a lack of investments in the economy, I assure you that investments in the banking sector don’t reduce. Due to the competition, we have to upgrade our IT platforms, build new offices. Otherwise, we will simply fall behind our opponents.

It means money went from the real sector to the financial one.

The financial sector is a part of the real one. Means of production and service used to be divided in the Soviet era. And now service is what increases its share in the economy of all countries more.

“From a business perspective, we have quite rapid growth of portfolios in the republic”

You said that people began to take our more loans. Do you think that there is a risk of a new bubble because of the high debt ratio?

There isn’t such a risk. Neither was such a risk in 2008. We didn’t have big growth of overdue payments, there were risks in currency mortgages only. 2014 was much more complicated, but there wasn’t any serious crisis. Overdue payments reached around 9% of the whole lending portfolio of natural persons. Now the overdue payment rate is around 4,5%. In other words, it is twice lower than it was after devaluation in 2014. And it is the all-time low overdue rate. In the bank we don’t see that our borrowers’ behaviour is getting worse at the moment, either among mortgagees or those who have consumer loans.

What is the share of the banking and insurance businesses of Otkritie FC in Tatarstan nowadays? What growth points and in what products do you see in our region for the group?

We have a good infrastructure of united Binbank and Otkritie here — it is 13 offices, 10 of which are in Kazan. We upgrade this infrastructure. In 2019, Otkritie Bank has already presented two offices in Kazan, one of which was united with Starbucks international coffee company. It is a gimmick for the youth and active people. We have several such offices in Moscow and Petersburg. Today (Editor’s Note: the interview was recorded on 28 November) we will solemnly open the biggest regional flagship office with a universal front line and a full assortment of products and services.

As a bank, in Tatarstan, we have two important sites apart from the chain of offices. It is a traditional call centre with 500 workers, here, in Kazan. Today we will open Sky Office — it is a remote support line for juridical persons, a centre for small and medium-sized businesses where all clients are serviced out of the bank’s office on telecommunication channels. It is a new format in general. We will increase the number of consultants in this office to 300 by late 2020. It will operate across the country. In other words, our client support will work in Kazan. Thus the bank quite seriously invests in infrastructure in Tatarstan.

From a business perspective, we have had quite rapid growth of portfolios in the republic, around 2,5 times over the year. Now our portfolio of corporate clients in Tatarstan is approximately 2,8 billion rubles, that of small and medium-sized enterprises is 2,1 billion and the portfolio of loans granted to juridical persons is near 3,8 billion.

The bank’s total number of clients will amount to some 65,000 by the end of the year. We set a task of having 100,000 active clients who carry out at least one operation in a quarter in Tatarstan late next year. It turns out that we have to increase our clientele by 70% in the next 12 months.