Oleg Deripaska, Russia's richest man, spoke recently with Wall Street Journal reporter Greg White about Russia's recent economic struggles and what they mean for his business and investments. Below, excerpts translated from Russian by the Journal. (See related article)

The Wall Street Journal: How do you see the environment changing for your companies as a result of the crisis and what do you expect from the government?

Mr. Deripaska: You understand what is happening -- the old model that ensured demand, now it either does not work anymore or it is malfunctioning for multiple reasons. It has provoked processes that are creating forces, pushing everything downward. We are expecting that everything will change for the better.

You see, our consumer is still experiencing the need to solve his basic problems. A family in Western Europe has at least 1.5 cars and in the United States it has already two cars. For them a second or third car does not matter; they can wait. Unfortunately, we have 13 million families who do not have their own homes. These are usually young families, or there are Russian families living together that have parents, grandmothers, grandfathers [in one home]. For every thousand, only around 120 have a car. For many a car is still a museum piece. You cannot even service some of these cars anymore: the old Lada "Kopeika" or Volga-21, Zaporozhets, Moskvich. This creates a demand that will be filled with our own and borrowed sources, of course when the world economy and Russian economy find a balance. I am optimistic because we have real demand; let us call it a consumer need.

The Russian economy, as a result of newly found balance of the global financial system and the Russian financial system and as a result of a bold liberal financial model, is turned inside out. The government has consciously limited the money supply in order to limit inflation. They removed funds from the banks and the treasury and concentrated it at the Ministry of Finance, then regulated liquidity, supported strong ruble policy, did not emit rubles. Therefore the Russian economy on one hand has half a trillion in reserves, on the other hand it borrowed half a trillion from abroad. And as soon as our external markets began to experience difficulties, of course the so-called demonitization of the Russian financial system began, which stopped generating demand and potential purchasing capacity.

You recall, back in May we could buy an apartment on credit, a car on credit, any kind of credit was available. Monetization of these goods and services was lifted. This is deleveraging that is so dangerous for the U.S. economy, but is not as dangerous for us because our level of financial penetration is very small. Even in the automobile sector, less than 26% of cars were sold on credit. So the consumer paid, himself, for 75%. I mean the sector as a whole, including commercial machinery. This is when I talk about credit, leasing … . We had less than 18% of apartments sold on credit. So the problem is not that large. On the other hand we had this inexhaustible resource, revenue from the rising prices of raw materials.

WSJ: And what will replace this source?

Mr. Deripaska: I think our hard work will replace this source. We need to get rid of everything superfluous, to fight losses, to recapitalize the financial system. The government needs to define its role in creating demand through recapitalization of the banking system, through offering accessible financial resources to the leasing companies, mortgage companies.

They [the government] have assumed a correct position, "no need to panic." They are simply feeling out the optimal decisions. It is not the same as you have in the U.S. There is a bailout today, no bailout tomorrow. Today we are helping General Motors, tomorrow we are not. We have this Asian trait in Russia; people want to wait and see.

It seems to me, first of all we have to get rid of all excess, cut losses, restructure the financial system, clearly define capex policy, and what we are doing, roads, and other projects. What we are doing already. We are helping companies that have started to modernize. Using new technology, we started building new plants with lower production cost. The production cost of our new Siberian plants is three times lower than the old plants in the European part of Russia. This has to do with other types of costs, electricity and so on. So it is clear that you have to close old plants and build new ones.

Now it is very important to continue investing. It is quite cheap to invest in "public spending" right now. You would need to spend 220 million rubles or $8 million before to build a school with desks, furniture, everything else. It would be a typical school for around 700 students. Today the same would cost $4.5 million or $5 million. The costs are lower; there is no lack of labor. And I think you can no longer build schools and hospitals based on the expenses of even summer 2008, there has to be a recalculation of costs.

So when I say that the policy governing state spending has to recognize the new reality … On the other hand, it has to be clear. Why not use these investments to improve our education system? These investments, of course, will ensure the next cycle of demand. Why not invest in medical facilities, build new hospitals? Why not invest in higher education, which would ensure the future of our sciences?

WSJ: When did your companies first start to feel the impact of the crisis?

Mr. Deripaska: We sell combine motors, we do not sell combine harvesters. Those who produce combines, they know the demand will decline. And they stopped right away. Why is that important?

Otherwise the entire system is pulling an unfinished production, raw materials, and components. And then you have an entire mountain that does not find demand. This was our problem in the 1990s, it was a pushing system. The result was the big volume of losses.

You remember, there was a barter system, when the goods could not find their consumer. So I was honestly surprised how far we have evolved in achieving an effective cooperation horizontally. Perhaps there is an influence on cost regulation, some kind of normative actions which are not market-based. But the direct interaction of market actors has evolved significantly. I can understand that a state company is not always effective at inviting bids and so on. But even the government companies started demanding to lower prices by 25%. That is also an indicator.

WSJ: Then there is a question. When they lower production, what happens to the workers? Do they close shop?

Mr. Deripaska: The second issue that I was really glad to see is the level of trust and understanding that exists between the management and the workers. When the management explained that the demand is such that we need to produce five times less… We have many factories that are the only ones in a city, where entire families work. And people began to make the right decisions, part of the workers decided to go on unpaid leave. So the system itself, from the inside, found a humane solution. The machinery construction declined by 50%, the same as ferrous metallurgy. And there are no problems with strikes, when union leaders try to oppose the action of others. The most market-driven sectors are those of construction, services, machine-building.

In other sectors there is less understanding and more expectations. There are people who do not understand why there is a shorter workweek, why we need to compromise, why we cannot pay the same salary and have to give up overtime. Those sectors, which are more market-driven, they adapt more quickly than material-based industries. In rentable sectors, at Gazprom, aluminium, copper, nickel companies, everyone is used to high salaries. But even they have a good understanding of the problems that we encountered, and they are prepared to wait for a year and a half or two years.

We will not live poorly, but modestly. We talk to people; there are some layoffs. We have a new program with the regional governments concerning those who we will no longer employ in the next 18 months. On the other hand, back in the summer there was still competition; there was a lack of labor resources. And Russia recruited more than 3.5 million people -- these are just the official figures -- labor migrants from Central Asia, Ukraine, the Caucasus. We made a decision to send people to study for a year or a year and a half. We have a system of professional education. We will keep one third of the pay rate, the region will pay one third, and one third will be paid by the Federation. We would like to negotiate with them [the Federation]. This system will allow them to acquire additional skills. I think at the time of crisis you have to spend time increasing human capital, to read books you have not had time to read, to watch movies, to travel somewhere.

WSJ: Before the crisis, your group relied heavily on borrowed funds to grow. How are you changing this model now?

Mr. Deripaska: What are we going to do? Cut back, of course. Our growth was based on our understanding of internal and external demand. Accordingly, by acquiring somewhere and building new, we made very large investments. Rusal's investments in construction and modernization were more than $2.5 billion. That is just Rusal. Then there is machine building, which brought more than $1 billion a year to our group. Today we have profitable production and unprofitable production. If you look at our producers of aluminum, then of course we will decrease inefficient production.

At this moment, I believe, there is a crisis of overproduction. There is the financial side and lack of liquidity. They already sent a signal. Then now there is a crisis of overproduction. There are ineffective facilities. The new demand is a few tens of percentage points below what it was in the summer, there was a slow landing. And the ineffective facilities are slowly phased out. It is as if we have put this mountain of production in front of us that will not be used, but will influence the prices. At our raw material companies in the oil and energy sector, there will be a phasing out of ineffective facilities. There will be no new facilities being built. No one will invest, with the exception of those projects that will be completed next year.

If you look at the streets in Moscow, you will understand that the new cranes will not appear anywhere until the entire volume of what was built in the last three years is sold. So when these reserves and excesses are consumed, there will be a very interesting phase. Meanwhile the government's role, not just Russia's but everyone else's, is to even out the negative fluctuations. On the one hand we see a sharp decline in prices, and they will reach their minimum. Then they will stay at this minimum until this remainder is consumed. Then there's no limit on where prices will go. I'm sure we'll see oil at $180 in less than three years and aluminum, which used to be $3,500 [per metric ton] and is now $1,500, at $4,000 in three to four years.

WSJ: Why? Where would the demand come from?

Mr. Deripaska: Why would it disappear? I think the Russian economy is an open economy. I use a material as an example. Take aluminum. We have plants around the world with production cost of $3,200 [per metric ton]. We also have the latest very efficient plants with much lower prime costs. But if you look at the curve, at the price of $1,500 dollars, 70% of today's producers around the world are unprofitable. Of course, if there was not phasing out of 70% of facilities, many are unprofitable because they have loans, other debts. But let us suppose one half of them is closed. This means 30 pct of facilities will be phased out.

As soon as this reserve is exhausted… the reserve was created during these six months before the facilities have been phased out. You have to be objective. Will the urbanization end in China and India? The only thing that can prevent this is if the nature of demand of the middle and upper working class will change globally. If they decide, for example, that they will not drive a car, but will ride a bicycle instead, even at the far North.

WSJ: And how do you plan to live through this period with your debts? Rusal's total debt was $14 billion, but you also have options obligations to the other shareholders.

Mr. Deripaska: We have worked all this out. We have negotiated with almost all the parties. Rusal is taking measures to lower its debts. Now there will be negotiations with all interested parties.

WSJ: And the actions of the Western banks as a whole…

Mr. Deripaska: They have been quite reasonable. Everyone knows we were a highly profitable market participant. Because we have the best vertically integrated, restructured facilities with our own raw materials. Or in the machine building we produce a commercial sector that is necessary.

Take our Gazel [light truck]. Can you find another car with a production cost of less than $7,000, that you can service at any garage from Moscow to Tashkent? Its construction is simple. Of course, when there were financial resources, everyone thought "Why do I need such a simple car, I can buy a high quality European or Japanese model and not think about how much its service will cost?" Today, its service costs five times as much as ours. In addition a successful weakening of the ruble, that is taking place, will make Gazel more competitive. But we understand that we will not produce the same volume of cars in 2009 and the first half of 2010, so we reduced production. As I said, the main goal is to get rid of all excesses and to work with economic parameters, materials, components, agreements, losses.

Today there are no opportunities for sweet life, but the efficiency and cost at Rusal today allows to live with today's level of debt. Do not forget that Rusal has a lot of potential investors. They waited for an opportunity to buy shares, and it was postponed twice. The first was the merger with Sual, and then an agreement with Norilsky Nickel. They are still showing great interest. Then I would like to see where you can find such an efficient aluminum company like Rusal.

WSJ: And the government's involvement in the companies' capital will grow at the end of this process?

Mr. Deripaska: I think so. Everything depends on how much cheaper the capital offered by the government is and its accessibility compared to the capital on the internal market and external, depending on the level of foreign investments in Russian at the moment. And it will depend on how the banks will use the debt conversion and into which instruments connected to equity.

WSJ: Is there a level of government's involvement that for you as a businessman would be critical to be able to conduct your own management policies?

Mr. Deripaska: I think my situation is unusual. I think that any level of government's involvement will not prevent me from implementing the policy I consider necessary. I think you have to analyze and use a scientific approach to any problem, to understand its causes, and find an objective solution. That is my approach. And despite some kind of domestic convictions that the government is exerting pressure, this is not the case. If it sees that this is the right decision, then it accepts it even if sometimes…

WSJ: And you do not regret starting the takeover attempt for Norilsk?

Mr. Deripaska: No. I do not work for money. Philosophically speaking, any crisis is a lesson. You have to draw the right conclusions from it. I do not see, as many try to imagine, that the crisis presents new opportunities. It is a lesson which teaches that the least likely scenarios may occur. You have to devote more time to risk-management, procedures of internal control. That is one side. On the other hand, I think it is very important for our country. People began to think about things we have not thought about since the late 1990s. I think that socially these groups that drifted very far apart, the regions and Moscow that is far ahead; we will come to a deeper understanding of each other. The problems of a small and simple man, they would be as important as the problems of a region that is hosting Olympic games. That is very important.

WSJ: And will the 2014 Winter Olympic projects in Sochi suffer from the crisis?

Mr. Deripaska: Sochi is a project for the next four years. Today is a tough financial situation, but today it is an easy phase. Today the projection phase, and they are not building much. The real construction phase will begin in the middle of 2010. Now there is infrastructure preparation, mobilization of resources.

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