Prime Minister Vladimir Putin's speech:
Good afternoon,
As you know, I have recently submitted reports to the State Duma and reaffirmed the invariable nature of our common strategic goals stipulated by the Long-Term Development Concept.
We need to build a modern competitive national economic model based on knowledge, innovations and state of the art technology.
Russia is called on to strengthen its leadership in the processes of integration underway in Eurasia and to occupy a worthy place in the global division of labour.
Most importantly, we need new living standards for Russian citizens, rising personal incomes, guaranteed access to education and healthcare services and expanded housing construction.
Naturally, considerable responsibility for attaining these goals rests the Ministry of Finance and the Ministry of Economic Development.
Today, I would like to draw your attention to the fact that we were forced to reallocate resources in an effort to overcome the consequences of the global financial and economic crisis. A proportion of those resources that could have been put towards modernisation, was instead spent on anti-crisis objectives.
Today, we are working amid considerably changed, to put it bluntly, tougher external and domestic conditions.
The events of the last few weeks have shown that it is still too early, too premature to say that the global crisis has ended completely.
Today Eurozone states are being forced to implement unprecedented measures in order to stabilise their financial systems, while the people have to pay for their previous macroeconomic miscalculations. In effect, a simple truth has been confirmed: in the long-term perspective only a responsible macroeconomic policy can facilitate steadily rising and improving standards of living among the population. I am deeply convinced that we must ensure macroeconomic stability.
Last year, I repeatedly said that anti-inflation measures are a high-priority objective. In January-April 2010, nationwide inflation totaled 3.5%, hitting an all-time low since 1991.
However, we need even more ambitious plans to curb inflation. Inflation should remain low not only because of curtailed demand but primarily due to consistent implementation of government measures. Apart from a responsible financial policy, such measures should include other mechanisms for curbing price hikes, including expanded labour productivity, reduced outlays and cost-effective anti-monopoly regulation.
Furthermore, we should proceed from the fact that a low or even zero budget deficit is normal for Russia. Only such policy can make one feel confident amid fluctuating prices for our export products. We should not cut back on budgetary spending and forego unsecured debentures. We must unfailingly honour our commitments before Russia's citizens whatever the circumstances. Consequently, we have to stick to our timeframe and reduce the budget deficit to 3% in 2012 and then down to zero in 2015.
Today, I would like the Minister of Finance and the Minister of Economic Development to explain how this objective can be accomplished, and under what global oil prices and economic-development scenarios this will become possible.
Our financial safety nets, the Reserve Fund and the National Welfare Fund, were a great help during the global financial crisis. The policy of building up our reserves has proven to be entirely justified. We should continue it once the financial crisis has passed.
I would like to emphasise that ensuring a balanced budget is not a task for the Finance Ministry alone. It is a task for the entire government.
At our next government meeting we will discuss a draft programme to increase budget spending efficiency. In fact, the programme envisages crucial changes to the structure of our public administration: a transition to a new target-oriented budget structure.
State programmes will be at the core of government activity. This will help tie up the work carried out by each federal executive authority with the priorities outlined in our policy documents. Every budget rouble should be aimed at achieving the end result.
The programmes will provide not only for budget financing, but also for other instruments related to legal regulations, reduced tax and customs duty rates, federal property and so on. Naturally, all these programmes must be as transparent as possible and always open for public discussion.
I ask the Ministry of Economic Development and the Ministry of Finance to speed up the preparation of the legal basis for this, setting forth the main principles for drawing up long-term state programmes.
We should also take into account that within the next three years the Government's ability to increase expenditure will be limited, to put it mildly. We need to take into account that the government is limited in its ability to increase expenditures in the next three years, to put it mildly. Therefore, we must do more with the same resources, which the transition to the new budget structure will allow us to do.
We need to carry out a sweeping reassessment of our existing commitments, cut ineffective and low-priority expenditures and consider possible alternatives, choosing the least costly options. And of course, we must seek guarantees that our objectives will be achieved.
I'd also like to emphasise that the projects included in the Guidelines for Government Activities up to 2012 could provide a good basis to formulate state programmes.
There are regional leaders and representatives of local governments here today. Last year, the federal government helped out the regional governments, and although their revenues fell by 13.6%, expenditures remained at 2008 levels. The ratio between federal budget and consolidated regional budget spending was about 50/50 in 2009, which means that aggregate spending by regional governments almost equalled federal expenditures after the deduction of the subsidies for the Pension Fund.
Some regions have significant financial resources that must be managed skilfully. This is why I believe that regional governments must also adopt programmes to increase the effectiveness of government spending.
We'll also need to adjust relations between regional budgets and the federal budget, namely by strengthening the role of federal support in stimulating increased regional financial self-sufficiency. Only those regions that carry out programmes to make their spending more effective will benefit from the new system.
In this context, the idea of increasing subsidies through state programmes deserves our special attention. There is no need to explain to anyone present that we have multiple types of subsidies and that, of course, it's time to increase them. The federal government will certainly set specific objectives for the recipients of these subsidies and monitor their progress. The regions will be free to choose the optimal ways to meet these objectives.
One of the key elements of the upcoming reform is improving the legal status of government-funded establishments. I'd like to speak on this issue in more detail, especially since this issue was met with many different opinions when the government recently delivered a report to the State Duma on its performance in 2009. Experts have discussed this issue in detail and pointed out the need to explain the essence of proposed legislation to ordinary people.
This initiative is designed to increase the quality and effectiveness of the public services that receive government support, remove outdated and redundant limitations for social institutions and re-focus these institutions on the demands and interests of ordinary people. The government will define objectives for government-funded institutions and provide them with a definite and clear-cut timeframe, quality requirements, the volumes and terms of rendering services.
Of course, these services will be fully funded by the government. Ordinary people - taxpayers and consumers of these services - will be provided with detailed information on social services, including which services they can receive for free, how much funding the government has allocated, and how a particular institution is using its property, as well as budget and off-budget funds.
So-called grey areas of undefined authority and irresponsibility should be eliminated, putting an end to the practice of extorting money from people for services paid for from the budget.
The law also protects the property of budget-funded institutions very effectively, and no levies can be imposed on it.
I'd like to draw the attention of everyone present here today and all Russian citizens to the fact that the draft law rules out the possibility of bankrupting these institutions, therefore precluding any sort of hidden or open privatisation.
Let me repeat that the budget will not be revamped; institutions will remain either federal or municipal. But those institutions that are ready to assume more independence and responsibility will receive the status of new budget-funded autonomous institutions, and the rest will operate as previously, based on cost estimates.
The adoption of the law on budget-funded institutions is only half the battle. The effectiveness of this critical reform, whose need became evident long ago, will depend on the performance of the executive branch.
We cannot afford to make a mistake, as is usually said in such cases. We must do everything carefully and at the appropriate time, even more so because the transition period stipulated in the law has been extended up to July 1, 2012. And we certainly need to provide assistance to regions and municipalities.
I did this intentionally to facilitate adaptation to new requirements; the transition must be smooth, so that everything that is carried out is for the benefit of the people.
We should do this carefully and smoothly, so that everything we do is for good and so we cause no harm.
This new mechanism should be one of the main criteria for evaluating the work of officials at all levels, especially the heads of budget institutions. In other words, it should serve as a measure of their professionalism and self-sufficiency.
I would like to point out that as we are moving forward on budget reform, there will be changes in the responsibilities of financial monitoring agencies. The focus of these agencies should be redirected towards evaluating the efficiency of budget spending under state programmes and other government work. They will essentially act as efficiency auditors.
State and municipal financial monitoring should focus, first and foremost, on authorities and officials, as it is the officials who are responsible for ensuring that all budget spending is lawful and rational.
The job of inspecting businesses will be left to other oversight authorities. We have plenty of them, as you know.
Colleagues,
In order to move forward, we need to thoroughly review the lessons of the global financial and economic crisis as well as the performance of our Anti-Crisis Programme, which we are currently implementing.
This review will allow us to understand which elements of the anti-crisis programme should be eliminated, which should be continued in 2011 and which should be written into law and included in our economic policy for a longer term, perhaps even permanently.
We need to accelerate the comprehensive changes we are making in the country, including our reform of natural monopolies, the housing and utilities sector, and education; modernising our armed forces; and fine-tuning the pension system.
This year we must also take the core decisions regarding healthcare reform. Much still has to be done here. The Ministry of Healthcare and Social Development needs to develop a reform programme and then strictly enforce it at each level of management in the sector. Naturally, the ministry should also provide support to whomever is prepared to implement the programme.
The economic crisis has proved that Russia's economy is solid and capable of withstanding external shocks.
At the same time, the crisis has revealed our weak points - areas where we are still lagging behind. Russia's economy is poorly diversified and resistant to innovation; the financial system is underdeveloped and the labour market is inflexible. You are all aware of this. Making improvements in these areas will require long and painstaking work.
First, we should make the following principle a hard and fast rule: the government will provide assistance only in exchange for a realistic development programme, followed up by monitoring of its implementation.
Uncompetitive manufacturers should be reoriented and their employees given an appropriate alternative. They should either have the chance to change professions or start their own business. Our work over the past year has shown that this works. A number of new companies have grown rapidly during the crisis. I don't know whether you expected this or not, but we all wanted them to appear and they did. The numbers could stand to be bigger, but, let me repeat, this works.
The second area that needs improvement is incentivising innovation. We have practically all the available tools at our disposal, such as tax incentives for the manufacturers of non-primary goods, development institutes and innovation infrastructure.
Russia consistently ranks among the top ten countries in the world in terms of spending on R&D. However (again there is a "however"), the effectiveness of this investment is extremely low.
According to the Ministry of Economic Development, in 2008-2009 upwards of 60% and perhaps even 75% of budget-funded R&D was not intended for the development of intellectual property. It was not even the intention! What's the point of such R&D? This is absurd. We must fundamentally change our approach toward R&D and it purpose.
Likewise, we must get a greater return on government investments in special economic zones, as well as industrial and technological parks.
The Ministry of Economic Development should be given a greater coordinating role in our efforts to make development institutes and innovation infrastructure more effective, and to create a continuous innovation chain. At some stages, this chain will require financial support from the government, while other measures will be required at other stages in order to create the right working environment.
On this point, I'd like to say a few words about tax incentives.
Over the past few years, we have repeatedly lowered tax rates and granted numerous tax benefits. We have already announced a new round of support for innovative business that will take effect this year.
But we must realize that tax benefits come at a price - declining revenues in the treasury. They are, in effect, budget expenditures. Before making further changes to the tax code, we should first ensure that current measures are yielding adequate results.
In particular, we need to pay special attention to the quality of tax administration. I have already spoken about this with the representatives of the Finance Ministry and the new head of the Federal Tax Service.
The absence of a modern system of technical regulations also poses serious problems. The more complicated and technological products are, the more certificates are required for their manufacture. Meanwhile, the procedures our foreign competitors must go through are much less costly and burdensome and yet no less effective, which gives our competitors significant advantages. All the red tape sometimes gets our industry stuck in the 1970s-1980s technologically.
Third, we will not be able to diversify the economy and make it more efficient without a massive amount of new companies -- not only innovative businesses, although I emphasized their importance, but also in traditional industries and in the services sector.
The emergence of new companies is the most objective indicator of an entrepreneurial climate in a country and the best way to judge the success or failure of our efforts to remove excessive administrative barriers, develop competition, attract investment and encourage innovations.
In this regard, I'd like to ask the Ministry of Economic Development to continuously monitor the development of entrepreneurship. I've already discussed this issue with Elvira Nabiullina at one of the government meetings. The ministry is setting up the relevant agencies. I hope their work will be successful.
Let me give just one example. As you know, we have drastically reduced the number of inspections of small and medium-sized companies. When we were working on this decision, the employees of the economy ministry gathered a vast amount of objective data on the administrative pressure on businesses from oversight authorities. They have figures proving how harmful excessive regulation and oversight are.
Fourth, we need to make major changes in how our financial markets operate, both in Russia and the rest of the world -- at any rate, to the extent that we can influence this. Allow me to say a few words on this point.
Let's recall that when the crisis was just beginning, many politicians and experts said it was necessary to eliminate imbalances in global finance and to impose significantly stricter requirements on all players on the financial markets, from banks to rating agencies.
When things returned more or less to normal, the rhetoric cooled down, and they even started saying that there no is need to make changes to regulations.
In any event, here at home we must work to build an effective system of bank and insurance oversight and introduce tough standards on how financial services companies operate and disclose information.
Remember that a law on derivatives trading came into force on January 1, 2010. We must continue this work. And so I am requesting that you and the deputies move to quickly adopt a series of laws to develop the financial market.
There is already a bill before the Duma on consolidated financial accounting. We must make the necessary changes to it, taking it account the lessons of the crisis, so that it can be passed before the end of the year.
We must also make changes to the Civil Code and the Law on Joint Stock Companies that would clearly define the status of public and non-public companies and the procedures regulating how their shares are to be traded on the market.
In addition, I ask that you finish working on the draft law to regulate related-party and interested-party transactions, as well as the laws on securitisation, insider information and preventing market manipulation, all of which are designed to protect the rights and interests of investors.
Incidentally, let me remind you that last year we finished the implementation of a strategy to develop the banking sector in Russia. We could have adopted a new strategy at the end of 2009, but due to the crisis, we made the decision to push this back. I would like you to return to this and adopt a strategy for the development of Russia's banking sector that covers the period from 2011 through 2015.
We need to promote Russia's point of view at international forums such as the G20, so that we can provide incentives for domestic and foreign capital to be invested in economic modernisation rather than speculation and new stock market bubbles.
Fifth, the Unified Customs Code of Russia, Belarus and Kazakhstan will come into force in just over a month. Our goal is for the three countries to establish a common economic space by 2012.
Clearly, once we establish this union, the work of the Russian government, the Ministry of Economic Development and many other agencies will undergo serious changes.
Many sensitive issues will be resolved at the level of intergovernmental structures created by the three countries. And we will all have to learn how to advocate our position in a civilised way and find reasonable compromises with our Belarusian and Kazakh partners.
We will also continue working towards membership in such international organisations as the World Trade Organisation (WTO) and the Organisation for Economic Cooperation and Development (OECD).
Sixth, we must admit that Russia is lagging far behind other countries in establishing a system to support exports. Practically all developed countries have such systems in place. I am not only referring to insurance and loans for export supplies, though these are also very important. The Finance Ministry should take heed. This is very important.
Our most urgent challenge is to identify and eliminate trade barriers hindering the access of Russian products to new markets.
And, of course, we need qualitative improvements in our customs administration and export control systems, which are unwieldy and sluggish. There has been a lot of discussion about this as of late.
Seventh, we have adopted numerous resolutions to form major holding companies with state participation in recent years, and every time we are faced with the same problem -- extremely convoluted ownership structures and a lack of the necessary documentation for state property.
After all, these holding companies were established not with a view to nationalise some property, but to systematise that which the state already owned but that was scattered around and poorly managed.
However, when we started working on this, all the problems came to the surface. As a result, we need two or even three years to reorganise, and only then will the new integrated structure start working to its full potential.
Of course, such quote-unquote "deliberation" is of no use to the matter at hand. Therefore, I ask the Ministry of Economic Development and the Federal Agency for State Property Management (Rosimushchestvo) to work hard to bring order in this sector. Please draft proposals on expediting the registration of state companies' ownership of real estate and land plots reserved for them as well as removing excessive administrative barriers.
The public sector must be made market-ready. In other words, its work should be guided by principles of modern corporate governance.
We need solutions that will obligate state companies and joint-stock companies to incorporate modern management models. And managers' compensation must be tied to cost-saving figures, increased energy efficiency and labour productivity and incorporation of advanced technology and innovations.
This year, we launched a mechanism for reforming state corporations. As you know, we started with Rosnano. In the future we should have a clear understanding of what to do with state corporations, as well as how and when to do it.
Some will be completing their work - the law stipulates specific deadlines; others will continue working. We need to be clear on this.
Colleagues, obviously I've only touched on some of the challenges that our agencies are facing. The ministers will describe these in greater detail. In closing, I would like to once again emphasise that the Ministry of Economic Development, the Finance Ministry and their subordinate agencies and regional offices, as well as the financial and economic services of the constituent entities of the Russian Federation, did excellent work in a difficult time during the global crisis. More than once, they found an acceptable way out of the most unusual situations, and I assure you, I know what kind of pressure you work under and what you sacrifice for your work - both in terms of time and, let's be honest, health. But know that we expect a high degree of professionalism, integrity and full dedication from the employees of your agencies -- the country's key economic agencies -- because the country's economic and social wellbeing really does depend on it.
Thank you very much for your attention.
Prime Minister Vladimir Putin's closing remarks:
I just have a few comments. Let me start with the last speech.
Indeed, things are getting better in the regions - gradually, but practically everywhere. This is a good sign, although there are still plenty of problems. The Sverdlovsk Region has a lot of them, as its governor can tell you.
As for increasing funding for the Mandatory Health Insurance Fund, this was not an easy decision for us, given that we are still dealing with repercussions of the crisis. We are aware that it has increased the burden on businesses. But I'd like the Ministry of Economic Development and the Finance Ministry to know... We don't usually focus on this, but we are spending a little over three percent of GDP on healthcare. I may be wrong, but I believe Germany spends over eight percent, as does France and all other European countries on average. We won't have a normal healthcare system if we don't spend on it. We give all our support to the economy, but who is the economy for? There should be a balance. We must always maintain a balance.
We have made a good start on our demographic programme, but it is just a start. We must increase our efforts, but not to the detriment of the economy. We should act with caution.
What prompted me to say this? It was the governor's remarks on how well the Housing and Utilities Fund has performed. Indeed, this is one of the corporations that is working effectively. We have repaired 11 million square metres of housing. This is almost one third of all housing in some regions. This has not been done in 70 years, and people appreciate it. This is not only providing support for the construction industry - which is important during the crisis; it is also fundamentally changing the situation in some of the regions. But we only give money to those who are developing this sector. This is very important. I'm emphasising this because here we will only give money to those regions that are ready to modernise their health care systems. I already spoke about this when I took the floor: the Ministry of Healthcare was given one year (it still has time) to develop the parameters of future healthcare reforms.
Mr Vyugin (chairman of the Board at MDM Bank), thank you for sharing your views. Your speech was very good and profound.
Mr Vyugin said that it is time to discontinue support for the non-financial sector. Well said! But we should continue to support the financial sector at the same time, right?
Reducing the rates on subordinated loans is nothing but support for the financial sector. Nevertheless, bankers come to us and ask us to lower the rates for them. This is support - serious support for the financial sector in our case.
We must be careful to maintain balance here, too. I agree that these measures of support for the non-financial sector may increase the demand for imports, which is not what we want to see happen. But this depends on you and on us.
Take, for instance, the programme for scrapping old cars. It has not boosted imports. But here we are faced with a completely different problem. Our people want the classics, like Zhiguli 6 or 7. VAZ has even restarted a production line for them. This does not help modernise the plant, but this is what's in demand, and that should be taken into consideration by all means.
Now, as for Mr Kudrin. Obviously, we went into 2009 with high inflation - 13%. This is true, and this clearly aggravated the effects of the crisis. But I do not think the careless use of government funds was the only cause of this inflation. We know that there were other reasons as well. We must analyse them and promptly respond to them. We have not done everything we need to.
So the high rates that banks were facing during this crisis, especially in the middle of 2009, were not caused solely by the 13% inflation rate. Mr Vyugin has just said that there was a fall in demand. This means that the risk of overproduction has increased. The banks locked themselves up immediately. How can they give back the money? This is not clear. You give them money, they manufacture products, but what can they do with them? Everything has come to a standstill. And we are not the only ones facing this problem.
Look at the kinds of debates they had in the British parliament. The same thing happened in Russia. I sometimes couldn't tell whether I was watching a meeting of the British parliament or the Russian government. The discussions were one and the same.
We faced the same problem, which made the situation even more difficult.
So when the Reserve Fund runs out of money, we'll be like all other countries. Of course, we're like other countries now. But if we were identical, we would have never been able to accumulate our Reserve Fund, Mr Kudrin, which means that there are differences between us, and they will remain. For good or ill, they'll remain for a long time to come. I'll speak on this in more detail later.
You know this. You're dealing with this issue and debating it, and those debates are going on in my office as well. The budget obviously has to be balanced. It's a fact.
The OECD is facing a 10% deficit, which is alarming. EU countries have similar debts. The debts of the leading economies have exceeded 70%! This is unbelievable, and it does not bode well for the global economy. And we should keep this in mind.
But we need to take a balanced approach. Look at what's happening in Greece. I didn't want to raise this issue again, but nevertheless. It's not just Greece that is in trouble. The situation is even worse in Iceland. Some other countries are on the brink, many countries. And you know as much about this as I do. Spain, Portugal, and all the Baltic countries find themselves in this predicament. All the Baltic countries! The situation there might actually be worse.
I do not regret the money we spent during the crisis. It is extremely important to maintain social and political stability and show ordinary people that we are doing everything in our power to keep their incomes stable. Otherwise, we'll have the same problems as Greece.
Social and political instability seriously limits the government's ability to conduct sound macroeconomic policy, indeed any economic policy. We must take effective steps here and have a clear understanding of what needs to be done.
We were right to modernise the pension system and update the Soviet method of calculating pensions. There's nothing to regret here.
This discussion is about whether to allocate more money for development projects or to spend more frugally. This is a worthwhile, necessary discussion. The leadership of both ministries have always managed to reach sound, reasonable and pragmatic compromises. I hope they will continue to do so.
I'd like to conclude my response by talking about modernisation, something we've been talking about a lot lately. It was raised repeatedly in the speeches today. Our main economic shortcoming is a resistance to innovation. Everything we do seems to go to waste. There is little progress. Why? Because the return is modest. There are a ton of problems. Markets are crowded with other companies, and our businesses can't get in. Our partners act very pragmatically. I met with Mr Kudrin this morning, and he told me how some international companies benefit from our solutions, but would only cooperate in a few individual segments. The main production centres are outside Russia. They don't come up with their own solutions, but use ours instead. They don't act the way they should in a free market economy. They impose so many restrictions that Russian companies are simply unable to penetrate these markets. The administrative barriers are very high.
I regularly meet with investors, including international investors, that manufacture high-tech products. They say they'd like to increase production, but they'd be unable to export their products if they do. I ask how this is possible, and they answer that the customs and taxation services erect too many barriers. And this is why they prefer not to expand production. It's a disgrace!
This is the economic reality we're facing. Ms Nabiullina spoke about it in detail today. You know what scares me most? I fear we might lose sight of our top priorities. We must single out the worst barriers and eliminate them, no matter what. It all depends on you.
Thank you very much. I wish you all the best.