Alexei Kudrin's speech:

Good afternoon,

Today, the federal budget for 2011 and the 2012-2013 planning period is being submitted for your consideration. This is the first three-year budget after the government stopped drafting such budgets due to the crisis. We are now resuming our regular approach to modernising the economy. This budget could be called a budget for the Russian economy's post-crisis modernisation. Such modernisation will hinge on economic growth and a new direction linked primarily with the renunciation of raw-materials dependence, our reliance on oil and gas. The government is pursuing precisely this strategy for the next few years, including a decreased oil dependence over the next ten years under the Strategy-2020. Consequently, the oil and gas sector's percent of Russia's GDP will decline faster on commodity-sector growth rates. Other sectors will grow.

We should keep in mind that the world has experienced its worst crisis in the past 100 years. In effect, this is the crisis of a new global economy. It highlights the need for additional tools to regulate the global economy, as well as the need for cooperative actions by some countries to counter global disproportions and risks.

Russia, which has not yet joined the World Trade Organisation, is unable to completely help create a new trade system during this post-crisis global economy. However, Russia is involved with various international organisations. The International Monetary Foundation and the Basel Committee on Banking Supervision are currently working to create a new financial system for market regulation.

Other countries, as well as the entire global economy, are still showing rapid growth. Russia depends on the global economy because its fuel and energy help drive global economic growth. A growing global economy needs more fuel. Today, we can say that extremely moderate global economic growth has resumed. The IMF has increased its 2010 forecast by 0.2% to 4.8%.

This is the first post-crisis year. The 2011 forecast has been reduced by 0.1% and will total an estimated 4.2%. Moderate growth will be posted. Consequently, we should also make a moderate assessment of this country's external-development factors.

On the whole, the first post-crisis year shows that we can attain economic growth totaling just under 4%. Nationwide inflation will be about 8% this year, hitting an all-time low in Russian history. In 2009, 8.8% inflation was posted, an all-time low since the early 1990s. Next year, we should bring inflation down to 7% or, maybe, even 6.5%.

Investment grew by 10% this year, showing that the Russian economy is beginning to harness new growth factors. Investment is the main driving force of future growth.

The processing industry grew 12.6% January through September 2010. Unemployment has also plunged. Thus, positive economic trends have resumed, making it possible to draft planned budgets. And we are now submitting a three-year budget to you.

This budget is called on to preserve macroeconomic stability, to facilitate stable business incentives, including gradual reductions in interest rates, the rouble's stable rate of exchange against global currencies and other indicators facilitating business-prediction conditions, as well as expanded investment and production.

Federal-budget proceeds will exceed 8 trillion and 844 billion roubles in 2011, topping 2010 proceeds by 12.5%. Expenditures will grow by 4.2%, totaling 10 trillion and 658 billion roubles.

Budgetary proceeds will fail to attain pre-crisis, 2008, levels next year, nominally exceeding them only in 2012. Pre-crisis real proceeds will not be attained in 2011, and in the next three years will be roughly 76-80% of 2008 proceeds, minus inflation.

Nevertheless, real expenditures will exceed pre-crisis 2008 levels by 12.5% in 2011, as well as by 11.9% and 14.9% in 2012 and 2013, respectively. This does not mean that we are moving to implement a difficult plan. Pre-crisis budget-proceed levels will not be reached. At the same time, we will exceed pre-crisis budget-expense levels, and be able to accomplish all the main social objectives and infrastructure plans to modernise the Russian economy.

In 2011, 2012 and 2013, the projected budget deficit is to total 3.6%, 3.1% and 2.9% of the GDP, respectively. The budget deficit will be primarily covered through somewhat expanded market borrowing. Debt-servicing payments will also increase.

In the next three years, public debt will not exceed a safe 18% of the Russian GDP. Given reduced debt-servicing payments in conditions of lower inflation, we will pay less for the debt increment being used to cover the budget deficit.

Our goal is to attain a deficit-free budget by 2015, with moderate $75-78 oil prices per barrel. Such prices should facilitate a deficit-free budget because oil prices could plunge to $40-50 per barrel. Average oil prices totaled $43 per barrel in the first quarter of 2009. We should be ready for this. Our budgetary policy should support state commitments and programmes, including defence spending, reducing the pension system's deficit and social spending, regardless of oil prices.

In this connection, I frequently hear the remarks of some parliamentary parties claiming that the forecast predicting extremely low oil prices is not sufficiently accurate. You should keep in mind that we have weathered a global crisis. I am surprised when some parliamentary parties say they are ready to compile a more detailed forecast while not a single party had predicted this crisis.

The goal of the budget policy is to ensure the fulfilment of social commitments under any GDP conditions, taking into consideration the challenges we'll be facing in the near future. Although we are emerging from the global crisis, we should not disregard the problem of bad assets on the banks' balance sheets. And the global economy can always bring a nasty surprise or two, plus Russia's growth has not yet become sustainable.

Therefore, our budget policy for next year must ensure the fulfilment of the government's objectives even though GDP may not be up to our expectations. I don't think it would be wise to upgrade our crude oil price forecasts, because the average crude oil price in the last ten years, from 2001 to 2010, was $52 per barrel. Forecasting an increase in crude oil prices to above $75 would provoke new risks for the budget policy, notably the risk of failing to honour our commitments.

One of the specific features of this year's budget is that apart from reviving three-year planning we will also stipulate three-year inter-budgetary transfers for the regions and introduce four new classes of spending, which will better highlight our standing in different spheres. We have also set aside reserve funds for the reform of the Interior Ministry: 138 billion roubles in 2012 and 189 billion in 2013. We are also establishing a Federal Highway Fund.

We also propose introducing programme budget classification in 2012, according to which budget parameters will be discussed not in terms of allocation growth for a specific sector - defence, healthcare or education - but in terms of our expectations from the implementation of the approved budget in these sectors. Expenditures must be substantiated. This implies State Duma discussions of all the targets and indices under all state programmes.

The government expects to launch 39 state programmes in 2012, with allocations to them comprising 97% of the budget. For the first time ever we have published information on the preliminary distribution of budget funds among these 39 programmes. They will be discussed next year and approved at a government meeting. They would be specified, and we will present the final, improved plan for distributing the budget among these state programmes during discussions of the three-year budget next year.

We have distributed supplements among the deputies providing funding figures for each planned project under federal targeted investment programmes, as well as the planned spending to honour budgetary commitments.

Another major objective for next year is to reduce the funding of the pension system deficit. However, we can do this only if insurance contributions to the budgets, notably the pension funds, increase. Aggregately, the burden on business will grow by about 2.1%. Is this much? Of course, such an increase is always a serious burden, but we must decide if we can achieve our goal without it.

The bulk of funds will be allocated to the pension system to ensure a pension increase. An alternative option other countries choose is to increase the retirement age. At this stage, the government and the Finance Ministry have a different proposal for the State Duma: to ensure the necessary reduction in the pension system deficit by increasing the tax burden.

The aggregate burden on business, comprising all forms of payments to the state system, will amount to 34.8% of GDP next year. Let's compare the figure to other countries. The average tax burden in the OECD countries is 35.9%. The tax burden in Russia is lower than that and lower than in the 27 EU countries, where it is 37.5% on average. It is even higher in some countries, for example 48.7% in Denmark and 43.6% in Norway.

A considerable portion of the tax burden in Russia next year, 34.8% of GDP, consists of rental payments to be made by the commodities sector: oil and gas producers. Excluding such rental payments, the mineral tax on oil and gas production and the export duties on gas and oil, the tax burden will be 26.7% next year, which is one of the lowest figures in the world. It is 28.4% in the United States. Excluding rental payments, the figure in Russia will be lower than in the United States.

When analysing all forms of ensuring revenues in the budget system and fulfilment of social commitments, such as pension rises, we take into consideration the tax burden and the competitive opportunities of the Russian economy and business in the next few years. We will have to bridge the gap between revenues and expenditures mostly with borrowed funds. Borrowing will increase but the debt will not exceed 18% of GDP.

We will compensate a part of the deficit by selling stakes in government-owned companies. The money raised will be invested in modernisation and infrastructure projects. We expect to raise 298 billion roubles through privatisation in 2011. The list of companies to be privatised is being discussed this very minute at a meeting chaired by the prime minister.

Considering the main budget items, a larger part of expenditures next year include an increase in allocations to education (by 16.4%) and healthcare (by 8.4%). We will spend more to promote physical fitness and sports (25%increase), taking into account preparations for the Olympic and student games.

The funding of industries and subsidies will grow 10% to 1.760 trillion roubles next year. Allocations for defence will be increased 18.8% and for national security and law enforcement by 9.6%.

It should be mentioned that the remuneration reform in the law-enforcement and defence sectors, planned to begin in 2012, is not included in the relevant budget funding. We will increase salaries in these sectors by an average of 30% beginning in 2012, with allocations from the tentatively distributed budget funds.

The analytical document on the distribution of allocations among the main state programmes, which we plan to approve beginning in 2012, indicates spending of 1.6855 trillion roubles on 17 innovation development and economic modernisation programmes. Other key provisions regarding budgetary allocations include 11 programmes aimed at improving the quality of life, together worth 4.761 trillion roubles.

Allocations to road building and maintenance will be increased by 20.8% next year even though balancing revenues and expenditures is not easy now.

We expect to allocate 125 billion roubles to agricultural development as stipulated in the law On the State Programme of Agricultural Development. The structure of the programme and spending on it should take into consideration the drought and the crisis year.

Salaries are to be increased by 6.5% in the law-enforcement, defence and security departments on April 1 next year and on June 1 in the budget-funded organisations. Student stipends are to be raised on September 1, 2011.

We are often asked if there is enough money in the stipend fund. Universities now have broad rights to distribute the money as they want, including allowances and additional stipends and allocations to underprivileged students. We don't propose giving equal stipends to all students, because their financial positions differ. Universities can provide additional financial support to talented or underprivileged students, and I know that they are doing so now.

We will launch seven new state programmes, including "Pure Water." The "Information Society" programme is to broaden the range of state services provided electronically and to cut queues. We will also have programmes in the pharmaceutical and medical industries; we plan to make a breakthrough in these high-tech sectors in the next few years.

Next year Russian regions will receive 1.259 trillion roubles of additional support from the federal budget. The money will be issued in the form of subsidies and subventions within national projects and federal targeted programmes, as well as in the form of other inter-budgetary transfers.

Federal budget allocations to all Russian regions will amount to 18% of the regions' total expenditures, more than before the crisis when the figure was 15%. We believe that the regions' budget deficit will decrease from more than 400 billion roubles in 2010 to about 300 billion next year. We are planning allocations to ensure this, including 113 billion roubles in loans, some to be used to balance the regional budgets and others for road construction and maintenance, worth 36 billion roubles overall, as well as five-year loans issued at one-third of the refinancing rate. Next year we will have more regions with a budget surplus and fewer regions with a budget deficit.

We have calculated the basic proportion for balancing the expenditures of the federal budget and regional budgets, with a focus on modernisation, innovation and support for the social policies. We are ready to thoroughly consider your amendments, to be submitted by the second reading, aimed at specifying and, where necessary, changing some chapters and whole programmes in order to further facilitate the fulfilment of the tasks we have formulated.

Thank you.