17 february 2011

Prime Minister Vladimir Putin chairs Government Presidium meeting

During a Government Presidium meeting, Vladimir Putin said that the regional and federal authorities should not allow electricity and gas tariffs to exceed the planned 15% increase. The prime minister also instructed the Federal Antimonopoly Service to continue monitoring fuel price cuts. Another major topic on the agenda was the implementation of the second stage of the demographic development programme. Putin said that 876 billion roubles of budget funds would be earmarked for this purpose through 2013.

Transcript of the beginning of the meeting:

Vladimir Putin: Ladies and gentlemen, let’s start with the questions at hand. As you remember, during the meeting on the energy sector’s performance last year we spoke about the growth of petroleum prices, which the Federal Antimonopoly Service said was unjustified. We discussed the problem on February 9, when we took decisions and reached agreements with the largest oil companies. I think that today we should discuss what is happening on that market.

According to the data that I have seen, prices have started falling: the price of diesel fuel has decreased by 2 roubles on average. People are taking an active part in this project, sending us information in a number of ways, including through the internet. I have asked the Antimonopoly Service and the Energy Ministry to monitor the situation. I wonder what the head of the Antimonopoly Service can tell us today. Mr Artemyev, you have the floor.

Igor Artemyev: Mr Putin, ladies and gentlemen. Information comes in from each Russian region every day. Here is the latest data, which we received from the Far East and Siberia today, and information about central Russia we received yesterday evening.

Unfortunately, the decrease of both wholesale and retail prices is smaller than expected. As for retail prices, large vertically integrated companies have reduced them at their filling stations by 1 rouble rather than 2 roubles, as they promised and as we expected them to do. In other words, prices have not been cut by 10% to 12%, as we expected, but by 4%, or by 5% in a few regions and by less than 5% on average.

As for wholesale prices, we also expected them to be cut by 10% to 12%, which would be consistent with the global market premiums of the oil companies on the basis of netback. Wholesale prices have been cut by about 2,000 roubles, but we think the cuts should be twice as large.

But still, this is a positive trend even though the companies’ actions have been insufficient so far.

An important event happened the day before yesterday: the Presidium of the Supreme Commercial Court passed a ruling on the lawsuit filed by the Antimonopoly Service to fine Gazprom Neft 4.7 billion roubles.

Both the first and the second phase of antimonopoly investigations are over; the total amount of fines collected has exceeded 15 billion roubles, and this money has been transferred to the federal budget. We believe that the latest Supreme Commercial Court decision, which has set a precedent, should accelerate the process.

On the other hand, we had to initiate an antimonopoly investigation because prices were not cut sufficiently in dozens of regions. The decision concerns quite a few regions where prices were monopolistically high before the February 9 meeting and were not cut enough after it.

Oil companies must decide within a week, and we could wait for one more week because we do not expect a dramatic reduction as it would affect independent retail prices, especially at the filling stations of vertically integrated companies.

Vladimir Putin: I presume that you are talking not only about diesel fuel but also about petrol?

Igor Artemyev: No, I was talking primarily about diesel fuel, as it is an unprecedented situation when diesel fuel costs more than premium petrol A-95. This inadmissible price equality has not changed in many regions. The reason for it was the artificial shortage (of diesel fuel) created by the oil companies, which are now taking measures to increase sales. We expect prices to be cut back to the level of October or November 2010, when diesel fuel cost less than premium petrol. This is a very important indicator.

I would like to say once again that there has been a positive trend, but it is inadequate to the goals and tasks the oil companies have accepted, or compared to the global pricing formula and common business practices. The situation is still not as we would like it to be.

Vladimir Putin: You should continue with this work. I would like to stress that it is, of course, not our intention to put our oil companies at a disadvantage and hinder their economic activities. This is not the aim of the government, but market prices should be economically justified. That is obvious.

In addition, we have agreed on a whole package of measures to make pricing in the fuel market more transparent and predictable. You spoke about this, and Igor Sechin and the energy minister spoke about it: we need to have mechanisms to protect the consumer. One way is developing exchange trading to exclude unnecessary intermediaries. While on this subject, if exchange trading is to develop we have to introduce some changes in the rules by which exchanges work, your deputy was present at the last Presidium meeting and he formulated these proposals.

However, I would like to draw your attention to yet another circumstance: major public sector consumers should also work at the exchange.

Igor Sechin, you have the floor.

Igor Sechin:  Colleagues: In the wake of the meeting that was held wholesale prices for the petroleum products of our vertically integrated companies have indeed been cut. The average prices of oil refineries have been cut by 2,075 roubles per tonne. The filling stations of vertically integrated companies have also cut their prices, and prices for some diesel fuels went down by 2 roubles and 31 kopecks (a litre). You have rightly mentioned such indicators. On the whole, prices are going down for the whole product line: by 1 rouble and 8 kopecks for the Ai-95 petrol, by 1 rouble and 10 kopecks for Ai-92 petrol and by 1 rouble and 56 kopecks for winter diesel fuel. We are now receiving data straight from the filling stations, Mr Putin, and we have photographs. I can show you the real-time information on the work of every company after this meeting.

The Antimonopoly Service probably has data on sales by independent distribution networks which, of course, even out that indicator. The results achieved should not be seen as the final goal, we should introduce the release of systemic results, as you have mentioned, Mr Putin. An interagency working group has been formed to monitor and respond to price changes. It comprises representatives of the Energy Ministry, the Federal Antimonopoly Service, the Ministry of Economic Development, the oil companies, commodity exchanges, Transneft and Russian Railways Company. To provide reference price indicators, it has been suggested that the volume of exchange trade in petroleum products be at least 15% of the total volume produced by each refinery in the country, including those outside the system of vertically integrated companies.

A proposal has also been made to consider the issue that you have raised, i.e. making it mandatory for budget financed organisations that are major oil product consumers to procure no less than 50% of the total volume through exchanges.

After the meeting you chaired we instructed the Federal Financial Market Service in coordination with the federal executive bodies to submit proposals regarding the line-up of the exchange committee. Meetings were held that requested that the Ministry of Regional Development, along with the regional heads, consider the issue of developing a network of alternative filling stations to create price benchmarks in the regions and, perhaps, to encourage the development of chains by vertically integrated companies. We propose discussing petroleum market issues on a quarterly basis at the meetings of the government commission on the fuel and energy complex, and based on the results of monitoring in February and March, to report to you on the current situation and the specific measures to stabilise the situation.

Vladimir Putin: Do major public sector consumers work at the exchange?

Igor Sechin: As of yesterday, not a single contract. I have spoken with the head of the St Petersburg commodity exchange. This is the main exchange for oil products: last year their trade under contracts amounted to 7 million tonnes, not a single federal organisation took part in exchange trading.

Vladimir Putin: We have been talking for years about the need to develop exchange trading in various fields, but federal entities do not work at exchanges. The Ministry of Economic Development took part in developing these rules and principles, didn’t it? Did you expect our agencies to be represented there?

Elvira Nabiullina: Of course we did – and not only to reduce the reference price, but to make government procurement more effective and transparent. We assumed that…

Vladimir Putin: What are our major public sector consumers?

Elvira Nabiullina: Beginning from the ministries and agencies, and I think budget-financed institutions should adopt that system, too.

Vladimir Putin: Which are the biggest ones?

Elvira Nabiullina: You mean the biggest buyers of petroleum products?

Vladimir Putin: Oil and petroleum products.

Elvira Nabiullina: The Defence Ministry and the Interior Ministry buy more than the rest.

Vladimir Putin: The defence minister is sitting to your right. Please monitor this, and work on it with the relevant agencies so that they can…so that they can start working at the exchange.

Mr Artemyev (turning to Igor Artemyev, head of the Federal Antimonopoly Service).

Igor Artemyev: I would like to say that after you issued instructions to create exchanges a very short amendment was developed to Law No. 94. Because Law No. 94 makes it binding on all the agencies to trade on five electronic floors, but according to your instructions, oil products should be moved from the five electronic floors to commodity exchanges. But the government bodies – the Defence Ministry, the Interior Ministry – must have a legal basis for doing this. An amendment to the law must be introduced and quickly finalised. It has been on the table for a long time.

Vladimir Putin: (addressing Anatoly Serdyukov, the defence minister) Which deputy is in charge of logistical support?

Anatoly Serdyukov: Bulgakov (deputy defence minister).

Vladimir Putin: Order him to work out all the necessary mechanisms.

Anatoly Serdyukov: I was just going to say that this is necessary, first, to introduce the amendments, and second, that we take out quite a lot from Rosreserv, the national reserve. In other words, we take part of the fuel from there and start to build up the system from there.

Vladimir Putin:  But Rosresesrv is a reserve, as its name suggests. It is intended…

Anatoly Sedyukov: No, we only do this when the time comes.

Vladimir Putin: I see. When the time comes to replenish the reserves, that I can understand. But this is not a permanent situation, but a one-time thing. Freshening up the stocks, as they say. But after they renew the stocks, then it will be necessary to operate normally.  

Mr Nurgaliev (Rashid Nurgaliyev, minister of the interior) is in the North Caucasus today. Who is standing in for him here?

Sergei Gerasimov: Deputy Minister Sergei Gerasimov.

Vladimir Putin: It concerns you too. How do you propose to work there?

Sergei Gerasimov: I think we will work with the Defence Ministry to put in place a legal framework for a final solution of the issue. We also think that transparency in the procurement of fuel and lubricants, if we go to the exchange, will give us a lot more leeway and will give us more control over the process.

Vladimir Putin: Carry on. Rashid Nurgaliyev deals with operational issues personally, including support for the families of Interior Ministry personnel who have died. If you need government support, specify your needs and we will do it.     

Sergei Gerasimov: Yes, sir.

Vladimir Putin: As regards work at the exchange, this applies not only to the defence and security agencies, but to all our ministries and agencies. I need you, Mr Sechin, to look into it more carefully, to work with your colleagues and help organise this work.

Now the second item that has to do with electricity rates and prices: I am very worried about what is happening in this market. Just to remind you: we determined that electricity tariffs for end consumers should not grow by more than 15%. But according to the reports coming in from the regions, the growth is much bigger: by 32.9% in the Tver Region, 33.2% in the Kursk Region, 32% in the Saratov Region, 30% in the Omsk Region, 46.5% in the Astrakhan Region and 37% in the Penza Region.

Meanwhile, there are regions that are working differently and are keeping it below 20%. They are the Vologda Region and Karelia (15%), the Kostroma Region (15.4%), the Tula Region (16.7%), the Nizhny Novgorod Region (16.5%), the Tambov Region (17%), the Voronezh Region (19%), the Samara Region (18%), Kabardino-Balkaria (16%), North Ossetia (15%), the Perm Territory (15.9%), the Republic of Altai and the Altai Territory (15.4%) and the Tomsk Region (17.5%).

Why are there such increases in other regions? Please comment on what is happening, Igor Sechin. We also have representatives from the regions here and I would like to hear from them too.

Igor Sechin: The government predicted that the increase of electricity prices for consumers in 2011 would be under 15%, 14.9% to be more exact. 

The government predicted the following average figures for regions and groups of consumers: 12.5% for the European part of Russia and the Urals, 12% for Siberia, for the territories that are not part of the price regulated zones – plus 4.5%, and for the general public – 9.6%. At the same time, I must say…

Vladimir Putin: The growth of electricity prices for the general public should not exceed 9.6%.

Igor Sechin: The parameter for this year was 9.6%, and we believe it is possible and necessary to stay with it.

Vladimir Putin: What is the structure of this price increase? What is the cause of it?

Igor Sechin: Mr Putin, forecasts for higher prices are now emerging in 38 regions and for some groups of consumers, which you mentioned and which allow a substantial price increase of over 15%. You have named these regions.

The Energy Ministry, the Ministry of Economic Development, the Federal Antimonopoly Service (FAS), the Federal Tariff Service (FTS) and experts from the Academy of Sciences conducted an analysis of these price increases, and found that prices are affected both by factors of federal (about 41%) and regional importance (59%-60%).

Some factors in the first group are objective: the growth of fuel prices (the price of gas has risen by 15%) is affecting price formation; prices were underestimated at the initial period of reforming the tariff base of the electric power industry in some regions – when compared with the actual, it results in a huge price increase (we will separately report to you on Khakassia and the Irkutsk Region, where this reason is objective); the investment increment for nuclear and hydro power stations; high tariffs for forced generation; an increase in one’s own sources of funding at the expense of the tariff in the investment programme of the FGC UES and the IDGC holding.

Regional factors include the growth of tariffs of territorial network organisations, including the IDGC holding; the growing share of the network component in the final price in connection with a switch of network facilities to RAB-regulation. The state of affairs in some regions is very alarming. In the Omsk Region the services of regional network facilities have grown by about 108% and in the Tomsk Region by 74.2%. Let me emphasise that these are network services but they largely affect the final price of electricity for consumers. The relevant figure for the Kursk Region is 54.3%, and the figures you’ve mentioned are the final price of electricity for consumers. But network facilities are a major factor in this context.

This is what we suggest on the growth of prices formed on the federal level this year – I’m emphasising this year – without affecting the principles of reforming the electric energy industry: very concise efforts to reduce the influence of subjective factors on the final price for consumers. This year we suggest no adjustment for inflation in energy payments in 2011. We haven’t done it in the past, and we’ve never said that this is our responsibility.  Let me emphasise that these are our decisions for this year.

We recommend changing the procedure for calculating tariffs for forced power generation (that has not been used commercially). We suggest reducing targeted investment for nuclear and hydro power stations – I’m referring to the possibility of redistributing incomes inside these providers – Rosatom and RusHydro. According to the Energy Ministry, Rosatom can get additional funds from operating on the world uranium market.

We also propose smoothing the tariff for the FGC UES without changing the investment programme by extending the source of funding to five instead of three years – they will be reimbursed in perspective. We must also introduce changes in the methods of RAP-regulation for the IDGC – the terms have not been increased. Regrettably, there is no regulation by increasing it from three to five years. We must level out the reduction of the growth of the tariffs of network organisations, which will allow us not to exceed the limit of 15%.

The first measure – adjustment of payment for power – will allow us to save 12 billion roubles. A change in the calculation of tariffs for the forced outage will allow us to save another seven billion roubles; the targeted funding of nuclear and hydro power stations will provide savings of another 15 billion roubles, and the levelling out of the FGC UES tariffs – five billion roubles. A more reasonable approach to the IDGC programme and territorial network facilities will save 25 billion roubles. Thus, we will be able to carry out the decisions you suggested.

The analysis of growth factors at the regional level is a separate story. Regrettably, here the influence of the federal link is minimal. There are no representatives of the FAS or the Market Council (the non-profit partnership The Council of the Market on Organising Effective Wholesale and Retail Trade in Electricity and Power) in the regional energy commissions. And sometimes five year-long investment programmes are carried out much faster – these companies try to implement their programmes in a year, which is then extrapolated to the price for the consumer. It is necessary to enhance coordination in this respect. We suggest that unified monitoring of electricity prices should be carried out by the Market Council and that this issue should be reviewed at sessions of the government commission on the development of the electric power industry every quarter.

Vladimir Putin: Okay. Thank you. Please, let’s start from the Tver Region.

Dmitry Zelenin: Mr Putin, in reality tariffs for the general public are protected – no higher than 9.5% in all regions of Russia, including ours. But the position of other consumers, including commercial ones, is even worse than you said. For instance, the Zapadnodvinsky District’s payment system is above 46%, and it was the Andreapol and neighbouring districts that were hit by freezing rain. I can imagine how small companies react to payment obligations with such figures. Moreover, these payment documents arrived last week.

How do energy supply organisations explain such prices? They say: “Don’t worry. We will recalculate them in February and reduce them.” And these payments and settlement accounts come to welfare institutions, small business and agricultural companies. The FTS made a decision in January not to restrict the permitted hours of use, which was supposed to lower tariffs for these small companies. But this did not happen. Unfortunately, the regions have no payment regulation system. I’d suggest that payments be issued by the Housing Inspection as a monitoring body responsible for housing and utilities as a whole.

The second point. When we talk about an increase in the network tariff, that is, the tariff of the network component in the regions, it does not amount to a full tariff, but only to its smaller part and the powers of the regions are not so big here. For instance, last year when we raised the average tariff component for network companies by a mere 3.5% in a bid to restrain the tariff, and by 7.5% for the IDGC, but the decision was reversed and administrative proceedings were brought against the head of the regional energy commission for insufficient tariff increase. I would like to emphasise that the case was filed for not raising the tariff high enough and not the other way around. This was the likely cause for his disqualification for several years.

I believe that our region switched to the RAB method back in 2007-2008. This method involved significant investment by distribution grid companies, which would result in reduced distribution losses as well as lower tariffs. Unfortunately, of the expected 7 billion roubles in investment, the power distribution companies invested 350 million roubles in the IDGC in 2009 and 550 million roubles in 2010.    

These are approximate figures. They can still be adjusted for 2010, but we have  accurate figures for 2009. And when we reduced the tariff for those companies in 2009, we also had to increase the tariff share in the final rate.

If we have the opportunity, I believe we should also reduce the tariff share this year. It has increased on average by 15% for the IDGC across the region, as they failed to meet their tariff obligations.   

Therefore, I agree with the proposals to expand the control zones to oversee the implementation of these investment plans in the course of the year, as opposed to at year’s end, and when setting the tariff for next year.

Besides, I can tell you that… You visited the region to inaugurate the perinatal centre – the powerful transformer station that provides power to the centre and other facilities was built using funds from the regional budget. That is, we include the cost of creating energy distribution facilities in the regional spending, which, to a certain extent, compensates for the lack of investment projects by distribution companies.

In general, however, the distribution companies should be responsible for the development of these energy facilities. I am referring not only to the perinatal centre. We have been investing in low-rise residential developments, which are quite extensive both in Tver and the region. Therefore, I believe we need to intensify the oversight over the investment commitments by the companies, especially those working under the RAB method.   

I would also suggest increasing the oversight powers of the Russian regions.

Vladimir Putin: We will certainly discuss the oversight issue. But with regard to the regional energy commissions, they fall within your area of responsibility, so you need to control them.

Dmitry Zelenin: We do control them, and the decision to cancel the insufficiently high tariff is having a psychological and administrative impact on the decisions the energy commissions are making. If there is an appropriate decision, we can again raise this issue with the federal…

Vladimir Putin: Obviously, they are not feeling enough pressure, considering that the rates have gone up so much. And secondly, you have mentioned the transformer station that was built for the perinatal centre. Quite possibly, it was a right thing to do for lack of an alternative solution, but you need to be very careful with including the cost of the investment projects in the tariff. Otherwise, all you are doing is diverting funds from day-to-day needs. This way you can build in as much cost as to raise the rate to 30, 70, and even 80. That’s the point. 

Dmitry Zelenin: Mr Putin, I personally…

Vladimir Putin: Thank you. Please.

Pavel Ipatov (Governor of the Saratov region): Mr Putin, first on fuel and lubricants. We watched the live TV broadcast, and almost immediately after TNK-BP announced the lowering of price by 1 rouble 20 kopeks, we checked in three hours – they reduced the price. So, with regard to the gas prices, the problem has been promptly resolved.     

Vladimir Putin: Good.

Pavel Ipatov: As far as electricity is concerned, the problem does exist. Mr Sechin correctly mentioned here that the price increase you were told about is a potential price increase which was built into the documents. But there is no price increase as of yet, as the new tariffs have yet to be applied for January, and the recount will be done on March 3-4.  

Vladimir Putin: Zelenin has already received the bills.

Pavel Ipatov: That is because in some regions some enterprising fellows were, so to say, too keen on being paid as soon as possible

Vladimir Putin: Everybody wants to be paid as soon as possible.

Pavel Ipatov: But there are some, who have used a small loophole to send their bills ahead of time. But I think the importance of today’s meeting is that we can act to prevent the expected price increase. 

I can speak for the Saratov region. When we received the estimates from the federal committee on tariffs, we realised that the rate increase for the final consumer would be in excess of 15%. And the excessive price rise is happening mostly in the federal area of responsibility. I can speak for the regional distribution companies – they increased their rates by 7% (the recommended rate was 10%)

For the inter-regional companies and specifically the IRDC-Volga, we have raised the rate by 13%, whereas the limit was 15%. We have stayed within the limits of the recommended federal rates in our area of responsibility. As for the estimates for the Federal Distribution Company and the price hike in the wholesale market, they were excessive. 

I have been dealing with this issue since September last year. I have appealed to the State Duma, to the Duma Committee, to Yuri Lipatov (Chairman of the State Duma Committee on Energy), the committee on tariffs. And they explained to me why tariffs were expected to increase by more than 15%. But Mr Sechin clearly explained today what measures will be taken to prevent the price rise.

I am confident that if these measures are implemented at the federal level, the rate increase for the final consumer will not exceed 15%. With regard to my area of responsibility, I can say that our regional committee on tariffs has strictly complied with the federal government directives, and we have not allowed any excess rate increases in the region. Therefore, we do not have any complaints.  

Vladimir Putin: Good. Please.

Sergei Novikov: Mr Putin, I would just clarify and add to what has been said here. What Mr Sechin explained here with regard to the federal government role is quite clear in terms of the proposed amendments and implementation deadlines.

But I would like to clarify what the governor of the Tver Region was talking about. In reality, the significant rate increase this year is to a large extent a consequence of the small tariff rise last year. When you hold the rates from going up for a long time and then simultaneously start pouring money into large-scale projects, you will get a big increase in the grid tariff.  

This issue was discussed by the government last year, using the Tver Region as an example. On May 31 last year, you signed a government resolution empowering the regions to reduce the grid rate should the grid company fail to meet its investment commitments. Therefore, the issue raised today, has already been resolved by government resolution.  

I would like to draw your attention to the fact that the currently proposed package of measures will set the average (and I emphasise the word average here) rate increase for each region at under 15%. Our current rates are not higher than the country average, taking into consideration all aspects.

The proposed package of measures will set the average rate increase at under 15% for each region of the Russian Federation. But I would like to draw your attention to the fact that in previous years, some regions, in the framework of the remaining regulated sector, provided certain categories of consumers, including state-financed consumers, agricultural producers, and some others with special reduced rates. 

Therefore, for these categories of consumers, we will not be able to avoid raising the rates by more than 15% even in the framework of the currently proposed measures. To do that, we will have to develop additional instruments such as using additional budget financing or other solutions. This is an extremely important issue I wanted to emphasise.  

Vladimir Putin: Good then. The issue is closed. It should be no more than 15%. And I urge everybody to comply. We all have our own area of responsibility, whether it is the federal government or the regional authorities. Mr Sechin has proposed a set of measures aimed at resolving the problem. Everyone should start working now on implementing them and in a week or 10 days, I expect you to report on the results.

We certainly need to implement our investment programmes as well as the regional investment projects, but we should do it wisely. The governor of the Kursk Region was not feeling well and could not attend today (I hope he feels better soon), but it appears, and I think it is more than likely true that they wanted to implement the five-year investment plan in one year. No wonder the prices have soared. Why do it, what’s the need to rush? Oh maybe they had to pour in all the money to the contractors in one year? What is making them to rush?       

The investment programmes should be implemented carefully and wisely. Such excess spending should be avoided. And of course, regional energy commissions should include representatives of the Federal Anti-Monopoly Service, the Federal Tariff Service, and market representatives to make decisions in cooperation with colleagues in the regions.   

With regard to Khakassia and the Irkutsk Region, they had a very weak base, therefore you need to work with RusHydro to develop a special programme for them. But please work very carefully. Please report on the progress in two weeks. Mr Zubkov (addressing Viktor Zubkov), please report on the preparation of farmers for the spring sowing season.      

Viktor Zubkov: Mr Putin, colleagues, over the recent years the government has been providing extensive support to farmers, who essentially are the small and medium businesses in agriculture. Today, their share in livestock and crop production is 52% and 62% respectively. There are quite a few interesting ways the government has been supporting them. This week I invited ten farmers from the Samara Region and ten from Tatarstan to come to see me. We talked for three hours, each one told me about their work, the problems they encountered and what their objectives are. A shift in the way the Samara Region governor has gone about tackling some of the problems over the past two years is worth mentioning: he has allocated considerable funds from the local budget – about 300 million roubles – to purchase cattle, heifers and pedigree cattle, all over Russia. He then gives them to people as commodity loans for a five year term. That means people do not have to pay for anything but still use these animals for a five-year period. What’s the rationale for this? In five years’ time the farmers have to return the cows they were given –  be it one, four or twenty cows. But they have had the use of these cattle throughout that five year period, getting milk or calves. People are very enthusiastic about the idea and very many of them are keen to participate in the programme. In addition, as part of this programme, the governor proposed setting up a cooperative to provide services, including veterinary services, helping with fodder procurement and so forth. As for Tatarstan, it also has experience worth sharing: farm machinery costs are split 50-50 between the regional authorities and farmers.

I remember the farmers of the 1990s: they were quite different people. Today, farmers are self-reliant, most of them hold degrees of some kind, be it in farming, teaching or law. As top-notch professionals in the fullest sense of that word, they understand the basics of farming and what the cost of production on the farm is, they are thrifty and well-versed in genetics – talking with them is a real pleasure.

We have discussed all the issues relating to preparations for the coming spring’s field work. No particular problems were raised, except for the loan term some banks offer: otherwise, banks have been cutting their interest rates from 11% to 9% and offering loans as requested. The farmers said they greatly appreciated the discount on fuel and lubricant prices in effect since November 1, 2010. Today, this helps the sector save about 10 billion roubles – really providing considerable support.

We also discussed social issues. The farmers told me that modern technologies and suitable farm buildings allowed them to keep their animals in good conditions. At the same time there are cases of the people who work with the animals still living in substandard accommodation.

We plan – and I have already given Rosselkhozbank and Rosagrolizing instructions accordingly – to roll out pilot projects to create family farms jointly with the regional authorities. We have already built more than 300 of such farms over the last two years. The projects will also provide for the construction of good-quality homes near the farms for the people who will be working on them. A female farmer with 14 children, 12 of them adopted, says she has a wonderful farm and well-cultivated land but that she also needs a nice home and decent living conditions. We shall proceed with these pilot projects that aim to enable farmers to live and work in acceptable conditions. We will also address the issues raised at the meeting ahead of the farmers’ congress scheduled for early March. Thank you.

Vladimir Putin: Thank you. Mr Ivanov, last year we saw a remarkable increase in passenger and cargo air transportation. This is an issue you considered recently,  please go ahead.

Sergei Ivanov: Esteemed prime minister and colleagues, acting on your instructions, I held a meeting with representatives of all executive bodies without exception as well as the heads of our leading air carriers and airports to consider the possibility of reducing the cost of domestic flights to passengers.

First, I would like to say that despite all the problems and difficulties our air carriers encountered, our domestic air infrastructure is stable. In 2010, passenger traffic on domestic flights grew by 26.2%.

Vladimir Putin: That’s higher than in other countries, isn’t it?

Sergei Ivanov: That’s right. These growth figures are among the highest in the world. Last year domestic airlines carried 57 million passengers. If this trend persists throughout the next few years, and so far there is no reason to doubt that it will, our air carriers will be able to catch up with railway companies in terms of long-haul passenger traffic. Although the competition will, of course, be stiff.

When reviewing the structure of domestic passenger charges, as one might expect we took into account all the different components that combine to influence ticket price, including seasonal factors and the condition of the flying stock. We identified two main factors. First – VAT on domestic flights. Mr Putin, you have often asked, and with good reason, why, other things being equal, passengers are charged less on international flights than on domestic ones that cover the same distance. This is chiefly because unlike international flights, domestic flights are subject to VAT.

Vladimir Putin: Could you put this in writing.

Sergei Ivanov: That has already been done.

Vladimir Putin: Good. I will discuss it with our Finance Ministry colleagues.

Sergei Ivanov: A representative of the Finance Ministry was present at the meeting and conceded that there was every reason to consider cutting VAT on domestic flights.

The other important factor is the price of aviation fuel, or kerosene. This issue was already given thorough consideration earlier today. By the end of 2010, with air traffic at its peak, the price of aviation kerosene had climbed to 24,000 roubles per tonne. Sometimes it exceeded international exchange prices.

However, last week, in the light of the decisions taken, the aviation fuel price fell, and it is now between 19,000 and 22,000 roubles per tonne.

Vladimir Putin: How much did it cost before?

Sergei Ivanov: 24,000 roubles.

Vladimir Putin: Then air fares must be adjusted accordingly.

Sergei Ivanov: Yes. It is important to understand that the price of aviation fuel accounts for 30% to 35% of the air fare even in modern more economic aircraft. This is the major parameter in determining domestic air fares.

Vladimir Putin: But then, Mr Artemyev, this needs to be reflected in the air fares.

Igor Artemyev: Yes, that’s right. For our part, we are urging carriers to take the appropriate steps. A week ago, some of them announced a several-percent reduction in their air fares.

Vladimir Putin: Good.

Sergei Ivanov: We have put together some concrete proposals, Mr Putin. First, air carriers must sign long-term agreements directly with aviation fuel producers. Our leading companies, such as Aeroflot, Transaero and YuTair, all stick to this practice - I have verified that. And most importantly, we suggest using the same formula to fix the price of aviation fuel.… Mr Artemyev will submit a new draft regulation under which the price will be pegged to the current price of aviation fuel on the Rotterdam and Singapore stock markets. Deducting export tax and transportation costs will give us our benchmark price – because some regions are entirely dependent on supplies from the mainland, say Sakhalin and Kamchatka, where the price of aviation kerosene is, understandably, the highest in the country…

Vladimir Putin: No, not quite. There is something here that doesn’t make sense.

Sergei Ivanov: Well, in part. We have carried out a comparison which showed that currently aviation kerosene is cheapest in Moscow.

Vladimir Putin: While they just have a monopoly.

Sergei Ivanov: Yes, they do. We suggest buying aviation kerosene at the Singapore exchange price, something that is in the airline’s interests because of the short distance and low transportation cost.

Now about duties and tariffs. First, a proposal was put forward – I accepted it and instructed them to report on the results by May 1 – to establish, at long last, clear procedures for leasing and taxing land where airfield infrastructure and integrated air traffic control systems are based. What tends to happen? The federal authorities pour considerable funds into the construction or major repairs of a new runway, while the regional authorities set high rates for taxes and duties which they collect. This is something you have already mentioned. We inject money while taxes…

Vladimir Putin: But these are not decisions we can make, they involve regional taxes, don’t they? Anyway, some kind of tax exemption would be possible after major investment by the federal authorities. We have discussed this issue with the Finance Ministry.

Sergei Shatalov (deputy finance minister): We have already passed a law under which new investment in sea ports and airports qualifies for a 15-year tax exemption.

Sergei Ivanov: Another issue is extending the list of services rendered on the airfields which are regulated by the government – a great many proposals were submitted. I do not support the idea of all-out regulation but some really outrageous examples were cited. One service – transporting passengers from the airport building to the boarding ramp – is not currently subject to regulation. Imagine that – this is an unregulated service and, as a result, in some regions it costs four or five times as much as in other regions. Let me give you an example: in Novosibirsk this service costs 1,135 roubles while in Chita it costs 3,100 roubles. And this is only one service! Many air carriers and airports – the leading ones at least – proposed regulating this service, as we have done for refuelling complexes last year, when we started monitoring the storage of aviation kerosene at refuelling complexes and how fuel is delivered to aircraft. We instantly squeezed the middle-men and all the various kinds of swindlers that were involved in these operations out of the airports. Now we have put things in order.

We also suggest improving relations with those entities that are considered natural monopolies, i.e. at airports, which provide ground services to the aircraft. We suggest adopting the transparent procedures used in Europe for, say, cargo handling or catering.

Air carriers have given us two proposals which we are also examining and which we will finalise by May 1. They suggest establishing a comprehensive procedure governing the cancellation or delay of flights by airlines and determining the extent of their liability to passengers in the event of unforeseen occurrences, such as freezing rain and all the concomitant effects of it we saw in the run up to New Year. After a “blamestorming” session we called the guilty parties to account. We concluded that in cases such as this, airlines should be authorised to cancel flights and close airports just as they do in the United States and across Europe: if such a contingency arises, the airport declares an emergency situation and closes.

The other proposal seems rather controversial. I suggest scrutinising it now, not approving it straight away. Many airlines, particularly the major ones, have complained about the lack of skilled pilots, primarily commanders and co-pilots for wide-body aircraft. The Transport Ministry recently worked out a programme to increase the number of pilots being trained in our flying schools. However, it takes a school graduate at least ten years to qualify as an aircraft commander. They also raise the issue of attracting skilled personnel from abroad on some – not all, of course – routes where currently this problem is most acut e. We try to grow our own personnel, but, as I say...

Vladimir Putin: You should train pilots here (in Russia). Rather than hiring qualified (foreign) personnel, set up your own training centres and invite competent instructors to work.

This way we’ll be able to replace foreign labour with homegrown talent in sectors where we’re competitive enough to do so. Sure, there are difficulties to overcome. But you should try and buy more hardware from domestic manufacturers and train Russian pilots to fly foreign-made aircraft.

Sergei Ivanov: But the market dynamics we’re facing…

Vladimir Putin: I’m not saying that’s an option to be ruled out. But neither should you let it become a routine practice.

Sergei Ivanov: Of course. By May 1st, I’ll brief you on how we’re following through on all of the proposals I just mentioned. We expect that the measures proposed will drive down the cost of domestic flights, giving an additional boost to the industry…

Vladimir Putin: Please carry on monitoring the situation together with the Federal Antimonopoly Agency.

Sergei Ivanov: I will. 

Vladimir Putin: Mr Khristenko, please tell us briefly about the federal target programme for the pharmaceutical industry. This programme provides for 188 billion roubles in allocations over the next decade, with 122 billion from the treasury coffers, I think…

Viktor Khristenko: That’s one of the most important tools to supplement the set of general measures for advancing the pharmaceutical industry in Russia. This programme is aimed primarily at bridging the gap between scientific research and commercial product.

The idea behind it is to raise the share of domestic companies in the production of essential medications to 90% by the year 2015 (by domestic companies, I mean both Russian producers and foreign ones operating in Russia).

On the pharmaceutical market as a whole, the domestic share is to be brought up to 50% by 2020. 

In other words, the target is to increase our pharmaceutical output six-fold by the end of this decade, which will lead to an eight-fold increase in exports. That increase is to be provided primarily through the development and the commercialisation of products under the programme at hand.

Last year, we set down to the implementation of a whole range of measures planned for this sector by the government. Our work involved the adoption of a strategy, a new distribution law, and a whole set of by-laws, as well as changes to registration procedures (including the registration of prices on medical drugs). These measures have had a considerable effect on the development of the sector already. The domestic pharmaceutical output increased 37% last year while the market grew by 8%, meaning that the share of domestic products rose to 25%, up from 22%, within the space of just one year.

Crucially, Russia’s pharmaceutical industry has already become much more vibrant and more efficient, with (many products now available at) lower prices.

In the hospital sector, the domestic share has increased to 22%, up from 19%, whereas in the field of medications for the treatment of life-threatening diseases, Russian companies have now gained a market share of 10%, up from zero presence in 2008.

Here’s what I’d like to stress in this regard. Even in its final stages, our work to establish this target programme prompted many serious investments.

A number of Russian companies have not only announced their plans to invest but are already delivering, with 15 billion roubles in initial investments – a fairly large sum for the country’s pharmaceutical industry. The geographical span is rather wide, stretching from the Moscow Region to St Petersburg, the Vladimir Region, Yaroslavl, and Kaluga.

The investment projects I’m talking about are all to be launched as early as this year, and we’ll be monitoring their implementation.

Foreign companies, too, now have their sights on the Russian market. Not just on the production stage, but on all other stages of the industry, from R&D through to global marketing. 

Already, global players are cooperating with Russian manufacturers and helping them promote some of their products internationally.

In this regard, I’d like to emphasise once again that with this programme, the government is entering a highly demanding market segment to share producers’ risks in the development and the commercialisation of medications.

Vladimir Putin: Good. Thank you. 

Now on to the Arkhangelsk Region, where there’s reportedly been a repeated disruption of heating supplies.  Mr Basargin, can you update us on this? What’s going on? What kind of assistance do you need there?

Viktor Basargin: (This happened) in the town of Nyandoma in the Arkhangelsk Region, with a population of 7,000. The central boiler house, with five boilers (has collapsed), leaving 70% of the population without heating.

Vladimir Putin: There are five boilers there, you say?

Viktor Basargin: Right. Two are currently in operation. A third one is to be started later today.

Evacuation points have now been established. Emergencies Ministry staff are working on the ground. More than a hundred fan heaters have been installed in kindergartens and hospitals. A relief effort is underway.

In our view, the boiler house wasn’t properly prepared for winter conditions, although judging by reports from those who were supposed to get it ready for the winter, it was in good shape.

Vladimir Putin: So the reports said it was ready for the winter?

Viktor Basargin: Yes, all the reports that were submitted claimed that the boiler house was ready for the coming winter season, so we had it made operational.

Vladimir Putin: You should investigate the situation and call those responsible to account.

Viktor Basargin: Yes, we’re already doing that.

Vladimir Putin: Find out who signed the reports and on what grounds. There’s a lesson to be learned.

Mr Shoigu, are your people working on the ground?

Sergei Shoigu: Yes, Mr Putin. We’ve supplied 105 fan heaters, primarily for hospitals and kindergartens. The local schools are currently closed because of the freezing temperatures. There are two hospitals in the town – one designed to accommodate up to 140 patients and the other, 88.  Heat generators have been brought in as well.

Our teams are working at sites where there’s a risk of the heat supply lines freezing over. We’re working in close cooperation with local authorities, and together we’ll be able to prevent that from happening, I think.

As Mr Basargin said, we’ll try to restart a third boiler tonight.  A team from Biisk is now on its way to Nyandoma. They’re carrying spare parts with them so that the two idling boilers can be repaired.

However, if they continue by truck, they won’t arrive for a week’s time, so I’ve instructed [my staff] to stop them somewhere on the border with the Altai Region, put all the equipment they’re carrying on board a plane, and deliver the freight by air.

The payload is 18 tonnes – not too much – so I think we’ll get it delivered within one day.

Vladimir Putin: Alright.

Sergei Shoigu: We’ll try and step up the process of restoring all five boilers.

As for the possible causes (of the collapse), I agree with Mr Basargin.

Indeed, according to technical reports, three of the five boilers were operational, with the other two on standby. But, in fact, these latter had no spare parts available (and could not be used as replacements in the event of an emergency).

Vladimir Putin: So the reports lied. That’s negligence, at the very least. You should look into this. And please make sure the relief effort continues. People need help. Do everything to support them. As I have said, all proposals must be considered. Send any complaints to law enforcement agencies, if necessary.

I would like to note some items on today’s agenda. The first concerns the demographic policy concept until 2025. Today we will discuss our goals on this subject for 2011-2015. You may remember that the concept includes four stages. The first, which began in 2008, is finished. It generally brought positive results, especially considering the baby bust of the 1990s.

At that time we were faced with a real demographic crisis against the background of economic hardships and a weakened social system. Mortality exceeded the birth rate for the first time since World War Two. Regrettably, we were dealing with a persistent trend, not an anomaly. We would have been unable to deal with it if not for expedient government policy.

As you may remember, there were many discussions as to whether we should launch the programme or not – I spoke about this as I met with the experts yesterday. Many were sceptical about it at that time. However, we were right, overall, when we formulated the basic premise and launched it. We have achieved tangible results due to comprehensive efforts on national projects, each giving prominence to demographic factors, and certainly due to an all-round policy of demographic development.

Since 2006 we have consistently increased our investment in public welfare, education and healthcare, focussing attention on mothers and children. We began with material support for families with children and for pregnant women. We introduced new welfare programs, such as maternity certificates and federal subsidies for multiple-child families, known as maternity capital. We regularly adjust this support as we announced at the start, so it gives recipients ever greater opportunities.

Young families get some help with housing. Regions pay attention to preschool and medical establishments, though we would like this attention to be greater. More than 150,000 young families improved their housing conditions in 2006-2010 with government help. Another 170,000 young families will get new flats or homes before 2015 in the federally targeted Housing programme.

It is important to attract public attention to domestic values, motherhood and children, promote fitness and instil the ideal of a healthy life style in the nation, especially the youth.

The government sees how hard it is to attain its comprehensive demographic goals. Many factors must be taken into account here. That was the approach of the demographic policy concept for 2008-2010. That part of the programme is over, as I mentioned. The infant mortality rate was reduced by almost 12%, and more than 5.3 million babies were born during those years. The birth rate increased by an average of 35,000 a year.

Importantly, life expectancy also increased. At present, it is 69 compared to 65 in 2005, when we began to draft the National Health project. So life expectancy increased four years between 2005 and 2010. That’s pretty good.

However, last summer showed how unstable and fragile our demographic balance is. The heat and wildfires sent the mortality rate up and exposed weaknesses in the healthcare system. We must be ready to face any disaster, especially abnormal weather.

It matters tremendously now to preserve our achievements and prevent regress, to stabilise the demographic situation, and lay a firm and lasting foundation for improvement. This is our objective for the second stage of the demographic policy concept, for 2011-2015. Our top priorities remain unchanged – increased birth rate, circumspect immigration policy and, last but not least, reduced mortality rate, especially accidental deaths.

The plan includes continuing the federally targeted Traffic Safety programme  from 2013 until 2020, the reduction of industrial injuries, and promoting the cancer prevention, cardiovascular and contagious diseases. As for industrial accidents, it’s important to implement the package of measures we have drawn up, particularly in mining.

Mr Sechin, please return to this theme. We have made this decision, and have started to implement it in legislation and at the government level. Let’s see how it works. We will meet again soon. Possibly, some  trade union representatives will be present. We will discuss how the plan is working at that time.

We will continue aid to multiple-child families – not only through grants but also through extending the options for using maternity capital, and social welfare – particularly, to improve housing conditions.

At the next government meeting, we will discuss tax incentives for families with children. More than 876 billion roubles have been earmarked in the federal budget to implement the second stage of the concept until 2013. The general amount of funding for the entire plan in 2011-2015 is roughly estimated at 1.5 trillion roubles.

The implementation of the second stage must bring practical results. First of all, we must stabilise the general population at 143 million. To do this, we need to hit three critical targets: first, to increase life expectancy to 71, compared to today’s 69; second, to increase the birth rate and reduce the mortality rate by 25-30% over 2006; and third, to implement a wise immigration policy, to be coordinated between the relevant agencies. Demographic indices reflect the quality of public life, and demographic problems will always be a government priority.

The ministries are creating the relevant federal development programmes. Please note that endorsed measures and indices for national projects on which demographic plans rest, should remain clear and must be included in the programme as a special chapter.

Colleagues: I would like to call your attention to another question. Today we will pass decisions on federal aid to regions affected by natural disasters – floods, torrential rains, and storms. Tyva, the Stavropol and Altai territories, and the Leningrad Region will receive a total of 95 million roubles from the government reserve fund to repair highways, housing, utilities and public infrastructure. People left homeless by the rains in the Stavropol Territory and Karachayevo-Circassia will receive 98 state housing certificates.

We will support the regions and the people in trouble, as we did before. We will use federal and other resources for this relief.

Why am I focusing on this? What reminds me of it now? After all, this is part of our work. Why have I brought this up at this point? What makes me uneasy?

We are only now making decisions on grants to regions for disasters that struck them last spring and summer – which means that it took almost a year for the necessary paperwork to make it through the bureaucracy. The regions are unforgivably slow to substantiate applications for relief, provide estimates, and repair the essential infrastructure. But the regional authorities are not the only problem. Colleagues, we too must work more quickly. The paperwork gets stuck in our agencies for weeks and even months.

I call on the Emergencies Ministry and the relevant federal and regional agencies to take stock of the situation and create a plan and submit it to the government with conclusions and practical proposals on how to organise this work for ourselves so those in need of our help not to wait for us to overcome all those bureaucratic obstacles.

Mr Shoigu, please submit these proposals within a week. Ms Golikova has the floor to report on the first item.

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