Transcript of the beginning of the meeting:

Vladimir Putin: Mr Shmatko, let’s discuss the situation on the energy market once more. What is the current status of electricity prices in the Russian regions? What about petrol and diesel fuel? Please.

Sergei Shmatko: Mr Putin, per your instructions, we are monitoring nationwide electricity prices on a grand scale. Under macroeconomic forecasts, average nationwide prices were expected to increase by no more than 15%. I would like to tell you that we have kept to these parameters in January-February, 2011. Nevertheless, I would like to note that numerous regions have posted 30-40% price hikes.

Vladimir Putin: Mr Shmatko, the average price hikes range from 7-9% and reach over 35% in some regions. People living in regions posting 35% price hikes don’t care that prices have increased by only 9% elsewhere. Do you understand? Consequently, we must strive to hit 15% in an overwhelming majority of regions. Naturally, this ceiling can be a bit higher in some cases, for objective reasons, but it can't get out of hand.

Sergei Shmatko: Mr Putin, this is exactly how we understand our task. While reporting to you on the situation, we have drafted a range of measures addressing federal and regional factors. Each such region will be analysed accordingly. We have already proposed a range of price-cutting measures that correspond to the expansion of a fully liberalised electricity market. Nevertheless, we believe that the main problem has to do with regional pricing decisions and regulating power distribution networks. The regions are working on this issue. If need be, we will move to modify previously approved regional prices.

Per your instruction, we are now moving to include representatives of the Federal Antimonopoly Service, the Federal Tariff Service, and the non-profit partnership Market Council in the boards of regional power companies. And I would like to reaffirm once again that our task is to limit price hikes in every region to 15%. We proceed from that assumption. Small cross-subsidies are facilitated by regulated electricity prices for the population and by price hikes totaling less than 10%. But I think that this level is within our means.

Vladimir Putin: What about petrol and diesel fuel?

Sergei Shmatko: The petroleum, oil, and lubricants market is currently in good shape. Those decisions made by oil companies after their February 9 meeting with you in St Petersburg on the results of the fuel and energy sector’s performance have proved effective. As of today, fuel prices have declined by 3.5-4.4% in various Russian regions, depending on fuel category. This happened during the first two weeks in February. Price levels have now been somewhat stabilised.

And now, I would like to discuss the most serious problem. As you remember, people were indignant over diesel prices in winter, which cost just as much as premium petrol for the first time in history. Prices have since declined 8%. I would like to note that these prices have declined even against a backdrop of rising export prices, or the export alternative on global markets, to be more precise. It turns out that global petroleum, oil, and lubricant prices continue to grow, while Russia has managed to find a way to lower them. Our current task is to monitor this situation at all times. Although price hikes are often caused by objective [market] factors, we must completely rule out those factors linked with lopsided supply and demand and eliminate speculative demand generated by intermediaries and oil companies.

Vladimir Putin: This is the issue that I would also like to touch on. We need market-based and economically sound prices. As I have already said, we have no intention of undermining the economy of our oil companies. But we must rule out any speculation and corporate collusion whatsoever. I urge you and the Federal Antimonopoly Service to continue this work. I would like to repeat once again that prices should not be stipulated by administrative methods but should emerge on the basis of market supply and demand. Any speculation is out of the question.

Sergei Shmatko: Yes, sir.

Vladimir Putin: This is the first aspect of the issue. And the second aspect is linked with the expanding infrastructure of our energy transport. First of all, I would like to ask you about the implementation of major projects. The status of the Nord Stream is clear. And how, in your opinion, is the South Stream developing?

Sergei Shmatko: Mr Putin, I would like to tell you that, technically speaking, we have made considerable headway in implementing this project. We have finalised the required regulatory documents with the signing of a number of inter-governmental and corporate agreements with state agencies involved in the project. After your trip to Brussels, we have decided that a presentation of the South Stream involving the European Commission will take place in Brussels in the second half of April. This is a very positive signal because, until recently, we had lacked any constructive or positive dialogue as regards public perception of the project in Europe. Recent progress has been encouraging. The Turkish side has given us the required preliminary permission to conduct surveys and seismic operations. This work will be quite serious, but I want to stress once more that such permission is preliminary. After the tests, we will once again have to obtain large-scale permission for pipe-laying from the Turkish side.

It should be noted that we openly discuss other alternatives with our European colleagues. This includes the creation of liquefied natural gas production facilities. During the latest discussion with our European colleagues, including the European Commission, we were briefed on alternatives to submarine pipeline routes, including the South Stream, and on the creation of liquefied natural gas production facilities. We are now conducting such work.

Vladimir Putin: Where?

Sergei Shmatko: For instance, this may mean the Black Sea basin.

Vladimir Putin: Let’s put it this way. Please, examine the possibility of building a liquefied natural gas enterprise in southern Russia on the Black Sea coast, as well as the possibility of involving the future gas liquefying plant on the Yamal Peninsula in the project recently proposed by NOVATEK and Total. You can involve Gazprom in order to accomplish this objective. Please, calculate the cost of gas transportation from that region to the European market and  other global markets. You and I both realise that the construction of gas liquefying plants opens up additional opportunities for market diversification. At the same time, we need to talk to our European colleagues and discuss prospects for jointly assessing projects as regards the construction of liquefied gas terminals, liquefaction facilities and channeling gas into the transport networks of our European partners.

Sergei Shmatko: Yes, sir. The construction of liquefaction facilities in Europe and Southern Europe is a very promising prospect. And the February 4 European Union Energy Summit has given the go-ahead to expanding precisely this type of infrastructure. To my mind, the Yamal Liquefied Natural Gas Project can be nicely integrated into official plans to expand the European energy transport infrastructure.

Vladimir Putin: Analysts believe that gas transportation aboard tankers becomes just as profitable as gas pipeline deliveries after a certain mileage, say 2,500 kilometres.

Sergei Shmatko: Yes, 2,500 km.

Vladimir Putin: Please make the required calculations in the next seven days and inform me afterwards.