Transcript of the beginning of the meeting:

Vladimir Putin: Good afternoon, colleagues.

Let us start with the most pressing issues. I would like Mr Kudrin to report on the progress of the federal and consolidated budgets. Mr Kudrin, please, go ahead.

Alexei Kudrin: Mr Putin, colleagues. The two-month budget is proceeding on schedule, and revenues are exceeding our expectations. We accumulated 1.505 trillion roubles in two months, which is 196 billion roubles more than over the same period last year, and we spent 1.452 trillion, as planned. We, of course, draw attention of the ministries and agencies that they should spend the budget money more uniformly and proportionately over the course of the year. The first two months saw a net surplus of 0.7% of the GDP – that is, of the planned GDP. I would also like to note that, as planned, the Ministry of Finance announced limits for all ministries and agencies in the amount of 98.8% of all expenses. This is the way we have been working with ministries and agencies for a few years: opening the limits in early January.

The rest of the limits – a total of 92 billion roubles – will be allocated as soon as decisions are made – I'm referring to upcoming government resolutions. Upon approval, this money will also be distributed – these remaining 92 billion roubles. Meanwhile the ministries and departments have distributed among their subordinate agencies that must know the plans of their expenses through the end of the year, of course, only 54% of money, which is not enough. So, many subordinate agencies do not even know their limits until the end of the year, and it is already the end of the first quarter. I would like to draw your attention to this.

Another point I want to emphasise is that this year we will not be able to channel all additional non-planned revenue from the oil and gas industry to cover expenses. We should avoid reversing the current decline in inflation. We have managed to reduce the rate of inflation, so the situation is more optimistic today than it was a month ago. We  should avoid weakening monetary factors.

So, to repeat, we do not plan to spend extra oil and gas revenues to cover expenses.

Vladimir Putin: What is the current accumulated inflation?

Alexei Kudrin: About 3.6%.

Vladimir Putin: How much did it grow in a month?

Alexei Kudrin: In a month? Mr Ignatyev (Head of the Central Bank of Russia) is here, he can…

Sergei Ignatyev: Inflation last month was 0.3%.

Vladimir Putin: 0.3%?

Sergei Ignatyev: 0.3%. We expect about 0.6% in March. Overall, we think that we can manage to keep within our planned figure of 6%–7% annual inflation this year.

Vladimir Putin: You mean the rate dropped?

Sergei Ignatyev: Yes, it dropped.

Vladimir Putin: Good. Thanks.

Alexei Kudrin: Mr Putin, I emphasised this point about extra oil and gas revenues because the ministries and agencies have sent their applications, proceeding from the fact that…

Vladimir Putin: They smelled money.

Alexei Kudrin: We must follow strict rules. They are very important for investors – those who come to work in Russia and for our domestic investors. We will not allow money supply to grow and trigger a rise in inflation.

Vladimir Putin: We have agreed, as our colleagues remember, to use part of these resources to cut the budget deficit and start replenishing our reserve funds.

Alexei Kudrin: We plan to receive over 200 billion roubles in revenues other than oil and gas. I repeat, these are non-oil and gas revenues. And this money can, of course, be spent. We have already decided how we will spend most of it. But do not forget about resolutions such as the one to cut the insurance premium for small businesses from 34% to 26%, which was approved in late December. So we will have to increase the money to be transferred to the Pension Fund by 80-82 billion roubles the next time we adjust the budget.

We also made decision regarding medical leaves for pregnant women – that also spells additional 16 billion roubles. The decisions we adopted lately are worth over 150 billion roubles budget money, so again, we must not increase our expenses too much over the course of the year.

As for the constituent entities of the Russian Federation, their revenue over the last two months came to 745 billion roubles. It grew 8%, which is 55 billion roubles more year-on-year. Profits grew by 74%, which shows that businesses are on the rise and coming out of the crisis. Personal income tax has brought in 10% more in revenue. There was, however, a slight drop in excise revenues; the amount collected through property tax remained the same.

Expenditures totalled 664 billion roubles, which is a 10% increase against the same period last year. Thirty regional budgets ended the first two months of the year with a deficit and fifty-three with a surplus. On the whole, over these two months…

Vladimir Putin: Fifty-three with a surplus?

Alexei Kudrin: Yes. That’s where we are now. But the situation may change because some of the funds will be used over the second half of the year. So you should keep in mind that, currently, revenues account for a slightly larger share than they will at the end of the year. It will be clearer by then where the federal and regional budgets stand.

Payroll debts were quite low. There were only a few such cases in the regions, but overall, they fell by 50%. Thank you.

Vladimir Putin: Thank you very much. Mr Shmatko, please. In early March I asked you to review the possibility of building LNG facilities in southern Russia, on the Black Sea, and to assess the potential economic effect of this project. What conclusions were you able to draw?

Sergei Shmatko: Mr Prime Minister, in a follow-up to your instructions, the Ministry of Energy is reviewing several alternative gas transport routes within the framework of the South Stream project.

The most feasible of these would mean building a pipeline on the bed of the Black Sea. Then we can set up either shuttle supplies of refrigerated and compressed gas – “LNG Light” – or shuttle supplies of only compressed gas within the Black Sea region. There are several other alternatives, including shuttle supplies of LNG only within the Black Sea region or further penetration of the Mediterranean market. Finally, LNG can be also supplied from Yamal.

According to preliminary estimates, the most costly alternative is building an LNG facility on the Black Sea and supplying gas exclusively across this region. Trading gas in the Mediterranean region and other international markets would doubtlessly mean more profit.

I have informed you earlier that according to our preliminary estimates, building an LNG facility has better prospects than building a gas pipeline if the transport distance is anywhere from 2,500 to 3,500 kilometres or longer. The best option is to supply gas from Yamal. This is because transport accounts for a significant share in the cost breakdown. Clearly, one of the most important factors in such projects is the distance between a gas field and consumers. We are revising current alternatives together with Gazprom and will soon submit our updated projections. In any case, we have several alternatives to choose from and will select the most economically justified.

Vladimir Putin: Good. Gazprom is finishing its project in Sakhalin, which will allow gas to be supplied to thermal power stations. In this regard, I am again asking the Ministry of Finance and the Ministry of Energy to review pricing policies and address a related issue – royalties on our international contracts. Overall, we need to consider all the problems facing the energy industry in the Far East. I would like you to be ready with your proposals so that we can discuss them later today.

Now, Mr Zhukov, please. The government has recently adopted a resolution on the state programme for people with disabilities, called “Comfortable Environment”, from 2011 to 2015. Please brief us on its main parameters.

Alexander Zhukov: Mr Prime Minister, colleagues. This program will benefit 13 million people with disabilities, as well as the elderly, pregnant women, and women with babies. The main goal of this programme is to make basic services and facilities more easily accessible to such people. We will focus on every pertinent issue – healthcare, education, culture, and sport. The programme will receive 47 billion roubles in funding over five years.

What are our targets? First of all, we plan to increase the number of schools with   handicap accessible facilities and infrastructure eightfold. At these schools, children with disabilities will be able to study along with non-disabled children. Naturally, we cannot accommodate all schools through this programme, however, and so far, we have committed ourselves to increasing the number of such schools to 20%.

In addition, the percentage of municipal transport that can service people with disabilities and the percentage of subtitled shows and programmes on the primary television channels will increase twofold and ninefold, respectively. We also expect that five times more people with disabilities will start to play sports, which is one of the main priorities of the programme. So, those are our targets. We will not stop even after we have reached them; ultimately, we intend to carry on the programme and expand its scope. Right now, we need to focus on the problems facing people with disabilities.

Vladimir Putin: Thank you. We need to ensure that it’s not just on paper and that your initiatives are realised in practice. A comfortable environment for people with disabilities is our absolute priority. We have announced our commitment, subscribed to all international conventions, and adopted the national programme. Now we need to translate those plans into action.

The Ministry of Communications is continuing to negotiate lower roaming tariffs with European mobile operators. We’ve recently taken an important step forward in this direction, reaching an agreement with our Finnish partners. Mr Shchegolev, please.

Igor Shchegolev: Mr Prime Minister, as you remember, during the talks with the European Commission in Brussels, we raised the issue of Russia's conformation to European regulations. At the same time, we reserved the right to hold bilateral talks with European companies since this market is currently regulated by the mobile operators. We have since managed to enlist the support of our Finnish partners. Yesterday the communications ministries and major telecommunication companies of Russia and Finland signed a memorandum acknowledging that current tariffs are unjustified and committing themselves to bringing them down to European levels.

And before May 1, our companies should submit concrete proposals and reach certain understandings so that they can serve as the basis for regulating roaming rates between Russia and other European operators in general. We are ready to discuss this issue as soon as possible at the CIS level in order to create a system similar to that of the EU with a view towards lowering tariffs and making the rates more acceptable and understandable for our consumers.

Vladimir Putin: Good. I am instructing you to continue this work and produce noticeable improvements on roaming in our country as well.

A couple of words about today’s agenda: I would like to begin with the task of strengthening the Russian lending system. I will remind you that in January we had a meeting at which we discussed a development strategy for the Russian banking sector. We contemplated a strategy through 2015. In drafting this document, we have taken due account of the lessons learned during the world financial and economic crisis, and, of course, we proceeded from the new objective that our banking system become an efficient instrument for solving development issues and fully meeting the needs of the Russian economy and people.

First, the main emphasis should be on raising the quality of the banking sector – its stability and the expansion of its resources. Russia needs a high level of competition and capitalisation in its banking business. It should use an advanced banking infrastructure and apply promising technology and up-to-date corporate governance methods.

Second, it is important to encourage the greater involvement of Russian lenders in the modernisation of the real economy, creating favourable conditions for bank loans towards innovation and high technology and, in short, converting national savings into development capital.

Third, we need effective and accessible banking instruments and services; that means mortgages, credit, and consumer loans for whatever people may need – whether it's paying for their children’s advanced education, repairing their house or flat, or moving to a new place of employment.

I want to note that the strategy for development in the banking sector has set rather serious targets. Plans have been made to increase Russian bank assets to 90% of the country’s GDP by the end of 2015. As of the first of the year, such assets amounted to 74.5%. The aggregate capital of the banks should reach up to 15% of the GDP. Again, as of January 1, it amounted to 10.4%. Finally, the real sector and individual credit portfolios must be increased to 55-60% of the GDP, whereas on January 1, it amounted to 41%.

In setting such targets, we can rely on the adequacy of existing structures. Current trends also show that the Russian banking sector has gained momentum and is rapidly recovering after the crisis. In 2010, bank assets grew by almost 15%, the amount of approved loans increased by more than 12.5%, and individual savings grew as much as 31.2%, which is an indicator of stability and public trust.

The Russian banking system has long been part of the global financial market. Therefore, to improve our competitiveness, we have to adopt international standards quicker – above all in banking supervision and regulation. So today, we will consider some amendments to the law on national banking.

I would like to say a few words about the essence of these amendments. We will apply some rules already acknowledged in international practice to banks and holding companies operating in Russia. The laws will clearly state what information will be required to disclose to the Bank of Russia.

The next item on the agenda also concerns the improvement of institutions involved in the development of innovative industries and the economy. I am referring to a more adequate system of export credit and investment insurance against commercial and political risks. The proposed draft law is intended to consolidate the position of Russian exporters on the world market of high-technology products and services and protect our investors who are involved in major international projects.

We are building a legal framework for the Russian Agency of Export Credit and Investment Insurance. The decision to establish this agency was made last year by the supervisory board of the Bank for Foreign Economic Affairs (Vnesheconombank). This bank will allocate funds for the agency’s resources and facilities. The new entity will support exporters and assume possible financial risks. As soon as this year, the agency will be able to insure up to $1 billion in credit, and by the end of 2013, it will be able to provide insurance support on more than 15% of all exported Russian machinery, equipment, and vehicles to a total of over $14 billion.

I would like to speak about one more agenda item. On January 19, we met with representatives of veterans’ organisations and discussed many issues of concern to the elderly. These included pensions, healthcare, housing, utilities, and other conditions for encouraging an active and wholesome life as well as a role to play in society.

All these issues are within the purviews of various departments and authorities at different levels. We need a uniform and efficient policy of resolving such problems for the elderly. We need feedback from them. For this reason, it is necessary to tap the potential of non-government veterans’ organisations, which is why, at the January meeting, we agreed to set up a Coordination Council on Veterans’ Affairs under the government. Today, we are to approve a resolution to establish it.

Another important question is the participation of veterans’ associations in the patriotic education of young people. I want to add that there are plans to form similar councils and advisory bodies at all government levels, including in regions and municipalities. In addition, the council is to assist in the development of a network that will render consulting and legal and social support for the elderly. In this field, we count on the efficient work of veterans’ organisations.

In turn, we will continue helping NGOs play these significant social roles. I want to remind you that, in 2011, we will allocate 900 million roubles to NGOs from the federal budget, including 270 million to veterans’ organisations. This is stipulated by a government resolution of December 27, 2010. Furthermore, we wish to launch a programme for setting up not-for-profit organisations, veterans’ organisations included. Our plan is to earmark 4.5 billion roubles in financing for the programme in 2011-2013.

Let’s get down to work.