Transcript of the beginning of the meeting:

Vladimir Putin: Good afternoon, ladies and gentlemen. We have been planning a meeting to discuss the issues of power engineering, a crucial industry for Russia, for a long time. In fact, everything we will be saying today is also relevant for the heavy engineering industry as a whole.

Many of those present had been calling for a meeting like this, which confirms that the time has come to discuss the prospects of one of Russia’s key industries. I believe that everyone involved will be speaking about this at our meeting today. Companies working in this sphere need to understand clearly what their prospects are above all in the domestic market, the size of the orders they will be receiving, how much they can invest to be sure that these funds will be needed and that the goods produced will be purchased with a profit, so fostering development.

Today’s meeting was also prompted by the tough competition in global markets and by the fact that we need to create conditions for our industry to develop. We will discuss all this.

I propose the following procedure. First, I will make some opening remarks, then Sergei Shmatko will make a speech and after that we will have a free discussion of issues that concern everyone present here. I would like to point out that the industry has good prospects and enormous potential.

It is not for nothing that we are having this meeting at the Nevsky Plant since a complete processing chain has been established here over the past few years. Not long ago the facility was in a deplorable condition, but today it has a whole processing chain starting with an iron casting facility of its own and ending with the assembly of finished equipment. The plant has established good, cooperative relations, including with leading international companies, and created an extensive network of branch offices. It has set up a good facility in Chechnya, right in Grozny.

This plant is a success story and a blueprint for a profound technological modernisation as well as of efficient cooperation between machine engineering companies and their customers. For example, major long-term contracts from Gazprom allowed the plant to start manufacturing Ladoga gas compressors in cooperation with its Italian partners. We took a look at these compressors today. The localisation of the production of these compressors has reached a very good level of 80%.

I would like to point out that at a February meeting here in St Petersburg we reviewed the performance of Russia’s fuel and energy sector in 2010 and set goals for the future. Major goals were set, and they are truly impressive. In the next few years Russia is to become one of the world’s leading equipment and technology providers for the fuel and energy sector, including turbines, grid equipment, compressors, and drilling machines and platforms.

Significant budget investment is planned, for example, in projects related to the housing and utilities sector, to say nothing of the fact that the largest guaranteed customers for these products are budget-funded entities. Look no further than the investment programmes for Russia’s energy production, oil and natural gas companies. Let me cite some figures.

Russian power generating companies alone intend to purchase power engineering products worth 1 trillion roubles in the next three years with grid companies to buy500 billion roubles worth of equipment. Natural gas companies intend to spend 600 billion roubles on it and oil production companies plan to spend another 1 trillion roubles. It is not difficult to add this all up to get an impressive amount of 3.1 trillion roubles. This is the foundation for modernisation, this is real money to modernise facilities rather than to manufacture goods only. But I would like to emphasise that power engineering companies need to be sure that they will be able to sell the equipment they manufacture. At the same time it is easy to understand their customers who want to purchase only the most cutting-edge equipment.

All in all, our domestic market guarantees demand for these products. This means that current investment in the development of power engineering and heavy engineering as a whole will pay off.

I would like to point out that large-scale and truly ambitious goals have been set for Russian power producers. They are expected to commission power generating facilities with a total capacity of more than 170 GW by 2030. I would like to underscore that facilities with a capacity of 6.5 GW, the largest figure over the past decade, are expected to be inaugurated in 2011 alone.

We will also have to deeply modernise Russia’s grid infrastructure, repair the existing infrastructure and build new transformer facilities and power transmission lines. I would like to point out that it is important to make sure that only modern equipment is installed and materials suitable for extreme climate conditions are used during this modernisation. We need to be prepared for any challenges related to weather conditions, including extreme temperatures, freezing rain and so on. We need to ensure that we will avoid massive blackouts, like the ones that we faced this past winter. This is a complicated task given our climate conditions, but it can be attained. We need to ensure that there is a reliable and efficient electricity supply for consumers. In fact an overhaul is in store for the entire Russian energy sector. At the same time, the power production infrastructure needs to be at the forefront of development so that it does not impede the development of Russia’s economy as a whole.

Modern equipment is needed to ensure stable and reduced electricity prices that can minimise the costs of producing power, transporting energy resources and managing the grid. This is a crucial material factor besides the competitiveness of the industry, which is a purely economic factor. This is all natural.

Moreover, we will have to explore new oil production areas in East Siberia and the Far East, start using fields on the Yamal Peninsula, the Arctic shelf, and in the Caspian and Black Seas.

Obviously, the successful development of the power engineering industry will require good management decisions, long-term investment, effective financial support for projects, and tax incentives. We must see what arrangements might work here – the tax and investment incentives, tax holidays, exemptions for special economic zones and related industrial clusters. We also need a customs policy that will stimulate the development of industry in Russia and one that does not function as a barrier to the import of foreign equipment and unique technology that we do not yet make and that consumers need so much.

I have already said today that the Russian power engineering industry has great potential, which should be effectively used and developed, more actively developing and manufacturing next-generation technology, which will not be inferior to foreign counterparts in terms of the key features of efficiency and environmental friendliness.

We have already approved the development strategy for power engineering until 2020. I want you to focus on the following when implementing this programme. First, we need to establish a chain of innovation in the industry to lay the technological groundwork for a manufacturing base for new products, and resources should be allocated in the best possible way. It may be possible that we need to purchase, as it is done here, for example, licences and technology with the obligatory localisation of production. And in this case, if the products are in demand, no need to reinvent the wheel. Of course, on this basis, you need to go further. And if some technology – that is in demand – is not available on the global market or its sale is limited for now, unfortunately, for various political reasons – if it is dual-use technology or there are prospects to make our own unique product with access to domestic and foreign markets – of course, we need to invest in development. Let me remind you that there is money available for these purposes. As I said earlier, effective demand, guaranteed demand – in fact, we have 3.1 trillion roubles.

Accordingly, I ask the Ministry of Industry and Trade to draft proposals on the list of required technology, with detailed calculations – what is profitable to buy and what is not needed, so that we can make accurate, prompt decisions in terms of customs policy.

I also believe that the government should support our manufacturers in the highly risky stage of research and development.

The Energy and Industry Ministries should develop a programme for the public co-financing of research and development spending, approve it and, of course, work through this issue with the Finance Ministry for R & D conducted by leading Russian power engineering companies.

Please also think about the possibility of providing specific grants to conduct research and development for equipment and energy technology.

Our colleagues had the idea of creating a common unified platform for scientists, energy industry experts and engineers to optimise new technology for the manufacture and  integration of modern equipment based on the principles of public-private partnerships, establishing a unique centre that would coordinate this activity, gathering information, helping to find a promising direction for development. This will significantly reduce the cost of innovation for the individual companies and enhance their efficiency. I agree with these proposals. I think we need to consider this.

Power engineers must have clear and understandable development guidelines. They should understand what kind of power equipment will be in demand in generation and grid companies, the volume of orders requiring an increase in production capacity, and which “line” of products is needed in the very near future, as well as in the medium and long term.

Second. The production of power equipment is a long and complicated process. It is a long-term cycle that sometimes takes several years – two or three years, so it is important to thoroughly rebuild the entire chain of relationships with subcontractors and suppliers of raw materials, and have predictable patterns for the tariffs for railway transportation and other services of natural monopolies and, of course, the same goes for electricity, primary raw materials and gas.

We need to develop not only a system of long-term contracts between power companies and equipment manufacturers, but thoroughly think up a system of long-term contracts for the entire production chain for power engineering, and this entails suppliers of fuel, iron and steel products. An unreasonable surge in one of the links in the end leads to an increase in the cost of the final product and reduces the competitiveness of the industry. And, unfortunately, we encounter such circumstances, from time to time, and fairly often. We need to think about economic incentives for long-term contracts – for example, about their insurance.

Bear in mind that for engineering, for the defence industry (industries with objectively low levels of profitability), it is fundamentally important to achieve substantial growth in production efficiency, and reduce the proportion of costs associated with natural monopolies. In short, we need an effective balance of prices and tariffs so that the actions of some market participants did not lead to problems or cause stagnation for others.

Third. We must make greater use of the opportunities offered by cooperation with leading world power engineering producers. The more so since major long-term projects in this sector are already in progress. There are 16 agreements in the implementation stage on joint assembly sites with our foreign partners, foreign companies, including such recognised leaders of power engineering as General Electric, Hyundai, Siemens, and the French concern Alstom. We have established good manufacturing contacts with all of them, very good partnerships.

Our machine builders need to actively learn from the experience of the auto industry. Seek a high degree of localisation of manufacturing through technology partnerships with foreign investors in order to create a single chain – from engineering centres to service, and expand the production of the most promising, in-demand equipment. In particular, this applies to high-power gas turbines. I am confident that with this approach, we will not only fully meet our needs in terms of modern power equipment, but also simultaneously expand Russia’s presence in the global market.

As you all know well, the current share of Russian companies on the global market for power engineering is extremely small. In order to solve this problem it is important to offer competitive products and good conditions for aftersales service. And, of course, we need to develop mechanisms to support Russian companies that produce and export high-tech equipment in their efforts to participate in tenders to supply equipment to other countries. In particular, we should consider whether to provide foreign clients with attractive loans for the purchase of Russian energy technology, as is done in the field of nuclear engineering. The system is fully developed and is working efficiently. Of course, it ultimately benefits the economy. Not only that we keep our businesses busy, but it also entails a guaranteed return of government loans and public investment – absolutely guaranteed. No risk there. Established enterprises operating on the basis of these loans generate income.

In addition, if we grant loans to other countries for the construction of major energy projects, such loans must be “binding.” But this is obvious – I have already talked about this.

Finally, the last thing. Of course, the main clients for domestic power stations must be Russian generating and grid companies. However, analysis shows that they often downplay the real need to replace equipment. In other words, they try to minimise their investment commitments.

The criteria here should be both technical safety and efficiency. I'll request that the Ministry of Energy and the Federal Service for Supervision of Environment, Technology and Nuclear Management  work on this problem in order to have clear and understandable rules – when and how things should change. Dates must be clear and there should be supervision for this very important activity, so that we don't go to extremes and so we don't have to deal with mitigating the serious consequences of delays in replacing equipment.

Let's begin sharing our views. Please, Mr Shmatko will make a short announcement, and then I invite you all to the discussion.

Sergei Shmatko: Mr Prime Minister, ladies and gentlemen,

As was noted earlier, further development of the economy is impossible without the stable and forward-looking development of power engineering. Admittedly, there are several factors that inhibit the development of this industry. First of all, quite a few enterprises still use worn-out and obsolete equipment; the import of machinery and equipment is growing; and the industry is failing to take full advantage of innovation, paying too little attention to research and development. The energy effectiveness of our power engineering is lower than in the West, while operational costs are relatively high, and maintenance and servicing leave much to be desired.

Mr Prime Minister, you have already outlined the main prospects for the power engineering market, noting that the industry will shortly receive guaranteed orders. I’d like to add that there are long-term programmes for power engineering, reaching until 2030. According to preliminary estimates, the industry will receive 20 trillion roubles through these programmes to construct new facilities and modernise the grid. Eleven trillion roubles are to be provided over the next 10 years.

The current situation in the power engineering market is really unique for Russia. If we are to carry out our plans – and they must be carried out to ensure stability and safety in the industry – the funding should be four times higher. This is a very challenging goal, but at the same time, it offers great benefits for the industry.

I’d like to provide a few figures. Steam turbine plants have been loaded only at 30% of their capacity, gas turbine plants at 85%, and boiler plants at 30%. Should these facilities be modernised, and four times as many facilities be put into operation annually, Russian plants will be able to meet 100% of the market demand. The Ministry of Energy has analysed the plans for long-term orders, revealing several shortcomings. First of all, the plans of several energy companies for purchasing new equipment for thermal power plants do not quite match the government’s programme for the modernisation of power engineering. I mean that while we have already announced our long-term plans for the industry, several privately owned companies offer hardly any development plans after 2015.

We understand why it is so: thanks to the reform of the industry, power generating companies received guaranteed orders through supply contracts to meet their investment commitments. Then they fell into some kind of stupor. The problem is that prices are very unstable, which hardly makes it possible for companies to draw up plans for the long term. But the government has one absolute priority for the industry – to ensure that it is safe and reliable, and you can be sure that we will place orders with Russian companies. We just want to have a choice. We will do it in any case and hope that Russian engineering companies will modernise their facilities so as to be able to handle these orders and that they will take an active part in auctions. Otherwise, we will have to import equipment, which we cannot allow. That’s how we see the future of the Russian engineering industry.

However, I have to admit that Russian power-generating units have certain shortcomings. Clearly, if production is located in Russia, it is more cost-efficient, and it is more convenient to ship and service this equipment. But, as I said, there are several drawbacks. We haven’t developed new gas turbines in a while, our equipment is not efficient enough, R&D is weak, we do not produce a full range of gas turbines, the quality of assembly is poor, and the servicing system is underdeveloped.

I’d also like to add on the nuclear power industry. It is the most advanced sector of the industry and has several distinctive features.

This industry is characterised by a long manufacturing cycle. So the number of equipment sets – with specifications such as the power of pressure equipment, the weight of slugs and so forth – is a determining factor in the assessment of production capacities.

Bearing in mind this protracted manufacturing cycle, it is important to plan for several years ahead and to make sure there’s no shortage of any specific types of equipment. Importantly, domestic production covers almost 100% of the Russian nuclear power industry’s equipment needs.

All new nuclear power plants we construct in this country meet the most rigorous of safety standards, and we should make sure the public is aware of this fact, especially given the nuclear power disaster [in Japan].

Russia’s power equipment industry faces the challenge of a major overhaul of its manufacturing facilities and its technological base. I’d like to highlight here the positive example of the Izhora Plants, which have recently upgraded their production lines for nuclear reactors and, according to the Russian State Atomic Energy Corporation, have achieved significant discounts on equipment supplies.

I should now say a few words about the oil and gas industry. Russian companies working in the sector have stepped up their investment rather than just maintaining it at a certain level. A higher pace of drilling has led to an almost 150% growth in the use of drilling rigs by major producers over a period of two years. Most of the derricks currently in use in Russia are outdated; their total number is estimated at 465-550 for the next decade. So we need to increase the output by a factor of 2-2.5 annually.

It should be noted that domestic manufacturers are now facing fierce competition with the Chinese. The Chinese have gained a foothold in Russia’s derrick market with support from their government in the form of generous export subsidies. So the need for government support for Russian manufacturers in that vitally important sector is a very topical issue indeed.

To reduce imports, we have built a system of monitoring and early order placement, including by designing mechanisms of long-term pricing, guarantees, and incentives for investment in the construction of new power engineering facilities, as well as by signing long-term contracts for equipment supplies and working to create a centre for innovative developments, which you, Mr Putin, mentioned earlier today.

The Energy Ministry has acted upon your instructions to create in Russia a modern production line where Siloviye Mashiny could manufacture power transformers in cooperation with Toshiba. The [Russian] company’s chief told me earlier today that already, nearly all necessary decisions had been made regarding the creation of this line on the basis of a long-term contract. This was no easy task, but I think the sides finally managed to meet each other halfway and find a workable solution together.

As for government support to promote long-term contracts between power generating companies and equipment manufacturers, we deem it feasible to consider the possibility of providing Vneshekonombank guarantees for the execution of such supply contracts. The Energy Ministry has already proposed three pilot contracts for testing a relevant scheme. Another option to examine has to do with subsidising R&D programmes for power equipment manufacturers. The ministry, for its part, has been making consistent efforts to advance modernisation and high technology in the industry.

Mr Putin, one task you assigned the Energy Ministry at a recent meeting on environmental issues has to do with the further development of coal-fired power generation.

An analysis we’ve just carried out has shown that this sector has great potential in Russia. A lot of work has to be done to make existing coal-fired power plants more environmentally friendly. New clean-coal technology proposed by Russian specialists has already been applied in the construction of a 660 Megawatt power generator, and the unit will become operational in a short while.

We also deem it important to stimulate high-tech research and development in power generating companies. We drafted and approved four corporate R&D programmes, providing for government support, as well as seven concepts. In 2011, the overall R&D outlay has been increased eleven-fold, to 14 billion roubles. The share of domestic power equipment manufacturing has also been brought up.

As has already been mentioned, we’ve got 16 agreements on cooperation and local production. Let me just raise one related issue here. I’d like to ask the heads of generating companies, which tend to conclude so-called anchor agreements, to make sure there aren’t too many such deals, otherwise there will be no healthy competition between equipment manufacturers in the years to come.

I believe long-term contracts of that kind (they have, indeed, sparked widespread debates in the industry) should be oriented not so much toward market shares as toward analysing business plans to build production lines here, in Russia, and to determine how much equipment should be purchased to ensure a plant can recoup its costs.

Thank you for your attention.

Vladimir Putin: Thank you.

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Vladimir Putin’s closing remarks:

I was very preoccupied with economic issues and the real sector before, but in the past three years I have been dedicating every day, if not every hour, to it. But you don’t even need to do all that to realise something that we all know. Russian carriers want to use foreign-made vehicles, our airlines want to fly foreign-made aircraft, regular people want to drive foreign-made cars and ship owners want to use foreign-made ships. This is obvious. We all want to use affordable and high-quality goods. But if we purchase everything from abroad, our economy will fall apart completely. This is something that I have said many times before.

The same is true for power engineering and heavy engineering as a whole, and this industry is the foundation of our economy. Just as in the automotive industry we need to find certain mechanisms for this sector to attract foreign technology and eventually offer the customer the necessary products while fostering development in the country. This means that there unfortunately have to be certain restrictions. If you remember, we first had to prohibit the import of used cars more than seven years old, then we brought the limit down to five years and so on. This is the only way.

The same is true for duty rates, isn’t it? Mr Klepach (addressing Deputy Minister of Economic Development Andrei Klepach), I would like to request that you submit proposals on duty rates and investigations. If these cases can be investigated why has not it been done yet? Why isn’t this tool being used efficiently? And duty rates can be utilised, too. I don’t see any restrictions here, and we will be doing this proceeding from economic common sense and what is better for Russian manufacturers. This is clear. But you also have to understand that we cannot ban imports completely. What will happen to us otherwise?

In fact, certain tools have been named, and they are being used but not sufficiently. Certainly, we have particular budget restrictions, this is true. We are recovering from the crisis, and we cannot afford to waste revenues from selling oil and natural gas that might not be available tomorrow. This is obvious. However, we need to do something. And we need to support long-term contracts making sure that all stakeholders and the government remain market-minded. We are not talking about cars that cost 300,000 or 400,000 roubles and are easily sold. We are talking about a completely different sector where each piece of equipment has its own lifecycle and cost. But we can make some calculations about what we are producing and within what schedule Russian companies will be purchasing these products. We are speaking about Russian companies, so these calculations can be made. And we certainly need to develop cooperation with Western partners. And we need to let them in our market – a pike lives in the lake to keep the perch awake.

Remark: That’s all fish.

Vladimir Putin: All fish including larger species while perch, a smaller species, need to stay awake all the time. Perch can even eat other fish. Anyway, all our measures should correspond to economic common sense. If we let every pike in…

I have good relationships with many executives of Western companies. And they have shown interest in our market – they want to occupy it. But I would like to emphasise a thing I’m sure you all know – market access costs money. And if we let them in we have the right to demand a particular level of localisation – this is what we are doing in certain industries. So, for example, if a company wants to work in sphere X it should provide localisation level Y. And we need to be doing this together. Everyone should understand this, including producers, consumers and the government.

I would like to request that the responsible government bodies properly devise the pertinent protocol giving special attention to all the remarks made by producers and customers at this meeting. This protocol needs to be devised considering our budget restrictions and other things. Naturally, we will be working toward a minimal inflation rate and will attain it in the end. And then everyone will benefit from cheap, long-term loans. But now, until we attain this, we need to do something for the industry to breathe and see the future prospects.

I am asking those responsible to review the draft protocol and amend it with consideration of the approaches and specific proposals voiced by participants at this meeting. Thank you very much.