Transcript of the beginning of the meeting:

Alexei Kudrin: Ladies and gentlemen, let me declare the joint meeting of the boards of the Ministry of Finance and the Ministry of Economic Development on the two ministries’ performance in 2010 and objectives for 2011 open.

In addition to the ministries’ heads and top officials, present here in this hall today are also representatives of many regional and subordinate agencies, international integration organisations and financial authorities from the Russian regions.

I would like to give the floor to Prime Minister Vladimir Putin.

Vladimir Putin: If you believe that as I look into this hall I think of dismissals then you’re wrong. I am fully aware of the crucial roles and jobs you have, as well as your colleagues working in finance and economy who are absent from this hall.

As you know, the government reported on its performance to the State Duma last week, on April 20. We presented to the parliament and the entire Russian nation specific results of our work last year and outlined prospects for our economic development. Above all, these include the recovery from the crisis and the transition to post-crisis development. I would like to say a few words about it.

We need to consistently work toward reducing Russia’s dependence on the commodity market. We all understand this and have been discussing it for many years. In fact our common strategic goal is to ensure a sustainable and quality growth of our economy based on the domestic market and non-resource related sector.

In this respect I would like  once again to point out that  processing industries and trade have made a significant contribution to Russia’s economic growth in 2010. For example, the machine engineering sector rose by 25%. This means that the structure of Russia’s economy is gradually changing and in a way that we all want it to.

The profit rate of industrial enterprises reached 16.7% in 2010, which is 2.2% higher than in 2009. Moreover, trade turnover grew 4.4% in 2010.

This is why we intend to focus on supporting innovation and industrial modernisation, on establishing a strong financial and credit system and boosting the efficiency of development institutions. We need to increase the number of knowledge-intensive and well-paid jobs that will require highly educated employees and consistent professional training. Naturally, we also need to foster greater labour efficiency both in public and private sectors. This is one of the most crucial goals for the future. Strict requirements need to be set out in relation to the efficiency of government and market institutions, quality and accessibility of civil services and effectiveness of budget spending and investment programmes. I’m referring to investment programmes of state corporations and major companies with a government share.

We need to remove barriers in the way of business initiatives and investment influx, to support entrepreneurship and small and medium-sized businesses and to form a favourable business and investment climate. We also need to set up an unbiased system to assess competition in Russia both in the federal centre and in the regions, which is crucial. As you know well, some Russian regions have made a great progress in this area. And I’m pleased to note that it is no longer only Moscow that receives investment both from this country and abroad. Many regional authorities have achieved very good results in this sphere.

We need to reduce the government’s unjustified presence in the economy and excessive amounts of government property creating more room for private initiative. I’m not only referring to giving them more property but also to lifting barriers often established by quasi-state entities that occupy key sectors simply collecting rent fees and completely neglecting efficiency requirements. In addition, we managed to steer away from de-privatization during the [economic] crisis. I recently brought this up at a meeting with the CEOs of some major Russian companies. I reminded them that back in 2009, many companies had offered their assets to the state for a buy out. This would have let them wash their hands of any insolvency.

But let’s give them their due: They eventually decided not to shift responsibility onto someone else’s shoulders. Many used their personal property as collateral against loans made by the government. That’s a real-life example of how businesses operated in those days.

We stopped short of nationalizing private companies (in 2009). Instead, we collaborated on effective bailout plans that allowed us to avoid massive layoffs. Of course, we weren’t able to prevent every possible loss. By and large, however, we managed to preserve each industry while also creating conditions for  breakthroughs and new, post-crisis development.

While providing massive aid for some specific sectors – such as the aerospace industry, ship building and mechanical engineering – the government seeks to make the beneficiaries competitive enough to develop independently in a market environment.

By the way, our favourable treatment of these industries stems from the intention to make domestic producers competitive with their foreign counterparts.

It’s no secret that many foreign governments provided wide-scale aid for particular domestic companies and sectors in the past and that a few of them continue to do so to this day.

I won’t expand on this, but if we just look back on what was happening in the 1960s, say in South Korea’s ship building industry, we’ll see that without massive support on the part of the state, our South Korean counterparts would have been unable to make such spectacular achievements in this sector.

We’ll have to proceed with a similar approach if we want to raise the competitiveness of Russian companies. But let me point out once again: Our ultimate objective is to make sure these and other sectors enjoying state support will eventually be able to survive in a competitive market environment.

We’re determined to participate proactively in global and regional integration processes, increasing the openness of the Russian economy. This should allow us to create new opportunities for individuals and businesses in Russia as well as promote Russian goods and services on the world’s markets and foster international technology and investment alliances.

To give you an example, improvements in industrial assembly procedures are currently underway, along with the introduction of new requirements for localising production. A total of $7 billion is to be invested in assembly facilities and at least 35,000 new jobs are to be created. The automotive industry is the first example to come to mind in this context, but it’s not the only one.

I came over here after a conference with representatives of the construction industry. At that conference, we discussed the need to advance the production of building materials and to introduce appropriate new technology, while stimulating localization. Many of our counterparts -- old, reliable partners from European countries like Finland, France and Germany – have shown their willingness to cooperate. The percent of localized production [for Russia’s market] is estimated at 70-80%. The situation is similar in other sectors, including pharmaceuticals, ship building, and the aerospace industry.

One other clear priority of ours is to continue a proactive social development policy, along with investment in efforts to improve living standards, reform public education and healthcare, and support  Russian culture.

Again: We need a model that will ensure Russia’s competitiveness in the modern world, making its economy and financial sector resistant to shocks of all sorts while also raising the living standards of Russian citizens.

Obviously, the greater share of responsibility for the implementation of all these tasks lies on the shoulders of related government bodies, notably the Ministry of Finance and the Ministry of Economic Development. So I expect you, colleagues, to produce meaningful, efficient and creatively original projects that don’t follow preset templates. This concerns above all long-term government strategic planning, intended to set objectives for industrial, business and social development.

We’ve invited a wide range of experts representing regional and federal government bodies, the research and the business communities, major universities and entrepreneurial associations to contribute to the discussion.

I’d like to emphasize the need to consider any meaningful proposal made within these ad hoc groups. We must not ignore any such proposal. If we manage to build a creative environment for these groups, we’ll stand a good chance of getting a high-quality intellectually competitive product. My personal meetings with experts suggest we should try to translate many of their ideas into reality right now, without delay.

Many interesting ideas have been proposed recently with regard to the development of vocational training, the convergence of universities and technical schools - colleges and high schools, and so forth.

I’d also like to dwell on issues that, in my view, are crucial to our progress and that will determine how effectively our country’s abundant development resources are used (in the years ahead).

Let me begin from the very foundation - macroeconomics, that is. We all need to realize we won’t be able to develop normally unless there is an equilibrium between all key macroeconomic indicators.

Russia has been able to preserve its macroeconomic stability and financial independence in times of crisis. That’s a big achievement. You’ve made it, and I’d like to congratulate you for that. This is a competitive edge we value and will continue to value in the future.

We need a predictable, reality-based national currency rate as well as a safe level of joint national indebtedness. At the moment, our aggregate sovereign debt is the lowest among developed economies.

We need a low inflation rate and, consequently, affordable bank loans for manufacturing industries, cheaper mortgage credit, and opportunities for long-term investment project planning – something crucial to all sectors of the Russian economy.

Most important of all is the protection of the public’s real income and savings against inflation losses. These inflationary processes hit the pocket of each and every one of us, after all.

On the other hand, low inflation – an objective we’re working toward – brings stability, both economic and social. So we need to set ourselves the objective of bringing the inflation rate down to a new record low. The Central Bank is set to keep inflation from rising above 7.5%. This will be no easy task, given the rates we had early this year, but it’s not unrealistic. If achieved, this rate will be the lowest since 1991. And by 2014, we should try to bring it down further to 4-5%.

Now on to the budget. Speaking at the Duma, I cited the additional revenue projections for this year. They are expected to total an estimated 1.5 trillion roubles, which is a handsome amount. 

Non-petroleum revenues will go to raise (public-sector) wages, pensions, student stipends, and development grants for schools, the agro-industrial complex and industry in general.

As for oil and gas sector revenue, it, by contrast, will be used to replenish our rainy-day fund. Just one important exception has been made here: Part of the oil and gas proceeds is to be channeled into a direct investment fund, to create additional tools for innovative development and economic modernisation.

This cautious balance between expenditures and earnings is the right way to go, I think. It will let us remain confident despite price fluctuations on our main exports.

I’d now like to say a few words about the budget deficit. As I’ve pointed out on more than one occasion, a low or zero deficit is the norm Russia should maintain or aspire to.

Ours is a country with a transitional economy. Thanks to additional revenue, we expect this year’s budget deficit to drop to 1-1.5%. And in future, we’ll work toward a zero deficit, using our reserve fund.

We should face up to the fact that our spending capacities will be significantly constrained in the years to come. We cannot just rely on high oil prices on world markets: we can afford to spend only as much as we earn, as much as the Russian economy generates. And, again, we should be very careful with windfall profits: they are here today and gone tomorrow. If we incur expenses today, it will be impossible to cut them tomorrow. What then? We should proceed very carefully, although of course there is always a temptation, it always seems that it would be better to spend more on this or that and then tomorrow everything will be fine. And what if it is not? So of course, as I said, in developing a plan for modernisation we will proceed little by little: we will spend the extra money from oil and gas revenues, but it must be done very carefully. Increasing spending through higher taxes is also not an attractive option. On the contrary, we should figure out how to optimize and distribute the tax and fiscal burden in order not to eliminate incentives for development and not to force business into the gray market. That applies of course above all to small and medium-size businesses. You know that today we are considering ways of diminishing the fiscal pressure while of course ensuring the fulfillment of all the commitments and programmes.

Now, going back to the budget theme, I would like to note that the main requirement here is of course that budget money be spent effectively. During a certain period, rapid growth of government spending was justified because we had to compensate for the previous chronic underfunding in many spheres that are important and very sensitive for the public.

But obviously we have reached a point where many problems cannot be dealt with by just throwing money at them: these cannot be accomplished without serious structural change. Neither the quality of education nor of healthcare, nor the efficiency of public services or the real economy sectors will improve. Without structural change nothing will change for the better and there can be no real growth; that is absolutely clear.

That is why it is necessary to pay particular attention to completing the budget reform which envisages greater autonomy but also a greater responsibility for public sector institutions. These reforms will create, at least we hope they will create, incentives for every institution to perform better and accordingly to receive more and in turn we will toughen service quality requirements. Budget investment should not be based on cost estimates, like it was in previous decades, in accordance with a very simple and primitive logic and formula whereby every year we must spend more than in the previous year. Budget outlays must be matched by real improvements. The people must feel it in their daily life when they deal with government institutions. Let me repeat that in every area of state activity the criterion of efficient use of every rouble of budget money must come first.

We are preparing long range government programmes. Let me explain that we are not talking about another budget reform, a formal redistribution of money, not about replacing shingles or changing names and language. The very principles of the way government agencies work must change, their responsibility must be enhanced, and that includes the actual authors and executors of these state programmes.

We should take another hard look at the quality of planning and the way federal agencies use budget allocations. That applies both to federal targeted programmes and to current spending. Unfortunately, every year we reveal considerable amounts of misspent money and mishandled programmes. However, all too often after inefficient spending is revealed no adjustments are made. In other words, even official admission of inefficient spending and a lack of results have no real consequences for these responsible. Not only that but such activities as a rule continue to be financed.

The cost estimates of construction projects tend to be repeatedly revised upwards and the deadlines for work and construction, on the contrary, tend to be postponed. Of course, one can always cite inflation and so on, but we factor in inflation expectations when we create a programme. Last year and the year before, inflation was at an all-time low level of 8.8%. By no means are prices growing to keep pace with inflationary expectations, they are racing ahead faster, and yet financing continues. There is no clear-cut system of priorities or personal responsibility, therefore resources are scattered about and are used without tangible results. At the budget planning stage all the agencies submit what would appear to be well-grounded and calculated applications. Let me stress that these documents have been signed by the chief executives and other responsible officials of these agencies, but immediately after the budget is adopted numerous amendments and various adjustments are proposed to the approved allocations.

Occasionally budget allocations are approved without the required legal acts and decisions, which is very bad: often it makes it impossible to start disbursing funds and begin the actual work on time. As a result, many federal targeted programmes are proceeding at an erratic pace. That is a problem that we have not yet dealt with, unfortunately, and I must say this from this podium.

For example, the Federal Targeted Investment Programme for 2011 includes 2,500 projects and more than 400 of them are not backed by the necessary regulatory acts or decisions. And then of course the messy business of changing parameters begins.

I ask the Ministry of Economics and the Finance Ministry to prepare clear proposals on the criteria for creating government programmes, with particular emphasis on increasing personal responsibility for the authors and executors. The system of state financial control must be improved. I should add that reporting on these programmes must be as open and public as possible. I think public monitoring is very important and useful. Incidentally, the Ministry of Economic Development has already been posting on the internet current information on the progress of the federal targeted investment programme, the so-called FTIP. The list of accessible government information must certainly be expanded.

I think building an electronic budget is a key task. We talk about electronic government. The electronic budget must be based on the information technology of managing government finances, and it is also necessary to put in place a federal contract system to ensure efficient state procurement, a transparent procedure for awarding contracts, for contract pricing and for monitoring contract compliance.

We should have more than 40 such programmes. The government has approved the list of these programmes, but of course the scale and depth of the work is great. Therefore we have postponed the transition to long-term state programmes and the new principles of designing the budget from 2012 to 2013. We thought that would be reasonable considering the amount of work involved.

We must install a coherent system of strategic management, tie in sectoral and regional strategies with the priorities of the development of the Russian economy and the potential of the country’s budget and financial system. We must create an effective system of monitoring and correcting state programmes, and this is one of the tasks for the Ministry of Economic Development.

Make a note of this: future long-term state programmes must be the basis of the partnership between business and the state, of joint efforts to create new markets and products and to develop the infrastructure to implementing these programmes.

In this connection the efficiency of existing development institutions must come under scrutiny. We discussed it recently and I asked Elvira Nabiullina (Minister of Economic Development) to carry out such an analysis. We visited one of these zones. I am referring to special economic zones, industrial parks, various funds in support of innovative activities and entrepreneurship, all matters on which the Ministry of Economic Development must play the role of active coordinator of development institutions.

It is necessary to create incentives to those Russian regions that foster entrepreneurship and competition in the regional markets, and strengthen regional innovative, economic and tax potential. It is important to strengthen the stimulating role of federal budget support: successful regions must get additional funding for innovative activity, for example, money to repay the loans incurred for the purpose of developing infrastructure, implementation of hi-tech projects and other development programmes. Such instances exist and there are many.

I want you to pay particular attention to the need to launch full-scale work in the framework of technological platforms. We discussed this recently. This public-private partnership approach must result in the development of breakthrough products and technologies that are competitive.

Our task is to create effective innovation chains, to motivate innovation, starting from a promising idea or simply from knowledge and ending with saleable hi-tech products that are competitive on domestic and world markets.

I ask the Economics Ministry to accelerate the submission of the Innovative Development Strategy draft to the government. I should remind you that this year must see the approval of programmes for the innovative development of natural monopolies and companies with state participation. As regards companies in the oil and gas and transport sectors, in the energy sector in general, the emphasis must be on introducing energy-saving and resource-saving technology.

A key task is creating an efficient system of support for the export of Russian products, above all hi-tech products, of course. We have great expectations in connection with the Export Credit and Investment Insurance Agency, which is being created.

At the same time it is important to promptly find and eliminate the barriers that stand in the way of successful entry of our companies into foreign markets. Of course, all the factors must be taken into account, starting with dishonest competition and ending with the streamlining of our customs procedures and the export control system. That is very important, especially in high-tech. Sometimes one can’t help feeling distressed: I talk with investors, domestic and foreign, and there is a working production facility. They say, if the amount of investment were doubled it would flood the market with products. Odd though it may seem, real problems arise.

By July 1, 2011 we must ensure the ratification of the agreements that create the legal framework for the common economic space of Russia, Belarus and Kazakhstan, prepare more than 70 documents that ensure the implementation of these crucial agreements. All this vast amount of work must be done on schedule so that the common market of the three states can begin on January 1, 2012.

We also face the challenging and delicate task of creating supranational bodies of the common economic space. We must approach the issue with a due sense of responsibility because it is a very important task. For the first time since the collapse of the Soviet Union we are moving towards real integration in the post-Soviet space, this time on the modern basis, in modern conditions, taking into account the interests of all our partners. We must be careful to maintain the balance of interests. In addition, we must create a unified system of technical regulation within the Customs Union. That is also a very delicate matter.

We must actively involve the business community when drafting these technical regulations, and the Ministry of Economic Development must exercise its powers to assess the impact of the regulations. The institution of assessing the impact of regulations has been in place for just a year. It is seen as a kind of filter to prevent the appearance, in legal and departmental regulations, of all sorts of barriers and restrictions which impede (or could impede) the work of business, entail additional costs for business. The mechanism has been given good marks, including by the business community.

I think this practice must of course be expanded. The Ministry of Economic Development must have effective instruments to audit and thoroughly examine the whole body of legal acts that influence business life in the country.

In this connection I would like to make a remark. In recent years we have been reviewing administrative barriers, control and supervisory functions, but we cannot tolerate the situation when we remove some barriers only to see various agencies or regional authorities promptly generate a dozen new ones. Again, let me draw my example from the construction industry, which we have just been discussing. We have 6 bodies of regulations, but the regions apply up to 30 such regulations. And we shouldn’t finger the regions all the time, because our federal agencies are “creative” in this respect too. As soon as a general decision is taken, immediately a dozen new rules appear. One must keep a very watchful eye on this. We must seek to match the best world standards within the next few years, the standards that make the conduct of business comfortable beginning from, say, obtaining construction permits and connection to energy grids and ending with the regulation of export and import operations. By the way, we could study the experience of our neighbours, indeed of our partners in the Customs Union, for example, Kazakhstan.

Incidentally, as you know well, business reacts to all these changes in a very flexible way. If those present fail to provide proper conditions for the development of business, many businesses will move out of Russia: they will all relocate to Belarus or Kazakhstan. That is a serious challenge, above all for you.

I think that the deputy prime ministers must assume personal responsibility for the business of oversight and control and for the so-called administrative barriers in their respective spheres, and they must regularly report on their results and on the trends, i.e. whether they are positive or negative and if negative then why, and they must propose measures to eliminate the shortcomings that obstruct development.

For my part I intend to maintain the practice of consultation with the business community in order to get firsthand feedback. Our aim today is to lay the foundations for sustained economic growth. We must set in motion all the key development mechanisms, make them more effective, fine-tune the budget policy and state institutions for tackling ambitious development tasks. In short, we must create all the conditions necessary for steady progress. This should be the focus of all our efforts.

The Ministry of Finance and the Ministry of Economic Development and your colleagues in the regions have accomplished a great deal of work in a difficult crisis period, for which I would like to thank them. I count on your professionalism, your efficiency and dedication. Thank you for your attention.  

Elvira Nabiulilna: Thank you. I now call on Alexei Kudrin, Deputy Prime Minister and Finance Minister of the Russian Federation.

Alexei Kudrin: Mr Putin, Ms Nabiullina, ladies and gentlemen,

I would like once again to address all my colleagues, the deputy prime ministers and ministers present here and to thank you for taking part in our meeting. I would like to address those who do not work in government today, representatives of major companies, banks, financial institutions, research institutes, those we have been working with on new proposals for the reform and modernisation of the country.

Today we are facing a strategic choice for a long-term development model, and not just because we have discussed it a lot and believe that such a choice must be made. It so happens that today we are reviewing the results of the outgoing year, a year of receding crisis. Because last year we achieved economic growth and could see from the hard statistics how much we used to depend on external forces during the crisis, on world volatility, key macroeconomic parameters, oil prices, the demand for our commodities and how we deal with those prices, due to what factors and measures. I must dwell on certain points in the report for the previous year and on the basis of these data determine what other changes should be made in our policy. But generally, I would like to discuss our strategic choices today.

Well, last year we were still fulfilling the anti-crisis programme. The government still had the authorisation to use the special fund and to support a number of sectors. Last year 325 billion roubles were earmarked for these purposes. I should also remind you that we used 994 billion roubles from the Reserve Fund to cover our deficit. Eventually it turned out to be less than we had planned. Initially we planned to withdraw 1.860 trillion roubles from the Reserve Fund in order to address all our problems, and on top of that we were planning to spend more than 300 billion roubles to support the pension system. We did not take that much, but the Reserve Fund was still used.

Last year, although the recovery was underway and oil prices were high, we were still implementing anti-crisis measures. Initially the price of oil was assumed to be $58 per barrel but actually it was $78, i.e. 20 dollars more. That made it possible  to reduce the budget deficit from the targeted 6.8% to 4.1% (we are in the process of adjusting the target and we may end up with 4%). But all this is happening while oil prices are fairly high, I repeat, at $78 per barrel, our deficit is 4%.

Of course there were difficulties. Nevertheless we managed to live through this difficult year and to resume growth: the financial system has been active in issuing loans to the economy, all our decisions and hopes that the financial system would pull us forward and ensure the necessary resources for development have come true. But we also had to count on borrowing in the market to cover part of this considerable deficit at the expense of market resources. In fact, we entered world markets for the first time. We borrowed about $5.5 billion, and one issue was for five years at 3.62%, that is, even when the situation in Greece deteriorated, just two days before the situation in the world markets became serious because of Greece, even at that moment we were improving the parameters of our external borrowing for the first time since 1991. I administered the previous issue in 1998 when I was First Deputy Finance Minister, but we have improved these parameters: the yields from the issue over ten years amounted to 5%. This was accomplished because our debt to GDP ratio was over 10%, which of course is the best indicator among G20 countries.

That is an additional margin of strength for our system, but in the domestic market too we increased borrowing by 50%, 622 billion in net borrowing, in other words, we covered the gap between borrowing and repayment to cover our costs.

Vladimir Putin: What is the percent of external debt in the structure of our debt?

Alexei Kudrin: If I remember right it is 15-20%, because in the early 2000s the external debt accounted for 80% of all debt. I should remind you that after the 1998 crisis the total national debt was 149% of GDP of which foreign debt accounted for 80%. This spike in our debt after the crisis was due to devaluation and a reassessment of the foreign debt in roubles, which was a considerable amount.

We have learned these lessons and increased the strength of our country. As a result, last year the total debt increased by 1% of the GDP. That is moderate growth, not bad for the current market conditions, but so far we have used the Reserve Fund.

Of course in 2011 we are not planning to use the Reserve Fund and our initial plans proceeded perhaps from a more pessimistic forecast, in terms of prices, oil prices and the dynamics of some budget revenues. Now we estimate that we won’t need to use the Reserve Fund or the Fund of National Wellbeing and we will largely cover our deficit with market methods, partly using oil and gas revenues. Oil and gas revenues will replace the Reserve Fund to the tune of 280 billion which we had originally planned to spend.

As of the beginning of the year the assets of the Reserve Fund and the Fund of National Wellbeing amounted to $114 billion or 7.7% of the GDP, which again shows that even with all the volatility of world indicators (in the financial markets, oil prices, economic growth which will be slower in the world this year on average than last year) we have the necessary strength margin which promises an inflow of investment. I think we will turn the trend around this year and by mid-year we will stop the current outflow of investment.

These key macro-economic indicators, and our resilience in the face of external influences, are very important for maintaining social stability and for the steady flow of investment into the Russian Federation.

I believe that as long as the debt risks of many countries –  primarily developed countries – will only increase due to mounting deficits, Russian debt and Russian assets, both state and private, will remain attractive. That is why I have this absolutely strategic and positive forecast that global attention will shift to Russia and we will see investments flow into Russia. Certainly, we need to do our best to meet this interest in full.

Let me briefly remind you that today’s oil prices are to a certain extent virtual, and the key institutions say so, too. As you are probably aware, the number of oil futures and other derivative contracts sold on the IMEX exchange in March 2011 was seven times greater than actual annual global oil production. That means that we do have the paper-based barrels and trading in paper is a financial instrument. Therefore, the leading global regulators, such as IOSCO, the Financial Stability Council and the G-20 have put on their agendas the task of curbing oil price volatility driven by speculative trading. In other words, speculative trading should be restricted. They are currently developing methods to put a cap on such transactions. The G-20 countries asked Russia to oversee this work and act as coordinator of a working group comprised of the internationally recognized experts from different countries and agencies for reducing the volatility of the commodity and food markets. The French, who lead the G-20 this year, have sent a corresponding letter to the president.

Russia is now part of the effort to bring down the volatility of global prices, because oil prices above 110 dollars per barrel put global growth in jeopardy. Over the past years, we have used these advantages to increase our spending, raised pensions during 2008 – 2010 (I will give the exact figure today) and significantly moved up

the replacement rate to almost 36% compared to 25% before the crisis. Budget system expenditures, including the Pension Fund, reached 8.8% of the GDP, which is higher than the average for developed nations. Therefore, we have reached a very serious level in this respect – in terms of the pension system’s load on the budget system as a whole.

Now we need to use other approaches for balancing the pension system. The budget system’s financial capabilities have been exhausted, including taxes and social charges. And the president has provided instructions not to search for solutions in this direction. But we will have to base our work on these decisions to ensure at least a decent level of pensions. As for other types of social spending, the budget system’s total social spending as a whole, including the pension system and non-budgetary government funds, grew from 9.8% before the crisis to 13.9%.

I would like to cite other countries’ figures for comparison. In the United States, this spending reached 12.9%. This means our budget’s social share is greater than in the United States. The OECD developed countries have roughly 15%. In fact, we have approached the level of developed nations in terms of the budget’s social spending share.

At the same time, we were stepping up support for Russia’s economy within our anti-crisis measures. Before the crisis, in the mid-2000s to be more exact, this support amounted to about 2.2% of the GDP.

During the crisis, the government’s investments in the economy reached 3.8% of the GDP, which is a fairly large amount. For example, government investments account for less than 1.5% of the US budget, as the government focuses on other objectives. Therefore, in comparable indices, we have used up all our budget system’s capabilities. However, we want to have relatively low taxes and to try to keep the tax burden at the lowest possible level compared to developed countries.

As you know, the rate between taxes and the GDP is between 34% and 37% and only 27% and 28% if we exclude oil and natural gas taxes, including the mineral extraction tax and export duties. The United States has about the same level, while in France and other countries this rate reaches 40% and more. Therefore, on the one hand, we want to have low taxes. But, on the other hand, our social spending and support for the economy have reached the level of developed nations. We should also bear in mind increased defence and security spending. So, when I cited last year’s figures – when we had a 4% deficit with [oil prices at] $78 – this is our country’s and budget system’s difficult and relatively high dependence on presumably high prices or the ability to take out loans in foreign markets.

In this respect, we will have to reorient our system and carry out structural reforms. As you said in your report, Prime Minister Vladimir Putin, these structural reforms should to a greater extent tailor the budget for modernisation. This will certainly require particular efforts and measures across all sectors – above all increased budget spending. And we should eventually see greater macroeconomic stability, so that businesses are not rattled by prices and inflation, interest rates are low, and favourable currency exchange conditions are created alongside other conditions resulting from greater stability, including those for foreign trade.

We should also see the government utilising its complete toolkit ranging from tax policy and resolving specific issues to the development of legal regulations and the legal system and ensuring investment growth, above all through private investment.

First of all, we need to search for new possibilities to boost investments in modernisation and innovation.

Decreasing the inflation rate is one of the important measures named earlier. And I support the Central Bank and its tough policy. Despite the fact that given high prices we can either bring the inflation rate down or make our system stronger, I believe that the decreasing inflation rate is more important because it will make a lower loan interest rate possible. This is the key factor in boosting loans, investments and people’s savings. I already said that savings in Russia stand at a sound level of about 30%, while investments in the economy reach about 20% of the GDP. Therefore, part of the savings are kept privately or invested abroad rather than invested in the Russian economy. Thus, we do not use up the capacity of the savings that we have internally.

Most crucial decisions in the near future will be decisions on tax policy and a set of measures to ease or optimise the tax burden on the high-tech and IT sectors. We will make several Skolkovo projects tax exempt. We need to move along the lines of decreasing taxes, which means that we will have to increase excise taxes. Excise taxes on vodka and tobacco will rise by between 25% and 30% over the next several years, but even then they will remain lower than in our comparable Western neighbours. In addition, we will slightly increase the mineral extraction tax for natural gas. Hopefully, these proposals will be completed in June. However, despite the difficult situation, the basic tax rates will remain the same, including the VAT and income tax for legal and physical entities.

This means that in the next several years we will have to consolidate our budget system and decrease the budget deficit partly by optimising expenditures that remain high. Speaking about various oil prices, for example, we will have a deficit of between 1% and 1.5% with an oil price of $105 this year. Next year, we proceed from $93 per barrel and expect a deficit of between 2% and 2.5%. This means that as soon as oil prices go down, we will immediately have a greater deficit. Therefore, it seems appropriate to estimate the deficit with a set price, for example, of $90. With a price tag of $90, all obligations undertaken for the next three years lead to a deficit of between 2% and 2.5%. We will hover at this level unless we carry out structural reforms in all sectors and improve budget efficiency.

This is why I would like to say a few words about budget efficiency. Putin highlighted several key points in his report about how we do the planning and then change our plans and often without good reason. Even if the decision is made, we don’t always execute it either in terms of documents or in the extent of performed works and measures.

In the 1990s, I worked in the regional authorities and then moved to the Finance Ministry in the late 1990s and early 2000s, and I can’t grasp it emotionally when funds are set aside, but not used up. However, I realise and know the reasons why this happens. For example, as of this year, there are national programmes and federal targeted projects worth more than 80 billion roubles that lack underlying government acts, specified sub-programmes and programmes. More than 80 billion roubles. Ministries and government agencies are responsible for this.

Over the past years, it often happened that funds were allocated, but not used up, for example, in subsidising interest rates for industrial enterprises by the Industry and Trade Ministry. More than 50% of the funds requested for subsidies were not used up last year. We spent so much time discussing each billion in great detail only to see that the work was not done. The Economic Development Ministry has already noted that a large number of subsidies were not even opened in the fishing industry last year and the planned investments were only carried out by less than 20%. I can cite some examples – over 700 facilities were to be commissioned last year, while only slightly more than 400 were in fact commissioned.

A number of ministries used to say until the end of the year that everything will be all right. Although facilities were not commissioned, no sanctions have ever been imposed. Mr Putin, you mentioned this briefly in your speech. I am confident that this situation, when we make plans but don’t fulfill them, when they propose raising the cost of facilities … I have examples of this because I have taken them from the report and the monitoring survey conducted by Deputy Minister of Economic Development Oleg Savelyev. We are all happy that this issue has been made public. It has already been mentioned today. Everyone can see this. To be honest, we must answer for this in some way. I am confident that we can solve or considerably minimise these problems in a year. Or we can eliminate them completely in 18 months or two years. The required documents should not be examined anymore, unless they are ready by mid-June or early July for the upcoming fiscal year. There will be no problems if some facility is financed a year later. As soon as we introduce this rule, everyone will realise that this is a mandatory condition, and that no projects will be listed in the budget, unless the documents are available. All requests for the next year should be reduced, and no additional requests examined, if the concerned parties receive funding, defend their proposals but fail to commission the relevant facilities. This will apply to all those failing to accomplish their respective objectives. I believe that it will take 18 months to change our usual style of work if two or three mandatory legal norms are introduced, and if these standards are fulfilled by the Government. In your speech, you asked our ministry to introduce responsibility-assessment criteria. I agree with this completely, and we along with the Ministry of Economic Development will do this in the near future.

In conclusion, I would like to mention several things related to openness and greater effectiveness. My point is that effectiveness is not really considered now when allocations are made, and we need to assess the cost of every square metre of roads or housing. Effectiveness starts with planning, assessing the goals of allocating adequate resources, specific balances and a new budget structure between social spending, infrastructure investment, military and security spending, as well as education and healthcare allocations. We will still have to assess all these measures. I would say these will become long-term decisions. After that, it will be possible to move towards specific methods for attaining those goals and objectives. And the cost-effective use of allocations should be assessed during the final stage. Consequently, the government had in its time passed a programme for assessing the effectiveness of budgetary spending. In my opinion, that programme has some rather good provisions.

I would like to note that the official nationwide procurement website, maintained by the Ministry of Finance and the Ministry of Economic Development, plays an important role in facilitating more cost-effective budgetary spending. In this case, it is managed by the Treasury during the monitoring and regulation of the issue by the Ministry of Economic Development. Our website now posts all federal and municipal purchases. In effect, any investor can learn all about budgetary procurement, right down to the municipal level.

This operational website is currently being upgraded, and new opportunities opened on January 1, 2011. The Government Commission for Budget Performance has just approved a concept for establishing and expanding the Electronic Budget integrated system to manage public finance. The system will allow us to compare income and expenses and provide additional information on current budgetary spending to ministries, departments, the public, foreign analysts and the market. Of course, this will create tougher restrictions for us.

I would also like to note that a 2010 international survey gave Russia 21^st place in terms of budgetary openness among 94 nations. I know that all of us are not always happy about the transparency of the national budget, but still this is 21^st place worldwide! I believe that Russia can rank among the top three nations. We will simply submit proposals to make it possible to work with the budget and to facilitate greater effectiveness.

Mr Putin, the Ministry of Finance website was comprehensively augmented by statistical data and analytical materials and won first place in the Golden Website contest involving all ministerial and departmental websites this year. The contest has been held for over ten years, with 200,000 users and 85 analysts answering questions. This was in 2010. We are trying to be open and transparent.

We can promote the same open work by the entire Government and ministries. Those measures being advocated under the Electronic Russia programme have already been implemented by the Federal Treasury and all its 20,000-plus divisions managing expenses nationwide. Online document exchange and signatures are now a reality. In some cases, our ministries still have to improve this cooperation. But the Federal Treasury has been working this way for several years now. We got involved, after the municipal budgets were introduced and helped them develop the same document exchange processes with the treasuries currently servicing their budgets.

Summing up, I would like to thank you for those decisions which I have probably failed to discuss in full measure. And I would also like to mention the substantial work that was done to establish and regulate the financial markets. This does not just include efforts to promote the international financial centre and the creation of a new Federal Service for Financial Markets division responsible, among other things, for insurance supervision. In essence, the mini-regulator which has emerged still does not encompass the entire financial market. Nevertheless, a banking strategy and the Law “On International Financial
Reporting Standards” have been passed. The law requires all public consolidated groups to submit reports for 2012 in line with these standards. This will be a new step in this direction.

I praise the role of the Ministry of Economic Development in many areas. But I would like to underscore its role in facilitating Russia’s accession to the World Trade Organisation. Mr Putin, this country will find itself in a new dimension, as soon as this happens, because all previously drafted protocols will become operational. This includes hundreds of protocols signed with various nations and the international report on Russia’s WTO accession stipulating new regulations for this country’s cooperation with its foreign trade partners, which will set forth long-term guidelines heeding the transitional period. To some extent, we will compensate for the lack of certain measures, reforms and expanded competition in the past few years because this process has been delayed to some degree.

We have completed a tremendous amount of work. First of all, I would like to thank all ministries, including the Ministry of Agriculture and the Ministry of Economic Development, because all of them have worked hard. But the Ministry of Economic Development has accomplished a colossal amount of work. I could thank the Ministry of Economic Development for many things today, but I would like to thank them for this, first and foremost.

I’m finishing. Unfortunately, I wasn’t very brief. Thank you for your attention. We are grateful for the instructions linked with subsequent economic reforms and the creation of a new climate for modernisation. Thank you!

Vladimir Putin: We are all proud of the fact that the Ministry of Finance is headed by the best Minister of Finance in the world. This is recognised by the international expert community. This is no joke; this is a serious assessment of Mr Kudrin’s modest work.

At the same time, I would like to take advantage of the fact that we’ve known each other for many years, to take some liberties and comment on some aspects of his report. What kind of commentaries? They are not substantial because, in essence, I agree with what was said and formulated by Mr Kudrin. I would only like to make some remarks on problems he mentioned.

Indeed, our hydrocarbon resources conceal a lot of risk. Mr Kudrin has noted that the number of oil futures sold this March exceeded global oil output seven times over. Technically speaking, only 12% of actual commodities are traded on the exchange floor. And the rest are nothing but papers.

Russia has assumed nearly the same social commitments as the Organisation for Economic Cooperation and Development (OECD) nations. This may be true in some respects, but Russia spends 3.5% of its GDP on healthcare, while OECD nations spend over 7%. If I’m correct, Germany spends 8-9%. But their spending levels exceed Russian spending several times over. Despite national budgetary, economic and other constraints, we should never forget this. I have repeatedly mentioned this, but there should be some balance.

And now a few words about social commitments. We debate this issue in our inner circle. But I believe that Mr Kudrin is mostly right. Barring the oil and gas sector’s commitments, this makes up for some 26-28%. This is not very much. But we can argue with statements that such spending levels approach OECD standards. This parameter is 40% in France. So, Russian spending levels are not the highest by far.

As far as the financing of open programmes is concerned, I completely agree with you. Please prepare these proposals, and let’s start introducing them in the near future. Let’s be tough about it otherwise we will fail to attain financial discipline.

And the last remark concerns the fact that the replacement rate of Russia's public pension system has soared dramatically from 25% to 36%. This is not exactly so. True, we raised pensions last year and conducted their valorisation. On the whole, pensions soared by about 45%. Those present here know what the replacement rate is, and I want to tell television audiences that this is the ratio between pensions and average earnings. But the replacement rate has increased not only due to pension increases but also because the average nationwide wage and salary dropped during the crisis. Wages and salaries dwindled, while pensions rose somewhat, and this resulted in an acceptable replacement rate. But this rate will shrink again, unless we do something about it. We should keep this in mind. All of you know this is so, but not exactly so.

Let’s face facts. I’m not saying we should do something in one go. We accomplished a lot in one step in 2010, but we still need substantial changes in the pension system. There are no easy solutions here, and I will not debate this issue now. Naturally, we have something to think about and to discuss. We have something we can be proud of, and something we can show the people. But this is still not very much.

Alexei Kudrin: Thank you, Mr Putin. I would now like to give the floor to Ms Elvira Nabiullina, the Minister of Economic Development. 

Elvira Nabiullina: Colleagues, I would like to address global economic development assessments, the Russian economy and our activity under economic policy priorities. I will start with an assessment of changing global trends, since they have an impact on the situation in Russia, as has already been mentioned several times. 

As we see, the world is emerging from the economic downturn. Many of the imbalances which led to the crisis have been, in part, removed, but some remain and new imbalances, in many countries largely related to government intervention to counteract the effects of the crisis on people, major companies and the banking sector, have appeared. This move has probably been vindicated, but overcoming the crisis is costing industrialised countries dear: sovereign debt and budget deficits have increased dramatically. We are all well aware of this.

I would like to draw the attention to the globalisation trend, which has proved its resilience despite many forecasts, whether people like it or not. Yes, protectionism has definitely grown, international currency and trade wars have become more frequent, but the long-term trend, of world trade growing faster than global GDP, has continued. Over the last decade, on average, global GDP grew by 3.8%, while world trade grew on average by 5.8%. This means that different countries in the world are becoming more interdependent in their development, and thus there is a parallel increase in global competition.

At the same time we can see that, even against the backdrop of the downturn, leading countries have been growing their investment in technological renovation, thus clearly demarcating the primary field for future global competition and the opportunities it opens up for us. These global trends remain very unclear, and we cannot say for certain whether or not the world has fully recovered from the crisis. In many countries economic growth is taking place without any increase in employment. Unemployment levels remain high. In coming years most countries will see sovereign debt increase still further, since cutting budget deficits has painful social consequences and economic development requires investment, which many countries are doing.

In this new reality, developing countries are becoming scientific powers. For instance, China may surpass the US in terms of the volume of published research papers in 2013, to become the leader in this field. Brazil, which is developing rapidly, already has the same nominal per capita GDP and average wages as Russia. The global recession has strengthened the Asian countries’ roles as leaders of the economic upturn.

High growth rates are no longer the sole preserve of the two countries we always talk about, China and India, but are also apparent in the entire group of new industrial Asian countries, a group which had a growth rate of 8.4% in 2010.  We estimate that, in five years’ time the Asian economy, including New Zealand and Australia, will be responsible for over one third of total global production and will be of a comparable scale to that of the US and EU combined.

Asian countries’ GDP will exceed the volume of the seven leading industrialised  countries by 2020. And of course this is the new reality. We believe that Russia and its Customs Union’s partners also have the chance to become an important player in the global economy.

The consolidation of the markets into the Common Economic Space will allow us to bolster our global position. Russia’s share in the global economy was 3.7% in 2010, and looking at the Common Economic Space, this rises to 4.3%. This may not be all that great, but it is an increase.

I would like to remind you that last year we established all the necessary legal provisions for the Common Economic Space, that the unified customs code currently applies there and that the mechanisms for its implementation in practice are being developed. Of course we see the maximum benefit for ourselves and our partners from the formation, in practice, of the Common Economic Space, a harmonisation of conditions for business and the coordination of macroeconomic policy, which will combine to help reduce the risk of financial destabilisation.

WTO accession, as Mr Kudrin said, is the key factor in our economic development. Last year we managed to achieve significant success in this field, and this is a very important process indeed. Both bilateral relations and the way work is organised at all intergovernmental commissions under the government have also been arranged so as to accomplish the goals of expanding our export opportunities and attracting direct investment. It should suffice to mention that we have started to implement 11 partnerships for modernisation this year.

But no matter how important these external economic factors are to our development, we see the primary driving forces and barriers to development and growth as lying within the Russian economy. And we are talking about the transition to a new model of stable growth which would differ from the growth seen during the crisis, which was based on high oil prices and relatively “cheap” foreign loans to companies.

We remember the problems that companies faced during the crisis.

Our economy is mostly unbalanced because large oil and metals companies that have been modernised and are now highly competitive export the major part of their products, while the domestic market (nearly 143 million people who are constantly consuming goods and spending their money) mostly feeds on the import. Therefore, the competitive sector of our economy depends on the unstable foreign market and the domestic market depends on the import. This is a major imbalance we have to rectify. It is a well-known problem but I would like to stress that the new model we will adopt must ensure a minimum self-sufficiency and internal stability of our economy.

Second, the new growth model must ensure fast growth rate. There have been some debates about whether 3% to 4% will be enough for us, or whether we should aim for much higher rates. I believe the growth rate should be over 4%. This goal is not only about competition or our ambition to outrun other countries or developed economies. It is a requisite because only this growth rate would allow us to fulfil our social obligations, which are more extensive than, for instance, the obligations of the rapidly developing Asian countries. We also must increase GDP to preserve the planned share in healthcare investments. Therefore, the growth rate is very important.

We also must increase investments in long-term development. Its share in GDP must be at least 50% more than now. I think it is clear that 20% is not enough for development and modernisation. We need more. Obviously, it is not only funded from the budget but also by private investments but this investment orientation of the model is  compulsory. This is why this model was defined as both innovative and socially-oriented in the Strategy of Russia’ Long-Term Development until 2020, which we discussed.

The strategy also includes the main steps of transition to the model. The crisis was a major hindrance. We have not finished the transition yet although we did not expect this to happen within one or two years. So far, the increase in oil and metals prices has made a significant contribution to economic growth. I should mention that now oil is three times more expensive than its lowest price during the crisis. Of course, in the future we should not rely on such high oil prices. The increment in investments is still very unstable. Mostly, we are still stuck in the pre-crisis growth model, which is based on the raw materials and fuel exports as well as low investments. However, the conditions are worse than before the crisis especially when it comes to access to loan resources in the global market. The flow of direct investments is not as big as it should be, including foreign loans. At the same time, we have a serious task of reducing the budget deficit, which holds back the economic growth.

We have found that a tax increase making 2p.p. of GDP in 2011, even if it is not as high as in other countries, resulted in the GDP growth being 0.5-0.7% lower than expected. I am not talking about the outstanding growth potential that could be realised if the infrastructure received more funding. Of course, there are some limitations but we can gradually overcome them. We have all necessary prerequisites for the growth. If we forget about the limitations, problems and internal insufficiency for a minute, the country’s economy looks quite attractive. Our market is large and even if the consumer market is smaller than in China or India, the average income and consumption standards are higher. This is attractive for businesses from the profit perspective.

Third, we have a unique diversity of natural resources that are so valuable in the world, as well as human resources which are also unique in their cost/quality ratio. We have highly qualified professionals, a relatively inexpensive workforce and a huge territory. Russia has a really impressive production and market potential. Maybe a hundred years ago this would have been enough to attract investment and businesses. Modern business is very demanding when it comes to the so-called predictability factor and compliance with regulations, financial market development, legal system and personal safety. Therefore we believe the ‘climate of entrepreneurship’ is vastly important.

If we improve this climate, then other factors and conditions will begin to work.

I should also mention that the economy has already shown signs of a trend towards a new level of growth. In his opening remarks, Prime Minister Vladimir Putin spoke about the growth in the processing and engineering sectors. Although lagging behind the oil and gas industry, the innovation economy is showing increasingly higher labour productivity rates, and the innovation sector’s contribution to GDP growth is also rising.

We expect an average economic growth of over 4% per year from 2012 to 2014, but this process is still exposed to certain risks. According to our estimates, if oil prices decrease by 25%-30%, the growth rate may halve, and the budget deficit would increase by 50% to 100%. And if these issues prove to be long-term, our funds could be depleted very fast. Just as a reminder, by the time the global economic recession set in, the amount of money in the Reserve Fund and the National Welfare Fund reached 16% of the GDP, and then it halved just after 18 months.

We need a financial cushion, but this also has its limits.

The real financial cushion is in the domestic economy’s competitiveness. We will only be able to achieve economic stability by establishing modern transport infrastructure, strong processing enterprises, and a high-tech services market. This is a major task of our economic policy as we see it.

Under conditions when promoting growth through increased government spending is impossible, the efficiency of both private and government expenditures and projects becomes particularly important, which Putin and [Finance Minister Alexei] Kudrin mentioned today. But the efficiency does not solely depend on economising measures, thrift and frugality, which are highly important, but also on the substance and the level of innovation of projects, as well as properly prioritising efforts.

State programmes should serve as a tool to establish priorities in a reasonable manner.

For the Economic Development Ministry and the Finance Ministry, 2011 is a crucial year in terms of launching state programmes with other ministries. A total of 41 programmes will be developed. Presently, 31 programmes are being considered by the Economic Development Ministry, with 14 already designed, and 17 still in the concept phase. Basically, we are now in the first stage of the programmes’ development, with sub-programme goals and budget expenses being structured. This is a highly important stage that will allow us to see how much and how efficiently we spend money for particular sectors.

Yet this is not enough. During the next stage, we will need to draft comprehensive programmes that will include, apart from budget estimates, the rationale for prioritising specific objectives and a full description of tools to be used to attain them.

We believe that government programmes should make up the core of the administration system, which includes strategic planning, budget planning, forecasting, lawmaking and organising. Programming requires more accurate economic forecasting. We do not only need forecasts to plan our budget. Forecasting has importance as an independent activity and is, to a certain extent, a digitised system of economic policies. It sets future milestones not only for ministries and departments, but also for regions and companies, and shows how balanced the sectoral, regional and national development measurements are.

Despite the persisting uncertainty in the global economy, we have embarked on a major task of drawing up a long-term economic forecast until 2030. Without that, we won’t be able to work out a long-term budget strategy or a balanced strategy of the economic sectors’ development. We must certainly broaden the horizons of planning because a task at this scale can’t be accomplished in a two- or three-year planning and forecasting mode.

Now I would like to discus something else, which is an important aspect of forecasting and analysis on a national scale – the work of Rosstat, Russia’s federal statistics service. Last year, Rosstat together with regional authorities conducted a nationwide population census. That was an enormous project. They have published their preliminary results and still have to process a vast amount of data, more thoroughly this time. As a result, we will have a more detailed account of the main processes underway in the country.

At the same time, statistical work is far from perfect and requires improvement, especially in estimating investments and people’s real incomes.

Experts look at the complexity of these statistics’ interpretation when studying time series. We also expect this year’s large project to compile an inter-industry balance – the so-called costs-and-output tables – to help improve the quality of statistics. The last such tables were drawn up in 1995! This work is highly important and will help us see the interrelations between the various economic sectors.

Ladies and gentlemen, I would like to return to discussing the business and investment climate in the country. Investment is growing much slower than we expected, even though most companies have regained their pre-crisis profit levels.

Incomes fell during the crisis, but they are now recovering.

Oil prices are approaching another all-time high and significant funds are coming in to our economy. But we no longer can compensate for the shortcomings of the business climate with high returns on investment in certain sectors. And this was proven in our latest forecast in which we left the GDP growth rate unchanged despite a $24 increase in oil prices.

Naturally, the business climate is a very complex and multifaceted concept. It doesn’t boil down to administrative barriers alone, rather it depends on the dialogue between business and the government and confidence in our policies. Any measures to improve the situation – even the ten most important ones – can be undermined by high-profile corporate raids or the actions of law enforcement agencies. By the way, we have agreed with the minister of internal affairs, who is present here, that we will look into how we can coordinate our actions and act in concert in relation to the investment climate. Naturally, this in no way devalues measures that we need to be taking consistently pertaining to privatisation, lifting administrative barriers and establishing institutions and mechanisms to protect investors’ rights demonstrating actual cases of addressing businesses’ problems.

I would like to point out that the ombudsman institution has begun functioning. Igor Shuvalov is the ombudsman. The ministry considers and addresses the actual problems of foreign investors. Last year we received 59 claims and we managed to resolve the issues in 38 cases. Let me cite an example. Last year the company IKEA said it would leave the Russian market due to excessive administrative barriers, but this year, after a discussion with the company, we are discussing new stores to be opened and not only that – we are also talking about a greater localisation of the production of  goods the company sells in Russia.

The plan for the largest privatisation in terms of money has been prepared. We expect to receive more than $30 billion by 2015. It is worth mentioning that second-tier companies will be privatised alongside government shares in major companies and banks.

The simplification of migration regulations for highly-qualified specialists carried out last year was another significant step. We were elaborating this bill together with the Federal Migration Service. I would like to thank the service’s employees since about 6,000 permissions have already been issued under the new procedure. Investors note that this is a real step toward simplifying the procedure of inviting highly qualified specialists to Russia.

Together with industry-specific government agencies we have devised action plans to lift excessive administrative barriers in key areas, such as construction, including land allocation and connection to public utilities, agriculture and education. Naturally, the application of new rules needs to be accelerated because many documents stall at the draft level even though a year has passed since the action plans were adopted. Apart from coordinating efforts our ministry has industry-specific functions that I would like to highlight. I’m referring to land allocation and property rights registration which we expect to complete this year together with the Federal Service for State Registration, Cadastre and Cartography.

We have heard a lot of criticism in this work. We have prepared amendments which will soon go through their second reading. The federal service that is subordinate to our ministry is actively transitioning to providing its services electronically, but we will be able to speak of a real success only when people no longer associate applying for a certificate to technical inventory bureaus and land registrars or registering property rights with red tape. Now we must admit that we have not made a turnaround yet, and our objective is to finish this work system-wide within this and the next year.

Let me say a few words about customs regulations, another element of the business climate. Last year the ministry along with the Federal Customs Service drafted a bill on customs regulation entailing a set of measures to simplify many procedures. The law entered into force in late December 2010, and now I can make some comments on it.

We are monitoring law enforcement because we can have good laws that are not always being enforced. According to preliminary data, we managed to simplify the export of high tech goods, above all by abolishing the need to confirm customs value. So, a whole bunch of documents is no longer needed. Moreover, a list of business associations has been compiled with whom the customs service is obliged to consult when preparing new regulations. This is very important.

However, there are still many problems to address. Simplifications for certified operators are not functioning. With another key innovation, the electronic declaration procedure that will help combat corruption because an automated process will replace human beings, we see that the situation is developing under a bureaucratic scenario that leaves much to be desired. We have conducted spot inspections – we joined several companies going through the procedure in several different regions. In practice, this electronic declaration procedure remains an additional structure on top of the traditional hardcopy procedure. We will need to think of how to make this electronic procedure work in practice.

I will not be speaking about the ministry’s key activity and performance in improving state management and our objectives in this area because we recently discussed this at a government meeting. I would only like to point out one area – increasing transparency and publicity. This is an important step in ensuring the efficiency of all of state management. One can try improving certain mechanisms in a closed procedure, but even if intention are good the lack of transparency can lead to ill-considered decisions, the inefficient budget spending that Mr Kudrin mentioned, restricted competition and other negative factors. We tend to understand transparency as a government body publishing information about its work on the internet. This important step was made following the adoption of the law on the accessibility of information about the work of government bodies, or Federal Law No 8, that our ministry devised. Our annual monitoring of all government bodies indicates a significant improvement of the situation – government bodies are indeed publishing their draft documents.

But we believe that transparency is first of all needed in government finances and non-budgetary funds. It was to ensure this type of transparency that we elaborated the concept of a federal contract system and will be amending the laws this year.

We believe that the entire government procurement system needs to be significantly reformed. Currently, the public only has access to the stage of government order placement, that is when all the basic specifications of the order, such as scope, initial price, delivery requirements and technical specifications, are already set out and often not publicly. This often results in higher prices and unnecessary purchases. Every day we read bloggers’ spiteful comments about expensive cars and furniture being purchased for government bodies. Naturally, the public and businesses have requirements of a completely different level as to the publicity and transparency of the entire procurement cycle.

We are convinced that we need regulations throughout the entire government procurement cycle – from justifying the need of a purchase and the price to accepting the work. Public discussions should be involved in these procedures because the current supervision over  compliance with formal order placement procedures often only become an indulgence for dishonest customers who frequently act in collusion with dishonest contractors. Meanwhile, rudimentary procedures often impede quality purchases in R&D, innovation and culture.

We began developing electronic trading – this was what our ministry was largely preoccupied with last year – but even this system is not yet the panacea. First, they don’t suit many types of government orders; second, there is risk that information technology can be manipulated. According to the statistics for the first quarter, almost a half of all announced electronic tenders were not carried out. We will need to tweak this system considering what works well and what should be traded through electronic tenders and how this system should function. We see three objectives for the new government procurement law. First, transparency throughout the process; second, making customers more responsible for making quality and justified purchases and providing them with modern tools, and third, providing operational support for customers by developing a contract risk management system, a database of sample contracts and pricing methods. The law will be discussed publicly, and it is already being intensely debated. This is good because ideas thrive on conflict.

In addition, I would like to mention that we have signed agreements with a number of regional authorities whose representatives are present here to test certain mechanisms so that we together with businesses can see what proves efficient in practice. To my mind, this work also helps boost the efficiency of the procurement system as a whole and the effectiveness of budget spending.

Moving forward, we are establishing new tools to involve business associations in decision making. First of all, I’m referring to assessments of regulatory control. It is very important for us to see businesses take it positively. It is worth mentioning that about a half of the more than 90 documents we considered were turned down or suspended as creating unjustified barriers for business. I would like to emphasise that I’m referring to excessive barriers when a new regulation does not contribute to the government’s objectives and imposes significant costs on businesses. Sometimes these costs can run into the tens of millions of roubles. This may be an insignificant amount for the entire country, but it is substantial for an individual company. Decisions were identified with estimated costs running into the billions of roubles. This institution needs to be further developed; first of all, a mechanism should be devised to abolish government acts that impede entrepreneurial activity.

There is another aspect I would like to mention.

Speaking about the quality of economic regulation, we should also mention improvements in corporate laws. One of the main things for us in this respect will be interaction with the legal community, especially the Council for Codification, in reviewing the new edition of the Civil Code that is being developed. We believe that the new edition of the code should boost the competitiveness of Russia’s jurisdiction to ensure that deals and companies are registered in Russia. This is particularly important in considering the establishment of an International Financial Centre in Moscow.

Russian regions have a special role to play in improving the country’s investment climate. Together with business, we are setting up a system to assess and monitor the competitive environment and the investment and entrepreneurial attractiveness of Russian regions. And this system should include international comparisons so regions can compare themselves to other countries rather than just Russia because we are speaking about global competition.

A key area for our ministry is the support for small and medium-sized businesses. Both last year and this year we have been and will be focused on supporting small innovative businesses. Last year assistance was provided to more than 1,500 small innovation companies working on industrial technology in 53 Russian regions. We are convinced that this is necessary and we will step up support for companies that have leased equipment and exported their products.

Speaking about innovation in general, our economy still lags behind our chief competitors. Figures supporting this have been cited repeatedly, and we analysed them while drafting the innovation development strategy. But a very important programme began last year and continues this year to encourage major companies, companies with a government share and state corporations to draft medium- and long-term innovation development programmes. Unfortunately, many of them are doing this for the first time. Our ministry has been providing methodological support and coordinating this work and the first nine programmes have been approved, including the Russian State Atomic Energy Corporation, the Russian Technologies Corporation, Rosneft and Transneft.

Last year we also worked toward another important objective we discussed at the previous board meeting – we were coordinating the work of development institutions that support companies during the different stages of the innovation cycle. I would like to point out that the innovation “lift” has begun working, largely thanks to the agreement signed between the development institutions. As soon as it went operational, its shortcomings were exposed, for example, insufficient funding for start-ups. We have agreed with the Ministry of Finance and Mr Kudrin that we will address this issue in 2012. Instead of the planned cuts in funding for start-ups we will try to maintain it on the same level.

This year we will be pushing through a bill that we have devised together with the development institutions, that creates organisational and legal forms that are best tailored for innovation. Unfortunately, many Russian projects related to intellectual property rights are registered abroad, partly because Russian legislation lacks a corresponding organisational and legal form comparable to other jurisdictions. Our goal is to make sure this bill is adopted this year.

Decisions pertaining to energy efficiency should also become a powerful incentive to introduce innovation. We have prepared a bill on energy efficiency and the bulk of related regulations with the Ministry of Energy and other government agencies. Pilot projects have been started in the regions and they are bringing results and prove that if these measures are executed system-wide, including in the budget sector, education and healthcare, they will help decrease electric energy consumption by 22% and heating energy consumption by 25%. This can be done attracting private investors and with loans at the affordable rate of 12%. So these projects are taking off.

In conclusion, I would like to say a few words about the efficiency of the government’s management of its assets, one of the most crucial government institutions. In 2011 we will continue improving the efficiency of state property management, including corporate management in companies with partial government ownership. Among other things, this implies the establishment of ad hoc committees at boards of directors that private companies usually have – committees in charge of HR and bonuses, of audit, and of strategic planning and requirements for annual reports. All the three ad hoc committees were set up with the boards of directors at 244 joint-stock companies in 2010. But the amount of state property in the hands of joint-stock companies is very significant and there are more than 1,700 of such joint-stock companies.

Another significant objective is the privatisation programme that includes large companies alongside medium-sized companies – the stock in 1,300 joint-stock companies. In this context, I believe that the establishment of conditions for a new type of privatisation is an important outcome of the ministry’s work last year. New legislation provides for the possibility to involve investment consultants and greater information coverage of privatisation as well as transition to medium term privatisation planning. A 10% share in VTB was sold under the new regulations and the federal budget received over 95 billion roubles. Naturally, privatisation is important in terms of boosting the efficiency of and developing the capital market, not just for attracting money to the budget.

Speaking about the efficiency of state management, I would like to spotlight project management. This is one of the issues related to the ineffectiveness of many federal targeted programmes and federal targeted investment programmes that Mr Putin and Mr Kudrin have mentioned.

For more than 15 years both types of government programmes have been used to address issues facing Russia and they indeed contributed to these objectives. We had federal targeted programmes to reform the tax service and the treasury, to set up the GLONASS system, to build the Sukhoi Superjet, Russia’s first civilian airliner in its contemporary history, and to commission the motorway between Chita and Khabarovsk. In fact, all these projects were carried out under federal targeted programmes. This helped us focus resources and not waste them on routine operations. Once a means for government agencies to wring additional funds for their routine activity, federal targeted programmes have become a tool to address top-priority issues based on project management principles.

Over the past two years we have been de-bureaucratising federal targeted programmes together with the Ministry of Finance. There was much criticism that it took too much time to introduce amendments. We managed to make this mechanism significantly more flexible and the timeframe for introducing amendments to existing federal targeted investment programmes was cut down significantly. However, we believe that de-bureaucratisation should also imply greater responsibilities for customers. We are working to provide the maximum possible transparency. And you can already see the current changes to these programmes on the internet. However, their efficiency remains relatively low. Commissioning deadlines are not met and initial costs are adjusted upward. Many reasons are cited as to why the government decisions fixed in these programmes’ target values are not implemented.

We have been monitoring this issue on a quarterly basis and we have arrived at the conclusion that this low efficiency results from shortcomings in project management rather than lack of funding. Some crucial tasks require personal hands-on management at the top level, as is the case with Igor Shuvalov’s involvement in the preparation for the 2012 APEC summit. This is a very important issue and in addition to setting out certain criteria as we said or sanctions, we also believe that we need to provide governmental customers with more advanced tools. We believe that most of the governmental customers’ functions, except for contract signing and project acceptance, can be delegated to professional management companies. But we do not have a single example of this despite the fact that our legal framework provides for this, and we encourage customers to use this opportunity. They say that there are no professional managers in the market. Indeed, there is still very little experience in managing large-scale projects even in the private sector. But as we know, where there is demand there is supply. And we are convinced that we need to develop project management since formal step-by-step supervision over various procedures does not always bring the desired result.

We have established an indicative planning system. There are target values and indicators in each programme but these indicators and related analyses are useless if nobody bears a clear-cut responsibility for failure to attain them. Given the scale of our objectives in diversifying Russia’s economy and developing the infrastructure, our largely obsolete management system becomes a serious impediment. In this respect, our objectives for 2011 include considering possible project management mechanisms and even introducing external management of programmes that are being implemented inefficiently, and there are such programmes.

We have begun using this approach in exclusive economic zones and the availability of professional project management has been made a condition for new zones. We are holding talks to involve leading companies from Singapore, Spain, France and Switzerland in the management of operating prospective platforms and we are also studying the experience, including that of private entities, of managing private industrial parks in Russia.

Ladies and gentlemen,

This report doesn’t allow me to point out every aspect of our work, including that related to accounting and achieving goals. You will find this information in the handouts. Naturally, to resolve all the outstanding issues we will need to significantly improve the quality, flexibility, efficiency and transparency of our work.

In conclusion, I would like to thank all of the employees of the Ministry of Economic Development, the Ministry of Finance which is very close to us, other ministries and regional bodies and business organisations for our cooperation because the issues we are addressing require concerted action. We look forward to your support in the future. Thank you for your attention.

Alexei Kudrin: Thank you, Ms Nabiullina. You can count on our support. We have more speakers and I request your patience. I now give the floor to Sergei Guriyev, rector of the New Economic School and president of the Centre for Economic and Financial Research.

Sergei Guriyev: Yes, thank you, Mr Kudrin, it is a great honour for me to address such a stately audience.

Ladies and gentlemen, Mr Putin, Mr Kudrin and Ms Nabiullina have mentioned almost everything I was going to say. But I believe that there is no harm repeating some of it, so I will focus on the most significant things to my mind.

I believe that today is the perfect time to discuss long-term economic development plans as Russia is recovering from the crisis. This country is indeed expected to reach its peak pre-crisis GDP per capita this year. It grew by 4% last year and we estimate that this year it will grow even higher than official forecasts, than the figures Ms Nabiullina cited. According to our forecasts, the growth rate will exceed 5%. But we should not sit back and relax because 4% or 5% is not that big a growth rate given the high oil prices. And if oil prices remained where they stood last year we would then be speaking about a 3% growth rate rather than that 4% or 5% which is an unacceptably low rate.

In this respect, in thinking of what GDP and what economic growth rate we want to attain in the next decade we can look back. The pre-crisis decade was characterised by a very high GDP growth rate of 7%. It is a remarkable achievement for an economy like Russia’s. However, we must realise that the pre-crisis sources for growth have been exhausted.

Oil and other commodity prices are unlikely to grow in the next decade at the rate they were growing in the previous decade. We should also not count on a cheap labour force or vacant facilities. These sources of growth have been exhausted and we do not have an idle labour force or industrial facilities we inherited from the past. This is why we say that we need to incentivise new investment. And I would like to join the previous speakers in saying that Russia’s investment climate has a vast room for improvement. It can be argued that subjective ratings, indices and opinion polls do not yield a complete and accurate picture of the fact that Russia has problems in its investment climate, but we can look at how investors are voting with their feet. Over the past six months, even though the Russian economy is growing and oil prices are very high, capital has been fleeing Russia. Unlike in 2007 when oil prices were lower than they are today, capital outflow rather than capital inflow is what we now observe. In that sense of course there is more still to be done.

What can be done? What Alexei Kudrin and Elvira Nabiullina talked about is already being done, but obviously we must go on working to reduce administrative barriers and combat corruption.

It is no secret that comparing the tax burden on Russian business with that in other countries is not entirely fair, because the corruption tax business pays in G8 or G20 countries is much smaller. So, when we talk about official taxes we should not forget that Russian businesses have to pay even more not just to develop, but to survive.

Many of the measures that Alexei Kudrin and Elvira Nabiullina mentioned will help tackle that problem. But until we have actually done that, I think it is too early to say whether we will succeed in dramatically improving the investment climate.

The second problem is the dominant role played by state-owned companies, state corporations and state investment in the Russian economy. One should not forget what Friedrich Hayek termed scholastic arrogance: state investment cannot replace private investment. Why? Because as long as prices in the economy are set in a couple of dozen offices, as long as investment priorities are determined by ministries and state-owned companies, we cannot expect investment to start flowing where the economy needs it. We must not think that those present in this room can determine accurately what exactly needs to be developed and where money needs to be invested. In that sense privatisation is important not only as a source of budget revenue, not only to increase efficiency at the entities privatised, but also in order to create demand for new institutions, and to ensure that real development priorities are determined not in government offices but in private companies and by the market.

Another problem is trust in what the government says. Today we are discussing issues that we have considered many times before. Many of these problems have yet to be addressed. One example of this is WTO accession, one of the issues discussed here today. I remember well that since 2000 we have talked of WTO membership as being a year and a half away. I think our optimism when we talk of acceding to the WTO this year or next year (I still hope it will really happen, just as I did ten years ago and five years ago) is an important signal that the government is accountable in what it says and is really committed to creating fair and honest rules of the game.

Another problem I wanted to touch upon and one that also relates to trust in what the government says is inflation. Today we have an historical opportunity to meet our commitments on inflation. In the past ten years the inflation target was met only once. In all the other years, as we know, we fell short of the targets. We came close to meeting the target last year, the Central Bank had all the instruments in its hands, but natural disasters intervened. I hope that this year we will meet the target of 7.5%. That would be an all-time low, but we should not forget that it would still be a higher figure than in other countries, in all the G8 or G20 countries. That is a very important indicator.

Inflation is important not in itself but as an indicator of macroeconomic stability. There is little cause for talk of long-term investment and long-term financial instruments in countries with two-digit inflation or inflation exceeding 5%. Without it we will not be able to build a world financial centre or solve the problems in the pension system. So, what Mr Putin and Mr Kudrin said here, to the effect that we will bring inflation down to 5% in 2014, will actually mark a highly substantial step forward in developing Russia’s financial system.

On the other hand, can all this really be done? Can a higher rate of growth be achieved? Other countries coped with these problems, when they were at the same level of development as Russia is now, including countries that had no oil, countries that did not possess comparable natural and intellectual resources. It seems therefore that if all the plans discussed today by Mr Putin, Mr Kudrin and Ms Nabiullina are implemented, we can expect to achieve 6% of GDP growth a year over the next ten years, creating living standards comparable to today’s levels.

Alexei Kudrin: Thank you. I now give the floor to Ruben Aganbegyan, President of the Moscow Interbank Currency Exchange.

Ruben Aganbegyan: Good afternoon. Thank you very much for the opportunity to speak here today. I would like to dwell on some aspects of an issue that I am closely involved with professionally, that is, the financial market. A good deal has been said about it today, but I would like to add a couple of things.

The financial market in Russia, especially trading floors in organised exchanges, is already a fairly significant phenomenon. Last year the amount of trading in organised floors exceeded 200 trillion roubles, that is a fairly large sum. Loans amount to about 1 trillion, not including credits and all the rest. We already provide considerable support to the economy.

Nevertheless many of us consider the financial market to be internally inefficient, and there is a lot of room for improvement. Today the financial industry is fairly powerful, employing a large number of workers and drawing heavily on intellectual potential, it is a major IT customer and a powerful driver of economic growth.

In terms of the country’s economic security too we stand to gain from further developing our own financial market. I believe that the work that is underway must continue and be strengthened. I think links between current government programmes, for example between that for the international financial centre and the privatisation programme, is very important.

In this respect we have fallen into a kind of trap where it comes to our own financial market. Very often our issuers go to international exchanges to issue their stock because of the accusations of inefficiency levelled at our own market. I see privatisation as offering a way out of that trap, and the state can set a very strong example. I also believe that the programme of state borrowing, just plain borrowing, is another example. You can see just how much money can be raised in Russia already.

At the same time I would like to note that it is important that we do not forget about the population and it is important to ensure they see tangible fruits of modernisation, of our economic success. The financial market is a great boon in that way too. It is through the financial market that we can enable the population to really feel these results. You know that in many countries a massive proportion of the population invests in major public companies and that is a challenge to which we must rise. But, at the same time, it is important to protect people against any losses that the financial market can cause. The financial literacy programme and similar activities already underway all have an important role to play. But that programme needs to be strengthened. It could begin at school, and then we may start seeing tangible results.

I also think it is important to develop a system of collective investment as a mechanism linking unqualified investors to complex financial markets. Here I would also note the protection of minority shareholders and unqualified investors through corresponding laws. I am aware that this work is underway, but much remains to be done. In conclusion I would like to touch upon the topic of promoting our financial market, our market in general, and the economy as a whole.

At present both strategic and financial investors draw a lot of their information from newspapers, from communicating with a broad circle of financial intermediaries who in one way or another sell risk management services, managing their exposure to risks inherent in our market. At the same time I think we say too little about all our market’s pluses, not only the risks but the pluses. That work can be stepped up and it can be carried out as a sort of public-private partnership using successful projects as examples. I think that this information should be disseminated more widely. Thank you.   

Alexei Kudrin: Thank you, Mr Aganbegyan. Colleagues, despite our best efforts we are somewhat behind schedule and Mr Putin has his own schedule (he has more meetings to attend), nevertheless if we manage to hear the remaining four speakers within 20 minutes Mr Putin will stay on. So I suggest we do just that and…

Vladimir Putin: Just so as not to forget, because there are a great many things yet to come and I would hate to omit something. I would like to share some thoughts on what has already been said. And I will start with Mr Kudrin’s contribution (I forgot to mention this earlier) and then move on to the other speakers, before the remaining speakers take the floor.

First, excise duties. This is a concrete practical topic. We have agreed that excise will be raised gradually, as planned, without making it the main instrument to plug revenue shortfalls in the context of the possible reduction of social benefits. That is a serious matter and I just wanted to draw your attention to it.

Incidentally, about planning quality: we understand that market volatility makes planning difficult. But we will not claim credit for results that are largely connected with the situation on the market. Anyway, we planned for a budget deficit of 3.6%, but in reality it will be 1%-1.5%.

Now to growth rates. I am in complete agreement with Elvira Nabiullina. We are all aware that 4% is not enough, we need to achieve a higher growth rate. We do have the potential, serious potential. Now, as for the eternal disputes between development, investing in development institutions and macroeconomic parameters, maintaining stability, and so on. I happened to note that Elvira Nabiullina said that the main instrument of our security – economic and financial – is a developed economy. Absolutely right, there’s no arguing with that. And yet take the example of Ireland. Is it a developed economy or not? It was called the “European tiger”, but everything collapsed as the result of the crisis, and it has no reserves. So, in addition to economic development, diversification, innovative development, modernisation and so on we need traditional safety cushions in the shape of various reserve funds.

Now regarding government procurement. Absolutely right. This is something I always stress, so I urge you to speed up work connected with amending Law 94 and so on. Wherever I go, I find the same problems. I see, Ms Nabiullina, that one of your tables is devoted to effective dividend policy. I don’t know what to make of it. Are we supposed to tell them what they should do with their dividends and how big they should be?     

Elvira Nabiullina: No, companies with state participation are the issue here. Each time we expect to gain certain dividends for the budget. In reality, receiving dividends is entirely normal for shareholders, but sometimes they have to leave some money to some companies for development and so on. That can be arranged, we should probably diversify our dividend policy. Such a policy must exist and we set ourselves the target, we set the bar at 25%. You remember that during one of our meetings we discussed that out of net profits…

Vladimir Putin: But if you are not able to allow dividends to be used somehow then… We are talking about companies in which the state is involved, then the private investor will never join them.

Elvira Nabiullina: Exactly. So it must be balanced. We must improve our policy and make it more effective. So far it is not effective, it is somewhat selective. We get a great result in some places and nothing in other places.

Vladimir Putin: I see. Now to managing companies. Having companies manage certain projects is certainly the right approach, we have also discussed that and broadly speaking I agree. Only we must bear in mind all the minuses that come with the work of external managers who oversee bankruptcy proceedings. There has been a lot of criticism. Whatever happens, we must ensure that these negative features are not transferred to these managing companies. Some solid criteria are needed here. The idea is certainly sound, but it must be backed up by practice.

Elvira Nabiullina: Perhaps we should use pilot projects? Sometimes things like that benefit from pilot projects.

Vladimir Putin: Yes. Now my comments on the contributions of our two colleagues Sergei Guriyev and the last speaker… They said that we no longer have the reserves that we could once draw on: that is, idle production capacity and cheap labour. We all understand that this reserve tends to diminish, and that this is only right. Some untapped potential still remains. Suffice it to consider what is happening in the real sector. There is untapped potential, but of course we cannot take it for granted, and here I agree with Sergei Guriyev. If we observe capital outflow, that of course indicates we have problems with our investment climate: this is an obvious fact, although there are many reasons for capital outflow, such as speculative capital. Where did I find some consolation? Sergei Guriyev (I am told that he has also worked abroad) spoke very well. He said that the corruption tax here is higher than in other countries. That means they too have a corruption tax. But ours is still higher. We are committed to eradicating corruption tax, we are absolutely determined.

Now, regarding the dominance of state-owned companies. We have repeatedly said that creating these companies was the lesser evil, especially in sectors connected with the defence industry. We did it in order to bring together the viable parts of the enterprises we inherited from Soviet times, to structure them and position them on the market. Dmitry Medvedev said, and this is something I have also said on many occasions, that creating state capitalism is not our goal. We have no such aim. We were forced to act in this way in certain sectors. For example, it is impossible to structure and put aviation industry enterprises in order without direct state participation. The scale of the industry is colossal and our private business, as all those present here today understand, is not ready to assume the financial, economic and administrative responsibility. It is simply impossible.

The same goes for shipbuilding. Things are a little easier there, but it has a long production cycle, it requires a great deal of investment and the returns are not immediate: this is not quick money. As long as fast bucks can be made in our economy money will flow into those sectors. Well, that’s life. Suppose you have some money, a billion or two. Will you invest it in oil and gas in order to get a profit considering it is a growing market, in metallurgy or chemistry? Or will you invest it in aviation where the returns will come in 15 years’ time?

The risks are high, and competition is tough. Unfortunately, it’s still impossible to operate in this extremely complicated sphere without state support.

Speaking of Russia’s rivals on the international aviation market, there are only two or three major companies manufacturing aircraft, and no one else is involved in this business. These companies receive substantial state support in various forms, including the infrastructure, direct financial support, procurement and through defence contracts. A multi-source support system has been established there. This is life. I repeat once again that state capitalism is, of course, not our choice. I agree completely that we should gradually move towards creating maximum possible market conditions.

Hence the following issue. Incidentally, the government frequently discusses this in a candid manner. Of course, there is nothing good about determining prices at a dozen offices. But I believe that you will agree with me, and I think Mr Guriyev will also agree with me, on the power industry issue. We consistently implemented reforms but are simply forced to regulate prices for the population and for specific industries. We are doing everything to keep our promises and to liberalise the electricity market. But we can see what’s happening. The economy would collapse with skyrocketing prices. Do you understand? However, we realise that Russian and foreign companies have entered the market and are investing in modernisation projects. At first, there were problems. They have now entered the market, they are fulfilling their obligations, and they have to get a return on their investment. We understand this, and we will strive to facilitate this in every way. Unfortunately, we are unable to completely liberalise prices because people would take to the streets tomorrow, it would be impossible to live and to pay. Many enterprises would go under. So we need to do this in a prudent manner. But we must strive to accomplish this objective. See for yourselves: in Europe, say, France operates highly monopolised power industry, and they have just started moving slowly and extremely prudently towards an open market industry. This is Russia’s goal. Doubtless, we must move in this direction. This is correct. I completely share this stance.

I have nothing to add on the inflation issue. There are no objections in this respect, either. In my introductory remarks, I noted that this ranks among our top priorities, just like in all other nations. This is a fact. Are there any contradictions between development and inflation? Of course, not. What is primary, and what is secondary? Where is the cart, and where is the horse? Anti-inflation measures are the horse which will take us out of the quagmire. And the rest will come later. We must also act prudently in this area. I realise this completely, and we will move in this direction.

Some nations, especially in Europe, say the Baltic states, had implemented extremely drastic measures in many areas, including anti-inflation and deficit-prevention measures, etc. First of all, that was a national idea for them, an idea which brought the people together. Esteemed colleagues, please understand this and don’t forget about this. That was a national idea, they, sort of paid for that, and the people took it for granted. But what will Russian citizens take for granted? Society would think this is an ineffective state policy. There is a difference. Moreover, they are backed by the European Union with industrial states and “driver” nations like Germany which pay for everyone. But there is no one to pay for us. Consequently, we need to select targets in this area, go out and hit them and try and achieve this. Just like other macroeconomic parameters, we need to do this, no matter what, but we should not overdo it. Am I right?

And now I’d like to say a few words about the system for collective investment. Of course, you know, and Mr Alexei Kudrin has mentioned this example. Accumulation and investment total 30% and 20%, respectively. Certainly, there is a 10% discrepancy here. How can this disproportion be explained? It is linked to a distrust of the state, quasi-state and other financial institutions! This will require time and successful systemic work on our part.

Alexei Kudrin: Thank you. Let’s go on. I now give the floor to Valery Goreglyad, Deputy Chairman of the Audit Chamber.

Valery Goreglyad: Esteemed Mr Putin, esteemed colleagues!

We are seeing more positive feelings than there were last year. Obviously, the economy is posting sustained growth, the state is implementing a consistent social policy and is assuming most of the financial obligations to promote public social security. At the same time, one is happy to hear that the Government fully comprehends the danger of a long-term welfare-state policy.

Indeed, a somewhat negative trend is now emerging, with our essential and important social obligations outgrowing the state’s financial potential. We should admit that the Government had effectively passed this stage during the crisis by adopting an entire range of measures, including social support measures. This trend is quite justified at a time of crisis. But I think it should evoke long-term concerns among all those sitting in this hall. Any long-term and stable model based on long-term state obligations to maintain the social sector is impossible. In my opinion, the speakers have voiced many correct and interesting ideas. I would like to draw attention to what is perhaps not the most pleasant issue. As I see it, this problem seriously hinders economic development. We don’t discuss this issue very much and therefore implement half-hearted measures in this area.

This issue is linked with the extremely dysfunctional system for distributing surplus product nationwide. Despite the state’s active role in improving the population’s social support, primarily through every conceivable budgetary and social benefit, the gap between the income of the wealthiest 10% and the poorest 10% of the population continues to increase each year.

All national security thresholds totaling 7/9 with regard to ten high-paid/underpaid decile groups have already been exceeded and have reached 17/8 in this country, despite consistent wage and pension raises by the state. This conceals a fundamental problem linked with compensation for the distribution of this surplus product. It is an established fact that wages and salary raises should not exceed labour productivity growth.

Nevertheless, our survey makes it possible to ask a multitude of questions. Many analysts estimate average Russian wages and salaries at 40-60% of European wages. At the same time, the salaries of top managers, especially those managers involved in financial activity, account for 1.7-1.9 of average European earnings. How can this be explained? In reality, the productivity of such companies did not increase at the same rate. Moreover, let’s admit that 0.2% of families now control 70% of the entire national wealth.

Naturally, such disproportion is unable to facilitate economic growth in any way. Now, I’m addressing this problem from the standpoint of economic efficiency, rather than from the standpoint of social justice or ideology. Respected international organisations provide all kinds of assessments and calculations. Although one may disagree with their quantitative parameters, their qualitative aspects raise no questions.

If this so-called excessive inequality is reduced by at least 1% (As I have said, this is 7/9 and 18, to quote official statistical records), then the economy posts 5% growth in relative, not absolute, terms. Investment grows by another 6%. One may doubt some empiric figures with regard to any specific economy, but the trend seems fairly obvious.

Polls involving various groups of businessmen show that most Russian entrepreneurs operating in the processing industry consider insufficiently stable domestic consumer demand to be the main problem.

That was the opinion of 70% of the respondents. So Ms Nabiullina was right: we have a vast consumer market and a still greater potential to expand it. As we know, high-income groups are rarely satisfied with Russian-manufactured goods. They make a majority of their purchases abroad, and so account for a substantial share of capital outflow. I think this issue deserves close attention.

As I see it, we owe our other problem to the “high price syndrome”, which dominates the public attitude again. We fully realise how noxious this problem is, and much has been said about it. However, judging by the performance of our executive authorities, which we evaluate at the federal and regional levels, we have to admit that the majority is content with their economic situations. Significantly, last year’s active efforts on the programme to enhance the efficiency of budget expenditures are being wound down now.

We have to acknowledge that a majority of federal ministries and agencies – with the exception of the Ministries of Economic Development and Finance, which are active in this work – have not yet passed the regulatory acts necessary to implement the programme.

True, it might be more important today to analyse the latest allocations for particular programmes. However, every inspection proves the inadequate efficiency of government expenditures. Misspending and embezzlement have been reduced by the effective Federal Treasury system from billions of roubles to very small amounts because it has become hard to embezzle. But the amount of money wasted through inefficient spending is huge. I can cite numerous examples provided by the scandalous recent inspection of Moscow transport, or the latest check of shipbuilding contract placing by the Fishing Agency, with abundant allocations frozen and later reimbursed to miserable economic effect.

I think that to enhance the efficiency of budget expenditures is the best way to meet increasing public demand.

I would like to say in conclusion that the Accounts Chamber is indispensable in the manager-subordinate feedback, and it is always ready to supply reliable and full information on all relevant issues to the Ministries of Economic Development and Finance. Thank you.

Alexei Kudrin: Tambov Region Governor Oleg Betin has the floor.

Oleg Betin: Mr Putin, Mr Kudrin, Ms Nabiulina, ladies and gentlemen,

Thank you for the opportunity to address this meeting on behalf of the regions.

Last year was difficult. I don’t know what could have become of us if not for our unity and if the federal centre had not supported the regions. There were plenty of sinister forecasts. Today, however, we clearly discern a positive trend in regional budgeting. The Tambov Region can be called anything but prosperous but its consolidated budget increased by more than 25% in the two past years, 2009 and 2010, despite the economic downturn. We were able to continue the reforms in interbudgetary relations, management, and public welfare.

Investments and economic development dominated all today’s addresses, so I would like to talk about budget funding, which has lately become the backbone of our economic development. There are many problems in this sphere now, however. Possibly, investors prefer to wait and see, particularly because our budgets have to spend more than they can afford. Current decisions might be correct but they demand excessive budget expenditures.

I mean that the modernisation programme in education is good. We have approved it, and we will support it. But then, the latest scheme proposed to us entitles the region to a 1.2 billion rouble federal grant for two years, while we are expected to spend twice as much from our regional budget on the same programme. The healthcare programme, which is also good, again implies joint funding. Road construction and maintenance should be funded from oil excises and transport tax revenues, so other sectors lose these financial sources. Suburban trains are another problem. As far as I know, this sphere will be also entitled to co-funding, with the Finance Ministry responsible for federal grants, and Russian Railways and regional budgets for equal allocations. The same can be said about the financing of summer vacations, housing, public utilities, etc.

What do I propose? I am afraid that the situation with insurance premiums will be repeated. The Mandatory Health Insurance Fund increased per capita standards in mandatory health insurance were increased straight away, while, Mr Putin, we still do not have enough funding. It is a shame but when we look at the budget we do not have enough power. I suggest we calculate it together. During the crisis, Mr Siluanov (Anton Siluanov, Russian Deputy Finance Minister) and I calculated revenues and expenditures. We managed to overcome the crisis and preserve the budgets. Now let’s take an average region as a model and see what we have. I do not suggest that we overload the federal budget with these obligations. There are more than enough obligations, as we know very well. Looking at the issue of securities, we could probably pay the commercial loans in installments over time. This lending could be directed at fulfilling certain obligations of the regions. It would be very efficient to use these funds for a specific purpose of the region. We definitely support this approach.

There are of course budget revenues we have discussed today. Mr Putin said in his speech that businesses had pledged property to get loans. Mr Putin, we have already pledged everything we could. To be honest, last year we pledged 4.5 billion, which is all of the regional property, to secure loans. We had pledged 6 billion before that. This makes a total of 10.5 billion. Now that we have nothing more to pledge we need to think of development. Therefore, what I would ask is… There used to be a good foundation of support for the development of investment  in the regions, but it does not exist anymore. Last year there were single-industry cities, etc. But if we want to ensure the rapid development of investment we should promote these mechanisms. I am very optimistic about the government resolution that established a security fund in the federal budget for regional investment projects. According to the resolution, the Ministry of Economic Development considers investments from 5 to 10 billion, while a government commission deals with investments of over 10 billion. The resolution was adopted and distributed, but the fund, however, is not functioning. Perhaps this is why we do not attract so much funding. I would like you to pay attention to this issue and find an appropriate solution.

I would like to say that attracting foreign investments is a very important task. In the previous years we obtained an added value of 0.7 roubles for each rouble of investment, which means those were direct investments and an increase in the regional GDP. This year we would like to increase investments by 30%. Even now we are constructing facilities and giving priority to food safety. Fifty facilities are currently under construction for these purposes. We want to ensure the development of the regional economy.

According to our estimates, if the new projects today make an added value of 29%, these 50 facilities under construction will make an increase of 88% as well as new capacities. What I mean is that if we succeed, by 2015 we will be able to do without subsidies from the federal budget and our budget will become nonsubsidised.

Remark: This is an interesting suggestion!

Oleg Betin: What I would like to ask you is to help with infrastructure development. We could coordinate the activities of many federal bodies such as Russian Railways, the Ministry of Transport, Gazprom, and chain companies. But their opportunities in the regions are not enough to achieve rapid development. But if we find a solution, Mr Kudrin, by 2015 we will be able to do without federal subsidies! Thank you.

Alexei Kudrin: Thank you, Mr Betin. I would like to give the floor to Alexei Ulyukayev, First Deputy Chairman of the Central Bank of the Russian Federation.

As Mr Ulyukayev is coming up to the stage I would like to say that Mr Betin’s speech was quite informative. I would like to highlight that today we did not have enough time to discuss inter-budget relations. The Ministry of Finance will meet with representatives of all the regions in June and at the end of the year to discuss this specific issue because today we did not talk this through. Thank you. 

Alexei Ulyukayev: Good afternoon. I’m grateful for the opportunity to address this meeting. As they have given me five, rather than 15, minutes, I will have to… 

Vladimir Putin: Cutbacks now top the agenda…

Remark: We also need to cut back on inflation.

Alexei Ulyukayev: Well, I’ll tell you how, if you give me an extra two minutes.

Vladimir Putin: That’s great!

Alexei Ulyukayev: I was interrupted while saying that I mostly want to express gratitude and admiration for the work of the two departments, all the more so as I’m a member of the boards of the Ministry of Finance and the Ministry of Economic Development, and I will bask in their glory a bit.

Seriously, I would like to make three brief points. First, Mr Alexei Kudrin and I were in Washington D.C. recently. In the reports we heard, various global analysts noted the challenges facing industrial and emerging economies. To put it short, industrial economies face a negative production gap, which is their main problem. In effect, real production falls short of the workforce potential, etc. Moreover, incomplete fiscal regulation spells major deficit and a snowballing debt. Emerging economies primarily face high and probably growing inflation. As usual, Russia successfully combines the problems of both economies. We face the problem of a negative production gap. International analysts think this is 1-1.2% or, maybe, more. An even larger figure was mentioned here. But its existence is an obvious fact. Fiscal uncertainty also exists. Our nationwide inflation rate is among the highest even for emerging economies. India and Argentina are our rivals. There are no others from among G20 nations.

Despite the Central Bank’s independent status, we have the same perception of the relationship between the cart and the horse as the prime minister does. Consequently, we should first deal with inflation, the horse.

In this connection, I would like to say that we are using the entire range of instruments stipulated by national legislation. Since December, we have been applying interest rate policies, refinancing interest rates from the entire combination of credit deposit rates and the reserve requirements policy rather prudently. This implies a general increase and differentiation.

But I should say that, in comparison with our BRICS colleagues, we are just setting out. For instance, the Chinese government stipulates a 21% mandatory reserve requirement for its commercial bank obligations. We stipulate a quarter less than that. This does not mean that we should attain this level. This means that this very effective tool is being used by our colleagues. We have already completed three stages of these changes and will be ready to do this in the future, as well. Certainly, we must utilise a flexible currency rate policy in order to prevent rapid liquidity fluctuation. In this connection, I would like to briefly comment on the comparison between 2007 and 2011 that was made here.

At that time, we posted a net influx of private foreign capital. Net capital outflow reached $21 billion in the past three months. But we should understand that this is the net outflow, and that both parts of this balance can change simultaneously. In effect, the influx and the outflow may increase.

It is not good if the gross outflow increases, meaning there is no domestic demand for these assets, and that exporters deposit part of their earnings abroad because they are unable to invest them in cost-effective domestic instruments. But it is not necessarily bad if the influx increases at a different rate. I daresay this may probably be good in our situation. Re-trade was the word in 2007. Both hot and short money was invested here due to a substantial interest rate difference. Investors knew that the Central Bank would guard the currency corridor’s boundaries and buy far more currency than could be imported.

Now, to the contrary, we are adopting a flexible currency policy as a response. In reality, we have come very close to a floating currency rate of exchange. Statistically, we could heed capital influx. In terms of content, this would highlight the risk of its uncontrollable influx and outflow, as well as high liquidity fluctuation.   

And now here is the last thing. I would like to mention the correlation between debt and the GDP. In my opinion, we should not feel complacent over the fact that Russian debt totals 10% of the GDP and will not exceed 15% in the short-term. First of all, we can see that some nations behave quite differently. Some nations, including Japan, have accumulated debt exceeding 200% of their GDP but still boast top ratings. Other nations experienced a sovereign default at 15%. Most importantly, we should compare this with the budget’s investment component, rather than GDP. If you borrow money to finance specific projects, due to yield a return on capital, then investors realise that they will get their money back from profits. If you borrow exclusively for wage and salary projects, then investors become somewhat apprehensive and demand additional premiums and spreads while purchasing your debentures. This process may become spontaneous. Greece is one such example. Until recently, the Greeks had borrowed in the same way as the Germans, with a spread of 100%. Now they are borrowing at 13.5% interest, with a spread of over 1,000% against the German debt. This trend changed in the last two years. I would like to note that we should be extremely careful. We should not rejoice over our small debt; we should prevent it from expanding in the future. Thank you.

Alexander Galushka: (President of the All-Russian Public Organisation Delovaya Rossiya): Many questions have been covered by the previous speakers. I will permit myself to make substantial cuts in my presentation and to focus on how business sees the challenge of modernisation and improvement of the investment climate and to formulate specific proposals on the matters that are uppermost in our minds. The need for modernisation is indeed acute, labour productivity in Russia is many times lower than in the developed economies. Modernisation is called upon to bridge that gap. In what situations do modernisation projects succeed? What do we see in practice? The answer is simple. When it spells benefits. In that case there is no need to make pleas for modernisation, it will happen by itself. This is the first effect that we observe: modernisation happens when it produces tangible benefits and when the conditions are ripe. Second. As a result of modernisation personnel is reduced many times over. Why? Because labour productivity at enterprises grows. From our calculations the workforce may shrink by between three and ten times. On the whole, according to the Gaidar Institute for Economic Policy, if one assesses the potential for redundancies in all production facilities, if you take the manufacturing sector and assume that we raise labour productivity to the East European level, for starters, that would make about 20 million people redundant.

Incidentally, the thesis that we will face a shortage of labour in connection with the demographic situation only holds on one condition, that is, if we do not increase our labour productivity. If we increase it, on the contrary, we will release a lot of manpower. Naturally, people need to be employed. I think we should aim for a socially stable and beneficial modernisation. Analysis shows that the creation of one high-quality, modern and productive workplace costs between 200,000 and 250,000 dollars. Naturally the creation of new jobs, and they are created by investing capital, also calls for a better investment climate. The last point we would like to draw your attention to is the rivalry of jurisdictions within the common customs space, which is already happening. It is worth noting the efforts Kazakhstan is exerting consistently in this area. The first to tell us about it were foreign investors, who said that they were increasingly turning to Kazakhstan. That alerted Russian investors. Now the governors of the border areas are also talking about it. They do not just say that new investments go to Kazakhstan but that old established production facilities and the tax base are migrating over to Kazakhstan jurisdiction. From the results of 2010 announced by Rosstat, and I stress, not the Central Bank, but Rosstat, foreign direct investments in Russia amounted to $90 per capita and in Kazakhstan to $890.

Therefore, all these challenges, the need for genuine modernisation, the fact that it is not only socially acceptable but beneficial, and competition with Kazakhstan make it imperative to improve the investment climate dramatically.

What do we observe in Russia? In Russia we have a very differentiated picture in the regions. We are glad that there are some regions that are true leaders. The leading regions have over the past 6-7 years consistently worked to improve the investment climate and these efforts are now being translated into tangible results. A lot has been said, and rightly so, about the Kaluga Region. Not only is that region the leader in terms of foreign direct investment per capita (it shares first and second place with the Sakhalin Region), but it increased its industrial output by 142% in 2010, it has the third highest wage level in the Central Federal District and since 2011 the region has not been receiving any federal subsidies. That is a striking example which shows that in addition to the two traditional alternatives – either increase taxes or cut spending – there is a third realistic alternative: to increase  the tax base as a result of a favourable investment climate. And this is happening in our land. In addition to the Kaluga Region there is the case of the Ulyanovsk Region, which has moved into first place in terms of direct investment per capita in the Volga Federal District. And yet neither is a region that produces natural resources and both used to rely on federal subsidies.

For our part we have studied the best practices and the concrete measures that have worked in the regions. The report is eight pages long and is called Model Programme for Improving the Investment Climate in the Regions. In fact it is a demand from those who benefit from the investment climate. We are heartened by the support we are getting from the Ministry of Economic Development. In fact it can be said that the programme is the result of a dialogue with that ministry and it is important now to start implementing it. The following circumstances need to be borne in mind. Practically speaking, everything in these regions hinges on the governor. If I were to name honestly the main reasons, then I would have to say that it is the personal position of the governor and his wish to prove himself in this way. That is of course to be welcomed. Back in the 19^th century Karamzin wrote that in addition to good laws what Russia needed was 50 efficient governors. In current conditions, in addition to subjective motivation, external stimuli are also important. Unfortunately, in the sphere of interbudgetary relations, such a system of stimuli is not very much in evidence. The region which improves its investment climate creates a new tax base and in practice is stripped of a matching amount of federal subsidies. It would be proper to change that situation and we have discussed one possible measure with the regions: 10% of the federal taxes generated by new production facilities, new investments should be transferred from the federal budget to the regional budget during a reasonable period of time, from 3 to 5 years. That measure would provide a real stimulus for many regions, as we have gathered from discussing the matter with them.

At the regional level it is heartening that 2010 saw some fruitful joint work with the Ministry of Economic Development on creating a coherent and clear-cut agenda on specific measures to improve the investment climate in the regions.

The federal contribution to improving the investment climate is also important. Let me focus on the main things: taxes, financing, tariffs and the justice system. Very briefly. The ongoing discussion on taxes is looking at the possibility of reducing insurance premiums. In our opinion what is essential for decision-making is the understanding that the majority of the 34 percentage points of insurance premiums are not inherently to do with insurance, they do not create individual rights and consequently its tax base may be not only wages, but any other tax base. In our opinion the main decisions will have to address that issue. But this topic merits a separate discussion. On financing, there are two key measures. Best practices. If we look at the world experience, Canada has been least affected by the world crisis. It has the smallest amount of bad debts. Today, the reasons have been universally recognised. First, the granting of financial services in the form of a public offer. Second, the creation of an agency to protect consumers’ rights in the financial services market. Suffice it to say that this experience has been thoroughly studied in the United States and it was decided several months ago to set up a similar agency in the US.

Since such an agency was created in Canada in 2001 the amount of funding for small and medium-sized enterprises increased 300% and the cost of funding dropped by 5-6 percentage points, mainly due to the elimination of hidden debts. On the whole the amount of bad debts in Canada was smaller than in any other G8 country.

Tariffs. We have seen a sharp rise of electricity tariffs. Three key points need to be made in this connection. We have analysed, together with the institute of the Aton Group, whether natural monopolies and energy companies are financed rationally and how they use the funding. Our analysis shows that the additional funding raised to meet the investment needs of such companies is as high as 2 trillion roubles. That is a way of meeting investment needs without increasing tariffs and without raising prices.

The power industry. The technology in that sphere have not changed in any fundamental way in the last hundred years. In Canada they have set the standards for such expenditure: there is a reference book which clearly sets forth the standards of such spending. It would be reasonable to do the same here: to create a specialised integral website that would contain the information of the corresponding companies in accordance with the modern standards of information disclosure on spending, both current and investment, and to make it accessible to the public.

Third, these companies should introduce the position of a controlling officer who has access to any information and submits quarterly reports on what is happening in the company, including its investment and current expenditure. And the last point has to do with the justice system. It is a very sensitive issue. I would mention just three key measures. First, to allow associations of enterprises to sue in defence of the interests of their members by actually giving entrepreneurs and investors the right not only to seek redress, but to seek redress through this kind of a public advocate. Naturally this increases the legal capacity of investors and entrepreneurs a great deal.

Second. Perhaps we should revisit the idea of administrative courts, the courts that bring together a) specialisation and b) if you look at the experience of such courts abroad, in their spirit and essence they proceed from the premise that the applicant who challenges the state is the weaker party in the argument. It permeates the whole spirit of the work of these bodies.

Third and last. It would be practicable to vest the arbitration tribunals  with the right to consider disputes between representatives of government bodies and entrepreneurs.

Thank you very much. In conclusion I would like to say this. If you ask the business community what is needed for modernisation in our country to take place, something that we all want, the answer will be very simple: to make modernisation beneficial for business and to create a favourable investment climate. Thank you.   

Vladimir Putin: Thank you. With your permission I will also make some comments, like I did after each of the other colleagues who spoke. Let me begin with the final words about the idea of creating commercial courts to resolve disputes between power bodies and business. We can think about it. One thing that I find a bit confusing is why the currently available opportunities to refer to general jurisdiction courts and commercial courts are not sufficient. Let us look to see what is lacking, what instruments are lacking in order to protect the rights of businessmen. We are ready to consider all this and meet you halfway, but we need to think it through, just like the possibility for business associations to appeal to the court to protect the interests of their organisations. In principle, there are enough instruments as it is: one can go to a law court and a non-governmental organisation such as an association of employers may act as a public defence lawyer and so on. All this is possible within current legislation. Still, I repeat, if something is missing we can certainly consider it and make additions.

I believe that disclosure of information on the structure of the spending of major companies, including power companies, but also transport and other companies, is very important and I absolutely agree with that. That is absolutely correct. I referred to this even in my opening remarks, and I have repeatedly said that I fully agree with that. We should seek to put this principle into practice.

I will speak in a moment about the relations between different budget levels. But first about disincentives for successful regions. Yes, it is a problem; however, it is already becoming less acute thanks to the measures and decisions that you propose. Let me repeat that the Finance Ministry cannot reduce its subsidies to a region by more than 10% if the region performs successfully. There are other measures, I think there are three measures in all. One is non-inclusion of non-tax proceeds in the overall regional revenues. That is a serious concession when the issue of supporting a region out of the federal budget is discussed.

Alexei Kudrin: And let me name one more: we have been calculating the tax potential on the basis of the last two years. In fact we have shortened that period. What is it now? 2.5 years. It used to be three years and now it is 2.5 years. So we make our calculations not on the basis of the last successful year but on the basis of the average performance for the last 2.5 years. And you have to add the restrictive measures… Thus the transfer to well performing regions is preserved for 3-4 years. And the fourth measure, which Mr Putin mentioned at the State Duma, is the creation of a bonus fund for regions which have made the greatest strides in developing the tax potential. At present its size is 10 billion roubles.

Vladimir Putin: Now on the question of making modernisation contribute to social stability. I fully agree with that. Of course this attitude of our business should be welcomed. We will do all we can to promote it and work together on this.

Regarding the competition between jurisdictions in connection with the creation of the Customs Union and the Common Economic Space. I have referred to that danger myself. But it was a considered decision on our part because we sought to create conditions that would encourage all the Customs Union countries and members of the future Common Economic Space to form competitive instruments to attract investments. That is normal, it makes all of us work more effectively. Regarding the statement that we do not need excess inflow of capital. As Alexei Ulyukayev said, this is good for us. It is good for the Central Bank because it is the main institution called upon to combat inflation. But it is not so good for the economy at large. Of course attracting direct investment is a question that needs to be carefully considered. But even the so-called speculative (inflow of capital) is not always harmful. There are many factors at work here. Concerning the statement that some of our neighbours are introducing tough measures, for example, the People’s Republic of China. Alexei Kudrin has cited the example of restrictions on bank reserve funds. Yes, their approach to this is tougher. They take a tougher stand than we do on many things there. Many such decisions are taken by the Politbureau of the Chinese Communist Party Central Committee. Yes, including decisions in the banking sphere, and they are strictly followed through. This is because the political system in the country is so tough. I am not being ironic. Because it makes it possible to enforce these rules. However, this does not mean that since we have a different political system we should not seek to be equally tough.

Now about the relations between the budgets of different levels. There are many problems there. I very much hope that the Finance Ministry will continue to improve that system.

But I would like to comment on the words of one regional representative who said: “we have taken out loans against all our assets and we have nothing left.” The question arises: was it necessary to take out loans against everything?

That is a big question. I will tell you why this question arises. Because if we want to achieve prosperity through state investments, or regional investments in this case, I am not sure that we will succeed. Of course federal and regional investments are important and necessary. But this is not the main instrument in achieving progress in creating a better investment climate. We should create a favourable investment climate and attract private investment. That is the main thing. You are speaking about regional investments, and everybody wants to increase them. In general, I repeat, I am not against it. And yet… the main thing is to create conditions for attracting private investments. A business community representative spoke about Kaluga and some other regions. I repeat, I am not suggesting that the interbudgetary relations in this country are ideal. Of course they need to be improved. We heard from Valery Goreglyad who said that it is necessary to turn around the negative trend of social spending outstripping the growth of the economy. Of course such a situation is not satisfactory. Economic growth should come first and only after that should social spending increase. With us it is not a negative trend but forced measures connected with the world financial and economic crisis. We had to meet our commitments on pensions under these conditions, we had to meet our commitments on increasing social benefits and so on and so forth. The reason is that the incomes of our citizens are very low, and unlike in other countries, including the so-called developed economies, our people have no extra money stashed away for a rainy day. This is the crux of the matter. People can barely make ends meet. We cannot build the country’s prosperity on the suffering of the Russian people. These are forced measures. And by the way, we still have not solved all the problems. I repeat, we are very well aware that economic growth must precede the growth of social spending. Yes, at the current stage we had to act a little differently. It was a forced policy.

Now regarding the gaps in people’s incomes. That is a fair point. Valery Goreglyad is right that it is one of our problems. We must do everything to solve it. Disparities in people’s incomes is an obvious problem and I am not going to dwell on it. It is a subject that merits and demands discussion: fighting poverty and many other areas of effort. It is not a task that we can shirk. But what I find hard to agree with is that the outflow of capital happens because people with high incomes are spending money abroad. The outflow of capital is not caused by people with high incomes wanting to meet their demand abroad. That is not the cause of capital outflow. The money that flows abroad for personal consumption is peanuts, really. All the rest is due to economic factors as the scientists and businesspeople here have pointed out today. And they have been very convincing. One cannot challenge their argument.

Regarding large amounts of inefficient spending. Valery Goreglyad works at the Accounts Chamber, which is a supervisory body. I think we worked together at the Presidential Control Directorate at one time. There is still a difference between what is called non-targeted spending and inefficient spending. These are different kinds of spending, you cannot lump them together. There should be no non-targeted spending. But one must admit that not all non-targeted spending is inefficient. Unfortunately, that is also a fact.

In conclusion I would like to say that judging from the discussion and the commitment with which we are all discussing the topics on the agenda, the things that most of those present have been engaged in all their lives, and judging from the keen interest with which all these things are discussed, I conclude that the people here are very dedicated workers. Workaholics (I know how hard you all work) who devote a significant part of their lives to their work. Thank you very much. I wish you success.    

Alexei Kudrin: Can I ask for your advice, Mr Putin?

Vladimir Putin: Sure.

Alexei Kudrin: We have to make a protocol decision. There are two options: to hear the reports and to take note of the reports of the two ministers or to approve the work of the two ministries?

Vladimir Putin: To approve.

Alexei Kudrin: Thank you.