Transcript of the beginning of the meeting:
Dear colleagues,
First of all, I would like to thank you for the opportunity to speak at the Congress of the Russian Engineering Union and address such a respectable and representative audience.
The Russian engineering industry, including the defence sector, employs over three million people. It would be no exaggeration to say that the state of the country's economy and the welfare of millions of our citizens to a large degree depend on the results of your work.
Over the next decade, Russia should join the ranks the world's five largest economies by GDP. I am, of course, not talking about a numbers race but about the need to achieve qualitative development through innovation and increased efficiency in both conventional and so-called new industries and sectors of the economy.
We need to diversify our economy and reduce its dependence upon natural resources – we have been talking a great deal about this, and it is one of the key tasks for the country's development in the coming decades. We need to modernise the job market and the education system; create efficient, highly productive, and well paid jobs; and implement large-scale projects in energy, transport, utilities, and construction.
There is another factor that also needs to be taken into account. Recently, there has been a great deal of discussion worldwide about the risks and dangers of deindustrialisation. It is clear now that educational, engineering, and scientific centres cannot function effectively if isolated from the manufacturing base. It would be a misconception to think otherwise.
Those countries that have been actively outsourcing their industrial facilities in an effort to save on production costs are faced with a real threat of undermining their leading positions in world markets.
Simultaneously, countries that not so long ago lacked experience and traditions in engineering have mastered the production of the most complex equipment, including defence systems, and have improved their national education systems and work ethic.
We are absolutely convinced that Russia should have a complete technological and production chain, from research and design to components and the large-scale manufacture of finished goods.
We need to maintain dominant positions in our domestic market. This first and foremost applies to the engineering industry. The market for our engineering sector is estimated at tens of trillions of roubles. And, of course, we should strive for significant and hopefully leading positions in the global hi-tech goods and services market as well.
This objective cannot be realised by strengthening the industrial and scientific base alone. We also need to improve our human resources and streamline the system of vocational training. We should inspire our youth with the idea of a technological breakthrough and revive the high social standing of our engineers and skilled workers.
I think it is no exaggeration to say that we are talking about a new wave of industrialisation. Of course, I am referring to the high-tech industrialisation of the twenty-first century, which is based on free market principles and such fundamental economic concepts as efficiency, profitability, market demand, and return on investment.
Today's meeting at AvtoVAZ is certainly a symbolic event. If you recall, just a short while ago, this giant automaker seemed to be going belly-up. There were many people who believed that the plant will never get back on its feet and recover in full. I remember my last meeting with the workers. Everyone had the same question: “Will the plant survive or not? Will it keep operating? Will we be able to keep our jobs?”
What can I say? The number of vehicles manufactured by the plant almost doubled last year. The after-tax revenue is over 2 billion roubles, maybe even 2.1 or 2.2 billion. Production runs at full capacity. The average monthly wages used to be low, about 18,000 roubles, in 2009. Today, they are at 21,500 roubles.
I should say that AvtoVAZ is not an isolated case of good fortune. Automobile manufacturing volumes doubled in Russia. The proportion of Russian-made cars sold on the market rose from 40% to 70%.
Certainly, government support played a large role. In order to encourage demand, we allocated 65 billion roubles in 2009-2010 towards the purchase of vehicles for the needs of federal, regional and municipal bodies and contributed over 13 billion roubles to scrapping old cars and issuing easy loans.
I have just spoken with the director (Igor Komarov, director of AvtoVAZ). He used the example of AvtoVAZ to show how important it is to complete this programme before year's end and to finance all its components so that it can fully implement its investment plans.
We have allocated almost 1.5 billion roubles to subsidising rail shipments of motor vehicles to the Russian Far East. We are even negotiating a market share in European Russia for automakers from the Far East.
As I said, this year, we allocated an additional 5 billion roubles towards scrapping old cars. In all, 19 billion roubles from the federal budget will be spent on this programme.
As you know, we are launching a programme to replace obsolete agricultural equipment. We will allocate 3.5 billion roubles initially. We are now looking for the best way to implement this programme so as to make government support available to both large- and medium-sized farms.
Quite recently, in April, we decided to apply the scrap programme to replace the fleet of lorries used by the Russian Army. The Russian producers will receive additional orders for 6,000 lorries, of which 4,000 are made by KamAZ and 2,000 by Ural.
In all, about 400 billion roubles were allocated from the federal budget to the Russian mechanical engineering industry, including defence industry enterprises. These funds were used to provide direct assistance to these enterprises and to subsidise loan interest payments, conduct retrofitting, and provide government loan guarantees, as well as to conduct other support measures that helped preserve the industry’s infrastructure and lay the foundation for future development.
Good growth numbers are being seen in other industries as well. Almost all mechanical engineering enterprises boosted their output in 2010, especially heavy and power engineering plants. Production is up by almost 25% across the industry, which is not bad at all.
Certainly, we are still recovering from the crisis. However, all performance indicators show that growth and demand are on a steady upward trend, and we should support and preserve it.
Colleagues, we conducted a thorough inventory before the crisis, prioritised our goals and established major integrated agencies in the ship- and aircraft-building industries and the defence complex. Rostekhnologii Corporation is engaged in consolidating the industry’s state-owned assets. Let me reiterate: this consolidation is not our ultimate goal. What we want is to run an inventory, identify enterprises that are still operating, organise them, and then gradually access the market, but this time, with revised prices and a new outlook for further development.
In conjunction with Russian businesses, we have developed clear action plans covering almost all mechanical engineering enterprises. We know which tools we are going to use to upgrade their production facilities, expand exports, and promote science-intensive technologies.
We will maintain our policy on the stimulation of demand with regard to Russian-made machines and use Russian industrial enterprises as much as possible during the implementation of major infrastructural and energy projects.
That’s exactly what we do when we assign contracts under production agreements.
For your information, Russia’s share in the Sakhalin project, or Kharyaga PSA, was 60% for the entire project implementation period of 1996-2010. That’s over 25 billion dollars. The level of Russian contractors’ involvement will remain a key criterion in evaluating the effectiveness of production agreements.
Russian energy companies plan to invest 3.1 trillion roubles in new equipment purchases over the next three years.
These enterprises, including fuel and energy companies, should replace their machinery with Russian-made equipment using local components.
I believe that the auction arrangements for purchasing Russian or foreign-made equipment should also be improved. If Russia makes something that complies with international standards, then there should be no preference for foreign companies or suppliers with regard to such equipment. That doesn’t mean we should squeeze them out of the Russian market. All I’m saying is that, regrettably, they enjoy greater preferences in comparison to domestic producers.
I believe that for the sake of Russian enterprises, we should employ more long-term agreements that can be insured by state development agencies. The agreements should also provide for lifetime maintenance services and repairs by suppliers. Certainly, mechanical engineering enterprises must ensure unconditional compliance with their obligations under such contracts and agreements.
I want to emphasise that the products made by Russian machinery manufacturers must comply with established occupational safety and environmental requirements. We will keep improving the industry standards in order to remove obstacles that hinder the development of such enterprises. I’m sure that many of you in the audience understand my message. This is a very complex and sensitive issue. We will stay the course and keep implementing these innovations, but we’ll also make sure we don’t create any additional problems. I believe that the union can join in this work.
Our mechanical engineering enterprises’ fixed assets, most of which are worn-out and obsolete, are our key problem. The coefficient of manufacturing equipment and machine renewal is as low as 1% per year. That’s far too low. The manufacturing equipment in Russia includes about 1.5 million units and is 90% Russian-made.
I believe it’s necessary to focus on the expansion of the capacity of Russia's machine tool industry. Its share of the GDP is infinitesimal, I’m not even sure I want to mention it. Still, it’s 10 times less that in China or Italy and 15 times less than in Germany. We should be mindful that the machine tool industry builds key production assets for all strategically important mechanical engineering and defence enterprises.
Several decisions have been made already, such as the strategy for the federal targeted programme titled “The Development of the Russian Mechanical Engineering and Tool-Making Industry in 2011–2016.” The federal targeted programme itself will be adopted in the near future.
Over 1 billion roubles will be allocated this year to finance the R&D work necessary for developing innovative machinery and tools.
Let me also add that during our defence-industry modernisation effort, we will make extensive use of Russian tool- and instrument-making enterprises. We have already imposed restrictions on certain equipment imports for the defence industry in those cases in which similar Russian-made equipment is available.
In this regard, I’d like to point out that the state weapons programme, which will provide more than 20 trillion roubles in allocations up to 2020, should become a major tool in the modernisation of mechanical engineering. Another 3 trillion roubles will go towards the re-equipment of enterprises with defence contracts to meet. But there’ll be a high degree of responsibility in terms of the production schedule, quality, and pricing.
In an effort to support various sectors of mechanical engineering, we’ll employ subsidised credit. Primarily, we’ll subsidise loans for technical re-equipment and the implementation of investment projects. We’re set to distribute more than 8.5 billion roubles for this purpose before the year’s end. We’ll also continue to support the industry by attracting funds from Vneshekonombank and other development institutions.
We’ll make the most of the advantages of industrial cooperation and technical alliances, and create incentives for luring in leading world manufacturers. Let me cite a few figures here. Direct foreign investment in Russia’s mechanical engineering sector grew by more than 50% in 2010, to nearly $7 billion, up from $4.4 billion (a year ago).
As you know, a special fund is currently being established to attract foreign capital into the Russian economy and co-finance large joint projects.
Some 62 billion roubles in additional budget revenue will be channelled into this fund later this year. In forging cooperation with foreign partners, we insist on a high degree of local production and the creation of local engineering centres.
We cannot content ourselves with merely serving as an assembly line for leading world brands.
By 2020, joint machinery ventures based in Russia should generate at least one half of all added value.
A few days ago, we approved a concept for organising the domestic manufacture of next-generation diesel engines and parts. The Ministry of Industry and Trade was instructed to begin working on an appropriate strategy, under which we’ll determine the amount of budgetary and extra-budgetary funds to be released for this particular project.
In keeping with the government resolution adopted this past April, some 8 billion roubles will be disbursed for this purpose from federal coffers over the period of 2011-2015, and another 6 billion will come from Vneshekonombank.
Why did I bring this up, and why have we decided to support this particular sector? I think it’s clear to everyone that diesel engines are used in almost all types of vehicles, primarily in military hardware, and also as emergency and reserve sources of electricity. So, guaranteeing our own production and expertise in this sector is a matter of national security.
I’m sure Russian machinery manufacturers will try to step up their exports, which is why we need to provide systemic support for those of them who are entering global markets.
As you know, we’re creating a national agency for export credit and investment insurance. The new institution will assume part of the financial risks, helping our exporters raise their competitiveness.
This year, the agency will be able to insure up to 1 billion roubles in export loans. This isn’t much, given our mechanical engineering industry’s potential. By 2013, however, we plan to provide insurance coverage for more than 15% of exported Russian machinery, equipment, and vehicles, worth a total $14 billion.
At a recent meeting on the advancement of power machinery, we gave instructions to thoroughly examine the possibility of providing foreign customers with easy loans for the purchase of Russian-made power machinery.
The loans we provide to other countries for large-scale projects should include conditions that stipulate the purchase of Russian equipment. This applies not just to power machinery, but to other areas of mechanical engineering as well.
Customs duties may prove quite efficient in the protection of Russian manufacturers' interests. The Ministry of Economic Development and the Ministry of Industry and Trade have already been instructed to develop coordinated proposals on measures to protect Russia’s power and heavy machinery market. I’d like to emphasise here that duties should be lowered only on specific equipment that will not be manufactured in Russia in the years to come.
This year, we began operating within the framework of the Customs Union of Russia, Belarus, and Kazakhstan. This [format] sets certain requirements on our machinery makers. The uniform technical regulations to be set by the year 2012 will become a major element of industrial policy, and they should prompt businesses to modernise production. This modernisation will draw upon the world's leading expertise, including standards adopted in the European Union.
The creation of the Customs Union and the Common Economic Zone will provide our enterprises with free access to our neighbours’ markets. This is a right that should be actively exercised, and we should and will help you expand your high-tech exports. But let me underscore once again that machinery manufacturers should justify their ambitions by turning out high-quality, competitive products.
I believe that the union could also contribute to the promotion of Russian-made equipment and machines on foreign markets, as well as to the formation of a positive image of the industry, despite the smear campaigns of dishonest competitors.
We live in an age of knowledge and innovation. Today, the share of high technology in the cost of a product reaches 80%, and those who have their own known-how and vision come out the winners. I think you realise that perfectly well.
In the next decade, we’ll need to raise the level of high-tech products as a percentage of total output from today’s 12% to at least 25% or, better still, 35%. We cannot afford to continue using production lines launched in the 1960s-1980s because we’ll never gain a competitive edge.
The Ministry of Industry and Trade has been instructed to analyse the technology necessary for every sector of the mechanical engineering industry and prepare detailed explanations of what we should import, what we should produce on license, and what we should make on our own. We also need to contemplate the local production of the most advanced technology using measures of state support. We’re ready to elaborate such measures.
The state must create favourable conditions for the development and introduction of innovations, supporting domestic manufacturers in the high-risk R&D stage, especially in cases in which it is possible to come up with a homegrown breakthrough.
Under the state weapons programme, some 200 billion roubles will be released for R&D projects annually. We’ll use that money to create multifunctional technologies that can be used both in the defence industry and in civilian sectors.
Instructions have also been given to prepare a programme for co-financing the R&D expenditures of leading Russian power machinery manufacturers. We are to examine the possibility of releasing special grants for the development of equipment and technology.
We’re working to build common platforms through which research centres, manufacturers, and consumers of finished products will test new technologies for the production and introduction of modern equipment. This applies primarily to so-called technology platforms. Such sites will operate according to the principle of partnership between the state and private investors.
I believe that the Russian Engineering Union should proactively contribute to partnership and cooperation within the framework of such technology platforms.
The business community should attach special importance to corporate science, encouraging independent research and design, so as to build its own research potential.
For our part, we are actively supporting the development of cooperation between Russian higher educational institutions and industry, and we are transferring money to private companies for the implementation of joint R&D projects with such institutions. We will channel 19 billion roubles into these purposes in 2010-2012. Some of you are probably already familiar with these projects. For those who aren't, I’d like to note that we will give money to those plants that are already prepared to put it to use, add a half out of their own purse, develop a good product, and, most importantly, put it on the market. We hope that, in this manner, plants will receive government support and higher educational institutions will further develop their potential.
The training and retraining of personnel is one of the most important issues. Highly qualified employees are now becoming key instruments of production in this country, but students are still sometimes trained using technology from 10 or even 20 years ago.
We are now establishing scientific and educational complexes according to the leading global standards – national research universities. This status has been conferred, for one, on the country’s leading technical colleges. We will apply 45 billion roubles to fund this growth in the period of 2010-2014.
Obviously, we cannot do without the help of industries and businesspeople. The business community must realise that it is necessary to invest not only in fixed assets and innovations, which are very important, but in people – first and foremost, into the rising generation that will shape the image of our domestic engineering in the coming decades.
Educational programmes and courses at institutions of higher learning and vocational schools must be tailored to the requirements of companies, while students must have an opportunity to undergo practical training at the plants where they will work in the future.
Some educational agencies have already embarked on this road. Thus, the Naberezhnye Chelny affiliate of the State Technological University in Kazan has established an educational centre together with the KAMAZ plant. The institutions of primary, secondary and higher vocational education are being integrated into one system. On a par with attending an institution of higher learning, students are working in different jobs that afford them additional scholarships and sign an employment contract with them upon their graduation.
The Krasnogorsk State College is drafting methods of advanced individual training for students at the Zverev plant. Starting from their first courses, students take part in the real production process. Practical training is tailored to concrete jobs at the plant, where students work on the flexible schedule of a part-time working week.
No doubt, it is necessary to introduce the opportunity for such experiences everywhere, including in the training of students enrolled in so-called applied baccalaureate programmes. We will also work on the mechanism for incorporating technical schools and colleges into higher educational institutions. This is what is called an applied baccalaureate. It is a proposal made by our experts to attach colleges and technical schools to higher educational institutions in order to enable young people to undergo better training and take on a specialty after two years of study. I think it is possible to raise the prestige of this type of education, involve higher educational institutions in this effort, and combine it with practical training.
Your union must take a more active part in improving professional education, facilitate cooperation between industry and educational institutions, and take part in appraising educational programmes.
And there is one more point. I think that professional education should start much earlier. If you remember, in the Soviet Union, we had a whole network of technical programmes through which children and teenagers designed their first models under the guidance of their teachers. The Engineering Union could restore this network of additional education for children. I think that the regions and municipalities would support you by all means. Needless to say, technical institutions must take schools under their wing to promote the vocational orientation of teenagers.
It is necessary to get the younger generation interested in inventions, new solutions, and scientific discoveries. This is a common task for the educational system, the media, and cultural institutions. Your union could make a very weighty contribution to this effort.
It is essential to raise the prestige of scientists, engineers, designers, and skilled workers by improving all the necessary conditions for their work and life.
Some engineering and defence industry plants are actively implementing programmes that support young specialists, including special monetary bonuses and housing loans and certificates.
Recently I visited one such enterprise in the missile industry. Having become a doctor of sciences, their employees receive a bonus of 200,000 roubles and a 40% raise. There are also incentives for other categories of workers. No doubt, this is the right approach. This is the only way to attract bright and talented young professionals into the Russian engineering industry. And we are well aware that we have many of them.
I’m sure you heard about the proposal to set up an Agency for Strategic Initiatives. With its help, we would like to ensure the broad participation of young people in implementing breakthrough projects and give new incentives for the advancement of the country. I hope that agencies within your union will help us find these talented people and the interesting and promising projects that they develop.
I’d also like to thank you for supporting a recently proposed political project – the Russian Popular Front. I hope that it will help us promote new and promising ideas and nominate new people to different government bodies, including the State Duma, which holds its elections this December. The participation of your union is very important to this work.
I’d like to say a few words in conclusion. Throughout its history, our engineering industry has proved its ability to guarantee our technological superiority in key areas of development. It is impossible to go forward without it. We have brilliant examples of triumphs in science and design in the missile industry, the defence sector, the nuclear power industry, and power engineering. I have no doubt that the current potential of the engineering industry and the ability of our engineers, designers, and workers give us the right to hope for new triumphs and breakthroughs in the future. I’m sure we will not be disappointed.
Thank you for your attention.
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Vladimir Putin’s closing remarks:
If you don’t mind, I’d like to make several closing comments. I will not repeat all the measures that the government took over the previous period, including decreasing the profit tax from 24% to 20%, increasing the depreciation allowance to 30%, and so on.
As for providing favourable conditions on purchasing land, we will look into it, I promise. When I return [to Moscow], I will instruct the Ministry of Economic Development to consider it. We will do it.
Let’s return to the other ideas mentioned here. The co-financing of personnel training: we will also need to weigh in on this, including stipulating the amount of funding and the ways in which it will be provided. Ultimately, we realise how important personnel training is – I've said so already. Let’s consider this together. If you make your proposal more specific, we can eventually agree on something, right?
Let me now turn to the more crucial issues, for example, tariffs. I have already given my opinion about tariffs on natural – or rather infrastructural – monopolies. And you all are well aware that these things are all interconnected. For example, let’s have a look at railways. We intend to keep the growth of railway tariffs within 5% or 6% next year, in line with the inflation rate. What does Russian Railways say? They say that if we do this, the company will have no funding left for maintaining orders on new stock and repairs; it will buy less track and fewer carriages, diesel and electric locomotives, and so on. We need to take this all into consideration. Ultimately, it will have a strong impact on the mechanical engineering sector.
I’m only referring to Russian Railways. There’s also Gazprom, which purchases energy-related equipment, pipelines, and many other things. Don’t forget about the electric energy sector. Our decision has to be well-considered. For now, the government is planning to keep the tariff growth in line with the inflation rate. I repeat – for now. The decision has not yet been made. The relevant ministries and government agencies are assessing the situation and will soon make the final proposal.
A few words about profitability. I have already said this, but I want to emphasise it again: the defence industry should work at a 15% profit at least – that’s the minimum level. However, prices should remain economically justified. One can always blame the inflation rate or growing prices on metals, transport, and so on, but we often see unjustified price growth. And it is impossible for you to be unaware of it.
Now for the Central Bank’s exchange rate policy. I understand clearly, as does the Central Bank and everyone else, that financial authorities have very few tools to attain the goals they seek to achieve, including the control of inflation.
Oil prices are high. Russian companies sell energy commodities for US dollars or euros and bring that money back to this country. The Central Bank takes the foreign currency and gives it back in roubles. And where does it take those roubles from? It prints them.
When 1 US dollar is exchanged for 30 roubles, the supply of currency is different than it is when 1 US dollar is exchanged for 27 roubles. That’s it. It doesn’t take a finance guru. But when the volume of imported foreign currency surges, two tools can be used: we can either change the rouble's exchange rate to reinforce our national currency – this is what the Central Bank is doing – or build up reserves by withdrawing this money from circulation. But we can’t put much money under the mattress when our budget entails major spending, above all social spending. That’s the problem.
However, there is an understanding of what has been mentioned today, and the Central Bank is acting carefully. All my conversations and meetings with Mr Ignatyev (Central Bank Chairman Sergei Ignatyev) start and finish with this.
Mobilisation reserves. I agree that corresponding requirements need to be cut down. We will look into this. I have taken note of it, and we will consider this issue.
A few words about advanced payments. It was mentioned that we are currently considering giving the Ministry of Defence the right to make full pre-payments under certain conditions. This possibility is being considered. I would like to point out that this option can only be made available to our main suppliers – large, sustainable enterprises. We all understand – we are all adults in this room – what a full pre-payment means. You can never spend the full sum at once, can you? Funding is spent gradually. This means that if a company receives a 100% pre-payment, it will put it into its bank account and spend it for other purposes. We realise that, and we are ready to do this in order to support certain enterprises, but only under particular conditions that guarantee that the order will be fulfilled. I have instructed the Ministry of Finance and the Ministry of Defence to draft a corresponding government resolution.
Land tax exemptions… We will need to think about it. You do understand that the tax… Enterprises own large plots of land, including in the downtown areas of major cities. And it places a significant burden on these enterprises. We are slowly pushing the tax up to force these enterprises to relinquish excess land. However, I understand clearly – I visit various facilities on a daily basis – that often it’s the engineering infrastructure that prevents an enterprise from leaving; you cannot cut off the infrastructure and sell the land. We will look into this once again. We need a proper incentive to make enterprises sell excess land. This may help cities address housing construction issues. That's what it’s all about. However, I repeat that we are considering this.
So, that's about all. Thank you very much.