Transcript of the beginning of the meeting:

Vladimir Putin: Good afternoon,

Mr Sechin, you were in Beijing. Tell us about your trip. And there is some good news from Bulgaria. Put us in the picture.

Igor Sechin: In accordance with the understanding between the Russian President and the Chinese President and with your instructions, I was on a working trip to China on July 26-27. I met with Chinese Premier We Jiabao and conveyed your message. The Chinese partners look forward to meeting you to discuss the key topics of trade and economic cooperation and the preparation of the 13th meeting of heads of government in Moscow in October this year.

During the negotiations with my opposite number, Deputy Premier Wang Qishan, we discussed the basic aspects of the mechanism of energy dialogue. We agreed that the new instrument would develop into a concept of a mechanism of regular meetings between the heads of government. The co-chairs of the energy dialogue will each have two deputies. On our part they will be Sergei Kiriyenko and Sergei Shmatko, and on the Chinese side, the chairman of the Reform Development Committee, Zhang Ping, and the head of the State Energy Committee. The working secretariats will be located at the Russian Energy Ministry and the State Energy Authority of China.

We have also discussed with Vice Premier Wang Qishan the key issues of cooperation in the fields of oil, gas, electricity and nuclear power.

Work to promote individual projects continued in meetings with the CEOs of the Chinese National Oil Corporation, the Sinopec petrochemical company, and the Chinese Nuclear Industry Corporation. In this work we assumed that the parties should comply with all the agreements reached at the top level. Vladimir Milovidov, the head of the Federal Financial Markets Service, who was a member of the delegation, conducted additional talks with the Central Bank of China and his opposite number to expand the rouble and yuan zones in the mutual payments in trade between our countries. They agreed to step up work in this area to ensure an early signing of the necessary documents.

The next round of the energy dialogue is to be held in Moscow ahead of your consultations with the PRC Prime Minister.

Vladimir Putin: When is the meeting scheduled for?

Igor Sechin: Around the end of October next year.

As you said, there is some good news from Bulgaria. On July 25 the Bulgarian Parliament voted overwhelmingly - by 140 votes against 42 with 2 abstentions - to ratify the agreement on cooperation in building the Southern Stream Gas Pipeline signed in Sofia on January 18.

Vladimir Putin: Let us give a round of applause to our Bulgarian colleagues.

Igor Sechin: I can report to you today that in accordance with your instructions issued at the meeting on the power industry on June 18, the working bodies of the Council of Electricity Markets were elected. D. Ponomarev has been appointed chairman of the executive body. S. Beloborodov has been appointed as chairman of the supervisory board.

Vladimir Putin: Very well. We should see to it that the Market Council starts working and performing its functions. Considering the need to prepare for the winter, that mechanism must be effective. We will talk about preparations for the winter later.

In the meantime, Mr Shuvalov, tell us about your trip to Krasnodar and what happened there. It is a very important issue: the interaction between agricultural producers, the processors and the major retail networks. You have the floor.

Igor Shuvalov: On your instructions, Viktor Zubkov and I conducted a meeting in Krasnodar on July 25. Also taking part in the meeting were the Minister of Industry and Trade and the Minister of Economic Development. It was the first time we worked in such a format. We invited the associations and individual agricultural producers, processors of raw materials and representatives of major distribution networks. We discussed the problems faced by food producers in getting their products to consumers through the trade networks. It was a very tough and very frank discussion. Many of the terms on which the trade networks work with the producers were put into question. In other words, the terms are imposed on food producers. They are contained in the contracts.

Vladimir Putin: The terms are imposed by the trade networks?

Igor Shuvalov: Yes. And when these contracts are signed the suppliers typically have no way of changing the contract terms. The representatives of distribution networks have themselves agreed that such terms limit competition and that they are discriminatory. They have undertaken to promptly start work to have these contract terms changed as quickly as possible.

At the same time they explained the nature of such terms and how they came about and the problems that they face in the market. We have proposed - and they agreed - that the representatives of voluntary associations of agricultural producers, the processors of raw materials and the trade networks would sit down at the negotiating table and work out a voluntary code of civilised behaviour and fair rules of trade. Such rules and codes exist in other countries. The code will be put to the general public and the Government in the next few months.

At the same time, we have agreed that this is not enough. The draft federal law on trade needs to be changed and we should propose to the Federal Assembly to pass a special act setting forth the main civilised rules of behaviour in that market.

We assume that the rules contained in the draft as it stands today restrict the development of distribution networks, which would ultimately have a still more harmful effect on the development of the competitive environment in the country, so we have agreed with Viktor Khristenko and other colleagues that we will rework the draft in a way that stimulates the development of trade networks. At present we have half the trading floor space of Europe and about 10 times less than the US, so we should develop trade networks. Therefore the rules we create should contribute to their development, but on the other hand, they should not humiliate the agricultural producers. So we will introduce them in Parliament. We ask to be given until December 1.

Vladimir Putin: Very well, it is a very important issue. I would like to ask Viktor Zubkov to pay special attention to it. We understand very well that market monopolies and some other factors, for example, transfer pricing, all these are domestic factors that raise the prices for various goods, including staple goods.

Just recently I conducted a meeting on the development of the metallurgical industry. It has its share of problems too. I said at the conference that one company was selling its products abroad at a price several times lower than domestic prices. They brought me information today. By several times is an understatement. They sell at 4,100 roubles domestically and at 1,100 roubles abroad to their own offshore companies, located in Switzerland in this case. In other words, four times cheaper. And then they sell at world prices, at $323. That is not the way. That is outrageous. It reduces the taxable base inside the country and represents tax dodging. The budget misses revenues. It creates a deficit in the domestic market and sends up prices for metallurgical products, which in turn affect prices all along the chain, not only prices for metal goods.

Regarding food products. In addition to the unfavourable situation in the external markets as regards raw materials and food, we have yet to put things in order inside our own country.

We have long been arguing the need to pass a law on transfer pricing. Mr Kudrin, please tell us what is happening there.

Alexei Kudrin: You have given instructions to prepare amendments to the Tax Code connected with transfer pricing. Amendments that would bring under control the prices in transactions between affiliated persons, amendments that would make these transactions taxable in the same way as transactions at market prices. This is to prevent prices from being understated in such transactions between mutually affiliated persons, as a rule within one and the same company, a holding or a subsidiary company.

First of all, such deals with subsidiary companies are usually made outside the customs territory of the Russian Federation. It makes it easy to conceal the real price at which these goods are sold. The current legislation has an article that mandates control and says that the prices must not differ from market prices by more than 20%. But the control mechanisms are very vaguely described in the article and are hardly ever used in day-to-day court practice.

As part of preparing these amendments we have a chance to submit a new draft law which takes into account present-day experience, including international experience of monitoring such deals for the purpose of taxation. Let me note that this draft law does not limit such companies' freedom of price formation, but prescribes that they pay taxes on the market price.

During a meeting chaired by First Deputy Prime Minister Igor Shuvalov we agreed the principle of such a draft law. We are ready to submit it to the Government by September 15 and thereafter to the State Duma.

Vladimir Putin: I would like to make the following comment: first, there should be no rush. Work must proceed at an even pace in the framework of the activities that we have planned. Second, the Government must be absolutely neutral with regard to all the market participants and avoid any preferences. The rules of the game must be clear and transparent for everyone. The Government's role is to work out and protect these rules while securing its own interests.

Ms Nabiullina, what is happening in our market?

Elvira Nabiullina: We will submit to the Government the draft concept of creating international financial centres in Russia this week, before August 1. Considering the goals and tasks we set until 2020, we need a powerful financial centre. Creating an international financial centre is a priority that will increase the capitalisation of the economy and give our companies broader access to financial resources.

The concept is in the process of development. It envisages work in many areas. First, the development of the financial market proper. It is important that the rules be transparent, as you have said, and that the rules of the game be understandable. We need to expand the range of financial instruments to make them attractive for domestic and foreign investors. We need to develop the infrastructure of the financial market and of taxation.

Speaking about the creation of an international financial centre, in addition to the efforts to develop that market, several other factors are essential, including overall macroeconomic stability. All the financial instruments - the curbing of inflation, the stability of the banking system, the development of the transport and social infrastructure - all that is important for creating a major financial centre in the country. Educated personnel are also essential. The concept will be submitted this week. If it is approved, we are already preparing a schedule of actions to create the centre. All this will enable us to develop our own powerful financial market in Russia and to increase capitalisation.

Vladimir Putin: You surely know the opinion of the experts. If we are to have at least a regional financial market here we should develop trade in export goods for roubles. Does the concept contain that provision?

Elvira Nabiullina: Exchanges are being created, and of course we need to expand the sphere in which roubles are used to pay for our goods. This work is underway. It is part of the plan to create international financial centres. That work is important in its own right.

Vladimir Putin: We should talk with the main exporters so that they introduce such settlements in their practice.

Elvira Nabiullina: We will look into that and work out proposals.

Vladimir Putin: Very well.

Mr Zubkov, tell us about the grain market.

Viktor Zubkov: About harvesting. On the eve of the large meeting that we conducted in Krasnodar and about which Igor Sechin has spoken, we discussed not only harvesting, but the development of the grain market in Russia. In addition to the ministries and agencies concerned the unions and associations of producers from Russian regions also took part in the meeting.

This year we see a positive trend not only in terms of the gross grain harvest, but in other areas. The grain harvest this year looks set to top 85 million tons, which is much higher than last year. And, as the meeting noted, harvests of all crops are growing. It is especially important that the spring increase of area under maize by half a million hectares will enable us to grow 2.5 million tonnes of that valuable product, which is vital for the production of animal feeds. Previously, we had a shortage of maize.

We discussed the balance of supply and demand for grain both at the federal and the regional level. We determined the volumes of the grain market for food purposes, for the production of combined fodders for livestock and poultry breeding, for seed breeding and for export.

The Ministry of Agriculture has been instructed to start creating a food grain intervention stock in mid-August, at least 5 million tonnes of food grain and at least 3 million tonnes of fodder grain. It was also instructed to apply government measures of custom tariff regulation of grain export. All this will enable us to stabilise the prices of flour for the production of bread and to some extent prices for livestock and poultry products.

On a number of problems raised at the meeting corresponding instructions have been given and their fulfilment is being monitored.

Vladimir Putin: What about funds to buy grain for possible interventions?

Viktor Zubkov: All the funds are available.

Vladimir Putin: Very well. Mr Kozak, how are the preparations for the winter going?

Dmitry Kozak: Preparations for winter are into the second week. Work is proceeding in accordance with the instructions given at the meeting of the Government Presidium. Above all, we are working with the regions that depend heavily on energy prices. We have agreed that they will submit proposals, approved by the Finance Ministry, by August 10. That task has been set to prepare all the materials and documents by August 6. We should avoid unnecessary expenditure and on the other hand prepare for the approaching autumn.

We should also take into account the topic that we omitted last time. The Housing and Utilities Reform Fund is contributing substantially to the preparation for winter. As of today, 50 Russian regions have received subsidies for capital repair of dilapidated and unsafe housing. The number of regions is 50, considering that we began implementing the law only late last year when practically all the regional budgets had been approved. This year they should be revised with an eye to implementing the reform programme.

Vladimir Putin: Have they done it?

Dmitry Kozak: Yes, they have. 50 regions have developed programmes for reforming the housing and utilities, submitted these programmes and defended them at the Fund. The Fund is now monitoring the implementation of these programmes. The regions have been allocated 27.4 billion roubles out of the federal budget, and if one includes co-financing, 44.3 billion roubles will be available for capital repair.

This year 24,000 houses are to be repaired. The repair of more than 7,000 houses is already underway. Two hundred and sixty two unsafe houses have been demolished. Basically, the programme is being implemented in full. This week we will sign agreements with another nine regions which will receive additional funding.

I would like to say that at present all the regions are involved. Initially there was a delay with the Far East, but now it is fairly active in implementing the programme. The same goes for the Northwestern Federal District. We held a conference there and the governors have actively joined this work. This is important. The repair of every house forms part of the preparation for winter. Replacement of worn-out equipment, the introduction of energy-saving measures and so on.

Vladimir Putin: Very well, thank you. Mr Zhukov, will you be conducting a video conference on national projects?

Alexander Zhukov: Yes, we are planning to hold several video conferences with the regions shortly to discuss the implementation of national projects. First, we will discuss progress of the national projects in various regions in the first half of the year. Some regions are doing better than others. Most importantly, of course, we will discuss the tasks facing the regions in the second half of the year. We will also discuss the implementation of the national projects over the next several years. Work is already underway on the health and education programmes.

Vladimir Putin: Will the tripartite commission hold a meeting on new forms of remuneration this week?

Alexander Zhukov: Yes. The meeting of the Russian tripartite commission with the trade unions and employers will be held tomorrow. We will discuss a whole range of important issues, including the transition to a new remuneration system.

As of December this year all the federal institutions are to introduce new remuneration systems that will enable the CEOs of these institutions to be much more flexible in matching remuneration to performance. The wage fund will increase by 30%, which will make it possible to provide additional incentives for employees. We will discuss all these matters with the trade unions and employers tomorrow, listen to their wishes and remarks on this matter and take them into account in preparing the transition.

Vladimir Putin: Adequate resources must be allocated for all these activities. That should be done in a timely manner.

All right. Let us pass on to our agenda. We have several items to discuss. One of the key items is the production of strategic materials for weapons, military and specialised hardware.

We are talking about the production of composite materials, alloy additives, lubricants and special materials. They are indispensable in creating new-generation equipment, in making it competitive, effective and reliable.

That key sector of the defence industry was at one time lagging behind. Some technologies were lost and production capacity was reduced. Unfortunately, we also lost some of the qualified personnel. As a result, we became dependent on foreign suppliers to some extent. And that in such an important and sensitive sphere as the defence industry.

So it is necessary to attend seriously to the retrofitting of our enterprises and to research and development.

The proposed range of measures will make it possible to support and modernise that key hi-tech sector of the Russian economy and make it independent of foreign supplies in fulfilling defence orders, strengthen the basis for the modernisation of the army and the navy.

Several thousand new jobs will be created and working conditions will be improved. We expect 10,000 new jobs to be created in the sector by 2015.

Leading defence enterprises are being brought in to fulfil these programmes. I visited one of them today. It is the Avangard plant, which produces air defence weapons. Their production is unimaginable without the most modern materials. We spoke about it with the enterprise management today. Only 5-7 years ago there were puddles on the factory floor. It didn't even have a roof. Production was winding down and workers were sacked. Today the enterprise is resurgent, but, like other enterprises, it needs constant attention and support on our part.

New technologies will of course be widely used in the civilian sphere. Besides, additional demand will be created for fundamental and applied research.

This will be the first issue that we will discuss today.

The discussion today will also touch upon the development of the resource potential of the fisheries industry until 2013.

A lot of problems have piled up there. Honestly, over recent years we have constantly discussed this problem. The work to reproduce marine biological resources falls short of requirements. The technical base of fishing and fish processing enterprises is very outdated. The fish terminals in our seaports are uncompetitive.

A lack of proper legal regulation has given a free hand to all sorts of criminal and semi-criminal structures in this sector. Our fish resources were plundered in a most barbaric fashion.

Imports of fish products have soared. The share of imported products in our domestic market is about 38% and in the big cities with a population of over a million that share is as high as 60%.

Russian companies mainly export raw materials with low added value. The imported goods are much more expensive, often goods made from our own raw materials.

To turn the situation around, some steps have already been taken. The process of renewing the legal framework for the fisheries complex has been launched. I hope it will create the basis for modern, civilised economic activities in this sphere.
But legal measures alone are obviously not enough. It is necessary to stimulate investment and innovative activities in the sector, to support some vital research and nature conservation projects, including the revival of the scientific exploration fleet.

Particular attention should be paid to the reproduction of valuable species of fish, above all sturgeon and salmon. This cannot be done without direct federal participation, including financial participation.

The total volume of financing allocated for the programme over five years should add up to a tidy sum of 62 billion roubles. Out of that sum the federal budget will put up 32.8 billion roubles, more than 52% of the total amount of funding.

We have plans to build and reconstruct 58 plants to restore the populations of sturgeon and other fishes, to build 27 research vessels, 8 vessels for the reproduction of bio-resources, 2 patrol vessels and 208 smaller craft.

As a result of this programme the tax revenues of the budgets of various levels will increase by about 16 billion roubles in 2014.

The implementation of the programme is expected to almost treble the capacity of the "fish" terminals in our seaports by 2013. The share of domestic products in the internal market should reach at least 80%.

The targets set under the federal targeted programme confirm the seriousness of the tasks that face the industry. To solve these tasks all the agencies concerned must show a responsible and coordinated attitude. This applies especially to Rosrybolovstvo. Finally, we are to prepare for submission to the President and subsequent ratification a package of agreements aimed at forming the Customs Union of Russia, Belarus and Kazakhstan. The introduction of these agreements will mark an important step towards deepening integration within EurAsEC.

Let us get down to business.