Vladimir Putin's opening remarks:
Vladimir Putin: Good afternoon, ladies and gentlemen, esteemed colleagues!
I am happy to welcome you at this meeting of the Foreign Investment Advisory Council. I would like to note that today we are celebrating an anniversary, for this is the 25th meeting of the council. I would like to thank all of you for your collaborative work. Let me say a few words about our work and about its general outcomes.
For 17 years, the Foreign Investment Advisory Council has undoubtedly established itself as an effective and authoritative partnership between the government of the Russian Federation and our esteemed foreign colleagues and the foreign business community. The council has earned a reputation not only for collecting information about issues pertinent to the Russian economy, which is important by itself; it also plays a direct and active role in forming the business climate in the Russian Federation, conducts investigations and analysis, and formulates clear recommendations – first and foremost, recommendations to the Russian government agencies at various levels.
In particular, I would like to mention the participation of the council in creating a new customs regulation that entered into force in 2011. It allowed us to progress more quickly in the integration sphere in the so-called post-Soviet space by using the experience of our Western partners and relying on international standards, and to create the conditions necessary for the effective work of the Customs Union of Russia, Belarus and Kazakhstan in global markets.
As I have mentioned to many of you in private conversations, within the Customs Union itself, the customs zone of the three nations will be based on the norms and principles of the World Trade Organisation and the Organisation for Economic Co-operation and Development. We are counting on – and I am absolutely certain it will happen – the creation of this integrated community to allow you to operate with greater ease in our common market of Belarus, Kazakhstan and Russia. This market and the rules of engagement are becoming more transparent, coherent and civilised. I am certain that we all will benefit from it.
We are preparing to take the next step, to open a Common Economic Space between the three nations in 2012. It will lead to a higher degree of integration, allowing us to coordinate our currency policies, among other things. It will unify the rules of the three states and simplify these procedures, making them less bureaucratic.
I also consider the contribution of council members to the drafting of the law on transfer pricing to be of great importance. Provisions of this law have been drafted in accordance with the regulations followed by the member-states of the Organisation for Economic Co-operation and Development. Recent decisions have resulted in the simplification of the rules on foreign businesses working in strategically important industries. We have talked about it on multiple occasions, and at the council meetings as well. For example, now a foreign investor will be able to purchase 25% of a subsoil resource enterprise without suffering through not very burdensome but still additional bureaucratic procedures. Presently they are limited to 10% and at one of the meetings, our colleagues broached the question about raising the bar. We were guided in this by your recommendations.
Moreover, if the percentage of foreign investment in the nominal capital of the subsoil resource enterprises does not increase, additional stock can be issued without the approval of the appropriate government commission. Necessary amendments are presently under consideration in the Russian parliament and I have no doubt that they will pass, because of our preliminary work with lawmakers. In general, members of parliament, State Duma deputies, support these amendments.
I would like to highlight that many foreign investors regard our council as a kind of gauge of the Russian business climate, and the opinion of the council members about working in Russia is often the deciding factor in the decisions of our partners on whether to launch a new business or invest in a particular project in the Russian Federation.
I would like to add that Advisory Council members themselves are actively engaged. The funds that have been and are being invested in the Russian economy by your companies have exceeded $100 billion. What is especially important is that the majority of you (many of you expressed this desire during our private meetings as well as at other venues) plan to increase your investments in the Russian market. To demonstrate some examples of good partnership, I would like to name a few of our partners and colleagues. For example, Siemens is one of our oldest partners and has worked in the Russian market for over 100 years. This company has now launched a new project to create a rail hub near Yekaterinburg, in the Urals region. Another example is Nestle; next year it will open its 13th facility in Russia in the Vladimir Region.
Among those who came to Russia relatively recently is one of the world’s leaders in the manufacturing of construction materials, our French partner Lafarge. Having started with the acquisition of plants, today it plans to participate in the construction of an industrial park in the Kaluga Region. I wish you success. We will do everything to help you reach your goals.
These and many other examples are the best proof that it has become promising and worthwhile to work in Russia. However, innovative and industrious investors have always seen it, and they promoted their projects even despite the complicated global situation of the last couple of years.
Remarkably, foreign direct investment in Russia from 2009 till the third quarter of 2011 exceeded $100 billion, and in the first nine months of this year we saw direct investment surge by almost 20%. We are perfectly aware of so-called capital outflow. But here we have people who do not need explanations: we all understand perfectly well what the reasons are for this outflow. We are all perfectly aware of the risks of the global economy, and I realise that when the global economy has a downturn and major markets devalue, countries like Russia, which happen to be emerging markets – especially those where the economy is not sufficiently diversified – find themselves in the risk zone. And if a country is in the risk zone, potential investors start thinking about moving somewhere less intimidating. Moreover, even though big economies are the source of threat, it is still kind of easier to wait it out.
We are perfectly aware of this, we know all this, and this is why we are meeting with you – to discuss all the nuances and complications of the process. But there is only one way out – and we understand this, too – we need to develop our own market, including the internal needs of our own market. It cannot be done overnight, but since we realise this, we will take it step-by-step. Nonetheless, information on the growth of direct investment shows that the attractiveness of the Russian market continues to grow and fundamental factors that significantly outweigh the influence of temporary fluctuations continue to rise in Russia.
We did not just emerge from the crisis with minimum losses, but were also among the first to see our economy to recover. Today, Russia is prepared for various scenarios of global economic development. We have accumulated serious experience and have a margin of safety both in the manufacturing and financial sectors. Let’s take a look at the government’s reserves at the end of 2008. We have two reserve funds, one is the Government’s Reserve Fund, which is used to make up for any current budget deficit, and the other is the National Wealth Fund, which is used to resolve problems related to certain deficits in the Pension Fund. So, at the end of 2008, these reserves were, of course, bigger than they are today. But, today these reserves funds are not dropping, but rather growing, and we allocate additional budget revenues there in order to increase the safety cushion. Secondly, the very fact of going through the complications of the crisis – both in the global and Russian economies – over the past two years has allowed us to create certain tools and gain experience of fighting difficulties we all encounter. And even though a certain drop in reserve funds is, of course, a disadvantage, the gained experience and tested tools for fighting a crisis are definitely an advantage. And I believe that if some turbulent processes get too strong – God forbid! – Russia will be ready to take these difficulties head on.
We expect the country’s GDP to grow by some 4% or even a little more by year’s end. So the Russian economy will recover from the decline caused by the crisis and reach the pre-crisis level already in this quarter.
Industrial production grew even faster, up 5.4% in the first eight months of 2011, with manufacturing growing at a priority rate of 7.6%. This, by the way, shows that the structure of the economy is gradually changing in the direction we need it to. We intend to continue actively supporting these qualitative processes, as it is a key item on our economic agenda.
I would also like to point to a significant growth in agriculture: last year, we saw a decline, which was mainly caused (as we all know) by droughts the past two years; last year’s decline was quite significant (about 10%, if I remember correctly). This year, however, we expect a growth of at least 14% in the agricultural sector.
Consumer demand is growing: it increased by 5.8% in the first eight months of the year. The surplus of our trade balance, which is important for any country, is growing: in the first three quarters of 2011, it totalled $147.7 billion, which is a very good result for Russia. Positive developments are also seen on the labour market. We all know that this is one of the key parameters for assessing the overall state of an economy. At the beginning of 2011, the number of unemployed was 5.8 million people, but by now it has dropped by over a million, to 4.6 million people. Moreover, we have not just reached the pre-crisis level of employment, but have even improved these results: at present, the number of the employed in the economy is higher than at the end of 2008, before the crisis; and the number of vacancies grew by over 400,000 as of September 2011.
We believe that a crucial task is ensuring macroeconomic stability, so we intend to consistently pursue a responsible budget and financial policy. We aren’t planning any changes in this regard. This year, the federal budget will not be in deficit, this we can say with certainty. To achieve our goals for social and economic development in the next three years, I’d like to emphasise that we expect to have a minor deficit, but it will only be possible if our very conservative estimates of oil and energy prices hold true. We base our budget on conservative estimates of oil prices. According to our preliminary estimates, we chose a figure for budget planning that is below the current price, but if prices grow a little, we won’t have a deficit next year. Let me repeat: we are ready for it and it will be minor, and we expect to have a deficit-free budget in two or three years even with these conservative estimates on the price of oil.
Inflation is slowing down, and this is very important. One of our priority tasks has been and still is fighting inflation. Last year, the inflation rate appeared to be fairly high, at 8.8%, but it was the lowest rate in Russia’s modern history. We expect it to be even lower this year. At present, the accrued inflation rate in Russia is 4.7%. However, budget spending traditionally increases towards yearend (at the end of October, in November and throughout most of December), and inflation will, of course, grow, but we project that it will not exceed 7%. This will be a new all-time low for modern Russia.
As to the issue of sovereign debt, pursuing a cautious, well-considered policy, we maintain it at 10%, and it consists mainly of domestic borrowing. Out of this 10%, foreign borrowing accounts only for about 3%. Let me recall that in a number of developed economies this figure exceeds 80%-90% and in some countries even 100% or 200%.
Colleagues, ahead of any big political events, the parliamentary and presidential elections in particular, investors are obviously interested in how the economy will be developing and what the economic policy will be. I have already said a little about it, but I want to once again assure all our partners: we are not going to change our economic points of reference. And we fully understand how important stability and predictability are in this respect. All planned projects to modernise the economy and to improve the efficiency of government institutions (which is another priority in our work) will be gradually carried out.
We plan to support both domestic and foreign investors, to improve the business environment, to seriously expand investment activity, and especially continue investing in the Russian economy’s non-commodity sector, the social sphere and infrastructure.
For instance, the government has already submitted amendments making it possible to implement long-term infrastructure projects on the basis of the so-called Service Lifecycle Management contracts to the State Duma. First of all, it is our intention to use this instrument during the construction of high-speed railways and highways. We will continue to exert every effort in order to expand this country’s human resources.
Over the next three years, we will spend an additional 600 billion roubles (about $20 billion) on the modernisation of healthcare and education. I would like to stress that these are additional expenses to supplement already planned and absolutely essential expenses.
Of course, even though this is the most substantial investment in these spheres throughout the entire history of modern Russia, it does not rule out private investment in such projects. On the contrary, we create and will continue to create additional investment incentives here. Starting this year, companies operating in the healthcare and education sectors will be exempt from profit tax.
Esteemed colleagues, I would like to speak about a related issue. Of course, we often hear critical remarks inside Russia and from our foreign colleagues, especially on the eve of major political events. We are being criticised for our excessive social spending. We realise how much we spend on social projects, what objectives we must accomplish in the near future, and how many resources we divert for this purpose. But we could use such resources for tackling purely economic problems, including support for small businesses and the business community in general, tax reductions, etc.
The economy is, of course, a science bordering on the verge of art. And we must have a very precise and clear idea of domestic socio-economic processes. The population, the Russian people, should feel that something in the country is changing and changing for the better in the context of their life, their everyday budget, their incomes, their health and the education of their children. This is the only way to gain people’s support and earn their trust.
If this doesn’t happen, then we might face a situation now shaping up in some industrial countries, that is, when hundreds of thousands of people, rather a group of marginal characters, take to the streets and demand the fulfilment of commitments, an objective which their national governments are unable to accomplish. In that case, such socio-political issues acquire a truly formidable scale, they begin to engulf the economy and start inflicting real economic losses.
Consequently, we must make timely decisions in the social sphere. I proceed from the premise that we are doing this cautiously but consistently. It is our intention to continue acting in this manner. Consequently, we have always said, and I would like to repeat once again that we will certainly fulfil all our social commitments to Russian citizens. I would like to stress that, in my opinion, this is a factor for economic stability, and that socio-political stability implies economic stability. I repeat once again that this is the only way to win the people’s trust and to implement well thought-out economic, budgetary and financial policies on the basis of such trust. This is how we plan to act.
Surely, we will have to considerably expedite the processes of Russian economic diversification and renewal. In the next ten years, we hope to increase the share of national innovation product from the current 12% to 25-35% of gross output and considerably increase labour productivity.
First of all, we intend to accomplish this by means of an active industrial and production policy. We will modernise available industrial clusters and create new ones. At the same time, the creation of complete-cycle enterprises, the siting of high-tech enterprises in Russia, and the creation of modern jobs will become a key principle of our cooperation with foreign investors. We proceed from the premise that up to 25 million modern jobs must be created nationwide in the next few years. This is a substantial amount for Russia. Although this doesn’t mean that all jobs must be absolutely new, all available jobs must be upgraded to a considerable degree.
With this in mind, we expect to see serious results from expanded mechanisms of public-private partnership, primarily at the regional level. At present, over 50% of Russian regions, 46 regions, to be exact, have passed their respective legislation as regards this form of cooperation. This will allow them to attract investment in line with concession principles and in other spheres of activity. Moreover, we have established the institution of investment commissioners. Instead of merely guiding business persons through bureaucratic corridors, they must expose all problems and drawbacks, and initiate required legislative changes.
In conclusion, I would like to note once again that active involvement of our foreign partners and friends in Russian economic modernisation is a two-way street. Notably, Russia gains access to advanced technologies, while foreign companies open up a large and high-profit market for themselves.
Certainly, much still has to be done in order to facilitate this mutually profitable exchange. By the way, this concerns Russia, and not only Russia but our partners in neighbouring countries and more remote states in Asia, Europe, and North America. Of course, we in Russia are ready for this. We expect active involvement from our foreign partners and skilled workers in the subsequent removal of various barriers at the interstate and governmental level. Specifically, an entire range of issues regarding tax, customs, and administrative regulation need to be resolved. I would like to repeat that this concerns Russia and the countries of our partners, and we are counting on your influence in your home countries. Our friends and colleagues in the governments of the concerned states should be able to address various issues in an open-minded way and to build upon full-fledged, partner-like and equitable relations. We hope that these issues will be prioritised by the Foreign Investment Advisory Council throughout 2012.
Thank you very much for your attention, and now it’s my pleasure to give the floor to Mr Turley (Chairman and CEO of Ernst & Young, co-chairman of the Foreign Investment Advisory Council). Please go ahead.
James Turley (via interpreter): Mr Prime Minister, many thanks for the excellent synopsis of the progress achieved of late.
As you mentioned, this is our 25th meeting today, a milestone. And we are looking into our combined achievements to improve the investment climate in Russia. We have made major progress since our first meeting in 1994 and tangible progress since last year. By the way, we applaud the Russian government for its handling of the economic crisis from 2008 until now. The government’s success in fighting the crisis gained it more trust and support. Today, I would like to speak about a number of initiatives of the Russian government, carried out with the assistance of council members, to create new opportunities for investment for Russian and foreign companies.
Creating the position of authorised representative, which you mentioned earlier, is among the best examples of the government’s initiatives to support direct foreign investment. Foreign investors have already held several meetings and filed 76 applications, of which 54 have been accepted. Most of these applications have to do with administrative barriers, government institutions, customs procedures and regulatory issues. We are grateful to you, Mr Prime Minister, and we would also like to thank Mr Shuvalov for his active support. We hope that the position of ombudsman will help us improve administration in the future.
We appreciate the progress achieved by the government on migration issues. It’s much easier for companies hiring high-skilled specialists to obtain work permits or work visas without having to go through bureaucratic formalities. Over 11,000 work permits have already been issued under the new rules. We believe that amendments to migration law will help attract foreign companies and foreign investors to Russia.
However, there are issues that we still need to address together. For example, the limits on the number of workdays reduce the benefits provided by these new initiatives. There’s a draft law that includes amendments preventing companies from using the secondment agreement, but it’s been approved by the Duma in the first reading, and we believe that this law will limit the companies’ ability to hire leading specialists. We think that this draft law needs to be revised.
There are taxation issues as well. First, the energy sector. We have a number of leading companies in the energy sector that are present here today. The government is revising oil taxation schemes in order to increase exploration and production here. Certainly, Ernst & Young support this initiative of the government regarding these new taxation schemes. We think that this is an excellent example of joint work to improve the investment climate.
The second issue concerns transfer pricing, which becomes effective on January 1, 2012. All major companies will have to analyse and revise their pricing practices with regard to transactions related to monitored transactions. Under this law, the documents should be drafted based on OECD principles. Russia needs specialists with new skill sets. We believe that we should do our best in order to implement transfer pricing. This will help improve the investment climate. Finally, there are new insurance policy rates that also take effect on January 1, 2012 and will include an additional premium in the amount of 10% of salaries over $15,000.
As for the Advisory Council members, we believe that this will be a heavier load on labour expenses and will eventually result in slower rates of hiring. These new rates will force Russian and international companies, especially the ones involved in research activities that hire high-skilled employees, to slow down a little. We believe that this will adversely affect the investment climate in Russia.
Let’s move on to customs. The Customs Union is removing certain trade barriers in the countries that form the Customs Union. Many proposals and comments by our council were taken into consideration when the Customs Code was being established. We believe that this is a very good and healthy initiative. However, we believe that there’s always room for improvement (Paul Bulcke, CEO of Nestle, will talk about this today). As for the regulatory framework, we have achieved substantial progress as well. Experts with our council have analysed and provided recommendations regarding more than 20 draft laws in the regulatory sphere. The Ministry of Economic Development has looked into this issue, and an advisory board on the impact of the regulatory framework has been established at the Ministry of Economic Development, which was an important step forward. This board includes members of our council.
There are two more points that I would like to make. First, obtaining a construction permit is among the most complicated issues for foreign investors and Russian companies. It takes twice as long to build a facility in Russia than in Europe or China. We support government initiatives to simplify construction procedures that are based on the advice of our members and make use of the best international practices and expertise. We will get back to this later during our meeting.
Second, globalisation is spreading all around the world, and the economy is becoming global. Legal institutes and the Russian Civil Code should be changed in order for them to comply with today’s challenges and the business environment. Russian companies are part of the global market, and international companies invest in Russia. Some civil law institutions, as well as legislative and legal entities should be reshaped. We welcome the introduction of amendments to the Civil Code. And we have provided our comments.
Finally, something really, really important. Investors, especially new ones, are looking into various overviews of the investment climate in Russia, including the World Bank Annual Report. In the future, we will work with the Russian government and provide information to the World Bank to be included in this report on how to conduct business in Russia. We assess the investment climate in 183 countries. This report considers legislation and the application of the regulatory framework and government measures to reduce administrative barriers. The World Bank has drafted over 70 recommendations to improve the investment climate in Russia. These recommendations have been considered by our council’s working groups. The most important ones were chosen by the minister of economic development and others in order to implement them and improve the investment climate in Russia. These are very, very important issues.
Mr Prime Minister, our joint work has brought results. These are quite tangible results for the Russian people and foreign investors, and we appreciate the time that you have taken to work and maintain a dialogue with us, a dialogue that is going on between the government and the Advisory Council. On a personal note, we support your candidacy for presidency, but we will miss your leadership as the prime minister on our council. Certainly, we will support your agenda and work with the next prime minster in order to improve the investment climate in Russia. Thank you very much.
Vladimir Putin: You know, you have listed so many important and critical issues that I now have the impression that we are sitting at an extended session of the Russian government. Yes, that’s right, because we discuss these questions during various meetings and sessions. One thing, though… I will offer comments on certain issues, which I believe to be very, very important. However, I have a question. I’m not quite sure what you meant to say when you talked about energy sector taxes and taxation issues. Could you please repeat what you said about the problems or, conversely, things that you welcome?
James Turley: On the contrary, we welcome wholeheartedly the changes that occurred in the tax code and believe that they are beneficial for Russian and international companies that engage in production and development here.
Vladimir Putin: There are certain innovations regarding sulphurous petroleum. They have to do with production in remote Russian regions that lack developed infrastructure, including East Siberia and shelf operations… We have taken a decision to significantly lower the tax burden and create good conditions for starting large-scale projects.
Certainly, there are issues that have taken up much of our time. Admittedly, it wasn’t easy to take such decisions. The 10% increase in insurance premium paid by employees with high salaries was among them. We thought about it for a long time and had many discussions as to whether we need to put an extra burden on enterprises that hire top-notch specialists commanding high salaries. There is such a problem, and we are fully aware of it. Still, we decided to go ahead with it given our budget restrictions – frankly, we need additional sources of budget revenue, which is obvious – and also thinking about social justice. In fact, employees who earn high salaries, or, more precisely, enterprises that hire employees and pay them high salaries, should pay a little more to the budget to cover social needs. Yes, such a tax on high salaries comes as an additional tax, but it’s small and is offset by one of the lowest individual income tax rates in Europe, a flat tax of 13%. There have been many proposals to increase this rate as well. We haven’t increased social charges, either. Overall, we believe that we have taken a balanced decision. Still, we understand the problem, and, personally, I share Mr Turley’s concerns. He is talking about hiring highly skilled employees in high-tech industries where salaries are pretty high, because they hand-pick the specialists that work there. I’m also concerned by this. We will give it a thought. No questions about it.
I was very pleased to hear it when you said that you follow not only developments related to customs, but also how rules are being formulated in the Customs Union. This is really important. It was interesting to hear you provide your assessments. I fully agree that we need to make construction permit procedures less complicated. There are two problems here that I would like to point out to you. We are ready to abide by the best European construction administration practices. There is just one consideration that I would like to share with all of you, because the issue is not about just housing construction but construction in general, including commercial construction. Administratively, we should strive to adhere to the best international practices, and let me assure you that we will do so. However, there is a problem with technical rules. We cannot simply take EU construction rules and apply them at a Russian construction site as they are: we live in different climate conditions, we have different snow loads. Certainly, there’s a need to look into that using expert opinions, including yours.
As for amending the Civil Code, we will be happy to listen to your recommendations. We have always done so, and we intend to continue to do so. We will maintain our cooperation and will also keep on working with the World Bank, with which we have established very good relations. God bless, we don’t need any major loans from the World Bank, but there may be interest for loans on behalf of specific projects related to infrastructure, the development of the financial administration system itself, and so on. However, we have worked and will continue to work with the World Bank as our advisor, as an organisation that we greatly respect and that was very instrumental in upgrading Russia’s economy and implementing the best international standards. Thank you very much.
Please. Mr Paul Bulcke of Nestle, go ahead.
Paul Bulcke (via interpreter): Mr Prime Minister, ladies and gentlemen.
First of all, let me thank you for this meeting on behalf of the group on trade and the consumer sector of the Foreign Investment Advisory Council. All of the members of the council are watching the development and establishment of the Customs Union of Russia, Kazakhstan and Belarus. This is a major factor that has a positive impact on the business environment for mass market goods, and also on the majority of FIAC and other companies working on the territory of the Customs Union.
Tremendous opportunities related to the improvement of inter-market operations are being established. This is an important factor for harmonising legislation to meet international standards and also for improving technical issues. But I think and I hope that these problems will be resolved. We have already taken advantage of changes to the customs regulations – veterinary control, food regulations, and so on. The FIAC participates in the entire process of the Customs Union’s establishment, and we are pleased to note positive changes influencing our everyday work.
The efficiency of chains is increasing, while spending and time are being reduced. We see changes in the healthcare regulations of the Customs Union. The government is working efficiently to reduce administrative barriers in healthcare regulations, to move from pre-market to more efficient market control mechanisms and to create transparent requirements. These measures also meet WTO standards and the Codex Alimentarius. In this context, we would like to urge the government to continue harmonising veterinary standards and control mechanisms.
Another positive development is the reduction of administrative barriers that we are witnessing in the union and their streamlining with WTO standards. In this respect, we would like to call for the quicker adoption of the new federal law on plant quarantine that is presently being considered. The FIAC suggests further simplifying the technical regulations in the Customs Union to make it based on the “one document per product” principle.
I would like to say that this is a significant opportunity to improve all business operations, efficiency and spending in the production chain in Russia and in neighbouring countries. The process' success will depend on whether we are able to resolve certain minor problems, such as the regulation of the new legislation during corresponding transitional periods and also ensuring the conformity of the national legislative base to the Customs Union’s legislation.
Thanks to cooperation with Mr Shuvalov and Ms Nabiullina, we have the chance to ensure a new future for the further exchange of opinions on the Customs Union’s agenda. Transparent legislation, the free movement of goods, common standards, and efficient legislation are necessary criteria for production and social development chains to be efficient. The establishment of the Customs Union between Russia, Belarus and Kazakhstan will speed up economic development. I want to thank you, Mr Putin, for the possibility to say a few words about the Customs Union's development.
Vladimir Putin: Thank you, Mr Bulcke, for your speech. I was very pleased to hear all of it, including the criticism. I was especially glad to hear your last point – the establishment of the Customs Union will speed up economic development. This is the primary thesis of our efforts in this area. This is crucial! This is why we are doing this. Of course, we have to resolve numerous problems and overcome different difficulties on this path. Of course, we will try to introduce the arrangement that you have mentioned, one document per product. This is the right thing to do. Unfortunately, we have to deal with a lot of stereotypes and a lot of rules that have been around for decades, and that we inherited from the Soviet era. It is not always easy to achieve in reality, but we will work to do so. You should have no doubts about this.
As for the changes in regulation and streamlining in the phytosanitary and sanitary standards within the Customs Union, as you said, my colleagues and I will meet in St Petersburg tomorrow and I hope we will adopt new rules on phytosanitary and sanitary control within the Customs Union. We have worked on them together with our experts for a long time. In fact, we will adopt these rules in compliance with WTO norms. This is something that we agreed upon with our colleagues during the WTO accession talks. Let me repeat – I hope that this decision will finally be adopted tomorrow.
Please, Mr Bruno Lafont, president of Lafarge Group. You are welcome.
Bruno Lafont (via interpreter): Thank you, Mr Prime Minister.
Members of government, colleagues. First of all, I would like to say that the council members appreciate the efforts on the part of the government to simplify construction procedures. This is an important step towards improvement of the investment climate in Russia. Many of these measures will require more than a year to be carried out fully. But I would like to say that consultations are being held on such topics as the reduction of the number of permits in the legislation for special technical conditions and for hazardous objects; working out new technical regulations; simplifying regional city planning and standards; and simplifying the land legislation and legislation on land use for industrial construction. It is necessary to improve transparency on such issues as power generation, water, roads and so on.
We need to discuss construction of “green” enterprises, and we need to reduce the high cost of industrial investment. We will make this the focus of the Council for next year. There have been changes to immigration legislation that we consider to be positive: a majority of large construction projects now employ a substantial number of foreign workers. It should be noted that 2011 has become a watershed year for the construction sector. But it's clear that there is still much to be done.
As for issue of permits, we understand that the expert assessment of environmental impact should become a priority next year. Today, carrying out an expert assessment is a very complicated event that slows down a project’s implementation, and this requires a detailed solution. We would like all criteria to be verified upon the completion of construction, as it is done in Europe. We need a permit that would improve energy efficiency and reduce impact on the environment. Environmental evaluation should be based on actual impact, and not on the project documentation.
We suggest focusing on bringing Russia’s technical regulations of the construction sector more in line with those of the EU. We are willing to share our international experience. We would also like to suggest considering the possibility of adopting European codes in order to improve Russia’s legislation on energy efficiency and sustainability. Adopting European codes, which are flexible in terms of geography since geographic conditions vary in Europe as well, taking into account the intricacies of the climate, would ensure the better integration of city planning elements and the safety of all buildings and facilities. We believe that a simplification of these processes, and even a reform of land categories, will help reduce timeframes for construction. We also believe it is necessary to take measures concerning construction-related risk. We welcome the decision to carry on with the reform of the regulatory system and in particular, to issue permits at the appropriate stage of construction, and also to issue licences related to construction technologies.
And, finally, I would like to acknowledge that the strategy for the development of the construction sector, which was adopted this year by the Russian government, contains very serious guiding principles outlining a path for Russia to follow that leads it through the best principles from global practice. We hope for processes in the construction sector to improve further, ensuring jobs in civil construction and other construction areas, and the reliability of construction specialists. And, finally, we hope that innovative technology will be used and developed in Russia.
I would like to thank our partners in our working group, PepsiCo and Unilever, for their expert knowledge and their profound understanding of what is needed in order to build large-scale facilities. We thank our partners in various government agencies for maintaining regular contact with us.
Vladimir Putin: Thank you. I was happy to hear you describe 2011 as a watershed year in the development of the construction sector and of procedures related to that sector. I must say that we do indeed pay a good deal of attention to it. And we allocated significant resources in support of the construction sector during the crisis, especially in 2010. We have managed to preserve some of this additional support this year. I believe it reached around 100 billion roubles in total. But this has helped to preserve many companies, to preserve the environment and to avoid serious disruptions in the functioning of the sector. Despite a minor decline, work is now building up.
Of course, we would like to see debureaucratisation continue, to eliminate all sources of corrupt practices. We will most definitely continue moving in this direction. In some areas, we may fully adopt the norms and regulations used by our colleagues and friends in the European Union. In other areas, to do this mechanically would be impossible. But let me repeat: we understand that as a rule, or at least quite often, these norms and rules were meticulously developed in EU countries, and some of them could be introduced into this country, into practical activities in Russia, following preliminary analysis, of course. We have expert groups working on this analysis, and we will try to complete it as soon as possible. A corresponding draft law is ready. We need to consider it once again and to elaborate on it, and then we will submit it to the State Duma. We will move forward in this direction, and towards the further debureacratisation of decisions concerning allocation of land plots. This is also a very important component of the construction sector’s activities.
And of course, there is environmental evaluation. We realise the importance of this tool, and the ways it can be wielded by unscrupulous market players, including those within administrative structures. So we will work towards improving these mechanisms. I should tell you that the State Duma is currently considering a law on applying the world’s best environmental practices not only to the construction sector, but also to other industrial sectors. While working on this law, we drew from the best global practices and cooperated with international experts. I hope very much that it will be adopted by the State Duma in the near future and will be implemented in practice.
Please, Tye Burt.
Tye Burt (President and CEO of Kinross Gold Corporation, via interpreter): Ladies and gentlemen. Since last year, we have been seeing indications of positive change in the regulations on investment in strategic commodities, such as mineral resources. The proportion of foreign investment has increased to 25%, up from 10%, which is an encouraging trend.
This year, Kinross Gold has been granted permission from the government to own 100% of a strategic deposit’s stock. This is an important landmark in our history as a foreign investor operating in Russia. Unfortunately, there have been few other major investments in this sector, as compared with other countries. Foreign investors tend to believe – wrongly, in our view – that Russia is not interested in bringing their money into the industry.
At our previous meeting, Kinross revealed its vision on the development of this sector and unveiled some of its related proposals. Now we are able to share with you the preliminary results of our survey of foreign investment in the development of deposits and the production [of mineral resources] in this country.
I’d like to show our findings to you, Mr Putin, and to the Council’s members. These findings are cause for serious concern. With global demand for mineral resources on the rise, Russia’s abundant mineral wealth offers a huge development potential. But you are not capitalising on this potential, unfortunately, because investors continue to operate under the belief that there are too many restrictions on foreign investment in Russia.
In our survey, we examine the causes of the lack of investment [in Russia], contrasting the situation here with countries such as Canada, Australia and Chile, where investment in mining sectors is growing. We also analyse Russia’s current regulatory framework and propose amendments in order to encourage new investment.
Fortunately, the Russian government has already launched some reforms aimed at improving foreign investment regulations in these sectors. Hopefully, the ideas expressed in our report will offer you some food for thought and will stimulate further improvement.
We believe that Russia should be more proactive on this front. We are not trying to criticise the [Russian] government. We would simply like to encourage it to attract more investment in order for Russia to gain access to a larger share of global investment. Broader outside investment will make it possible for the country to create an active capital market. In this way, you will be able to attract new technology, create new jobs, and bring in investment in other sectors, as well as stepping up the production of mineral resources.
We remain committed to cooperating with the Russian government and fellow Council members, and in this spirit of cooperation, we are happy to present our report to you today.
Vladimir Putin: Thank you very much. I’m very pleased that you've spotted some positive trends and that your business is developing nicely in Russia. I appreciate your analysis and the materials that you will present to us. We will be happy to consider them diligently. We are aware of the need to streamline our mechanisms and tools for attracting foreign investment in this sector, as well as others.
Perhaps there are countries out there where they work more proactively in this area, and have managed to create better conditions. But you are absolutely right in saying that Russia contains a potential that probably no other country can match. And we realise that this could give us a competitive edge. Despite the fact that our primary goal at present is to diversify the national economy by incorporating high-tech industries, we have no intention to kill the goose that lays the golden eggs. On the contrary, we’ll do our best to keep it healthy, and to try to find ways to stimulate investment in the production of mineral resources. As I said, it will be a pleasure for us to consider your proposals. Thank you very much.
Thomas Mirow, President of the European Bank for Reconstruction and Development, please go ahead.
Thomas Mirow: Mr Prime Minister, ladies and gentlemen. Turbulence in the global economy continues to create difficulties for the Russian economy. You may remember that following the results of a survey of the business climate in ten regions of Russia, we presented a research at the plenary session last year that pointed out the need to study the regional business environment systematically: to hold such surveys on a broader scale. In this respect, the EBRD together with the World Bank and in cooperation with the Ministry of Economic Development, the Center for Economic and Financial Research and Vnesheconombank have made a detailed survey of the business environment and work of Russian companies of different sizes which are active in 37 regions of Russia.
The review is not yet completed, but preliminary results show that some sectors – infrastructure, first of all: power generation and telecommunications, increase of the workforce potential, access to financing, regulatory burden and bureaucratization, law enforcement and corruption – need to make significant progress. We see a significant disparity between different regions. Here are a few results: on average, Russian companies believe that if their access to power grids is improved, their spending will drop by 1.6%, but in Khabarovsk, this figure is 5%. They also believe that their revenues will grow (by 11%) if there is no shortfall in the of quality workforce, but in Samara, this figure is 24%. That is, Russia may significantly improve the conditions of doing business not only in absolute terms, but also on the regional level. This means that regions will have a lot to learn from each other’s experience in different areas.
We believe that this review may become a very important tool that may allow Russia to achieve certain goals in its regions and to recognize examples of successful business practices, as well as positive achievements that can be applied in other regions as well. Taking all this into account, we continue supporting efforts to develop Russia on the regional level. We also are working to help to stabilise the financial sector through capital influx, including into regional banks. We support the non-financial sector and open credit lines on privileged terms for banks in different parts of the country: in Siberia, in the Far East. We invest in infrastructure development: for example, we took part in the release of energy efficient bonds, we supported the development of ports and the diversification of the Russian economy in general by investing in different industrial projects. Overall, we have allocated €1.7 billion this year for 45 projects in Russia, which is about 30% of the bank’s portfolio. Our investment in Russia in the last 20 years has exceeded €18 billion; we have financed over 700 projects with an aggregate cost of over €50 billion. Of course, our activities depend on our clients’ investment plans, but we still have huge plans for the end of this year. In 2012, we will continue supporting the diversification and modernisation of the Russian economy, improving energy efficiency, developing small and medium-sized companies, strengthening the financial sector and the internal capital market, as well as widening infrastructure bottlenecks and carrying out projects which make economic development more feasible.
Mr Prime Minister, ladies and gentlemen. Over many years, the Council has proved its usefulness for determining priority measures to improve the business environment. In order for Russia to grow and develop, the EBRD is willing to continue its work in the future. Thank you for your time.
Vladimir Putin: I would like to thank you, Mr Mirow, and all your employees for many years of interested cooperation between the European Bank for Reconstruction and Development and Russia. We have long had very good relations, and absolutely constructive ones at that. We continue to put a high value on this interaction.
I would like to say that the issues you address and study are definitely among the crucial ones. What you said about power generation, energy efficiency, and environmental protection is true, of course. Indeed, it is very important to study opportunities where investing is attractive, specifically on the regional level, because the situation is indeed very different in various regions. The research you conduct gives us additional information to analyse and, eventually, to make decisions.
Regarding the example you gave, i.e., access to power grids, we have adopted a number of decisions on the issue (which you must be aware of). For example, we made small power consumers equal to big ones, and their energy spending has leveled out – percentage-wise, of course, not in absolute terms.
We have made a number of decisions seeking to de-bureaucratise access to power grids. One of the key decisions is that the consumer should not have to pay in advance for the investment plans of energy suppliers. At the same time (and we understand this perfectly well), we cannot endlessly lower tariffs for connection to and use of power grids, because this would reduce investment opportunities for development of the grids; so we need to strike a balance, a happy medium here. We would be very grateful if you could give your opinion on the best parameters for this, including on the regional level. It is a very important, practical issue. In this regard, we understand perfectly well that, unfortunately, these regional and even national power grid monopolies have a certain positive function in our economy, because the scale of work is enormous and it seems hardly promising and even counterproductive to divide it all into small parts all over the country. Still, any monopoly, even infrastructure monopoly, sometimes has the urge to take advantage of its position. There are disadvantages of this monopolisation, too: monopolisation of the economy in general (which is definitely one of our problems) and of the energy and infrastructure sector, in particular. This is why we have decided (and you probably know about this) to limit the growth of tariffs of natural monopolies, including tariffs of power grid monopolies, starting next year. They all will have the right to raise their tariffs next year by no more than the inflation rate and not on January 1, which was the common practice earlier, but beginning in July 1, in order for consumers to enter the new year’s economic cycle and feel that a real change has taken place.
The only two exceptions that we will make are: we expect inflation next year to be around 6%, and we have given Russian Railways the right to raise its tariffs from January 1, given that it needs to do regular repairs and needs sources of revenue. Also, we have given Gazprom the right to raise its tariffs by 15% instead of the inflation rate, from July 1, except for the housing and utilities sector and for households. We will continue subsidising these rates for households to avoid a surge in tariffs. I think for many participants of this meeting it is clear why we have done it for Gazprom. Unfortunately, we still have a significant disparity between the prices of different primary energy sources. So our goal is to gradually bring them all to the same level within Russia by making activities in the gas market more economically balanced and grounded. But overall, let me repeat, we will limit the appetites of infrastructure monopolies starting next year; this will also be done – and done for everyone – to curb inflation, so not to accelerate it. This gives us the right and reason to believe that we will further lower the inflation rate next year, to 7%, as I have already said.
Thank you very much, colleagues, ladies and gentlemen.