Prime Minister Vladimir Putin attends a conference of the national association Delovaya Rossiya (Business Russia)
21 december 2011
Vladimir Putin’s speech:
We have awarded Boris Titov (the chairman of Delovaya Rossiya) with the Stolypin Medal on the occasion of the organisation’s tenth anniversary. But I should say that this award represents our recognition of this entire business community. Thank you very much.
Now that we have broken the ice, let’s get down to business. I should say that my colleagues and I have focussed our efforts towards having a meaningful discussion today, rather than just going through the motions. The same is true of my own presentation. There are items that we need to discuss, issues that you bring up often and that we are trying to respond to.
First of all, let me congratulate you once again on the first decade of Delovaya Rossiya’s existence. You represent the community involved in industrial business, in the non-commodity sectors, which relies not on tapping natural resources but on initiative, on management strategies, and on promoting modern goods and services. According to my sources, Delovaya Rossiya comprises 72 regional and 43 sectoral unions. That’s quite a serious organisation.
Delovaya Rossiya has not only consolidated the majority of the country’s business community. It has been directly involved in all reforms and transformations that have taken place over the past decade. Business Russia has initiated efforts to eliminate administrative barriers from all levels and has sponsored meaningful amendments to corporate and business legislation. I would like to thank you all for your valuable contribution and partnership. We have awarded you the Stolypin Medal not only in recognition of your first decade, but also to show our gratitude and respect for your organisation, which has supported many changes that we have promoted, and with great success, as a matter of fact. One of the changes in particular which you helped promote is the cancellation of the capacity utilisation hours rule (which categorised retail power consumers based on the number of hours of electricity that they use). You initiated this improvement and as you know, it has been approved – I’ll touch on it later.
Delovaya Rossiya’s influence has grown substantially over these years. Evidence of this resides in the tangible results of your activity and of course in the growing role of industrial production businesses in the national economy. This, in fact, is what we mean to discuss today. I am pleased that we have succeeded in establishing a constructive dialogue that is able to help us find specific solutions and formulate shared objectives for businesses and society. The goal that we have set for ourselves is to propel economic growth to at least six per cent, or better still, to seven per cent per year, and to join the ranks of the world’s top five economies within five years. We must achieve this through growth, not because of a contraction in the world’s major economies. Over the next decade, Russia needs to increase GDP per capita by 50%, from the current $20,700 (let’s speak in terms of dollars) to over $35,000. This year’s GDP growth rate is estimated at 4.2%, probably even 4.5%.
It is clear that the ambitious goals we are setting for ourselves can only be achieved under a new economic growth model propelled not by the commodity sectors, but by powerful high-tech industrial production businesses, which Mr Titov has just described. But in order to restructure the national economy, we need to build an entirely new system, or modernise certain parts of the existing one. It was your initiative, again, to create up to 25 million high-tech jobs. Let me stress that this is not a chimera, and that you don’t have to create all 25 million jobs from scratch. It is possible to modernise those which we currently have, which I think is perfectly attainable. We have discussed this during our previous meeting, and I mentioned it at the social business forum in May. Today I would like to move forward from identifying goals to defining areas for our cooperation.
The key issues here are the costs and resources for building an innovative economy. According to our estimates, fixed investment needs to be increased to nearly 25% of the GDP by 2015, and then to 30%. Almost 43 trillion roubles are expected to be invested in Russia’s economy within the next three years. To give you an idea of the scale, this is nearly the size of last year’s national GDP. Can this problem really be solved? I think it can, because the amount of investment in fixed capital will be up 6% as of late 2011 and, therefore, the share of investment in the GDP will amount to 20%. What we are saying is “increase by up to 25% and then by 35%.” This is quite realistic. The Ministry of Economic Development says that the growth rate of investment in fixed capital is expected to more than double in 2012.
How do we procure such vast funds? This really is a lot. Of course, we won’t be able to increase investments at the expense of the budget, public sector or infrastructure monopolies. We have achieved a reasonable ceiling. Otherwise, we’ll run the risk of compromising macroeconomic and budgetary stability. This seems obvious, no? The more budgetary funds we spend, the fewer opportunities to address other tasks, including the social ones, we will have. Currently, the public sector accounts for about 40% of the total investment, of which 19.4% comes from the budget. We should also realise that increased budget spending results in a larger tax burden. How do you come up with money in this situation? Making an uncontrollable bubble out of investment programmes run by infrastructure monopolies will lead to higher prices and lower efficiency. This is also clear to everyone: as soon as Russian Railways tell us that we need to build this or that and we don’t provide the funds from the budget, then what? Then we see prices go up, that’s what. This means suppressed economic growth and development. Certainly, we cannot afford uncontrolled tax bubbles or price bubbles inflated by infrastructure monopolies (I choose not to call them “natural monopolies”).
In addition, foreign investments are limited for obvious, objective reasons. Markets are contracting across Europe and the United States. Things are improving in the United States, thank God.
With all its problems, Russia is very appealing to long-term investors. We talk a lot about our investment climate problems, but Russia has a lot of appeal for investors, which is obvious, and foreign experts tell us so as well. Based on a study conducted by UNCTAD in 2010, Russia, China, India, Brazil and the United States are the best countries for foreign direct investment. Russia’s economy ranked 8th in terms of the amounts of foreign direct investment in 2010. However, like I said, the global capital market has substantially contracted right before our eyes, and the situation in Europe and the United States is far from ideal.
Clearly, we need to get our domestic investment engine running and support manufacturing. We need to encourage investment in the Russian economy and industry and make it a lucrative proposition. Speaking about macroeconomic issues, we will do our best to support the rouble’s exchange rate and maintain low inflation, which is particularly important for manufacturing. We will maintain strict budgetary discipline and guarantee the unfettered movement of capital. As you may be aware, inflation will be slightly over 6% as of the year end, which is an all-time low. Please note that in Britain, which is a developed economy, inflation will stand at 5%. You see, we have come close to this benchmark. As of December 12, accrued inflation stood at 5.9%. Certainly, large budget spending in December will increase this figure up to 6% - 6.3%.
The next key issue is the tax burden. I’m aware that this is a hot-button issue, and so I will elaborate on it. Our fiscal system is tailored to replenish the budget. As a matter of fact, this is how thing are in all countries. Almost half of the revenue comes from oil and gas sales. These numbers aren’t new to you, either. This year’s number is about 49.2% and is included in the budget estimate. The government understands that the amount of oil and gas revenue will decrease. This figure should fall to 43.5% by 2014.
Certainly, the current economic situation poses substantial risks for the economy and our ability to honour our social commitments. One of the challenges facing the new economy is to eliminate these risks and modify the structure of the national economy. The taxation system should encourage investment in manufacturing in order to strengthen and build up the nation’s industrial potential. Businesses engaged in activities other than oil-and-gas production should have more funds and reserves to enable their expansion.
I believe we should carefully analyse specific industries, make calculations and eliminate existing disparities in the tax burdens faced by different economic sectors. Let me be clear: the issue is not about applying the same approach to different industries. While I was getting ready for this meeting, I came across something that was quite unexpected to me – I will share it with you. It bears mentioning that the tax burden is distributed unevenly even across the manufacturing sector. For example, for machine and equipment manufacturing, the tax burden is 11.1%; for construction, 11.3%; for metallurgy, 3.3%; for the production of coke and petroleum products, 5%. Clearly, metallurgy pays the lowest taxes as compared to other manufacturing industries.
Clearly, our economy needs a decisive shift in terms of taxation. It needs a modern taxation system. We should also think about streamlining taxes that contribute to high-quality economic growth. Money always goes where the rates of return are highest. Today, this is the oil-and-gas industry, no question about it. We won’t be able to force the money to go to other industries even if we enlist the police. We must turn these flows around and channel them to high-tech and manufacturing businesses. This is a pre-requisite for the creation of a new economy in our country. Otherwise, we run the risk of perpetuating the deficient nature of our economy with its dominant commodities sector. I would like to ask the Ministry of Economic Development and the Ministry of Finance to join efforts with other departments, crunch the numbers going into such a tax shift and come up with specific recommendations to re-adjust the fiscal policy for the purpose of our country's industrial development. This is a very delicate and important task, and we should proceed with caution, because a misstep will give rise to a series of unwanted events. However, it must be done, all the more so since Russia’s joining the WTO. Prospective integration processes, such as the Common Economic Space and the Eurasian Union, should also be taken into account.
By promoting an integration agenda, we will be able to create a vast market with high capacity. However, it’s important that Russia keeps its competitive edge on this market. This also applies to our businesses and business environment, including tax systems, administrative procedures and the quality of government institutions. Unfortunately, we still lag behind even our Customs Union, Common Economic Space (which is to be operational since January 2012) partners, namely, Kazakhstan. I am not going to list all the areas of our backwardness. It hurts to say it, but this includes taxes, taxation levels and some other areas. Of course, we will need to take decisions, even though they might cause the Finance Ministry to worry about revenues. But there’s no way around it. This is the good part of integration, because the Russian economy and fiscal system, as well as our administrative procedures, should be competitive even among the small number of participants – Russia, Belarus and Kazakhstan.
Let me emphasise that we will do our best to improve our enterprises and improve access to new markets for our businesses and entrepreneurs. For their part, businesses should understand their responsibilities toward the nation and refrain from hiding their money and assets in offshore accounts. I spoke about this yesterday or the day before yesterday when we discussed the energy industry. Clearly, it’s inadmissible to use all kinds of gimmicks to evade taxes.
Today, the offshore legacy is becoming a real hurdle on the way of forming a normal business environment in Russia. It undermines the trust of Russian and foreign businesses and investors in our economy. We need to adjust our regulations. Ladies and gentlemen, I want to be straightforward about it: I am not against offshore businesses in general. This is a regular and occasionally economically efficient way of doing business. However, when we can’t see even the ultimate beneficiary behind all these offshore schemes, we can’t take certain key decisions. Investors, including foreign ones (I hate to admit it, but I have to), tell me plainly: “Listen, we would love to invest in a particular industry or an enterprise, but we can’t figure out who’s the ultimate beneficiary, so we stay away from it.” Don’t you think that this is an excessive, to put it mildly, use of offshore practices?
We need to bring our assets back to Russia. There’s nothing to be afraid of. We need to improve the taxation system together, as I’ve just mentioned. We are not against it, we are all for it. We need to butt heads and come up with ways to protect property rights. We are not going to do this unilaterally; we are working on this together. All recent bills were passed with the involvement of the business community. Let’s work on it together. However, this work should be done in an open and transparent manner, so that people know what decisions are made and why. So that the society doesn’t reject everything that’s going on in the business world, and people know why a particular law is being adopted. They should know that it’s done not so that certain people can line their pockets, but rather so that new jobs are created. Only then will the people support us, and no one will ever have to hide their businesses in offshore areas. You’ll have to pay taxes, that’s true. What’s going on in London now? I remember telling them that they’ll wear themselves out going from court to court. Now you can see them doing exactly that. I warned them!
And you know what the court system is like in some countries, in Great Britain, for example. They will shear off so much, you’ll have to pay through your nose, more than our taxes. It’s true, look at the revenues of the law courts. By the way, this accounts for a substantial part of the British budget revenue – the revenue from the judiciary system. They make serious money over there. Everyone who does business in Russia must be sure that the right to private property, as I have said, is securely protected. If necessary, let's think about this and see if we can strengthen that institution. And of course we will continue to strengthen and develop the country’s court system, including the creation of effective mechanisms to resolve corporate disputes and stop hostile raider takeovers. This is still a cause of concern for us, one that provokes serious criticism, justified criticism from the business community. The main thing is that our tax and judiciary system, and the work of law enforcement bodies, must be based on justice and objectivity. That's the main thing.
Dear friends and colleagues.
Russia has a great deal of truly talented and energetic people who are able to create effective, thriving enterprises. We are prepared to bet on these people. I am convinced that the country today is in need of economic freedom and entrepreneurial activity more than ever. One has to admit that we still have effectively two economies. The first is the sector that produces raw materials and infrastructure companies. It has natural rent, access to state financing, an opportunity to make long-term plans and it employs only 5.5% of the workforce in the economy. That sector employs only 5.5% of workers. The mining sector employs about 1.5%, power generation and distribution of electricity, gas and water employs about 4%. That's the extent of it. Everyone else works in the production sector.
The second economy is the non-commodity producing sector, which consists mainly of small and medium-sized businesses that are least connected with the budget and government contracts. They provide the largest number of jobs, they have the potential to develop and diversify the national economic base. And yet it is the non-commodity sector that feels the full impact of such barriers as the inefficiency of administrative procedures, the shortage of credit resources, infrastructure limitations and excessive interference from inspecting organisations. It is in the interests of the country that we redress this injustice and rectify these imbalances, and eliminate all obstacles that stand in the way of the emergence of our new economy.
Allow me to say a few words about crediting. What is the situation like today? The resources for the development of medium-sized enterprises are clearly insufficient, the banks issue loans at a high interest rate and their size is limited by the size of the borrowers’ assets that can be offered as collateral. The cost of these assets is not great, especially for a company that is only just getting on its feet, and as a rule the enterprises cannot avail themselves, very few of them can avail themselves of the system of state guarantees because of the high level of collateral and the unwieldy procedure of loan provisions. It is necessary to put in place a truly efficient mechanism – I stress, a truly efficient mechanism, of providing state guarantees in order to make them an accessible instrument for medium-sized businesses. We need to make a system-wide decision that is not confined to any specific sector.
Of course we face certain limitations. I understand the Finance Ministry, I understand the Central Bank, there is a certain logic there. It is not associated with personnel reshuffling at the Finance Ministry, I assure you, it is connected with the systemic approach of the fiscal agency, and in general I think that is the way all finance ministries behave. There are limitations, but the issue has to be addressed anyway. Of course we will not take the approach of so-called developed economies by thoughtlessly churning out more banknotes. We cannot afford to do this for the simple reason that ours is not a reserve currency, we are simply unable to do it. We would have liked to, but we cannot. We would destroy our economy, but it is obvious that the mechanism of state guarantees must be more effective, and some bolder steps are needed.
Moving on. We must create conditions in which success in business can be achieved not just by people who possess greater administrative resources or more personal connections, but by those who produce quality products that meet international standards and are truly the best in the market. We need a more effective anti-monopoly policy and we must remain committed to creating a truly competitive environment.
The bar must be set correspondingly for companies with state participation, including for the choice of suppliers. It is no secret that today every state company sets its own requirements, which are unfortunately often very vague and muddled, as concerns the suppliers of equipment, materials and other goods and services. As a result state companies are surrounded by their so-called “pocket” firms, and outfits that supply goods that are often produced according to outdated technologies and charge prices that are obviously higher than the market prices.
Incidentally, you laughed about the matter of offshore companies, but state companies (as I was saying with regard to the power industry) employ these instruments: they create family firms around them and channel the money that they receive from you through offshore companies. But we cannot have two different sets of rules for them… we must have regulations that are universal and can be interpreted uniformly. The earliest area to suffer from this is of course the economy in the real sector.
To remedy this, to combat this intolerable situation in a consistent way, we have formulated, as you know, a whole package of instructions that was unveiled at the recent meeting of the government energy commission. A detailed inquiry involving law enforcement bodies, the Federal Service for Financial Regulation and other agencies will be conducted in all the strategic sectors of the economy. We have started with the power industry. I can honestly say that I had not expected such results. There are things that boggle the mind. When the Energy Ministry submitted these materials I realised that we should take a close look at other sectors, including financial institutions, and we will be sure to do so without fail.
At the same time, I am already hearing comments that such moves would allegedly worsen the investment climate and would scare off businessmen. I think the opposite is true. There will be nothing of the kind. I am convinced that it will finally enable the honest entrepreneur, tens and hundreds of normal companies, to breathe a sigh of relief – for it is impossible to work when everything is interconnected in these state companies or companies with state participation, when all the doors are closed and they demand kickbacks at every step of the way, and when during tenders the winners are those firms whose only asset is influential connections. I would like to ask the Ministry of Economic Development and the Agency for Strategic Initiatives to work out clear and transparent mechanisms for signing long-term contracts between enterprises with state participation and companies in the real sector of the economy, including medium-sized businesses. I need you to submit your proposals at an early meeting of the supervisory board of the Agency for Strategic Initiatives at the beginning of this year.
The next urgent issue concerns connection to power grids and getting energy at reasonable and affordable prices. As you know, we have been dealing with this matter recently (I am personally involved in it) in practically every aspect. We must get things in order in the marketing sector. Business Russia raised all these issues during the course of our meetings. In fact you were among those initiators who pushed the government and myself to pay attention to this problem. And of course during trips around the country… Indeed, wherever you go, everyone talks about this.
As you know, we have done away with fines for failure to meet energy consumption targets. Now when consumers sign corresponding contracts with energy providers, they will pay according to the meter. The concept of the number of hours of capacity use has been cancelled. The government passed a resolution to this effect on November 4.
Next. We have tried to reduce the cost of a technological connection to power sources, though this cost is still unfair and far too high. This fact is obvious, and this is the next step that we must take. This is my opinion and that of our foreign colleagues and experts. According to the World Bank, Russia has some of the highest connection costs in the world. For small and medium-sized facilities (up to 100 kilowatts) the cost of connection to power grids is paid in instalments. This is already the case. And starting this year, the charge for connection will not be allowed to include the cost of developing the existing network. Thus, the consumer is required to pay only the cost of building the last mile, so to speak. But in practice, unfortunately, this is not always the case.
I have asked my colleagues to look at the current situation in the regions, and even after the latest decision, the picture is far from bright. In many regions the charges for technological connection have not changed, and they have even increased in some. So the business community is right in saying that the problem is still far from resolved. According to the Federal Anti-Monopoly Service, the charges for technological connection have not changed in 33 regions of the Federation, they have actually increased in 16 regions, and only in 26 regions have they gone down. Victorious actions are certainly required, and they will be taken. In four constituent entities of the Federation – the Nizhny Novgorod, Samara and Sverdlovsk regions, and Yakutia – the investment part is still included in the payment for technological connection. We will be sure to attend to this issue without delay.
There are some counter-questions that have been voiced by the energy people who complain that consumers often declare a certain capacity and then fail to use it. There are all kinds of proposals, but what immediately comes to mind is this. The Federal Anti-Monopoly Service must step up its monitoring of the law enforcement practices that are involved in connection to technological networks. Secondly, I think that the Energy Ministry, jointly with the other ministries and agencies, must once again analyse the current situation to determine why the decisions that have been made do not work or do not work efficiently enough. In general, we need an analysis of what is going on in every region, we must understand what additional steps need to be taken to make connection to power grids less burdensome for entrepreneurs, and to ensure the effective use of energy capacity. If changes to the regulatory framework are required, these changes must be introduced quickly. And incidentally, Mr Titov, we expect these proposals from you, please formulate them on behalf of your organisation. Let me stress that all of the above issues must be resolved early next year. That is quite realistic, all the more so because some work has already been done.
And to conclude on energy issues, one other question that comes up frequently concerns gas. And you know that we have passed a decision in this area as well: small consumers will no longer have to pay for failing to use up all of the capacity, take-or-pay is also cancelled, but I had to agree with Gazprom that major consumers, major energy companies, major generating facilities, stations and power plants must, after all, plan their consumption, and they are in a position to do so. Otherwise there will be chaos in the energy consumption sphere, which is particularly dangerous in the autumn and winter period.
One of the key problems for medium-sized business is the availability of qualified personnel. I believe that entrepreneurs should become actively involved in working to develop professional and educational standards in our country, and they should do so in close contact with educational institutions and regional and municipal authorities. The day after tomorrow (on December 23), we will hold a conference on vocational training of workers, and representatives of Business Russia, your colleagues from the RUIE and OPORA Russia will take part in as well. I expect that we will come up with concrete, systemic decisions. I would like to hear your proposals on these matters as well.
And one more topic I would like to draw your attention to. In order to successfully build a new economy, we need not only basic, system-wide conditions for the development of industry in Russia – we also need to create specific sites, points of industrial growth. Having said that, opinions vary on this matter as well. Some believe that we should simply create good overall conditions, that this would be enough for systemic growth, and that there is no need to give preferences to certain areas and sectors.
However, the experience of many countries reveals that attention on the part of the state to strategic areas is often justified. We are looking at the creation of powerful territorial and industrial complexes that will and certainly must provide an impetus for the development of entire regions and sectors of the economy, that will pave the way for the creation of tens of thousands of new jobs and provide incentives for related industries. It is my understanding that an agreement is being signed today between Business Russia, the Ministry of Economic Development, Vnesheconombank and the Agency for Strategic Initiatives on a joint project to create such industrial-technological clusters. It is important to formulate clear-cut selection criteria, to determine effective principles and mechanisms of support for such comprehensive projects, to tie them in with the development plans for territories, individual sectors and infrastructure, and to upgrade the capacity of development institutions, major banks, special economic zones and leading research and educational centres. And of course we should structure the system of strategic management of industrial development and the creation of territorial industrial clusters in a competent way.
We have already done a great deal to ease the administrative pressure on businessmen, on business in general, and have eliminated some barriers and obstacles. We have introduced a notification-based registration procedure for many types of business, we have cut the number of inspections by more than a quarter, we have simplified customs procedures and procedures in the construction industry. But based on many criteria, the investment climate in our country is still far inferior to that of developed market economies, and according to some criteria, we are at the bottom of global ratings. Although I am very sceptical of these ratings, they often do reflect the reality.
In order to develop normally, targeted decisions are insufficient; we need a dramatic breakthrough in all components of the national investment climate. You know that a standard has been introduced for creating the investment climate in the regions. This is the results of the joint efforts of Delovaya Rossiya and the Strategic Initiatives Agency, which will make it possible to promote the best regional practices in the field of business support and to evaluate the work of regional administrative teams and their managers, which is of equal importance. This can have important practical consequences. Some regions have no resources: neither gas, nor gold and other metals. However, economic growth there is considerable, even outstanding.
Today, I propose that we take another step: formulate and implement a sort of national business initiative aimed at forming a truly competitive environment for doing business in the Russian regions, in the whole of Russia. You are well aware that the investment climate is not an abstract idea. It is formed by quite comprehensible and tangible things: the tax and judicial systems, the level of competition and impact of corruption on business, the quality of administrative procedures and a clear tariff policy, access to infrastructure and loans, professional education and the quality of the workforce. It is necessary, by all means, to develop and implement road maps, which will contain precise, practical steps to improve business environment. If we adopt such programmes in the regions and gradually implement them, we will change the country’s image and investment climate in a calm and confident way, without any revolutions. I believe that the this work must be conducted by the Strategic Initiatives Agency as well as Delovaya Rossiya, together with government bodies, first of all the Ministry of Economic Development, as well as other ministries and authorities, and business associations. It would be wise to set a clear objective – in the next 10 years to join the world’s leading countries with the best conditions for doing business. This is a big challenge because extirpating corruption is very difficult. Unfortunately, corruption is part of the culture, or rather a sign of the lack thereof. We must change the mentality of officials. You can break or move most anything, but changing mentality is incredibly difficult. Breaking up the ossified apparatus requires time and systematic effort. First, we have proved again and again that we can resolve the most challenging issues. Second, a new generation is already entering the civil service and the business world, and they are ashamed to play by the old rules and really want to change the country. This is a positive factor, which we must take full advantage of. And finally, if we want Russia to be a prosperous state, we have no choice. We must be strong and competitive in every sphere.
What I would like to say in conclusion? We see the business community and entrepreneurs as our partners. Changing the country is our common objective. We expect close and open cooperation with all those who want to do honest business in Russia, and we are ready to help you. We want you to be successful. We need your experience and your understanding of the real problems in this country. I strongly believe that we must engage more representatives of mid-sized businesses to work in executive and legislative bodies. Let me point out that members of Delovaya Rossiya and other business associations have been elected to the State Duma through the Popular Front. I hope that they will be effective there. I expect that those of you who have already come or who will come to work in the government at various levels will help change the country’s business climate, the image of towns and villages, and entire regions of the country, rather than protect and promote their own interests. Generally speaking, the people who come to work for government bodies do so in order to help other people. You have the necessary potential, opportunities and aspirations; you are ready to continuously develop and expand your field of activity, to use your talent and energy, and to move forward. I’m sure that together we will eliminate all obstacles in our way, achieve good results, and resolve the most complicated issues. Thank you for your attention.
Vladimir Putin’s statements and comments during the meeting
Alexander Galushka (President of the National Non-Governmental Organisation Delovaya Rossiya): … And this is a microeconomic approach to assessing the tax burden…
Vladimir Putin: You should explain what that involves.
Alexander Galushka: It is when we carry out the assessment not in relation to GDP, but in relation to profit, what proportion of its profits an enterprise has to pay, what proportion of its real earnings it has to pay. And we see that in Russia we pay about the same amount as they do in Germany and the United States, measured not through the prism of GDP… It is a different approach and hence it yields a different result, it looks at the tax burden from the specific company’s viewpoint rather than from the macroeconomic viewpoint, i.e. the share of taxes in GDP. The decision you mentioned as to how to solve that problem and to reduce the tax load…
Vladimir Putin: Let me say outright that we have to think about it, it’s hard to follow all that out loud. It is a controversial perspective, but we must consider it.
Alexander Galushka: We will provide you with all the details. The main idea is that we take all the taxes and consider how they relate to the profits, how much of its profits a company pays in taxes.
Vladimir Putin: I was not suggesting that we will not pay attention to it, simply that it is a difficult subject for discussion.
Alexander Galushka: Yes, but this is the World Bank assessment, and luckily it is comparable for 183 countries, including Russia. I will address the issue of tax administration in a moment.
Elvira Nabiullina: They calculate not only the percentage taken, but the administrative burden involved in paying taxes.
Alexander Galushka: Yes, quite right, I will move on to deal with that now. The decision you have just mentioned, a robust tax move, could be put into practice because different taxes have different impacts on economic activity, and taxes on wages, added value, and profits suppress economic activity far more than those on natural resources, excessive property, luxury items, excess consumption, and consumption of hazardous products. We can shift the emphasis to the right side and thus diminish the tax load on wages, profits, and added value.
Vladimir Putin: I did not say all that just for the sake of it, I also believe that this action should be taken, but it must be carefully calculated because the things you have mentioned represent different sources of government revenue. The luxury tax is more of a socio-political measure, an issue of social justice, so to speak, but how much revenue will it generate? And how much slashing the profit tax will yield? How great will the revenue shortfalls be? The profit tax (incidentally, for the benefit of everyone present I can say that almost all regional budgets this year will see a surplus mainly due to increased profit tax). The profit tax is growing and it is being paid, that’s just for your information.
Alexander Galushka: Mr Putin, we are very grateful to you for issuing the instruction and for your involvement in our work. The relevant calculations have been prepared and we would like to have a separate meeting to discuss the details.
Vladimir Putin: With pleasure. You see, if we sit down and you share your calculations, I will issue instructions to the Finance Ministry and the Ministry of Economic Development. We are interested in looking at it from a truly professional point of view. It was no accident that I expressed our interest in doing this, I am personally keen to do it, that is, to take further, additional steps to rebuild that system. But when I spoke, I also said that every step in this area will have its consequences, that this is a sensitive area and every step is a delicate matter. We want to go ahead with this, and we will move in this direction, it is no accident that I mentioned it, but it is extremely important to take everything into account in these calculations: if some cuts are necessary then we should understand where and how we can recoup the shortfalls. There is constant talk about the need to cut insurance premiums. But how do we cover the resulting shortfalls? Excise? Everybody has latched on to excise taxes. But that would mean that the price of vodka would increase five-fold in one fell swoop. That is simply unworkable. Or that the price of cigarettes will increase tenfold. That is impracticable. Some say, “It is possible, people will drink less.” Well, they won’t, they will make more moonshine vodka and poison themselves with denatured alcohol: that will be the result. So, you see, this is a delicate area, we must calculate everything thoroughly and we must hear each other out.
Alexander Galushka: We have, in this regard, attempted to prepare some specific precise calculations taking into account international experience and opinion polls, and we would gladly submit them, if you could devote some time to this particular issue.
Vladimir Putin: I’ll do so with pleasure, because this is truly a key area of our joint work, we must look into it. You don’t mind that we’re taking this approach? After all, you are not delivering a report, we are having a meeting.
Alexander Galushka: Of course, the tax on the property owned by individuals comes to mind immediately, that is, the whole Rublyovka area – and there are similar communities around other cities with a population of over a million. We collect 16 billion roubles a year, and the cost of collecting this sum exceeds the amount collected.
Vladimir Putin: So what are you saying? Do you want to raise it or keep it at the same level?
Alexander Galushka: I want to see it raised, but I also want to see other taxes cut. We want investing in production to be more profitable than investing in yet another villa. But everything must be very precisely calculated.
Vladimir Putin: Do you believe I am a particularly ardent supporter of the idea of somebody investing their money in yet another villa? I have already addressed this issue, I cannot recall precisely where, but it is an issue I raise all the time: the proceeds from individual income tax this year (or last year) equalled the Russian government revenue for the year 2000. Can you imagine that? Everybody has just started paying. As soon as we begin… This can be done, we must ponder it, only we should ensure the administrative processes are in place. You speak about the payment of social contributions and that some of the money will be paid in envelopes, etc. And what if we increase individual income tax? You see my point? When I went to that clinic (I have already told this story), and saw the doctor, a surgeon is sitting there. To me what he does looked fantastic. I am used to wielding my pen, and working with my computer a little bit, but it is seldom that I see the things I saw there, and I was greatly impressed. He sits there, the patient is somewhere else, he moves something about a bit and that thing he moves is what carries out the operation. He earns 300,000 roubles, up to 500,000 roubles. And if we slap him with a 40% tax? We already have a brain drain, and if we do that we won’t have any specialists like him left, do you understand?
Alexander Galushka: No way.
Vladimir Putin: Then there will be no one to perform these operations. That is what I have in mind. We need to calculate everything carefully. Luxury tax, yes: you built a villa and you should pay. You earned serious money… Individual income tax is one thing; essentially it is a tax on wages, on real income. There is some money in your company’s accounts, you do not pay income tax and use that money for development. You want to withdraw that money, put it in your pocket, start spending it, buying Buicks and building new homes on Rublyovka? Then pay for it. This is fair, I think. But even so we are prepared to take another look at individual income tax.
Alexander Galushka: No, Mr Putin, we don’t want you to look at individual income tax, please don’t.
Vladimir Putin: In that case I don’t understand you.
Alexander Galushka: Individual property tax, not income, but the property…
Vladimir Putin: Then we are on the same page.
Alexander Galushka: We are completely on the same page. An individual property tax that yields just 16 billion roubles is as good as zero.
Vladimir Putin: I understand. So we agree.
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The proposal to create an Agency for Consumer Protection on the Financial Services Market
Vladimir Putin: In fact, there is no one to protect borrowers’ rights, this is true. With all due respect for the country’s financial organisations, this is often a source of outrage. This is particularly true for regions that are located some distance from Moscow – there is outrage indeed. So let’s think about it, but in a way that won’t make things worse.
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Vladimir Putin: With regard to customs – I asked my colleagues to consider the following idea: customs duties should be reduced to zero on the export of non-raw material goods. They should be simplified – they cannot be eliminated altogether.
As for procedures, to reduce human error down to zero, we do not need to be overly financially conservative – instead, we need to utilise new digital technology on site.
Remark: The Ministry of Economic Development received a large number of proposals pertaining to customs.
Vladimir Putin: Is that so?
Elvira Nabiullina: Yes, it is.
Vladimir Putin: Well, we will certainly consider them. I agree that there is a lot that must be done. Without question... We need to find systemic solutions, I agree with that.
* * *
Vladimir Putin: To begin with, we realise very well what caused the global financial crisis. It was caused by the US banks’ policy of unsecured loans. These debts kept growing and eventually toppled the system. The same unsecured loan philosophy is being used not only in mortgages (the mortgage market meltdown was the event that triggered the crisis), but also in other industries. This leads to unsecured derivatives, which muddy the waters in the global economy and finance. That is the first part of the farce. There is also a second part, connected with the fact that Western, including US banks seriously differ from our banks. Their level of protection and accumulated resources differs radically from that of our banks – in fact, it is much better. Our banks are much more vulnerable. If they… I don’t mean to say that this must never be done – I am talking about the risks.
The risks are enormous. The actions taken by our Central Bank and fiscal and financial authorities during the crisis proved to be very effective. They accepted the risk, because the Central Bank issued funds at unsecured auctions, thereby increasing the bank’s liquidity. They accepted the risk and, unlike many other financial institutions and central banks, the Central Bank of Russia managed to remove excessive liquidity from the market after the crisis. Not everybody was able to do it. And the current inflation rate is also a result of hard work by Russia’s financial authorities. I have told you the figure. (Economic Development Minister) Elvira Nabiullina is telling me that accrued inflation was 0.1% last week and 6% as of December 21. This is primarily the result of the Central Bank’s efforts. I know very well, and I also want to do it – itching to do it… Every time we meet I quarrel with the Central Bank and our leading financial institutions – of course, I try to avoid four-letter words and coarse expressions, but the general tone is very close. I keep saying that they must work even harder. Of course, we want our banks to be able to issue loans without demanding a down payment in exchange for a share in future profits, but these banks should be big enough also to take these additional risks without additional insurance. This is a very delicate and dangerous thing. Our financial system is only developing. On the whole, it is moving in the right direction and getting stronger. I’d like to tell you – I will not say anything extraordinary here, and will keep within bounds – about my surprise at learning that large global financial institutions wanted to borrow from us on the inter-bank market during the crisis. I was shocked. But it really happened. It’s true that global financial institutions asked me to help them obtain loans from our banks on the inter-bank market. This shows that our financial system – touch wood – is stable. However, we don’t yet produce a global reserve currency and so should act cautiously. Probably, or even certainly, I agree with you that today banks should be more flexible when deciding which is more important for a loan: a collateral mortgage or some other assets.
Remark: Or money flow.
Vladimir Putin: Yes, exactly. But please, don’t expect them to provide everything the Western financial institutions offer immediately.
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Vladimir Putin: As for reserves, I keep talking about reserves whenever I meet Mr Ignatyev (Sergei Ignatyev, chairman of the Central Bank of Russia) while he always responds that the banking system must be reliable. However, they have started moving forward. I think the Central Bank can move forward some more; we will work towards this goal jointly with you.
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Protective measures after Russia accedes to the WTO
Vladimir Putin: Do you recall my visits to Rostselmash during the crisis? I think we were able to provide you with real assistance. Furthermore, we did not just help you; when taking decision I took into consideration your views on the duty increase…
Our objective is not to stifle industrial development but rather to encourage industry to fight to reach higher grounds. Elvira Nabiullina has just informed us about protective measures even within the WTO: there are, I think, two color baskets, one yellow and one green. I believe we can look through those baskets and pick the necessary measures. That’s the first thing.
Second, speaking of ratification.... There will be no rush here. In accordance with WTO rules, ratification may occur during the first six months (up to six months). We have this time, so we will closely examine all possible options to protect the interests of our domestic manufacturers of farming equipment and other products. This is not the only sensitive area. We should pay special attention to used equipment. Let us now think about this; we have been negotiating for 18 years. In general, things are very much in balance, so we aren’t in a position to negotiate something else even after ratification; this could cause everything else to collapse.
Each element is bound up with the others across the board, but we can and we must think about protecting our interests, and we will find an effective solution. Let’s do this. The issue, however, is that, despite the New Year holiday, the Ministry of Economic Development, the Ministry of Industry and certain industries gave it some serious thought, and collaboratively and productively worked on finding a solution. These issues have already been discussed. I don’t want to take the audience’s time, but clear directions have been decided upon, which may lead us to the desired results.
Alexander Idrisov: Thank you for your response. I would like to add that this cluster approach (that countries use) would, in part, allow us to recover the losses from joining the WTO, by shifting the support from a particular company to the territory in question. We are no longer strictly bound in our support. Certainly, the issue is not completely addressed, but at least partially.
Vladimir Putin: What is the problem? The whole time we keep talking about the import tax, etc. but you and I know it well (you expressed concerned to me about it in the past): we take the decision, but the equipment continues to be imported from other countries (we will not name them here) after it gets stamped at the border “Made in Russia.” You know what I’m talking about. This is the same issue we raised in the beginning – it is customs administration. You know, in many our issues, problems, and industries … We say “duties will be lowered, duties will be lowered,” but in reality no duty is paid, for most equipment is imported quasi-legally and illegally – that is the problem. We seem to have an open economy, but in fact this still happens, that is the problem. When we begin working in accordance with outlined norms and rules, we will need to get used to these and put protective measures in place and take the necessary decisions well in advance. Let’s do that.
* * *
Building student dormitories
Vladimir Putin: This is an acute problem, but I think it is largely unrelated to today’s meeting and conversation (that is, dormitories). However, it goes without saying that we need to increase construction – in general, this is entirely public, budget-financed construction. Construction was even reduced slightly because of budgetary restrictions during the crisis. Now we will increase it. But it is obvious that, first and foremost, student dormitories in major student centers and cities – Moscow, St Petersburg and perhaps Tomsk – must be used as intended, so that there aren't migrant workers living there. Before anything else, we need to establish order. We should certainly continue construction, and we will be sure to do so.
* * *
The proposal to differentiate between licensing strong and mild alcohol
Vladimir Putin: This must definitely be worked on, and should certainly not be forgotten.
* * *
Subsidies for agriculture
Vladimir Putin: There is one more WTO-related issue. You, we, everyone involved in agriculture must consider how best to avoid any potential damage caused by acceding to the WTO and becoming party to its legal framework. The agricultural industry is particularly sensitive. So what I am going to tell you is that today we… In the past two years, we spent 400 billion roubles from various sources on farming, which is around $4 billion or $4.5 billion…
Elvira Nabiullina: More. These are green and yellow basket subsidies combined.
Vladimir Putin: So, that’s around 7-7.5 a year. Wait a minute. But we won the right to spend annually nine billion roubles on agricultural subsidies, and now it works out as being seven or just over seven, while we stipulated nine to 2013, with subsequent staggered reduction to this figure, then down to 4.5. But during the first stage we can not only continue with this funding but even increase it. But in this regard it is very important that we understand where the most sensitive areas are in agriculture that will require specific support. We must work this out together.
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Vladimir Putin’s closing remarks:
Thank you very much for this conversation. It really is very important to me. Our conversation was highly interesting, and I believe it has been useful, at least because it helps us understand the general attitudes and what we need to do to resolve specific issues. There is one thing: I hope that what we discussed today, which was accompanied by a lengthy storm of applause from the audience, will not be forgotten. Therefore, I’d like to ask my colleagues and you, Mr Titov, not to forget about these specific issues, such as accountability or creating appropriate agencies that will work, say, with customers in banks. These are good ideas and we must implement them as soon as we can.
As for long-term, strategic issues, such as the formation of a normal business atmosphere in the country, we can achieve this, we can create it together and will be sure to do so.
Thank you very much for this conversation.
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During the Delovaya Rossiya conference, Prime Minister Vladimir Putin attended the signing of a cooperation agreement among the national public association Delovaya Rossiya, the Ministry of Economic Development, the state corporation Bank for Development and Foreign Economic Affairs (Vnesheconombank), and the autonomous non-profit organisation Strategic Initiatives Agency for Promotion of New Projects.