Vladimir Putin’s speech:

Ladies and gentlemen,

Mr Siluanov (Anton Siluanov, Minister of Finance) and I talked about your courtyard just now – it looks pretty somber, actually, and crossing it may be quite a chilling experience. Mr Stepashin (Sergei Stepashin, Chairman of the Audit Chamber) is smiling, though – he seems to like it.

 Jokes aside, yours is a serious agency, probably one of the most serious in the Russian government – in any government, for that matter. So I suggest that today we should not just sum up your performance in the financial sector, which takes a lot of effort and commitment to manage, but also discuss our problem-solving strategies for the future.

A state’s rapid development and resistance to shocks depend in no small measure on the quality of its budget and tax policies, of its fiscal policies as a whole. Russia, like other countries, was hit by the 2008 global crisis, whose aftermath continued into 2009 and 2010. As we pointed out more than once earlier, and as I said in a recent speech at the State Duma, we coped with it quite effectively thanks largely to our economic agencies and the Finance Ministry. We managed to stay the course, retaining our financial and economic sovereignty, our steady macroeconomic indicators and our balanced public finances.

Of course, we couldn’t have possibly foreseen that crisis, nor how it would develop. But it was obvious that Russia had the stamina to weather it. In any case, it’s obvious now that we can see the outcome.  In pre-crisis years, we managed to achieve substantial economic growth and to consolidate the country’s financial institutions – public and private alike; we got rid of the national debt burden and formed cushion funds, including the Reserve Fund and the National Welfare Fund.

Admittedly, much of the credit should be given to the Finance Ministry. I would like to thank all of your ministry’s staff, as well its former long-serving chief, Alexei Kudrin. He did a great deal, proving his professionalism, his resolve, his commitment, and his strategic and tactical consistency.

Now that we’ve overcome the crisis, we’ve seen inflation drop to its lowest rate in twenty years – 6.1%. Our total sovereign debt is currently under 10% of GDP, which, as we know, is far less than in Europe and the United States. Our foreign exchange reserves are now the world’s third largest. This country is on the threshold of a new era. We can see new challenges looming on the horizon; we’re aware of those challenges, as well as of the fact that we’ll have to work toward our national development goals with the world’s economy and finances facing turbulent times. This is why macroeconomic stability is crucial to all our plans and initiatives.

Let me identify some of the priority tasks for you. I won’t break any new ground here, though. I’m going to talk about things we discuss every now and then with the leadership of the Ministries of Finance and Economic Development, things that stay at the centre of our attention. First and foremost, we should continue along our path to a balanced budget, to eliminate budget deficit by 2015. We have no deficit this year thanks to particularly high oil and natural gas revenues. But, as you know all too well, we are projecting a small deficit in the years to come, which we must bring down to zero again. Even a small budget deficit is a risk to Russia, given its dependence on the global economic situation, and we should try therefore to minimise that risk.

Second, we should not lose sight of the fact that we’re running a serious non-oil and gas deficit. It was minimal in 2005, but began to rise afterward, only to reach menacing proportions during the economic crisis (13.7% of GDP as of 2009); it then began to fall gradually again, and reached 9.5% mark 2011.

Now that the crisis is behind us, we should make a principled decision as to how big a non-oil and gas deficit we can actually afford. We should revisit our special oil and gas excess profit spending practices, determining just how much should be spent on current consumption and on covering the deficit and how much should go to replenish our reserves. We’ll get down to work shortly in order to find an appropriate deduction formula. New budget rules should arise from our assessment and vision of long-term prospects. By the end of April, the government should consider scenarios for Russia’s socio-economic development up to the year 2030. And the Finance Ministry should use these scenarios as a basis for its long-term budget strategy, to be elaborated in three months’ time, in association with relevant government officials and members of the expert community.

Third, to be able to cover the non-oil and gas deficit, we will have to borrow money. But we should be careful not to accumulate debt. A safely low sovereign debt is what gives us our competitive edge, so keeping our debt burden low should be a strategic priority for us. This applies both to foreign and domestic borrowing.

According to Finance Ministry forecasts, the national debt can be allowed to grow to 15% of GDP in three years’ time. A growth of five percent within three years – this doesn’t seem to be a great deal. But we’d be better off without it. Anyway, we should try to keep our debt within that range, reducing our foreign borrowing to a minimum.

Borrowing on the domestic market should also be done with the utmost care. We’re all aware of this, aren’t we? The budget should not compete with the economy, nor with private companies operating on the financial market.

While maintaining macroeconomic stability, we should try to fulfil our national modernisation goals. That’s why we should give fiscal and budget policies a bigger role to play in stimulating development and economic growth.

We invest heavily in infrastructure, in regional development, in upgrading welfare and the utilities and housing sector, and in equipping the armed forces. The public should stand to benefit from all these expenditures. Maximising the efficiency of budget spending is what we should focus our energies on, I think. Crucial to meeting this goal will be the transition to federal budget schemes built around state programmes, with precise targets and the possibility of performance monitoring by the public. Once the E-Budget project is launched, it will be possible to monitor the execution of the federal budget in real time.

We must have our first programme package finalised before the year’s end so that we can form the 2014-2016 federal budget in accordance with the new target-programme principle. Unfortunately, we still have a lot of problems and inconsistencies to deal with here. Forming the entire budget on the target-programme principle is something we still have to learn.

We should be especially meticulous about forming welfare programmes. Over the last four years, social spending in absolute figures has increased by a factor of 1.5. In 2011, it hit 11 trillion roubles, or almost 20% of GDP.

On the other hand, though, more money does not necessarily produce better results, unfortunately. At times, people can see no direct connection between higher spending and better quality of life and better functioning of the social and other sectors.

As I’ve emphasised repeatedly, resources should be invested in reforms that are beneficial to the public. State and municipal institutions should be oriented toward results that their end users – individuals, that is – will find satisfactory. This is what Federal Law No. 83 is aimed at. Developed by the Finance Ministry, this law came into force on January 1 this year. Thanks to it, more than 80% of local government institutions on the ground have gained greater authority.

I’d like the Finance Ministry to sum up application practices for this law and then, in cooperation with other agencies, submit proposals on further improvements to social legislation. At the regional level, we constantly discuss this issue with governors.

Also, we need to dramatically increase the efficiency of development spending. This applies to all kinds of instruments, ranging from federal targeted programmes to inter-budgetary relations. The efficiency and the implementation quality of development instruments such as federal targeted programmes (FTPs) are not yet high enough. A month ago, we held a special session on this. The Ministries of Finance and Economic Development were then instructed to make an inventory of all existing FTPs before June 1 of this year.

There’s fierce competition among agencies for FTP allocations, which sometimes results in fighting and tears. And then, halfway into a year, we can see that some of the programmes have made no progress whatsoever. But what was all that fuss about then? Instead of being rechanneled into some other development projects, the allocated funds have been wasted on programmes at a standstill.

We need to bring the funding of priority programmes to a level that would ensure the unconditional achievement of target goals. On the other hand, if a programme provides neither well-grounded justifications nor clear-cut goals and its implementation is slow and inefficient, we should either abandon it or review its financing schemes.

Wrapping up the FTP issue, I think it’s clear to everyone, including the Finance Ministry staff: Money earmarked for a federal target programme should be disbursed on time. An underfunded programme or one suspended over funding delays just loses its relevance. And then again, money is wasted, with none of the target goals achieved.

Now on to inter-budgetary relations and our allocations to the regions. Admittedly, under the existing system, regional administrations are better off living off [federal] subsidies than developing their own economies and expanding their own tax bases. We should therefore work to enhance the role of inter-budgetary relations as an incentive.

We’ve begun introducing standards for creating a favourable business climate in Russia’s provinces. I believe the performance of regional and local government agencies should be assessed using indices such as investment, tax revenue, and job creation. And decisions on the co-funding of regional development projects should be made based on that kind of assessment.

We should be sensible about transferring funds to the provinces, along with authority and responsibility. Such policies will become a real incentive for raising the competitiveness of regional administrative teams.

It takes heavy investment to advance domestic production and to create millions of new well-paying and high-productivity jobs. This should be about private investment, above all. As we know, private investors tend to put their money into lucrative [sectors and projects]. This is why we’ve set ourselves the task of getting into the top twenty most business-friendly countries, including in terms of tax administration. The logic behind our steps is that taxes on manufacturing, modernisation and investment should not be burdensome.

To encourage the upgrading of capital assets, we’ve decided to lift the property tax on new equipment, machine tools, and other hardware – movable property, that is. According to preliminary estimates, enterprises will be able to save up to 80 billion roubles thanks to this measure alone.

On the other hand, there are sectors that unfairly enjoy tax privileges. The mining industry is one example. We used to have disputes about this with the previous head of the Finance Ministry and keep having them with the current finance minister. Overall, I agree that this is part of the gas sector. It’s imperative that we proceed cautiously here. Of course, there are reserves, but we need to act so as not to undermine the investment plans of our producers. We need to be extremely careful.

Now, a few words about excise taxes on tobacco and alcohol. As you are aware, we have assumed certain commitments regarding the coordination of our activities, including in the sphere of taxation, in connection with Russia’s accession to the Customs Union and the Common Economic Space of Russia, Kazakhstan and Belarus. I would like the Finance Ministry to keep this in mind and weigh everything that’s going on in neighbouring countries and in Russia. My point is that we need to be viable and competitive operators across all areas of the economy. Do you see what I’m trying to say? Make sure that certain manufacturing activities and services don’t flee to the Customs Union countries, as is already the case. This is also true of excise taxes, so we need to be cautious here as well.

Most importantly, we shouldn’t believe that higher excise taxes will resolve all our fiscal problems. We fully realise that if we increase excise taxes, prices for alcohol and tobacco will follow. What’s next? People in the countries of the Customs Union will start buying someone else’s products or just revert to moonshining. We’ve been there, so we need to be cautious this time around. Of course, inflation is there, and we should think about the health of the nation as well. That’s the right thing to do, and I share this approach. But it’s hard to agree with the assumption that sharp tax increases will solve all our problems. No, they will not. To be sure, we need to raise taxes, but we need to do so gradually and never forget about economic realities in our country and internationally. I’m referring to the unions that I mentioned before. Certainly, in addition to increasing excise taxes, we need to stop trafficking in counterfeit, contraband and surrogate products.

As was announced earlier, there are plans to increase taxes on excessive consumption. Please note that this tax needs to be applied carefully so that it doesn’t affect households with median incomes. All specific steps in the fiscal sphere should be outlined in the Key Areas of Taxation Policies in 2013-2015, which are currently being finalised.

Now, with regard to tax administration, we need to stay the course of drastic simplification of tax return preparation. In particular, we need to reduce the volume and complexity of the paperwork and the number of inputs. We also need to radically simplify the maintenance of tax records and bring tax calculations as close to accounting rules as possible. We have spoken about this with the Finance Ministry and the Tax Service on many occasions. Of course, we need to use electronic forms during the initial stage of tax preparation that have so far been filled out on paper.  

I believe it is likewise imperative to promote pre-trial reviews of tax disputes. This should become a mandatory procedure and be applied to all actions by tax authorities and to actions or inactions of their officials.

There’s one more important topic. The Finance Ministry received additional authority with regard to financial market regulation. With regard to this, I would like the ministry to step up its oversight of loan interest rates for both individual and corporate loans. The Finance Ministry has already been charged with quarterly inspections of interest rates. However, we shouldn’t just monitor the situation. Instead, we should look into how interest rates are being inflated by banks, including through hidden commissions. There must be a system-wide solution to this problem, since individual borrowers are now paying hidden commissions alongside corporate borrowers.

In addition, I would like to ask the Finance Ministry to speed up the submission of the draft law On Consumer Loans to the government. It’s imperative that we enshrine the unconditional right of borrowers to know the real and final cost of the loan, so that we don’t have situations where the front page of the loan agreement shows one figure, but hidden commissions and mark-ups in the fine print result in totally different figures.  Of course, borrowers should be able to repay loans early without any penalties. You and I realise what’s going on here: banks slam customers with certain terms and conditions that are very hard to change later. Is that the kind market that we have built in Russia? If borrowers want to switch to another lender, the original bank won’t let them go: they have their customers by the throat. Let them cut their expenses, too. We keep telling manufacturers to cut their expenses. Bankers need to do the same thing.

In closing, I would like to say the following. We are entering a very important period of forming the 2013-2015 budget. The priorities that we will put into it will determine the quality of life of our people, as well as economic and social growth. As a matter of fact, the budget for the next three years will become the financial basis for the strategic programme that we proposed to our society and that was approved by millions. I expect that the Finance Ministry will continue to be at the top of their game, as always… I’m aware that many of your employees spend nights working in the ministry, especially during the budget formation. Few people know about this heroic labour, but I do, and I’m very grateful to you. I wish you every success. So long!  

Anton Siluanov: Mr Putin, with your leave, I would like to report on the results of the implementation of the financial system tasks for 2012.

Mr Putin, colleagues. In my presentation I’d like briefly to sum up the major results of the past year and identify the range of tasks on which the Ministry of Finance and financial bodies of the Russian Federation, the whole financial system, must work.

The main result of 2011 is the return of the financial system's indicators to pre-crisis levels. In 2011, the budget system incomes in real terms practically reached the same level as the best year in the history of the Russian financial system since 2008: the expenses in real terms exceeded it by 25.1%, the incomes of the federal budget as the part of the budget system in 2011 in real terms were 2.4% lower than in 2008. However we expect that this year this indicator will exceed the pre-crisis 2008 level by 2.6% in real terms.

As for federal budget expenses, in 2011 they exceeded the 2008 level in real terms by 15%. In 2009, to implement anti-crisis measures we abruptly had to increase federal budget expenses by 17.3%. And between 2010 and 2011, this level was decreasing gradually but not by much. Our task is to gradually reduce this anti-crisis canopy that was created during the crisis, thereby bringing the level of expenses down to a realistic level for the federal budget that will not depend on the risks of changes in the foreign economic situation.

In 2011, Russia pursued a policy of containing the growth of budget expenses. Practically all oil and gas income additionally obtained due to high oil prices was channelled to the Reserve Fund. This was done primarily to ensure the stability of the macroeconomic situation. This made it possible to reduce inflation to the minimum levels in recent years, this made it possible to do without foreign loans. Last year we did not employ our right to take loans on foreign markets because we had an additional reserve, additional budget resources.

Thirdly, and this is even more important: in 2011, for the first time since the crisis, we returned to conserving a share of oil and gas income due to the high prices. The next slide shows that the Reserve Fund, which initially in 2009 shrank by practically 80%, has now grown in 2011, and we can see its continuing growth. This is important because the growing reserves, the growing federal budget insurance, improves our investment rating. The improving investment climate means lower lending rates, lower rates on loans taken by the Russian Federation, and so this leads to further sources of economic growth. According to the results of 2011, the Reserve Fund grew by 1.1 trillion roubles to 3.4% of the GDP. So last year we practically returned to observing budgetary rules by saving oil and gas incomes conditioned by our economic situation.

In 2011, the implementation of budget reforms continued. We managed to advance in many areas, but simultaneously we are falling behind our initial plans on a number of positions such as a transition of the federal budget to programme format formation, improvement of procedures of state financial control and other positions. However, last year we succeeded in implementing a number of serious structural reforms.

With the participation and coordinating role of the Ministry of Finance, we reformed the system of service pay and retirement pensions of servicemen and law enforcement agencies, and we conducted work on reducing the personnel of the federal executive bodies. In 2011, we carried out a serious structural reform with the constituent territories of the Russian Federation. We transferred to them from the federal budget the expenses for certain subsidies, incomes, taxes, and raised to the federal budget the expenses for police and public security. This was a serious structural reform that involved all constituent territories of the Russian Federation.

Last year we launched a system of rewarding regions for increasing their own taxation potential, which is very important especially when we see that the constituent territories of the Russian Federation have developed a growing welfare mentality. We implemented major decisions in the area of taxation policy, we have prepared and are currently implementing draft laws on transfer pricing, on consolidated taxpayer groups. This has made it possible to implement the task that was set long ago, of calling for a more equal distribution of the tax potential between the constituent territories of the Russian Federation and a transition of taxation bases from large financial centres to the constituent territories of the Russian Federation.

The regulation of financial markets has improved, and the following key laws were adopted: on clearing, on tender organisation, on the central depositary, on insider dealing and on the national payment system. The Ministry of Finance has made a considerable contribution to strengthening Russia’s positions in the G8, the G20, BRICS, APEC and so on.

But these are all results. What are the short-term tasks that we and our financial system need to solve? There are ten of them. Above all, we need to restore the budget regulations; without this it is impossible to define the priorities that we set in terms of the state policy, and it is impossible to define the resources that we can manage in terms of the implementation of these priorities. In his address, Mr Putin noted the growing share of oil and gas income, the growing federal income. This slide shows that the dynamics and indicators in the last ten years reflect a growing federal budget dependence on the foreign economic situation. This is the highest point – oil and gas incomes as a percent of the federal budget. If in 2000, this share was 24.7% for Russia, and in 2004 it was 30%, the share in Russia of oil and gas income is currently 49.6%, that is, almost half of total income is based on the foreign economic situation.

If in 2006 the federal budget deficit could be avoided with a price of oil at $24.6 per barrel, in 2011 the price of oil was $101 per barrel, and in 2012, it was $116; and this shows significant risks resulting from the implementation of additional spending obligations, which Russia had to adopt in the crisis period.

Before the mid-2000s, the non-oil and gas deficit did not exceed 3.5% of the GDP, while in 2009 it grew to practically 14%, and this year we expect it to be 10.6%. I would like to say that this is a very significant risk, a considerably high non-oil and gas deficit which needs to be reduced year after year. According to our estimates, a $10 reduction in the price of a barrel of oil will lead to an income reduction of 600 billion roubles, which is comparable to the expenses for education. This is why our primary goal is to ensure budgetary stability, the stability of the budget system. To achieve this, we need to formalise the budgetary rules so that federal expenditures are calculated based on the basic, that is, the average, oil price over the past 10 years, so that the potential budget deficit does not exceed 1% of GDP.

If the actual oil price is higher than the basic price, additional revenues will be channelled into the Reserve Fund. If the oil price falls, the Reserve Fund will be used to cover our expenditures. In essence, this is a countercyclical fiscal policy whose implementation is vital for Russia. Of course, the bigger the Reserve Fund, the longer we will be able to cope with falling oil prices.

We believe that the Reserve Fund needs to be 7% of GDP for us to be able to honour budget spending commitments and fulfil Russia’s obligations in a crisis for two or three years if oil prices fall to $70 per barrel. This would be enough to adjust spending to suit the new circumstances. Just to remind you, the level of the Reserve Fund is currently only half of what is required. According to our proposal, if the Reserve Fund is greater than 7% of GDP, we could transfer 50% of foreign trade revenues to the National Wealth Fund and invest 50% in those infrastructure projects that do not have permanent spending obligations attached to them.

We propose introducing these budgetary rules from 2016, with a transition period before that to prepare for their gradual introduction. The budget should be deficit-free in 2015, a goal that can be achieved using the proposed transition period. Using this mechanism, we could reduce the non-oil and gas deficit to approximately 8% by 2020, even though this figure may look high compared to the pre-crisis level. But it will be extremely difficult to drastically reduce the non-oil and gas deficit in a short timeframe.

There are alternatives for working out the budgetary rules, based on the oil price over a 3-year period instead of 10 years, but these options as the slide shows... You can see that the risk of changes in the foreign economic situation and the insurance of these budgetary rules are less effective in the 3-year version than in the 10-year one. We are in favour of the more conservative approach to the implementation of these budgetary rules.

By the way, I would like to say that when we were placing Eurobonds...  Mr Putin, our Eurobond placement this year was exceptionally successful, the best ever in Russia in terms of price and profitability. We placed 10-year bonds at a 4.5% yield and offered 30-year bonds on foreign markets. Most importantly, demand focused on the long-term, 30-year bonds, which accounted for about $11 billion of the $24 billion demand. This means that investors, including foreign investors, believe in our financial policy and are ready to invest in the bonds of a state they trust.

However, when we held our road shows, almost all investors asked about our [large] non-oil and gas deficit. When will you get it down to the pre-crisis level? Let me remind you that before the crisis, the non-oil and gas deficit was 4.7% of GDP. We had to tell them that we would do it gradually, and that our first step should be to adopt budget rules to help limit spending and lower the risks of us failing to honour our spending commitments.

Our second goal is to draft and adopt a long-term budget strategy which should define the parameters of the budget system, according to which the resources for each state programme could be outlined. This will encourage the ministries responsible for fulfilling the state programmes to formulate their budget priorities within the allocations approved for each of the said programmes.

Given the need to extend the budget planning horizon, we consider it expedient to draft a budget strategy until 2024. The requirement on drafting a long-term budget strategy should be stipulated in the Budget Code, including in relation to the Russian regions.

The third goal is to develop a budget based on state programmes. This work started at the federal level in 2010. We defined the procedure for drafting state programmes, and approved the list of these programmes and the first analytical distribution of funds among them. However, in 2011 these efforts stalled. As a result, the Finance Ministry believes that only eight of the 41 state programmes are ready for approval, 21 could be completed fairly quickly, and the government needs to define and take a conceptual decision regarding nine programmes.

To resolve these issues, we suggest that the government expedite the submission to the State Duma of comprehensive amendments to the Budget Code, which should create the legal foundation for a transition to a programme-based budget. Any unresolved issues still under government review could be removed from the Code, but the basic bill allowing the Federation and the regions to move over to programme-based budgets should be submitted without unnecessary delay. Mr Putin, we are asking you to do this as soon as possible.

Some regions have surged ahead of us in this respect and have already started working on programme-based budgets. The Komi Republic, the Republic of Sakha (Yakutia), and the Bryansk, Vologda and Sakhalin Regions are already drafting state programmes, while the city of Moscow is implementing a programme-based budget. I am asking fiscal agencies to analyse this experience and to organise work in their respective regions to accelerate the introduction of programme-based budgets.

The transition to a programme-based budget is not an end in itself but a way of launching a comprehensive reform of the entire system of government, to realign it towards measurable, socially important results, and to enhance the responsibility of programme coordinators and customers for achieving the targets set out in these programmes. Unfortunately, we are lagging far behind other countries in this respect. The world has surged ahead and now assesses the performance of ministries, agencies and the government in terms of such programmes. There is a project and a ministry responsible for implementing it, so this ministry must implement the project and be held responsible for the specific results. The whole world is using the project-based approach, and we should too.

The next task is to improve the efficiency of state services. Federal Law No. 83 is the tool for achieving this goal. The bulk of the responsibility for implementing this law rests with the fiscal agencies, but this work is not over yet. There are two issues to be resolved in 2012. The first concerns giving the federal ministries the power to approve the basic lists of work and services included in the state order – the relevant law has been drafted by the Finance Ministry.

Second, to regulate on a permanent basis the mechanism of budget investments in the property of public-sector and autonomous institutions, as well as other organisations that are not recipients of budget resources. A bill to this effect is currently pending approval before the Ministry of Economic Development. But a distinct task is the adoption of new principles of payment for the services of state and municipal institutions: I am referring to the need to adopt uniform rules for determining subsidies for fulfilling a state (municipal) order. Until now such rules for the most part have been approved individually for every institution, but this is not the result we expect from such a reform, so a series of further steps should be taken.

The fifth task is to develop and implement a new stage in upgrading the system of relations between the budgets of different levels. On the whole, our system conforms with the basic world standards, but we do not always adhere to them: in recent years in fact they have been watered down. More decisions have been made at the federal level that increase the spending of Russian regions and municipalities, there are more subsidies and subventions, there is a growing tendency toward free-riding, and orientation toward one-off individual decisions on financial assistance to the constituent entities of the Russian Federation. With this in mind, the necessity of the following measures that the Finance Ministry is proposing is clear. Allow me to elaborate.

First of all, it is necessary to prepare measures to broaden the powers of regional authorities in the sphere of social policy to remove factors that impede the introduction of needs criteria in rendering social support. This is the key task, because the Russian regions must themselves identify the categories of citizens and the social strata that are in need of support, based on a means test, because this is a very important and serious criterion in the implementation of social policies. Such decisions must be made and the regions of the Russian Federation must be given such discretionary powers because today the regulations are determined by federal law.

In the opinion of the Finance Ministry, we should renounce any delegation of powers to the maximum degree – delegation should be replaced with the transfer of these powers to the relevant sources of the regions of the Russian Federation. Today transfers between the Russian Federation and the regions are effected on 96 different counts. It is necessary to adopt the principle of: one programme – one, or at most two, subsidies, and to determine the list of regional commitments when receiving these subsidies. At present the bulk of such subsidies are distributed under regulatory acts of the government. In our opinion, to ensure transparent inter-budgetary relations it is necessary to do so within the framework of the law on the federal budget. It is necessary to limit the practice of making decisions on the support of regions outside of budgetary procedures, as I have said.

The practice of individual decisions to support this or that region has often stimulated the heads of Russian regions to “beat out” decisions on financial assistance to Russian regions, this being a more effective means of obtaining additional resources than earning them or attracting investors to their regions. That is not right, so we believe we should revisit this issue, establish some rules for passing decisions on support for the regions of the Russian Federation if they apply for it and for passing a decision on support after approvals and after proof is provided that a corresponding region really needs additional financial assistance.

And one last thing that has to do with the relations between budgets of different levels: the responsibility of the regions must be increased for inefficient budget policy resulting in the adoption of a budget with “bubbles” in revenues, with unrealistic sources of financing, which leads to default on budget commitments, when Russian regions come to the Finance Ministry for additional financial assistance, complaining that they have no money to implement the decisions that have been made. That cannot be tolerated, because it leads to debt. Mr Putin, we have a mechanism whereby a temporary financial administration is introduced in the event of a region’s increase in accounts payable. I suggest that when the regional administration fails to meet its commitments and its accounts payable increase, the issue of no confidence in the governor should be raised by the President of the Russian Federation. Bringing a region to the point of bankruptcy is serious grounds for questioning the qualifications of the regional head, who organises work in a given region and deals with budgeting, and for raising the issue of whether that governor is up to his job.

The sixth task is reform of state municipal financial control. Draft amendments should be adopted as quickly as possible to the Budget Code and the Code on Administrative Offences in the sections dealing with state municipal financial oversight. We want financial oversight to be reoriented from mere verification of whether the budget resources allocated match the target. The adoption of programmes will enable supervisory agencies to assess how effectively the head of this or that ministry and agency or regional head has used the budget money.

The next task is the creation and development of the Electronic Budget information system. You have referred to it in your speech, Mr Putin. I would like to say that the introduction of an electronic budget will increase the transparency not only of the government and the financial agencies of the Russian regions, but of the entire algorithm of working out and making decisions, which is very important for oversight by citizens, by civil society. The electronic budget will simplify administration, cut costs, and make oversight of the use of budget resources more effective.

The next task. We have considered seven tasks that have to do with the budget. There are also three tasks that go beyond this framework, the key one being in the realm of taxes. Mr Putin, you have made clear the main direction in the development of the tax system. We have prepared the relevant proposals on each aspect of the development of the tax policy. I would just like to say that we are at present preparing proposals on improving the taxation of financial markets, optimising tax and accounting reports and out-of-court settlement of disputes. The issue of administration, regulation and the relationship between the tax payer and the tax official is very important in terms of how business perceives executive government bodies. These relations, and in many ways the overall business climate, will depend on how understandable and transparent these relations are and what the underlying rules are. This issue will be the focus of attention.

The next and ninth task is the development of the system of managing the state assets and commitments of the Russian Federation. Maintaining a moderate debt load is an important competitive advantage that Russia holds. The national capital market remains and will remain the main source of financing the federal budget deficit. We have made good borrowing in external markets (as we have mentioned) but we will not increase the amount of foreign borrowing so as not to create currency exchange risks and market fluctuations risks. We do not want to see them and we believe it is necessary to develop the domestic market. To this end it is necessary to improve the market infrastructure by facilitating access of non-residents to our market (proposals to this effect have been prepared) and creating comfortable conditions for them. This year we will launch the central depository to guarantee property rights in securities for the investors. All these are structural measures that indicate an improvement of the overall situation on the financial market, and simplified borrowing both for the federal budget and for institutional investors.

The creation of a financial agency is important for the development of the system of managing state assets and obligations. One might ask, why create yet another agency? But in our opinion the issue of managing our resources – and that means the resources of the Reserve Fund and of the National Welfare Fund… At present we place them at the lowest interest rate. Yes, we do invest them in stable and reliable instruments, but these do not yield high interest because our main task is to ensure risk-free investment and the opportunity to obtain resources quickly if the need arises. The task that confronts us now is to make these resources more manageable while preserving their stability and hedging against the risks of investment, but this is the business, everywhere in the world, of the structures set up for that express purpose, of the specialists who watch the markets day by day and minute by minute, analysing the securities and bonds markets. That will give us additional resources generated by managing state assets. This is a very important measure. We also ask you to expedite the decision on creating a Russian financial agency, we have all the necessary documents ready.

And last but not least, there is the task of improving the business investment climate. You have stressed, Mr Putin, the need to take Russia from the 120^th to the 20^th place in the rating of terms for conducting business, i.e. business environment. A number of tasks (you can see them in this slide) confront both the regions and the federation. We marked out in red the positions on which the Finance Ministry should concentrate: accessibility of credits (assessment on ten different counts is carried out as part of business share assessment), tax payment, the prevalence of cases of insolvency, investor protection and honoring of contracts. An action plan will be developed for each of these positions, as well as a plan for cooperation with the agencies that assess the Russian Federation according to those indicators so as to raise the standing of the Russian Federation. By the way, I would like to say that most of the positions refer to the regions of the Russian Federation. Look here, launching a business, registering property rights, getting a construction permit, and protecting investors are also a responsibility of the regions of the Russian Federation, connecting to power grids and communications, etc. I want to address the constituent entities of the Russian Federation that you have to pay attention to these matters, and we at the Finance Ministry will be ready to provide incentivising grants for those regions that pursue and achieve the highest results in these positions of the rating.  This issue should be tackled from two directions by both the Russian Federation and its constituent entities so as to lift the Russian Federation from its shameful 120^th place. 

A few more issues. The Finance Ministry is preparing a new programme of budget reforms for the period up to 2015. This is our priority. As part of the implementation of the programme, some fundamental approaches to the definition of state governance should be changed. Unfortunately, Mr Putin, we still take an overbearing economic approach: we love building, we love large networks of budget institutions with large staff.  If a task is set, we say, “We have to build a few buildings, we need extra staff”, and so on.  This is all wrong. It is an obsolete, old approach to state policy. Today we need, while keeping in mind a clearly defined task, to identify the mechanisms of realising such tasks within strictly defined budget parameters that will not lead to imbalances, as now the task of transitioning to an effective contract system is high on the agenda. What does that mean? It means that public sector employees rendering state services should work more efficiently, instead of filling out endless forms all day long; they should work and provide services to the population. The effective budget contract implies a natural wage hike for quality services. We say that increasing wages, which has been discussed, by 50%-100% depending on the categories of state employees outlined in Mr Putin’s programme articles, should not be conducted by equal distribution, by raising salaries across the board at the same level. No, this would yield no efficiency. Our understanding of the effective contract lies in its greatest efficiency reaching the most efficient specialists who render the top quality budget services, that’s what our task is. 

We see now that the regions are now applying to us for help: give us extra money, we need funds to raise salaries for doctors, teachers and so on. Colleagues, the point primarily is not just about wage hikes, it is about overhauling the management system of the branch. We have to assess how efficient the branch is and to focus our attention on more efficient salaries for those specialists that, in fact, carry the whole branch on their shoulders and not for those who are dead weight. There is absolutely no room for wage-levelling here, it is wrong. That is why the realisation of the tasks put forward in the programme articles both at the regional level (of course, a significant amount of tasks should be dealt with) and at the federal level should be solved through new approaches towards the structuring of the branch. We are talking about a new outlook on the budget that should allow for the realisation of tasks without increasing the tax burden, without raising budget deficits, this is our task for the coming years. That’s the way, Mr Putin, we are going to pursue our budget policy. Thank you for your time. 

Vladimir Putin: Mr Siluanov has left the podium but I have a couple of questions. We will discuss them from our seats. So, the first question is about the fund you are going to set up which should govern the reserves. Do you think the fund should place the money exclusively on international markets, or international financial instruments, or should it also work in some other directions? 

Anton Siluanov: Mr Putin, there are two considerations. The first one is setting up a Russian financial agency to manage the resources, the reserves that are now kept in the National Welfare Fund and the Reserve Fund. 

Vladimir Putin: Yes, I understand.

Anton Siluanov:  And secondly, we are saying that if the Reserve Fund exceeds, in our estimates, 7% of the GDP …

Vladimir Putin: Yes, I saw it.

Anton Siluanov:  …then a part of it may be directed to not only into foreign sovereign securities and so on but also to the projects that would bring yields later, and that would be the right thing to do.

Vladimir Putin: I saw it written here, on your slides “including infrastructure projects.” That is the agency or the fund you spoke about that would manage reserve funds’ resources …

Anton Siluanov:  Yes.

Vladimir Putin:  So you expect it will allocate resources, among other things, to those infrastructure projects after the reserve funds reach a definite level – 7% of GDP, right? A yield of 7%. 

Anton Siluanov:  Yes, that is what’s envisioned.   

Vladimir Putin: I see. This is the first question, and the second one is related. Do you think that reserve fund resources cold only be spent on infrastructure projects exclusively depending on the amount of the accumulated funds, or is it connected, among other things, to the necessity to decrease non-oil and gas deficits in the economy as a whole? 

Anton Siluanov:  We are just talking about using those resources more efficiently. 

Vladimir Putin: Yes, right, but only upon meeting certain conditions. Is decreasing non-oil and gas deficit to a certain extent one of them? 

Anton Siluanov:  According to our estimates, as we have reported, the realisation of the budget rules will let us bring down the non-oil and gas deficit to about 8% of the GDP.

Vladimir Putin: Do we have to wait for that decrease of 7% of GDP?  Or will we start spending the reserves on infrastructure projects after they reach a set amount? 

Anton Siluanov:  Mr Putin, they are two different indicators that is why …

Vladimir Putin: I understand, yes.

Anton Siluanov:  …we can accumulate the Reserve Fund exceeding 7% and start spending it without waiting for the volume, without waiting for …

Vladimir Putin: …a decrease in non-oil and gas deficits.

Anton Siluanov:  Yes, right, a decrease in non-oil and gas deficits.

Vladimir Putin: Till we reach the parameters we need.

Anton Siluanov:  In fact, we are talking about using funds that already have been received, concentrated in the funds, that is why, to our mind, there is no contradiction here. 

Vladimir Putin: All right. But I would like to draw your attention to the following. It means that the Finance Ministry and the finance minister believe that after those reserve funds reach a certain amount we could start to slowly and carefully, of course, allocate them to promising and absolutely reliable projects, infrastructure projects. 

The question is, what are the parameters, at what amount should we start doing this? The Finance Minister thinks that after they reach 7% of the GDP but as I see it, the colleagues from the Ministry of Economic Development will say that this is the right direction to take, and as to that cutoff point, we are going to discuss it later. 

Anton Siluanov:  There are differing opinions, Mr Putin. Some say our resources should be allocated to such projects today.

Vladimir Putin: Yes-yes-yes.

Anton Siluanov:  We’re saying we' are not going to perpetually save and accumulate money simply for the sake of saving. 

Vladimir Putin: I got it.

Anton Siluanov:  That’s why we’re saying: let’s define a safe margin, a boundary of 7%, and any excess above that can be directed to our various projects. I think that’s a reasonable approach. 

Vladimir Putin: I agree, I generally agree, I just wanted to know. I absolutely agree with you, I just wanted to hear the logic. 

Regarding taxes on the commodities sector, there in your slides you have it: the commodities sector – we won’t raise taxes; as to raw materials sectors we’ll see, we could raise them. I understand all this, we also do the same overall, but we have to be very careful here, of course, we and you understand this perfectly well. This also concerns the staff at various agencies. Mr Siluanov mentioned the staff in passing, yet it is a very sensitive issue for the budgets at all levels including the federal budget. A mechanical staff reduction across the board should not become the goal per se. Surely in some areas personnel should be released. In general, staff reductions are needed, but in some cases care should be taken, and I call on you to take a serious, non-mechanical approach.

Yes, Mr Siluanov mentioned in the beginning that our oil and gas revenues are going up. That’s true. But we understand that this is not related to the degradation of real manufacturing or the service sector in our country. In addition to other factors, this is related to the fact that oil prices are increasing faster than our real economy and service sectors. This is why we have ever increasing revenues. But what should we do, give it up? Although, our efforts at economic diversification, towards non-oil and gas revenue will continue; but actually that’s exactly what our budget projections for the coming years suggest. We are projecting a steady decrease from the oil and gas sector, and an increase of revenues from non-energy sectors. Is that the case? 

Anton Siluanov:  Absolutely.

Vladimir Putin: We talk a lot about this, and the minister has just mentioned streamlining inter-budget relations. Generally I share the ministry’s approach in this respect. But I’m asking for an assessment of the situation from different perspectives. Look, yesterday we discussed the problems of developing the housing market in the country. Those at that meeting, mainly the businesspeople, drew our attention to things that are probably evident; we addressed them one way or the other but still left them behind. For example, some said that we increase the amount of construction but that it is becoming increasingly difficult because many municipalities aren’t interested in large construction volumes. Why aren’t they interested? They aren’t interested, because they get nothing out of it. If, as the population increases as more houses are built, it brought in more tax revenue, then they would be interested, or if they collected property taxes for the local budget, then they would be fighting for every development project. But so far nothing comes out of it except a heavier load on the infrastructure and on the local budget.

Well, so what, don’t we realise that taxes are collected at the workplace, not at places of residence? We do realise that! I’m not suggesting we should turn everything upside down tomorrow, but it’s not hard to collect taxes at people’s place of employment if it is a simpler way (and I understand that it is simpler that way) and to redistribute it to the taxpayers’ places of residence. But this is not the final solution either, so I just ask you to keep thinking about this. We’ll talk more about it with the minster and the head of the tax authority. But generally when these decisions are taken on improving inter-budget relations, we should always start from reality.  

Anton Siluanov:  May I make a comment? 

Vladimir Putin: Yes, please.

Anton Siluanov: Mr Putin, but if residential complexes are built, local budgets immediately get taxes. Firstly, the cadastral values of the land go up and correspondingly the property tax goes up too. This is number one. And secondly, property appears in those houses, our citizens’ property, and property taxes are collected for the local budgets. That’s why here we can’t say, as they did at your meeting, that local budgets do not get anything, they do. By the way, as for personal income tax being withheld in a place of residence and not at the workplace, we have ongoing discussions about that transition, and the  regions are split in half on this – one half suggest we do it, and the other half is against depending on an entity.

Vladimir Putin: I know and understand that. But I would like to reiterate that it is easier to withhold taxes through employers, clearly, then to pass them over to places of residence. Nevertheless, we can collect taxes at the workplace and then redistribute among the residences; we can do this, or there are other variants of this approach. Again, this is not the final solution, but I suggest we think about this particular issue and about other problems while solving our inter-budget relations.

As for what you just said, yes, the tax base increases but the expenses for infrastructure multiply and are not fully covered by the taxes you mentioned. They don’t cover all the costs. But we’ll talk about that in a more focused format.  

Finally, one more thing. Mr Siluanov (again, I agree with what he said) mentioned that we have the lowest budget deficit in twenty years. I mentioned this too, and this is a matter of justified pride. But the finance minister said that we put all the extra revenue, extra revenue that practically everyone had, into the reserve fund. Well, not all of it – we still allocated 10% of it for various programmes, so he dodged it a little bit there, but most of those here know about that. But this is not the case… I meant to say about a different matter.

The point is that the finance minister, of course, talked about how that helped us reach our goal, but there are also other reasons. We now have the lowest ever food deficit, you see, the lowest, but how did we achieve this? And this also contributed to lowering the rate of inflation to 6.1%. We achieved this inflation rate by not going on a buying spree and directing this revenue largely to the reserve fund. Let me repeat, we still spent 10% of it, but we also had the lowest food cost inflation, and how was this achieved? Because we were not scrooges, we gave money to the non-financial sector to support agriculture. And in the hard times of the two-year drought and the world financial and economic crisis, the rural population was supported by direct allocation, straight from the budget. The money went to different areas – farming, long-term credit extensions, new credit programmes and so on and so forth. We had no fear, gave the money and the food cost inflation in our country – bang – fell to its lowest level. And this also contributed to lowering the inflation rate. That’s why everything we are doing is correct, but we should always look at a problem in its entirety.   

And finally, in conclusion, Mr Siluanov called on us to give up non-systemic solutions in supporting some regions. Mr Siluanov, I promise that I will no longer write direct orders – to give money to a certain region. But I seldom do this now anyway!

Anton Siluanov:  Thank you very much, Mr Putin. Colleagues, on behalf of all the financiers and all those present, I would like to thank Mr Putin for participating in the meeting of our board. Mr Putin, this is very important for us. You set the objectives; we will pursue them, and I hope, achieve them.

Vladimir Putin: I wish the staff success, and I would like to thank you for the past four years of cooperation. They were very hard for the nation, for the economy, for the financial system. I would like to thank every single person here with no exception. We have the chairman of the Central Bank, Mr Sergey Ignatyev, attending the meeting. We spent a lot of time during those years arguing for acceptable solutions. The Central Bank was operating in tight cooperation with the Finance Ministry and with the government. All that has given us a result we can be proud of. We have a lot of problems and deficiencies, we might also have made mistakes, but in general we can be proud of the results of our work. I would like to wish you good luck – you and the Finance Minister. Thank you very much.