Participants in the meeting discussed the forecast of Russia’s socio-economic development for 2013 and the 2014-2015 planning period, as well as the draft federal law On the Federal Budget for 2013 and the 2014-2015 Planning Period.

Transcript

Dmitry Medvedev: Colleagues, today is an important day for us, not because of the Government meeting (we have different types of meetings), but because today we will discuss a key issue – the draft budget for 2013 and the 2014-2015 planning period, as well as the outlook for Russia’s socioeconomic development for the same period.  Before we begin our discussion of these issues, I should say a couple of words about the approaches we used when drafting the country’s main financial document.

The principles of drafting the budget have remained unchanged. They arise from the parameters defined by the budget rule. And there can be no compromises. Everybody should remember this. This is my position and the President shares it. The budget arises from the real economic situation in Russia and in the world. This situation is no cause for joy. It is complicated, that’s why the budget will be tough in some areas. It was quite difficult for the Government and for me personally to take many of these budget decisions. But these decisions have been taken and discussions in the Government and in the various agencies are over. The draft budget will be introduced to the State Duma within the established timeframe.

I would like to emphasise the following: despite all the difficulties, for the first time the budget has been drafted based on a strict budget rule, which makes it quite sustainable especially in light of the problems that are emerging in the global economy and in Russia’s economy. But the budget priorities have remained the same: meeting social obligations that we have undertaken, modernising the economy, infrastructure and the social sphere for the good of our people.

The budget has been drafted based on a forecast prepared by the Ministry of Economic Development. The forecast is based on accurate estimates on which both Russian businesses and foreign investors rely when planning their operations for the next three years. I believe the entire set of factors has been taken into account, including the dynamics of the foreign economic environment and global economic trends, which are rather contradictory.

The main variables of the forecast are based on the assessment of external conditions. According to the basic scenario of this forecast, our domestic economy will become more competitive and the investment climate will improve. State expenses on developing the infrastructure are expected to grow at a moderate rate, while salaries of public-sector employees will increase more quickly. The GDP is expected to increase by 4.2% each year. We expect a flow of investment into the main assets and an increase in retail trade. Industrial production is supposed to grow by 3% and inflation will stand at 5-6% in 2013 and, we hope, no more than 4%-5% in 2014-2015. We must deal with this separately.

According to the forecast, the real incomes of the population, in turn, will grow by no less than 4%-5% per year. I’d like to emphasise that the Government is drafting a tough, reform-oriented budget policy aimed at creating the necessary conditions for all vital spheres – education, healthcare, social protection, support for mothers and children and a longer life expectancy. It would be good to allocate even more money for these areas, but everything is relative. I’m now referring not to percentages but to the absolute amount of money in the social sphere. This amount does not even compare with the amount three or five years ago – today’s allocations are much bigger. Expenses on healthcare from the federal budget, funds for compulsory medical insurance and regional budgets this year and the next exceed 2.5 trillion roubles. In 2015 they will reach almost three trillion roubles and will keep growing.

Naturally, we will continue to modernise education. In 2013, federal budget expenses on education will top 560 billion roubles. Some 28 billion roubles will be earmarked to support leading universities and improve the quality of education; about 630 billion roubles will be allocated in 2013 for fundamental and applied research and the development of high-tech production. In 2015 we will bring the funding of state-run research funds to 17 billion roubles.

Of course, one of the priorities of the Government’s work on the budget will be to increase salaries for public-sector employees – teachers, doctors, social workers, research associates and employees of cultural institutions that provide government and municipal services. We’ll certainly find the money for these purposes, despite the very rigid budget rules.

Today, we’ll also review a draft law on increasing the minimum wage to 5,205 roubles – a 13% growth from 4,611 roubles.

One more issue that I’d like to emphasise is about the allocation of funds to the regions for the payment of government stipends to full-time students at vocational and technical schools and universities under the programmes of primary and secondary professional and technical education in priority areas. The relevant provision was approved at the end of the past year. The first payments for the best students that are mastering highly demanded professions will be made in 2012-2013. We plan to issue 5,000 stipends, including 1,500 for 2,000 roubles and 3,500 for 4,000 roubles. The budget provides for these allocations.

In summer we decided to increase stipends to students in need. We have done this, and the relevant allocations have been made both for 2013 and 2014.

Today, we will also review draft laws on the budgets of the Pension Fund and the Medical and Social Insurance Fund for 2013-2015. The main task is to improve the mechanisms of their action, broaden their opportunities and make assistance more targeted, more recipient-oriented wherever necessary.

Revenues and expenses of all funds will be growing over the next three years. The Medical Insurance Fund will spend its money to render free medical aid under the basic programme of compulsory medical insurance, increase salaries to healthcare workers and conduct additional medical examination of working people and children in difficult circumstances. The medical workers who came to work in rural areas will continue to receive lump sum allowances next year as well.

The Pension Fund budget has been balanced, so we will be able to honour all our commitments on pensions. The amount of pension payments will be adjusted in 2013 and then maintained at a level where it outpaces increases in pensioner’s subsistence minimum. The size of retirement pensions will average over 10,000 roubles in late 2013, while social pensions will be over 6,000 roubles. Changes in tariff policy have been proposed to balance the Pension Fund budget, which will primarily affect the employers who have jobs with harmful and hazardous working conditions.

In addition, we will continue to improve the pension system, upgrade some of its elements for the benefit of the people and strive to balance it properly in the long term. This work will be based on an extensive discussion of the pension reform strategy that has already been finalised and released. The discussion should be held before the year’s end, and all decisions should be taken within that timeframe as well.

The revenue of the Social Insurance Fund’s budget will come from insurance premiums paid under mandatory insurance policy for major insured events, such as temporary disability or maternity. This source of revenue will be quite substantial at 310 billion roubles in 2012 and 462 billion roubles in 2015. Thus, the financing of these expenses will increase substantially.

In addition, federal budget funds will be used to pay for public services performed by the fund. Each year, 75 billion roubles will be spent on maternity benefits until the child is 18 months old, providing technical rehabilitation equipment to people with disabilities and Chernobyl disaster relief workers. The total cost of insurance related to industrial accidents and occupational diseases will amount to about 76 billion roubles in 2013. By 2015, this figure will be up to about 90 billion roubles. These are some of the indicators that I felt it was important to share with you in my opening remarks.

There will, of course, be other figures. As I said at the beginning, the Government will submit the draft budget to the State Duma before October 1. I’m referring to the basic approaches that I have already mentioned. There is some time left to make finishing touches and submit the draft for deputies’ consideration.

Let's begin the discussion. I have a suggestion. Let’s first listen to the forecast of socio-economic development in Russia for 2013 and the 2014-2015 planning period by the Minister for Economic Development. We may skip discussing the forecast separately and let the Minister of Finance speak about the draft federal budget law for 2013 and the 2014-2015 planning period. After that, we’ll discuss everything together. Mr Siluanov, you could also speak about introducing amendments to the tax law before opening the discussion, because it’s related to the draft budget.

That way, we will hear reports on four issues, and then discuss them all. Agreed? I turn the flow over to Mr Belousov for the forecast of socio-economic development.

Andrei Belousov (Minister of Economic Development): Mr Medvedev and colleagues, the Ministry of Economic Development submits for your consideration the updated forecast of Russia’s socio-economic development in the medium term for 2013-2015. Although many of the people in this room have already discussed the forecast, I believe we should once again focus on the most important underlying  internal and external conditions and trends.

To begin, I’d like to provide a brief overview of the current situation. The Russian economy grew fairly steadily in the first half of 2012, with GDP growing at 4.5%, which, truth be told, was a bit unexpected for us. This is higher than we expected. The manufacturing industry, wholesale trade and financial activities also grew faster than expected. Real wages grew noticeably. We have revised our estimate of GDP growth for 2012 from 3.4% to 3.5% as compared with the baseline scenario adopted in April. This is an insignificant increase, because, according to our estimates, growth will slow in the second half of 2012. First, we are expecting a slowdown in consumer lending. The early signs of this trend were spotted in the middle of 2012. We expect consumer lending growth rate to decline from over 40% in the first half of 2012 to 30%-33% by late 2012. Accordingly, this will somewhat slow down retail sales.

Second, imports may start growing in the second half of 2012 amid declining customs tariffs.

Third, drought caused us to revise downward our grain harvest. According to preliminary estimates, the grain crop will be about 73 million tonnes, down from 97 million tonnes in our scenario.

Fourth and final, the drought and rising global grain and other commodity prices triggered growth of food prices and will bring about steeper inflation rates. Food prices were up 2.2% in June-August even though normally prices for produce are low throughout the summer. We think that consumer prices will grow by 7% rather than the 5%-6% we thought in April.

I would like to remind you that price increases from January 1 to September 17 amounted to 5%, including for food, whereas last year it was 4.6% over the same period and almost half, 2.2%, for food.

Colleagues, the global economic outlook was another factor that significantly affected our forecast numbers. Clearly, the future of the Russian economy is largely determined by the global crisis, especially in the European economy, which is our major trading partner. It is one of the major uncertainties in our economic development in the near future.

I would like to note, however, that the current situation and the situation in the near future will be fundamentally different from the previous crisis of 2008-2009. The baseline scenario for the world economy is that with the active policy of the European Central Bank and international institutions, the crisis may be and, we hope, will be contained to several troubled European countries, primarily in southern Europe. We believe that the euro zone will largely remain in stagnation, and it will take years for it to recover and start growing, but it will nevertheless avoid a major recession and production slump.

The US will partially mitigate the rules of budget consolidation and maintain positive growth of about 2% next year. China has rather powerful levers and reserves for stimulating domestic demand and we can expect that although China’s GDP growth rate will decrease to an extent, it will not drop below 7.5%-7.9%.

In general, global economic growth will slow to between 3% and 5% in 2012-2013, but it will reach 4% by the end of the forecasting period.

Regarding projected energy prices, what is most likely, in our view, is the scenario in which oil prices will remain relatively high during the entire forecasting period. In general, the prices will be supported by the continuing rise in oil demand in China and in India, by looser monetary policy in developed countries and by OPEC’s rather strict control over oil supply.   

The relatively high cost of alternative sources of oil is a rather significant factor. Unfortunately, the continuing tensions in the Middle East will play a role, too. On the whole, the basic scenario in the oil price forecast is rather conservative as compared with the prices determined by the world’s largest banks and analytical centres. The slides show consensus prices; however, I can say that this year’s consensus price will be  $109 per barrel, next year it will be $107, and further on $105 and $106. We forecast $109 per barrel this year, $97 ($10 lower than the consensus price) in 2013, and then $101-$104. So the trajectory of oil prices included in the forecast (it has been proposed to make assessments of federal budget revenues based on this trajectory) is rather conservative and below the average trend according to the assessment of the largest banks and analytical centres around the world.

Next. How will Russian economic development in the coming years be qualitatively different from the preceding period? The first thing (and this is a very important factor) is that the export of hydrocarbons will cease to be the leading growth factor. The expected launch of new oil fields in eastern regions and in the north will only compensate for the declining production in active fields. The coming years will see a stabilisation of oil production at a level of about 510 million tonnes a year. A slowdown in the growth of gas exports is also expected. While from 2003 to 2007 the foreign economic factor determined over half of our economic growth, which is some 3.5-4 percentage points of 7%-8% GDP growth, in the next three-year period we expect that the foreign economic factor will contribute less than one percentage point.

The second feature – we expect wage growth to be more strictly pegged to the rise in labour productivity. This will lead to slower wage growth as well as to slower retail trade growth. Remember that in the pre-crisis years, consumption growth largely rested upon rapid wage growth. At that time, wage growth outpaced by 2 or 3 times the dynamics of labour productivity due to the rise in export revenues. Currently corporations have a more balanced approach to labour costs despite a growing shortage of skilled personnel. While this year real wages will grow by some 9%, we expect a significant slowdown in their growth in 2013-2015, approximately by half, down to 5%. Meanwhile the growth of labour productivity will accelerate up to 4.6%. As I said, these two indicators will converge to a significant degree. Such growth is healthier and more balanced, but slower.   

The third feature is economic adaptation in light of our accession to the WTO. The level of tariff protection will be reduced approximately by a third, from 9.5% in 2012 down to 5.9% in 2015. This is a very serious challenge which means that in the coming years the set of measures outlined and adopted by the Government in order to adapt leading economic sectors to the WTO requirements and global competition must be implemented in full. Some of these measures have been implemented, and we have to implement others by the end of this year. The year 2012 has seen an abrupt slowdown in import growth down to 7% expressed in physical terms against 20% in 2011, and we expect that in the coming years import growth will keep the same level or about 7% yearly. This means that import growth will approximately equal domestic demand growth, that is, the share of imports on the domestic market basically won’t grow. This is also an absolutely new feature of of economic growth in 2013-2015 as compared with the preceding period, and the realization of this prerequisite will be possible only due to a significant improvement in the competitiveness of national producers.     

And finally the fourth feature is budget consolidation, which means reducing government demand and slower economic growth. Many nations are maintaining government spending, but according to slides 9 and 10, the majority of developed countries have a higher level of budget spending than Russia, and the level of reductions in budget spending is considerably lower as compared with the crisis. 

I can report that in the federal budget we have planned to reduce spending from 25% of GDP at the peak of the crisis, when government spending was at the highest level, down to some 19% in 2015, that is, down by six percentage points. I must say, budget consolidation is being carried out on this scale only in the countries suffering great financial difficulties or seeking to prevent such difficulties, such as Britain and Spain, if we look into the whole post-crisis period. In European countries, even including rather problematic countries, such as France and Italy, the level of budget consolidation, that is, spending cuts that increased during the crisis, accounts for some 3%. According to the assessments of the Ministry of Economic Development, the cost of budget consolidation is approximately one percentage point yearly.  

Now I want to highlight basic qualitative characteristics of economic development up to 2015. In the medium term, we forecast an increase in GDP growth from 3.5% (the assessment of the current year) to 4%-4.5%. I’d like to note that in 2011, Russia’s GDP per capita was $21,000 by purchasing power parity.  This approximately corresponds or even exceeds the level of Eastern European countries and is approximately 1.5-2 times lower than the level of developed nations.    

Dmitry Medvedev: What place does Russia hold in the world in terms of purchasing power parity?

Andrei Belousov: In developed countries, the GDP per capita by purchasing power parity is some $30,000 and above. Currently, Russia is approaching the level of Southern European countries and has exceeded the level of Eastern European countries. We have approximately exceeded them.

If we take the entire list of largest nations, we see the following picture. As I said, Russia seems to have a good position in terms of GDP per capita, that is, in terms of income and consumption, even if compared to some European countries. On the other hand, Russia’s labour productivity is lagging behind developed countries by 2.5-3 times and is at the level of Chile and Mexico. That means that in the near term our major strategic priority is to increase labour productivity. Unless we reduce this gap, we just won’t be able to sustain consumption at the level that we have essentially reached. Therefore we need economic growth, and we will not be able to meet our challenges without an annual GDP growth rate of 4%-5%,, simultaneously providing for a rise in living standards and the growth of national security and defence. We have made the calculations and we believe that by intensifying all existing factors of economic growth Russia can achieve the targets set by the presidential executive orders, that is, growth of labour productivity by 1.5 times by 2018. This scenario included in our forecast is called the accelerated growth scenario. This scenario mainly involves a significant build-up of investment at least up to 25% of GDP by 2015, as well as greater use of gross national savings in conjunction with some growth in government spending aimed at developing infrastructure and a new economy as well as facilitating the influx of capital.    

What should be done to ensure that we meet the growth targets in the forecast, that is, some 4%-5%? First, it is necessary to support accelerated technological development. The fact is that the majority of European countries, almost all of them, are currently pursuing a policy of budget consolidation, they are reducing budget spending. However, practically all major countries including European countries are not reducing but rather increasing their spending on technological development. This is a very important parameter, and the [current] situation and the three-year period significantly depend on it, and the coming years will depend on it, too. 

We believe that Russia should reverse the trend of declining spending on research and development and, without a doubt, increase private spending and improve the payback. According to the assessment of the Ministry of Economic Development, Russian spending on research and development relative to GDP has been declining for three years, and currently stands at approximately 1.1% of GDP, or half the European Union and other developed countries. For example, in Sweden, South Korea, Japan, Denmark and Switzerland spending exceeds 3%, in the US it is 2.8%. The forecast includes the growth of research and development spending up to approximately 1.2% of GDP.     

An important tool here is the launch of 32 priority technological platforms covering the highest priorities of technological development – composite materials, medical technology and biotechnology, agricultural technology, aviation technology, space technology, nuclear technology, smart grids and new power sector. All this is included in the forecast.

Second, the forecast presupposes a considerable intensification of capital accumulation primarily in the following areas: the improvement of the investment climate following the implementation of the national entrepreneurial initiative; sustainable capital inflow beginning in 2014, which will not only expand the financial basis of capital accumulation, but will also bring the needed technology and experience. We estimate the 2012 capital flow at approximately $60 billion. In our assessment, the period between January and August saw a capital flow of $52 billion. But we believe that starting from 2014, the trend can change fundamentally. I recall that in 2007, the total capital inflow to Russia exceeded $100 billion but primarily due to foreign loans. We believe that in the coming years we, in principle, will see a capital inflow of about $30-40 billion. 

Third, given growing global competition, export support complying with WTO rules is becoming more important. Such systems have been created in many countries and these systems are operating in many countries. We should provide means and measures enabling Russian exporters to use competitive financial, primarily loan, packages, which can significantly support research-intensive products in Russia. The budget includes allocations of some 3 billion roubles from additional receipts for these objectives already this year.

We believe that the necessary amounts should be stipulated in 2014 and 2015. We think that given the stabilisation of energy export, non-energy export in 2013-2015 should be growing at the rate of at least 4% a year, compared with 1% growth of exports as a whole.

The fourth and final point is the policy of curbing inflation and holding back the growth of tariffs for the goods and services of companies in the infrastructure sectors. As I have said, inflation is forecast to decrease: we are set to achieve the level of 7% in 2012 and 4-5% by 2015. The prices and tariffs in the infrastructure sectors will grow a bit faster than the prices for the end products, which requires greater efficiency. Electricity tariffs are to increase by about 10-14% a year, and for gas by 14.5-15%. The forecast, compared with the previous version put out in April, has a slightly higher growth of tariffs for freight and railway carriage (up to 7%), because the companies must not sustain losses. However, for Russian Railways, tough targets have been set for saving material resources (up to 2% a year) and raising labour productivity.

The housing and utilities sector remains a serious problem. Therefore, in spite of the rapid growth of tariffs in recent years (from 1999through 2012 tariffs were growing at four times the rate of inflation), the rate payers still are not covering the cost of these services. Thus, in 2011 it remained practically at the level of 2006, that is, at about 84%. In the forecast period, housing and utilities rates will grow by about 10-11% a year, which is largely due to the need to reduce cross-subsidising. The transition from cost-based pricing to long-term methods of tariff setting will slow down the growth of utilities tariffs, which will stimulate decommissioning of inefficient production facilities and attract investments in this sphere.

Fifth, and finally, is of course the issue of raising incomes. The forecast growth of the economy will make it possible to increase real incomes by almost 15% in three years. The forecast envisages significant growth of pay in such sectors as science, education, healthcare and culture: this is not just money to finance higher wages, it should dovetail with increased efficiency of the public sector and the introduction of an effective contract practice. Considering all these measures, the real wage in public sector  may grow by more than 18% in the next three years.  Colleagues, the forecast also contains alternative versions that take into account external and internal risks - you can see their parameters in slides 17 and 18. We propose as the basis for the budget a moderately optimistic forecast scenario with an average GDP growth of 4.2% by 2013-2015, as the Prime Minister said. The forecast I have presented has been agreed upon with the Energy Ministry, Agriculture Ministry, Ministry of Industry and Trade, Ministry of Healthcare, Ministry of Labour and Ministry of Transport, and has been discussed with the Central Bank, major companies, the business and scientific community . We urge the Government to approve the forecast to be submitted to the State Duma as part of the budget package. Thank you.

Dmitry Medvedev: Thank you, Mr Belousov. Take your seat. I would now like to give the floor to the Finance Minister. Please, Mr Siluanov, your comments on the three issues.

Anton Siluanov: Mr Medvedev, colleagues. The draft budget prepared by the Finance Ministry and now presented to you is based on the main characteristics approved by the Russian Government and the results of the draft budget discussion with all the ministries and agencies at the meeting of the budget commission. The budget has passed the zero reading at the State Duma and has been approved on the whole. The draft budget determines the budget policy in accordance with the President’s Budget Address and the guidelines of the budget policy approved by the Government. The task of the budget policy is to make the budget less dependent on fluctuations in the world markets. This has been achieved through the use of the budget rule. The main task is to ensure the implementation of the President’s May executive orders concerning key areas of social and economic development. The main task is to use the budget and the mechanisms that underpin the budget in order to start reforming the budget-financed sectors such as healthcare, the social sphere, education, labour efficiency in the public sector, and to improve the quality of budget-financed services rendered by public sector organisations. The budget is aimed at meeting the targets of social and economic development. It envisages a slowdown of inflation and sustained economic growth, and seeks to ensure the stability of the budget system of the Russian Federation.

In my report I would like to use the presentation materials that you have in electronic form in order to present the main characteristics of the budget more clearly.

Slide 2 shows the budget projections for oil prices and for the rate of growth of the GDP. Pay attention to the fact that the price of oil assumed in the macroeconomic forecast for 2013, 2014 and 2015 is $97, $101 and $104 per barrel, respectively. But, using the budget rule, the price of oil used in calculating the federal budget revenue and expenditure is $91, $92 and $93 per barrel, which enables us to project our spending needs in a more conservative way.

The third slide presents the main federal budget parameters. We see that in 2013, 2014 and 2015, oil and gas revenues will drop from 10.5% of the GDP in 2012 to 8.9% of the GDP in 2013. The reason, above all, is that we have a more conservative forecast of oil prices on the one hand, and we are taking into account the effects of Russia’s accession to the WTO and the decrease of import duties, on the other hand. Besides, the budget for 2013, 2014 and 2015 will see a gradual reduction of the budget deficit from 0.8% of the GDP in 2013 to practically a balanced budget in 2015. I would like to draw your attention to the non-oil-and-gas deficit. It is still considerable, it is quite high in fact. In effect, we are still in the “red zone,” as we have been in recent years when the non-oil-and-gas deficit increased in 2009-2010 before we began to diminish it gradually. Nevertheless the non-oil-and-gas deficit will amount to 9.7% of the GDP in 2013, and we are planning to bring it down to 8.5% of the GDP by 2015. This means that practically half of budget spending, in the amount of about 20% of the GDP, will be financed by oil and gas revenue, thus preserving the risk of dependence on foreign markets. Even so…

Dmitry Medvedev: For the benefit of our colleagues, what would you consider to be an acceptable level of non-oil-and-gas deficit for a country with an economy such as Russia’s?   

Anton Siluanov: Yes, indeed, we believe that we should aim for the figure of 4-5% of the GDP at the most. Our plans will see us reach the figure of 7% of the GDP in the coming years. Still, we believe that whatever opportunities for income generation and mobilisation we have should not be used to increase our spending commitments, but rather they should be used to diminish the risks that still exist in financing our spending. I should remind you that prior to 2008, the non-oil-and-gas deficit was within the range of 2-4% of the GDP. We believe therefore that in the medium and long term our main task is to bring down that indicator to that of the pre-crisis period.

What other parts of this table should be noted? In our reports on the third and fourth items, we will give a more precise figure of revenues from the tax on the extraction of minerals and excise tax. That will introduce some adjustments to the 2015 parameters compared to those you see in the slide today, as the level of expenditure in 2015 tentatively approved today, that is, 5.4% of the GDP, will be reduced to 5% as envisaged by the Budget Code of the Russian Federation. So, given the adoption of the decision on the tax on the extraction of mineral resources and the decision on the excise tax, we would like to ask you, Mr Medvedev, to allow us to make some adjustments to the budget parameters. But even so, our spending commitments fit into the parameters envisaged by the budget legislation.

Slide 4 shows the sources of financing the federal budget deficit. I would like you to note that the bulk of budget deficit financing will come from domestic and foreign markets. In the coming three years, we expect to borrow $7 billion in the external market, the same level as in the current year. Nevertheless, borrowing in the internal market remains considerable: about 1.1-1.2 trillion roubles annually. This is a substantial amount considering that if the world economic situation deteriorates, it may affect the domestic financial market. Therefore we will pursue a policy of minimum borrowing in the internal market so that the resources available  there  today could be used in the real sector of the economy and to a lesser degree redistributed through the federal budget.

I would like to pay special attention to the proceeds from privatisation. These proceeds will amount to 427.7 billion roubles in 2013, 330.8 billion in 2014 and 595.1 billion in 2015. These are quite ambitious targets which dictate that preparations should start in advance. Perhaps we should  prepare the privatisation measures now that will be enacted in 2013. We should be mindful of the fact that in recent years we struggled to meet the targets of privatisation incomes, and this year we may get less than 200 billion roubles instead of 300 billion roubles, the target set for the budget in 2012. So I would like to urge all those present to work in advance on these revenues and the necessary preparations of privatisation transactions.

Mr Medvedev, colleagues. Slide 5 shows the parameters of the Reserve Fund forecast. According to our plans, it will be replenished to the tune of 373 billion, 596 billion and 818 billion roubles in 2013, 2014 and 2015, respectively. That will enable us to increase the Reserve Fund to 5.7% of the Gross Domestic Product by the end of 2015. As we said during discussions at Government meetings, after the Reserve Fund reaches the 7% mark, half of all the proceeds over and above that mark could be used to finance infrastructure projects. That may become possible as early as 2017 when, as you can see, the proceeds over and above the 7% level will amount to 293 billion roubles, and half of that amount could be used to finance the development of infrastructure -- 1.044 trillion in 2018 and 1.083 trillion in 2019. In other words, half of these sums could be used to implement key infrastructure projects.

The next slide shows the forecast for the National Well-Being Fund. It practically does not change in nominal terms, there are merely some adjustments due to exchange rate fluctuations and the use of the Fund’s assets. But by way of implementing our task and the Government’s decision to establish the Russian Financial Agency, we think the resources now concentrated in the National Wellbeing Fund and in the Reserve Fund could be used more effectively by increasing profits from the assets of these funds.

Slide 7 shows the amount of spending planned for 2013-2015. Nominal spending will increase by nearly 570 billion roubles in 2013, 819.7 billion roubles in 2014 and 1.5 trillion roubles in 2015. Total spending, as a percentage of the GDP will amount to about 20% in 2013, which is actually more than in the pre-crisis period. Just to remind you, the total federal budget spending hovered around 16% of the GDP in 2004, 2005, 2006 and 2007. Nevertheless the amount of investments and the dynamic of direct investments in the basic assets and the economic growth rate were substantially higher than they are today, and than we are forecasting for the next three years. Direct investments in 2006… The rate of growth year-on-year was 16.7%, 22.7% in 2007 and 10% in 2008, when the crisis was already starting and the GDP growth was 8.2%, 8.5% and 5.2% each year, respectively. So, in spite of the low level of revenues, the low percentage of revenues and spending compared to the GDP, the total volume of investments and economic growth were much higher than we are planning now, so, colleagues… of course, growing state demand results in economic growth, but I would like to note that the growth of spending is not always matched by the rate of economic growth. Therefore in pursuing a responsible budget policy in the pre-crisis period and limiting spending, we had substantial budget surplus at the time, and were already building up the Stabilisation Fund. Such a judicious policy encouraged investors to invest in our economy, and the rate of GDP growth due to investments and investment demand was much higher. Our budget policy will bring us back to a responsible and tight budget policy, while investments and sources of growth should be generated in the first place by the enterprises, the real sector and foreign investors, and not by the Federal Budget.

Slide 8 shows the structure of federal budget spending. Yes, it is changing, and a whole number of items are reduced in nominal terms. Take for example the spending on healthcare: it will drop by about 18% as compared with this year. But if you look at the consolidated budget and take into account the spending out of the consolidated budget of the Russian Federation, including the resources of the Mandatory Medical Insurance Fund, the share of spending both in the GDP and the consolidated budget is not diminishing, but is actually increasing -- it will amount to 2.5 trillion roubles in the consolidated budget. The share of the federal budget in this total spending is just 15%. Spending on education also accounts for just about 19% of the consolidated budget, because the main spending commitments are at the level of the constituent entities of the Russian Federation, and that is where spending on these matters will increase.

A word about spending on agriculture. We have adopted a state programme that increases spending in support of agricultural production, with the federal budget allocating 158.3 billion roubles. In reality that is a substantial sum: if you look at the total spending on agriculture, including in the regions, the total spending would exceed 250 billion roubles, which represents a 9.5% growth on the expected spending this year.

Now a word about the incomes of road funds. We will replenish them every year and these revenues will increase, considering the growth of the excise tax. Accordingly, the spending on roads will grow. Next year we should determine the target for excises for 2014-2015, and there will be some changes as technical regulations for new grades of petrol and new grades of fuel are introduced. So the taxation of petrol and diesel fuel through the excise tax will be determined next year.

The biggest growth, a substantial growth of spending, will be on national defence and law enforcement. We are increasing procurement of defence products for state needs and increasing the salaries of servicemen. This is our main function, this is the function of the Federation and it is in this area that budget resources were largely concentrated.

Now I would like to say a few words about the consolidated budget of the constituent entities of the Russian Federation (slide 9). In our estimate, the total volume of regional budget expenditures will increase by about one trillion roubles next year as compared with 2012, to reach 9.1 trillion roubles. At the same time, considering our additional regional wage obligations in 2013, primarily obligations regarding the salaries of teachers, the total budget deficit in Russian regions will reach 120.8 billion roubles.

We estimate that Russian regions will spend an additional 328 billion roubles in order to implement presidential executive orders throughout 2013. Moreover, 479 billion roubles and 673 billion roubles will be spent for this purpose in 2014 and 2015, respectively. They will finance their additional expenditures, of course, primarily from their own revenues. In our estimate, regional revenues will increase by about one trillion roubles throughout 2013. Regional revenues are set to increase by 800 billion in 2014 and by just over one trillion roubles in 2015. The Government will also support regions, and we have set aside 100 billion roubles for implementing presidential executive orders, which are primarily linked with wage increases.

I would like to note that today we are holding a meeting of a trilateral working group together with State Duma deputies and Federation Council members. We will examine a proposal to distribute subsidies, to even out budget funding and other allocations to make it possible to balance regional budgets.

I would like to say a few words about budget’s crisis-prevention measures. We will receive several instruments next year. First of all, we have reserved 200 billion roubles by withdrawing certain maximum allocations from budget recipients. The Government will meet next year and will decide to allocate or redirect funding for other purposes. We have this resource.

Second, we believe that it is possible to exchange 150 billion roubles’ worth of federal-loan bonds for preference shares of loan agencies. As a result, we would be able to support loan agencies in case of negative developments. Actually, this anti-crisis measure was stipulated over the 2008-2010 period.

Furthermore, we have stipulated state guarantees of the Russian Federation during the implementation of Government-backed projects. In effect, we can use this instrument to support enterprises, organisations and banks in the event there is trouble. Moreover, National Welfare Fund assets can be deposited in a Vnesheconombank account, and they can subsequently be used to support enterprises and industries.

And now I would like to say a few words about the implementation of the May 7 Presidential Executive Order. I would like to note that we have allocated an additional 277 billion roubles for implementing presidential executive orders next year. Moreover, 381 billion roubles and 487 billion roubles have been set aside for this purpose in 2014 and 2015, respectively. The main projects is this area are as follows: wages and the conversion to cost-effective contracts; benefits for families with three and more children; the establishment of state research funds; paying higher stipends to top students and students in need; additional funding to relocate the tenants of dilapidated housing; support for leading universities; the annual increase in the number of military personnel serving on contract; and inter-budget relations and support for the regions in line with such inter-budget relations. In reality, despite the complexity of the budget, we have carried out a so-called budget manoeuvre, and we have obtained budgetary allocations, making it possible to implement presidential executive orders and to accomplish top-priority objectives stipulated by the Government. Apart from executive orders, we have focused on such highly important decisions as support for enterprises storing small arms and ammunition. We are launching a new programme during this complicated period, and we are allocating 16 billion roubles for this programme over a three-year period. In addition, we are moving to build three new nuclear-powered icebreakers. We have seen nothing like this in the past few years. Colleagues, this is a highly important decision that is being stipulated by the cash-strapped Government for the next three years.

Moreover, we are setting aside allocations for a new programme, which is called upon to improve the missiles-and-explosives storage infrastructure. This programme will receive 25 billion roubles over a three-year period. This is a new issue and a new programme, and the need to implement this programme has been discussed rather actively over the past few years. In addition, we are addressing the issue of apartment buildings’ resistance to earthquakes. This programme is to receive… The Government has approved this new programme, and 18 billion roubles will be allocated over a period of three years. We will also support other sectors, including propulsion engineering, the aircraft industry, etc. The draft federal budget stipulates funding for all these sectors.

I would like to say a few words about specific decisions, in line with presidential instructions for the execution of decisions adopted at a meeting that was held two days ago. We will envision additional funding for university professors and lecturers. I am talking about more rapid work ahead of schedule in 2013, so that this issue can be resolved completely. We will also provide extra funding to support various organisations during Russia’s accession to the World Trade Organisation (WTO).  As has already been noted, we will also support Russian enterprises exporting high-tech products. Where will the funding come from? In our opinion, we need to include Rosneftegaz dividends in federal budget revenues. This company, which owns stakes in major oil companies, has recently accumulated dividends and has retained control over such dividends. We therefore believe that, in 2012, we could take away up to 95% of the company’s dividends and focus on the capitalisation of our major enterprises, including the capitalisation of RusHydro. In addition, high-priority funding could be allocated for the Far Eastern and Siberian infrastructure. We believe that these proposals have to be implemented already this year.

Colleagues, we now have to accomplish the following objectives. We need to prepare roadmaps in order to achieve various goals that are stipulated by presidential executive orders. This primarily involves wage raises. We have already noted that this should not take the form of routine wage raises. These measures should be accompanied by restructuring. Wage raises would become an element of this decision. Therefore, the issue of incentives for professors, lecturers, educators and healthcare-sector personnel through higher wages should include the required reforms, and we have to compile these roadmaps as soon as possible.

We should provide budget guidelines for Russian regions, which also face these problems, and they should be briefed concerning wage raises for educators.

In addition, we have to draft all regulatory documents regarding the 2013 budget-implementation process. We should start working on this already today, without waiting for the State Duma to examine this budget, and prior to the signing of the budget.

Mr Medvedev, we have assessed the 2016 and 2017 budgets. This year, we have used a mechanism of loan schemes, with due consideration for the approval of our programme to raise the wages of public sector employees. And we have compiled a mid-term budget forecast. These proposals have been submitted to the Government, and these estimates show that all our current obligations will conform to our budget regulations and projected revenues. This concerns both the mid-term budget and the long-term budget.

By way of conclusion, I would like to address my colleagues: if we endorse the budget resolution today, we will still have to discuss budget drafts with the State Duma. So we call on our colleagues to take a consolidated position in complying with relevant Government decisions in defence of the drafts we are discussing today. It takes a common understanding and a kind of united front to defend the targets set by the draft budget.

Thank you for your attention. I am ready to report on the third and fourth items, too.

Dmitry Medvedev: They are all interconnected, so I think you should. Then you can take your seat and we’ll talk it all over.

Anton Siluanov: Okay, thank you.

Ladies and gentlemen, I am referring to the draft law on amending Clause 193 of Part Two of the Tax Code – on setting excise rates. The Government has prepared a draft resolution on adjusting excise duties on petrol and diesel fuel, with a proposed increase in the second half of next year of an average 6% above the rates set out in the Tax Code. We also propose increasing excise duties for most types of excisable goods in 2015 by an average of 20% compared to 2014, and by 25% for low alcoholic beverages – that is, wines and beers with an alcohol content of 0.5% to 8.6%. We also propose increasing excise rates by 10% for cars with engines above 90 hp. These amendments should bring in extra budget revenues of 15.4 billion roubles in 2013, 32.8 billion in 2014, and 96.7 billion in 2015, so I ask for your support.

We also propose amending Clause 342 of the Tax Code, Part Two. We propose to increase tax rates for natural gas mining based on planned increases of gas companies’ profits as a result of the rise in regulated domestic gas prices. We also propose a gradual narrowing of the gap between tax rates for owners of facilities in the united gas supply network and their subordinates, and independent gas producers, in order to bring domestic and export gas prices into line with one another.

The draft federal law specifies a tax rate for mineral extraction of 622 roubles per 1,000 cubic metre for July 1 to December 31, 2013; 700 roubles for January 1 to December 31, 2014; and 788 roubles from January 1, 2015, for the owners of facilities in the united gas supply network, and businesses in which the holders’ summary share is greater than 50%. This increase should bring in extra tax revenues of 17 billion roubles in 2013, 60 billion in 2014 and 99 billion in 2015. 

Independent gas producers will retain a tax rate reduction factor of 0.646 in 2013, 0.673 in 2014, and 0.701 since January 1, 2015.

Dmitry Medvedev: Thank you, Mr Siluanov, please take a seat. Now we’ll discuss all the reports we have heard. Does anyone want to add anything? Government members should be the first to speak. Mr Dvorkovich, over to you.

Arkady Dvorkovich (Deputy Prime Minister): Thank you. I would like to touch upon several points and begin with tariffs. Their dynamics is set forth in the forecasts for socioeconomic development rates for 2013-2015.

The planned annual 15% increase of gas prices means that domestic gas prices will gradually reach the present world market level. Russian gas prices are closest to prices in the US, and may even be higher in some regions. This situation creates problems for many industries, so we expect industrial and domestic gas users will have to take significant steps to improve energy efficiency. Given current gas prices, these programmes to improve energy efficiency take on special significance, and our forecasts take them into account.

As for electricity and heating prices, we expect to put an end to cross-subsidising within two or three years. Our calculations show that we can cope with price rises if we address the problem on a regional basis, pinpointed by region. We will be ready with proposals on this matter in the next couple of months.

Many other issues depend on price and tax rates. For instance, the mineral extraction tax (MET) rate that was mentioned just now is tied in with the rate of gas price changes. At the same time, a draft law has been submitted to the State Duma to end the preferential treatment for the property of Gazprom and other infrastructure companies. So no further MET rate shifts should be made before a final decision on the deadline of the abolition of these preferences has been taken. We will tie in further changes with that decision and propose a pattern to differentiate MET rates based on gas field geography and production conditions. We will finish the job before the end of the year, and the first differentiated rates will appear next year or in 2014 at the latest. Otherwise we will never produce the required amounts of gas (or oil either for that matter) to obtain the planned budget revenues.

As for Rosneftegaz, we have been analysing this problem for a long time, and have concluded that the company does not need such vast resources to meet its objectives, while the budget is in dire need of the money, mainly to implement…

Dmitry Medvedev: That’s right, the budget does need the money.

Arkady Dvorkovich: …projects for the development of the Russian Far East and Siberia, particularly the capitalisation of RusHydro and a number of other projects. So therefore I fully support the Finance Minister’s proposal. We have discussed it with the Energy and Economic Development ministries, and the relevant papers are ready. We will submit them to the Government within the next few days.

We must do this by the end of the year, otherwise the money will go into the Reserve Fund and we won’t be able to hit our targets. A part of the money is also required to implement transnational projects and meet our international obligations, particularly in connection with the agreements on the construction of hydropower plants which we signed with Kyrgyzstan today.

As for infrastructure, you said in your address that there will be a moderate rise in government investment in infrastructure. In this connection, we have to look for other sources of investment in road construction, the railways, airports, ports and electricity grids. We will give priority to public-private partnerships and infrastructure bonds. The relevant decisions have been drafted and we will submit them to the Government for approval within the next few days.

And the final point: Adapting Russia’s economy to meet the terms of the World Trade Organisation. Even though the budget has the necessary resources, we have only two or three months to develop the support and protection mechanisms and adopt the bylaws so that they are as effective as possible. Thank you.

Dmitry Medvedev: Thank you very much. Who else wants to talk about the budget? Ms Skvortsova, go ahead.

Veronika Skvortsova (Minister of Healthcare): Mr Medvedev, ladies and gentlemen, I would like to say a few words about a disagreement that persists to this day between the Healthcare and Finance ministries about a gap of 18 billion roubles needed to raise salaries to the level specified in the Presidential decree.

A strategy has been introduced to streamline the structure of healthcare, and arguments have been submitted stating that it is impossible to substitute money from the Mandatory Health Insurance Fund for allocations to federal research centres and universities licensed not for routine healthcare but for innovative medical research – in particular, to get translational medicine off the ground. If we lose the 18 billion rouble compensation, federal institutions will be shifted en masse to the mandatory health insurance system and will lose the opportunity to do their statutory duty. That will be the end of these institutions. Thank you.

Dmitry Medvedev: Thank you. Ms Golodets, go ahead.

Olga Golodets (Deputy Prime Minister): Mr Medvedev, we have discussed social programmes which contain many performance indicators that are tied in with others, which the new budget does not take into account, unfortunately – above all this concerns infant mortality, maternal mortality, life expectancy and certain education indicators, particularly accessibility to education. As we said during the discussion, there are alternative sources of revenues that could make the programmes affordable. I think we will come back to social programmes before the end of the year. Otherwise, we will be hard put implementing the plans we have set for the social and cultural development of the country.

Dmitry Medvedev: Thank you. Next speaker, please.

Dmitry Livanov (Minister of Education and Science): Mr Medvedev, ladies and gentlemen, I would like to draw your attention to the reduction of spending on civil-oriented research in the three-year budget draft – 324 billion roubles for 2013, 310 billion for 2014 and 307 billion for 2015. These cuts contradict the presidential decrees of May 2012, which specify an increase in research allocations from all sources, and the targets set by the Economic Development Minister in his report on increasing investment in R&D for the technological modernisation of the economy and sustainable economic growth. Thank you.

Dmitry Medvedev: Thank you. Mr Nikiforov, please.

Nikolai Nikiforov (Minister of Communications and Mass Media): Mr Medvedev, ladies and gentlemen, we have just been talking about alternative sources of revenue. I would like to add that there is another source – thrift.

My ministry and the Finance Ministry worked together to coordinate funding for information and communication technologies. A total of 87 billion roubles has been earmarked for next year. Standard infrastructure components that could be shared by other state agencies make up more than half of that sum – 49 billion, out of which communications make up a mere 20 billion.

Charges for standard services of one and the same communication channel vary from between 30,000 roubles and 70,000, for exactly the same service. We expect the introduction of uniform rules for procuring such services to have a major impact, and it should be pointed out that 10 federal agencies account for about 75% of these costs. In this way, through joint efforts, we will be able to find additional funds within the existing allocations to implement priority projects such as e-Government and services for private individuals and small businesses. Thank you.

Dmitry Medvedev: Thank you, Mr Nikiforov. Does anybody have anything to add?

Alexander Konovalov (Minister of Justice): Ladies and gentlemen, under the existing legislation Federal Penitentiary Service salaries are due to increase from  January 1, 2013 to match the level of police salaries. However, the relevant budget indicators for 2013-2015 do not take this rise into account, and I would like to draw your attention to this.

Dmitry Medvedev: Thank you. Mr Belousov has the floor.

Andrei Belousov: To begin with, I would like to say that a few days ago we came up against new sources of federal revenues that had been overlooked when the budget was drawn up. One of them is the recently privatised Sberbank block of shares which previously belonged to the Central Bank of Russia. It’s a considerable sum, roughly $5 billion, which will be added to the federal revenues next year and classified as Central Bank profits.

The second source, Rosneftegaz money, approximately 100 billion roubles, is also not mentioned among the budget revenues. Mr Siluanov referred to it just now, and it has come up in this discussion. Some other revenues have also been omitted from the budget – in particular profits from the placement of money from the Reserve Fund and National Welfare Fund, which have been undervalued by 30-50 billion roubles a year, and a number of smaller amounts.

I mean that we can increase expenditures to balance out the budget, especially because the omitted figures all represent non-oil-and-gas revenues.

However, this is not possible due to the current interpretation of fiscal discipline, which passed its first reading in the State Duma today. In other words, reducing the budget deficit is the only way we can speed up the growth of GDP and obtain bigger non-oil-and-gas profits.

I think we need to reconsider the matter, especially after analyses made in recent days and the President’s conference of two days ago highlighted a major increase in risk as a result of blocks of reduced spending. One such block is the drastic reduction in funding for the Far East and the Trans-Baikal region, which the President mentioned. The relevant development programme will run out next year. Even this year only token amounts have been allocated compared to last year’s 85 billion roubles. A mere 14 billion roubles of budget money has been allocated for 2014, while energy facility maintenance alone requires over 20 billion.

Of course we could consider Rosneftegaz and others, but they should still be reflected in the budget indices, together with the funding sources.

We have a development programme for the Far East and the Trans-Baikal region. I say “have” because it was provisionally approved by the Ministry of Economic Development on September 10. I don’t think finishing it should take too long. I think the funds it mentions, considering the new circumstances, should still be taken into account.

Suburban transport costs were also on the agenda of the President’s meeting, and Mr Putin thinks the sector deserves support.

By and large, nearly all meeting participants agree that we must not allow the number of commuter trains to be reduced because half of them run in Moscow and the Moscow Region, and neither can we allow a major increase in ticket prices. The budget has outlined spending cuts. Some subsidies will be financed in full in 2013, with a reduction planned for 2014-2015. However, Moscow Mayor Sergei Sobyanin has told me that it is extremely important for Moscow (which accounts for half of the commuter traffic, as I have said) to have a view of the future. They need stable sources of funding to launch the programme of transferring part of co-financing to the region, at least for the next three years. This position was also supported by the President two days ago.

Another issue that in my opinion is creating very high risks and needs to be considered is the financing of the credit schemes which currently help to save budget allocations for the state armaments programme and for the development of the defence industry. I don’t have the figures to hand, but to offset these costs until 2016 and replace them with loans will require the unconditional fulfilment of two conditions. First, 100% of these loans must be covered by government guarantees, and second, interest rates need to be 100% subsidised.

According to our estimates, these conditions have not been fully met in the budget. Banks may simply refuse to issue loans to enterprises. These loan sources are set out in the respective programmes, but as for the loans themselves… Banks may refuse to issue them because they can’t see any sources for the interest rate subsidies in 2014-2015.

Regarding this spending (for the development of the Far East, commuter transportation and interest rates), I suggest that an instruction be issued to the Ministry of Finance to work together with the federal executive bodies and with us to discuss this issue again within three days, taking into account the fact that we now clearly have new sources of funding.

Another issue which the President supported and which Mr Livanov addressed today concerns the need to increase investment in technology. Allocations for technological development will be drastically reduced in the federal budget, given that the R&D, research and staff training programmes are coming to an end. This issue should be also discussed within three days.

And the final thing I wanted to say: Mr Siluanov said their calculations show that we can easily deal with all carry-forward decisions for 2016, 2017 and 2018 if we act strictly in compliance with the budget rule. That may be the case within the framework of the old estimates. But first, I’d like to announce what figures are involved.

The spending which we will have to postpone until 2015-2016… includes spending on wages, which we have to do to reach the targets set out in the President’s executive orders, as well as on the state armaments programme and on the development of the defence industry, because the relevant loans have to be repaid in 2016-2017. We will also need to approve additional allocations on the development of football as part of preparations for the FIFA World Cup; the costs have been tentatively estimated at around 600 billion roubles. All of these are additional expenses, the carry-forward spending which amounts to 500-600 billion roubles, as I said.

How can we deal with these issues? I have a letter signed by Deputy Minister of Finance Alexei Lavrov, which the Ministry of Finance sent to all federal executive bodies and which states unambiguously that spending on targeted federal programmes, in particular vital programmes for the development of the pharmaceutical industry and healthcare, GLONASS and nuclear energy technology, should be changed… in accordance with the GDP deflator in 2013-2020 and in accordance with the 2015 deflator in 2016, 2017 and 2018, and all funding that could not be provided by that time should be carried forward to 2019-2020. Of course, with carry-forwards from 2016-2018 to the period beyond 2018, to 2019-2020, we will be able to balance the budget, but at what price? What price will we have to pay later? As for other spending, for example on the development of the transport system, it’s been suggested that real spending should be stabilised in 2015. I can tell you that today spending on road construction is more than 200 billion roubles short of the target.

What does this mean? First, I suggest that we consider a decision, while still, of course, supporting the stance of the Ministry of Finance, to use the Reserve Fund for financing infrastructure projects. However, the Reserve Fund won’t reach 7% of GDP until 2017. We suggest lowering the target to 5%. We believe there is sufficient proof that 5% would be quite enough to weather the crisis if it lasts two years, like the one that began in 2008 did. If it won’t last longer – not three, four or five years, but about two years. But if we lower the target to 5%, this will allow us to launch the relevant programmes as soon as 2014 and to mostly cover expenditures which are currently not budgeted for, in particular in the energy and transport infrastructure, due to the severe budget restrictions. Moreover, this can be done without leaving the budget unbalanced and without violating the budget rule. All this is beyond the scope of the restrictions which we have pledged to comply with. Thank you.

Dmitry Medvedev: Thank you. Go ahead, please.

Vladimir Puchkov (Minister of Civil Defence, Emergencies and Disaster Relief): Mr Medvedev, preliminary work on the budget has helped us resolve many practical issues. But there are two issues we have not resolved. The Ministry of Emergencies is facing the same problem as the Ministry of Justice – the funding to support the transition to the new, higher pay for military and civilian personnel. We have taken all the necessary measures to prepare for this: we’ve drafted the necessary legislation and coordinated the main figures with the Ministry of Finance. However, these documents have not been included in the draft budget, and I therefore ask you to add this issue to the protocol. That is the first issue.

The second issue concerns the streamlining of our internal reserves to resolve the problems within the framework of the federal targeted programme Fire Safety, which was approved as a framework document at a government meeting. Mr Medvedev, I can tell you that we have looked for internal reserves and can finance about 50% of the planned federal spending. But we would like to ask you to support this issue, because the relevant budgetary specifications for the regions and organisations have been incorporated in the budgets from 1 January, 2013. A contribution from the federal budget would allow us to greatly improve performance in the area of fire safety and support the producers of fire-fighting equipment. Single-industry towns have a problem in this regard, so [federal budget allocations] would help us deal with it, including in view of our entry into the WTO. Thank you.

Dmitry Medvedev: Thank you. Has everyone had their say? Shall we conclude the discussion? Yes, you can take the floor (addressing Oksana Dmitriyeva), but please, make it short.

Oksana Dmitriyeva (State Duma Deputy): Thank you, I’ll try. I am Oksana Dmitriyeva, a State Duma deputy. I’d like to address two issues. The first concerns transfers to the Pension Fund and abandoning or preserving the compulsory accumulated part of pensions.

I believe compulsory pension savings should be abandoned immediately and without a second thought, abandoned by all, except those willing to build up their savings and ready to assume all associated risks.

There are four arguments to back up this point, and I’ll try to outline them here briefly. First of all, the funds channelled into accumulated part of pension – primarily by intermediaries such as Vneshekonombank (VEB), private pension funds, and pension fund managing companies, are then transferred as loans into the federal purse anyway. So no “long money” for investment is created here and, at the end of the day, it’s the federal budget that insures against demographic risks, sending funds to cover the Pension Fund deficit.

Dmitri Medvedev: Ms Dmitriyeva, I agree with much of what you’re saying, but it’s not quite the point, you see. It’s the budget – the federal budget – that we are now discussing, and we’ll discuss the Pension Fund budget later on. Perhaps you’d like to have your say on both occasions then?

Oksana Dmitrieva: No, no, if you let me, I’ll just have my say right away briefly and that will be it.

Dmitri Medvedev: OK, say what you have to say then, but please keep it short.

Oksana Dmitrieva: A second argument is that we’ll get a double-burden effect, to last 50 years, reaching its peak in 2024. So we’d better avoid dragging our feet on this. Estimates show that in theory, self-invested personal retirement plans aren’t a more efficient scheme than contributory or non-contributory state pensions – if we factor in the servicing costs, on the one hand, and, on the other, if we realize that the yield cannot possibly exceed the nominal GDP growth rate. By moving away from savings-based schemes, we could regain quite a lot of money and have it rechanneled into some other social projects.

Now on to the budget. Understating budget revenues has been a common practice all those years. The resulting error in revenue forecasts came to some 1.3 trillion roubles in 2010, 2.5 trillion in 2011, and is expected to be around 1 trillion in 2012. Basically, this is about deliberately understating the budget’s actual potential.

That combination between understated budget revenue and the introduction of the new, stricter budget rule plays down the government’s ability to address the tasks set, including in presidential orders.

On the other hand, it may provoke unnecessary additional spending, related primarily to the borrowings made concurrently with investments in the Reserve Fund.

The Reserve Fund will be replenished by, say, 2 trillion roubles in 2012, with net borrowings to come to 1 trillion. The debt and the servicing costs will grow as the result.

A hurdle to social, infrastructure and R&D programmes, the new budgetary rule could also entail additional national debt servicing costs. Which is why I believe it should be either scrapped or revised. That’s quite realistic at this point, as the bill is still up for its second reading in the State Duma. Thank you.

Dmitri Medvedev: Thank you very much. Let’s now wrap up our meeting, shall we? I think I understand the stance of each of the attendees because we discuss things together every now and then, including with members of the State Duma. Later on, we’ll have an opportunity to consider the federal draft budget in the State Duma, with all the parliamentary parties and public organisations and to amend it accordingly. What we’re having here today isn’t a draft reading but a hearing of a Finance Ministry report, as well as a review of the Government’s recent efforts, including within the framework of the budget commission and the budget planning commission... But before we sum up, let me just say a few words in conclusion.

It’s quite normal for a budget to spark controversy. There is no such thing as a perfect budget everyone is happy about. During my presidency, I was never really satisfied with the federal budget, nor with the work done on it. But I always kept in mind just how difficult it is to piece a budget together. It’s a very tricky process, especially during a crisis or in pre-crisis or post-crisis conditions. Nor was it an easy task in our years of prosperity, for that matter. Those who then worked in the Government or as part of the Government Executive Office remember that...

The budget always involves trade-offs. It’s also about prioritising. And there’s always a dilemma to solve. We are all aware, though, that despite the crisis and our current economic woes, this country is making progress, and allocations for many social and infrastructural programmes keep growing. In some segments, amounts unheard of in the pre-crisis era are being allocated, and this is something to appreciate.

I’d like to stress once again the importance of making our federal budget a well-balanced one. The Finance Minister’s stance on this is absolutely right, I think. Please have a look at the figures cited in the report. These are consensus figures. To achieve a balanced budget, we need price of oil at $105 in 2013, $103 in 2014 and $104 in 2015. Let’s ask ourselves whether we’re at all certain prices will be that high. Any drop in prices may trigger a budget deficit, and should the drop be by more than $20, we’ll face a dramatic deficit. In 2008, when I was serving as President and many of those present here today worked in ministries and government agencies, no one expected oil prices to plummet as dramatically as they did. Our economy was among the worst affected. And we’ve got homework to do on that crisis so that we can cushion future blows.

We should by all means make an analysis of additional sources mentioned by some of the speakers here. I agree with them fully. If there are no sources, there’s nothing to talk about. But if there’s one, let’s share it. That’s good news in itself. I’m now referring to privatisation proceeds. It’s good they are growing, thanks to a whole number of deals. We are often criticised for being too slow in implementing our privatisation plans. It’s suggested we should speed them up. We could also look at alternative sources such as Rosneftegaz dividends. Why don’t our critics prepare concrete proposals and present them to us? Indeed, as many of the speakers have pointed out today, such alternative sources could help us finance a whole number of positions.

This morning I instructed those in charge to remedy some of the controversies mentioned during our session today. Hopefully, appropriate adjustments will be agreed and introduced within a day or two.

We’re now on the threshold of pension reform, as I said in my introductory speech. We’ll officially present our strategy shortly, and then move on to discussions and reconfiguration. Decisions on savings-based pensions and other controversial issues should be made following debates – as is normally the case in any civilised country – that are open and public, and involve all political forces.

If additional funds appear, we’ll channel them into some priority programmes, including social ones. But distribution priorities should be set through public consensus, I think.

In conclusion, I’d like to say a few words about how we live, what kind of rules we obey, and what kind of requirements allow us to maintain the system’s balance.

It’s always hard when we get into issues such as understated revenues. I had to do so myself in the past, and criticising the Finance Ministry for that is fair, in my view. But if we analyse the situation in earnest, we’ll see that understating revenue is better than overstating it because we get a more sober and conservative approach to our future circumstances. If there are additional revenues, we can always distribute them and invest in priority development programmes. And if the economic situation gets worse (a prospect no one can be immune to these days, with most of the forecasts being moderately or quite pessimistic), then our habitual fiscal austerity will help us cope. Rules, even uncomfortable ones, should be followed and not modified according to the current political situation and personal ambitions. Otherwise we’ll never evolve into a state with a modern economy and a civilised political system.

I’d like everyone to bear this in mind, including Government members, State Duma deputies and Federation Council members.

We’ll resume our work on the draft budget within the proposed budget rule in collaboration with all the relevant political forces. The Government is open to dialogue on the issue and hopes for meaningful cooperation. Thank you.

Now let’s agree on what comes next. The draft budget and associated bills will be finalised. Certain interpretations voiced here will then go through a final round of deliberations, to be submitted to the State Duma by the deadline. Would you agree? Ok, fine, settled.

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