8 november 2012

Government meeting


Dmitry Medvedev: Good afternoon. Greetings from Laos and Vietnam! These countries may be located a long way from Russia, but they are close to us in spirit and history.

Today we will again discuss Government programmes in the key areas of the socio-economic development of the country. Our agenda includes the draft programme for the Development of Shipbuilding for 2013-2030, which is a long period.

I’d like to remind you that Russia has nearly 40,000 kilometres of coastline and over 100,000 kilometres of internal waters and many other water infrastructure facilities. A considerable proportion of foreign trade is transported by sea. Up to a quarter of the world’s hydrocarbon reserves are located on the Russian shelf. These figures speak for themselves.

Russia has had a powerful shipbuilding industry since the time of Peter the Great and used to be one of the top 10 countries in this field. But the number of our contracts for building naval and merchant ships has declined considerably of late, complicating the situation for our shipyards: not all of them but a considerable proportion. The programme which we will discuss today is aimed at restoring Russia’s position in the global shipbuilding industry. Funding within the programme is planned at over 600 billion roubles, and more than 50% of it, or 330 billion roubles, is to be provided from the federal budget. I will name several priority tasks. They are technological advancements necessary for the creation of prospective marine and river vessels, for the renovation of industrial capacity of research institutes and design bureaus, which are in a very difficult situation and for the development of the industry’s human resources potential. I recently visited several shipbuilding plants – the workers there are mainly middle-aged and older people. There are practically no young workers. We must pay special attention to attracting young people in the industry. Another priority is the implementation of the Government’s defence order.

We must carry out an innovative modernisation of the industry. It is time for us to produce ships using digital design technologies, the way we have produced planes in recent years, not the way we did in previous centuries. We must develop new technology, create pilot models of high-tech vessels, as well as modern and unique test facilities. The objectives include increasing the production of civilian vessels five times over by 2030, achieving a similar labour productivity growth (or at least by 350%), creating and modernising over 100,000 highly qualified jobs. The share of naval ships on the global market must exceed 15%, and of civilian vessels must be at least 2%. The current share is less than 0.5%.

Today, we will also consider an investment programme and financial plan for our largest company, Russian Railways, for 2013 and until 2015. The 2013 investment budget stipulates more than 400 billion roubles, and the three-year budget envisions over a trillion roubles. These allocations will be used to develop the railway transport infrastructure, to facilitate safe traffic, to make railway transport more affordable to individuals and to modernise rolling stock. Of course, this funding is not enough to address the railway sector’s problems. We hope that the programme will, on the whole, become more ambitious, and that it will heed the economic demand for dynamic and innovative development of railway transport.

We need to accomplish a multitude of objectives. To be honest, we have repeatedly discussed them at meetings on the development of railway transport. We need to increase the capacity of the entire so-called Eastern Sector, to build access routes towards Far Eastern ports and to introduce railway transport. This is important for the entire country. I am talking about high-speed railway transport, which will make it possible to link all Russian regions. And, of course, this network must be affordable.

Obviously, efforts to accomplish numerous objectives are hampered by financial restrictions facing Russian Railways. We must improve work, reduce outlays, search for new sources of funding and, of course, we must eventually increase investment volumes. This is important for railway transport, for the entire railway sector and for ordinary people using this transit method.

Today, we will discuss issues of the domestic automotive industry’s development in the context of Russia’s accession to the World Trade Organisation (WTO). The industry consistently expands motor vehicle production and meets domestic market demand. The current situation in the automotive industry is quite good. In all, 1.6 million vehicles were manufactured over the first nine months of 2012. This volume has increased by virtually 12% on the same period of 2011. It should be said that the industry is posting impressive growth because the domestic market has not yet been completely saturated. At the same time, all sectors, including production of passenger cars, lorries, buses and light commercial vehicles, continue to grow. Foreign concerns/companies have become an integral part of the Russian automotive industry. Foreign cars being assembled in Russia now account for almost half (49%) of all cars being sold here. On the one hand this is good, but this is not yet everything.

As I have already said, Russia’s WTO accession should have a favourable influence on its economy. In general, we have reached a consensus on this issue. However, some sectors need time to adapt to new conditions and to find their own global economic niche. This is completely true of the automotive industry. That’s why I am talking about this here today, and I would like to remind you about specific measures for supporting the automotive industry that have been adopted. First, a loan-subsidies programme has been extended until 2020. This programme deals with loans that were taken out by companies for implementing their respective investment and innovation projects. Second, the relevant procedure denoting the “industrial assembly” concept has been modified. Four new agreements with a duration of eight years have been signed. These documents stipulate import-duty breaks for auto components, provided that automotive enterprises will assume additional obligations. This calls for expanding current production facilities to 350,000 vehicles per year. In addition, at least 30% of all cars being manufactured here should be equipped with Russian-made engines and transmissions. I would like to emphasise the fact that these changes do not concern previously signed agreements and those specific enterprises that continue to operate in line with previous terms.

Moreover, additional expenses for paying import duties on auto components will be compensated from the federal budget until 2020, or in 2018-2020, to be more precise, as has already been agreed. I would like to draw your attention to this once again, so that everyone will understand: We are not leaving the national automotive industry to its own devices. We strive to act in accordance with WTO regulations. And, at the same time, we are striving to support domestic producers. As you know, car-scrappage fees are stipulated for motor vehicles. This will help shield the national market from all sorts of junk cars, and to create a modern car-scrappage system that will not harm the environment. This will enable us to accomplish well-known environmental objectives.

Here is another long-awaited issue that I have repeatedly mentioned. We have finally started re-examining this issue. I am talking about the conversion of Russian companies to international financial reporting standards. The Government has repeatedly tried to address this issue, but for some reason, this issue was not examined. At long last, this issue will be examined by the Government in line with my directive.

Obviously, the relevant principles and requirements concerning national documents, forms and records in this sphere should not deviate from the generally accepted standards, because if we develop in line with our own laws, then it will be possible to predict the direction of such development. This should help Russian companies to eventually overcome various barriers that hamper their work on global markets. And I hope this will also make Russian companies more popular with investors. Data from an independent international survey makes it possible to say that Russia already has a rather good corporate reporting infrastructure which, on the whole, largely meets internationally accepted standards. On the other hand, there are certain problems with international financial reporting standards. Here, we must balance the interests and goals of applying international standards. On the whole, we did not invent this entire practice. It is possible to simultaneously use international financial reporting standards for preparing consolidated financial reports and national standards which, in turn, are also based on international financial reporting standards for legal entities. Indeed, various countries, including numerous European countries as well as some other states, use this model. At any rate, the Ministry of Finance and the relevant federal departments must continue their efforts to convert national companies to this system. They must also draft proposals to expand the relevant sphere for applying these standards, as well as proposals regarding various provisions that ensure the collection, submission and publication of specific reports.

This will help the market learn more about the financial conditions in which these companies operate. This is vital if we want them to be investment-attractive and if we still want to establish an international financial centre. This will eventually improve our international financial ratings. This is an important, highly anticipated task. I hope to hear real proposals on this score.

And, finally, there is one more issue that concerns people who are entitled to state support by law. I’m referring to people entitled to benefits, including veterans, people with disabilities, Chernobyl cleanup workers and many others. Experts have prepared a draft law on the norms regarding monthly financial expenses for one person entitled to free provision of medicine and medical products or dietary therapy for disabled children. Naturally, the inflation-adjusted norms for 2013 will be higher than for this year. The funds required by this draft have been included into the draft federal budget.

And the last thing I wanted to say – we have a “new-comer” at the table – Sergei Shoigu. Mr Shoigu, welcome to the updated Government team. We wish you every success as the Minister of Defence. I hope all those present will help our colleague and good friend in his new position, as has been the case on other occasions. I wish you success!

Sergei Shoigu: Thank you.

Dmitry Medvedev: Let’s start with shipbuilding. Mr Manturov, please go ahead.

Denis Manturov (Minister of Industry and Trade): Mr Medvedev, ladies and gentlemen, the Ministry of Trade and Industry has elaborated a draft government programme for the development of shipbuilding in 2013-2030. It has been coordinated with all departments concerned and has passed through broad public and expert discussions. While drafting this programme, we analysed Russia’s positions in the world market and determined promising technological and market niches. Our main principle was to ensure the effectiveness of decisions at all stages of the industrial cycle – from R&D to industrial production.

Today, the shipbuilding industry is obviously on the upswing – this year we planned to reach the level of 290 billion roubles whereas by 2030 we plan to increase it to 700 billion roubles. Importantly, civilian products will account for a considerable part of the growth. This estimate relies on major strategic documents of our customers and the state armament programme. In turn, the future of our industry depends on the strategy for the development of shipbuilding to 2025. I’m referring to the federal targeted programmes on the defence industry and civilian marine facilities in 2009-2016.

Domestic shipbuilding has been historically oriented to the construction of naval and sophisticated civilian ships. The large-scale manufacture of civilian ships, including passenger craft, was traditionally a responsibility of the countries of the Council for Mutual Economic Assistance. Obviously, we should retain this feature of domestic shipbuilding in the foreseeable future. We must focus on high-tech domestic orders and renounce futile competition with China, Japan and South Korea, which are engaged in large-scale production of multi-service vessels, including carrier ships, with the exception of vessels for domestic waters. Therefore, we have determined our priority market niches in the programme – naval shipbuilding, the fishing fleet, production of hardware for the Northern Sea Route and development of the shelf, and river shipbuilding.

Let me cite a specific example. On the third slide we have indicated the demand for shipbuilding products for the development of domestic shelf deposits: the green area shows deposits that are already being developed; those that are planned for development are marked in yellow, while red indicates deposits that are subject to follow-up exploration and may be developed over the long term. We have chosen an optimal model for the development of deposits for our calculations. Until 2030, projected demand will be over 30 platforms and more than 150 support vessels. Naturally, these figures will be refined after the results of the geological exploration.

The programme’s measures are aimed at ensuring this future demand. Its goal is to make domestic shipbuilding much more competitive in the world market. In the long term it should meet the requirements of the state and domestic private contractors for modern hardware. The sub-programmes are aimed at increasing the added value of shipbuilding at all stages – from fundamental and applied research to the development of production capacities, and the sale and maintenance of the industry’s products.

I’d like to speak in more detail about a number of sub-programmes. The goal of the sub-programme on shipbuilding research is to produce all-purpose basic platforms of civilian and military hardware.

Our task is to make the most of our resources in R&D because 85% of the experimental capability for military and civilian hardware is absolutely identical. The formation of the uniform research sub-programme is an effective solution that will allow us to concentrate our resources, unify experimental capability, reduce the cost of production and ensure mutual exchanges of civilian and military technology at all stages – from designing to selling products on the market.

The second sub-programme deals with the development of civilian marine and river ships. It is aimed at carrying out specific pilot projects. Different departments taking part in this sub-programme will turn basic platforms, developed under the state programme, into market products for specific customers who will pay for these coordinated efforts.

Domestic shipbuilding has three clear-cut clusters – northwestern, far eastern and southern ones. Each of them plays its own role under the state programme. The northwestern cluster historically has a substantial potential. However, its production capacities must be streamlined because the technical level of its enterprises is fairly uneven. It would be best to pay for this work with extra-budgetary funds. As for the projects to upgrade capacities, these may be partially financed from the budget.

The southern cluster is actively forming special economic zones for shipbuilding. The construction of Zvezda, a modern shipbuilding complex, is a priority in the far-eastern cluster.

The fourth sub-programme is aimed at creating the conditions to promote the industry’s products on the domestic and foreign markets and, of course, at localising the production of spare parts at home. In addition, it provides incentives to encourage domestic customers to buy civil ships of Russian make. Measures requiring budget funding are aimed at facilitating the leasing of river craft and fishing vessels and rapid scrapping of their obsolete models. About 85% of their fleet is obsolete. We have also envisaged two legal measures – the formation of special economic zones for shipbuilding under the already adopted law on supporting navigation and shipbuilding and the elaboration of a mechanism for issuing quotas on the construction of fishing vessels. We have coordinated this position with the Ministry of Agriculture. Recently we have come to terms on additional measures to develop the fishing fleet. All measures of state support under this programme correspond to WTO standards.

The fifth sub-programme is aimed at elaborating modern shipbuilding standards and providing analytical and expert support for its implementation. The total funding (you have already mentioned all programmes) is 600 billion roubles. These funds are allocated primarily for civilian shipbuilding and do not concern the focus areas in military shipbuilding under the federal targeted programme on the defence industry.

Under the plan, by 2025 our shipbuilding should be headed down the path of independent development. The state will continue supporting its R&D to make the industry more competitive on the world market. This approach corresponds to global practices. Implementation of the programme will increase the share of the industry’s products on the global market. You have mentioned the targets and I’d like to mention two main figures for civilian shipbuilding – we plan to bring its share in the global market to two percent in tonnage and to 10% in money terms. As I have said, we are focusing on high-tech production and our ships will cost more than standards vessels.

We must also meet roughly 30% of domestic demand for civilian marine and river vessels. Thank you for your attention.

Dmitry Medvedev: Thank you, Mr Manturov. Does anyone have questions for Mr Manturov or comments on what he has said? Does anyone want to say something? Mr Rogozin, please go ahead.

Dmitry Rogozin (Deputy Prime Minister): Mr Medvedev, ladies and gentlemen, I’d like just to add a few words. At the meeting of the Marine Board in St Petersburg on December 4, we will also discuss technology for the development of the Arctic. In other words, all the different kinds of new marine equipment that were reviewed during the drafting of this programme will be discussed in detail, with expert participation, at the Marine Board as well. As for the programme, we discussed its draft in the Government before submitting it at this meeting and believe that the targets mentioned by the minister are fairly realistic.

Dmitry Medvedev: Okay. Thank you. More comments? Please, Mr Novak.

Alexander Novak (Energy Minister): Mr Medvedev, ladies and gentlemen, the Energy Ministry has also discussed and coordinated this programme with other departments. Importantly, it has been tailored to meet the requirements of companies in the building of ships and oil-and-gas platforms. Considering that we plan to produce on the shelf, according to various estimates, about 100 million tonnes of oil and 200 billion cubic metres of gas by the year 2030, total demand for ships and platforms by that time will be about 1,400 units. We estimate this huge contract will cost about a trillion roubles. Therefore, we support this programme. It is important to note that these ships and platforms should be equipped with domestic equipment. Regrettably, for the time being the platforms produced domestically are using foreign technology and foreign equipment. In carrying out the programme it is important to localise the production of equipment for such ships and platforms on our territory to the greatest possible extent. Thank you.

Dmitry Medvedev: A fair requirement but very difficult to meet. Okay. Do you have more comments? No? Let’s then pass a resolution on the draft state programme and proceed to other issues.

In terms of the draft investment programme and the financial plan for Russian Railways for 2013 and the 2014-2015 planning period... Mr Sokolov will speak first as the minister, and then I would like Russian Railways President Mr Yakunin to speak. Then, Governor of the Leningrad Region Mr Drozdenko will speak on behalf of the community of governors. Please.

Maxim Sokolov (Minister of Transport): Mr Medvedev, members of the Government, colleagues... We are presenting for your consideration a report on the draft Russian Railways investment programme and financial plan for 2013-2015.

Before talking about the indicators for 2013-2015, I would like to briefly discuss the 2012 preliminary results as a basis for future planning. The main performance indicators for Russian Railways in 2012 – as indicated by the analysis – have exceeded the planned figures. Thus, shipments’  have increase will be  3.3% compared with 2.7%, freight turnover’s  increase will be 4.3% compared with 1.2%, and passenger traffic is virtually the same since 2011. The rail tariff indexation implemented early in the year and the allocation of funds from the federal budget generated about 1.4 trillion roubles in revenue and about 5.3 billion roubles in net profit. As a result, the 2012 investment programme amounted to slightly over 492 billion roubles.

The federal government has identified the following key parameters for 2013 – the freight tariffs will be indexed at 7% and passenger rates for long distance trains will be regulated in the 10% range. It should be noted that the 7% indexation of freight tariffs was approved this summer when the Ministry of Economic Development envisaged a 5% inflation rate in 2013. In an updated forecast, the rate was increased to 7%, while the freight tariff indexation rate was upheld. The 2013 shipment level is expected to reach 1.314 billion tons – a 2.5% increase year on year.

The financial plan of Russian Railways is characterised by 3% faster growth in 2013 compared with the previous year. Income from shipments and transportation in absolute terms is about 120 billion roubles, or about 10%. The average annual growth of transportation costs in 2013-2015 will be 4.5% and consumer prices will grow by an average of 5.8%. This indicates that the transportation expenditures will be reduced by almost 24 billion roubles in 2013 to ensure a balanced budget.

Despite the measures that were taken, we estimate that net profits in 2013 will total 1.1 billion roubles. As for the company’s investment programme, I would like to note that the draft investment programme provides for an estimated 1.1 trillion roubles, or 1.1 trillion roubles for 2013-2015. These funds will be allocated as follows – 411.5 billion roubles in 2013, 360 billion roubles in 2014, and 346 billion roubles in 2015.

It should be noted that the parameters of the company’s three-year investment programme have increased by 24.5 billion roubles compared with last year’s forecast – based on the decision of the Board of Directors from November 2011.

The investment programme includes the following activities in 2013 – projects implemented through contributions from the federal budget to the company's authorised capital, such as, for example, the completion of construction projects in Sochi (about 33 billion roubles), the Moscow transport hub's development (over 17.5 billion roubles), the construction of the second track and the electrification of the Vyborg-Primorsk-Yermilovo line (over 2 billion roubles), and the upgrade of the Gremyacheye station in the Volgograd Region (about 770 million roubles).

The second group of projects included in the investment programme is related to projects concerning transport technological security. Over 425 billion roubles will be allocated in 2013-2015 for projects aimed at ensuring transportation safety. This is more than 40% of all of the investments allocated for the period. Of the amout, about 135 billion roubles will be allocated in 2013.

Projects in this block are primarily aimed at ensuring the functioning of transport and fire safety, upgrading civil defence facilities, and ensuring the technological sustainability of the transportation process and the maintenance of the existing capacity.

The majority of the investments will be used to renovate the railway track and to upgrade the automatics and telemechanics, to introduce a two-way automatic block system, and to upgrade equipment and power supplies. For example, it is planned to upgrade over 1,500 electric interlocking switches and about 1,400 kilometres of an automatic block system in 2013-2015.

A total of 250 billion roubles will be allocated for the reconstruction of the railway track in 2013-2015, including 81 billion roubles in 2013. During the same period, it is planned to reconstructe over 11,000 kilometres of railway track with about 10,000 kilometres of track renovated each year. This includes all kinds of renovation work, including major repairs and reconstruction.

Broken down by year, 3,700 kilometres of track will be reconstructed and 6,200 kilometres will undergo major repairs. This will help to prevent an increase in the length of track in need of renovation. Unfortunately, the amount is still substantial – about 20,000 kilometres. We cannot allow the rail transport’s technological stability to deteriorate.

Despite the high priority of projects related to railway infrastructure upgrades, the company’s fixed assets are being used rather rapidly. This will remain the case considering the investment programme's current parameters.

According to preliminary estimates, if the present rate of railway infrastructure upgrade continues, the level of track wear will reach 84% by 2015, and the level of the automatic block system’s wear will hit 65%. An audit of the investment programme commissioned by the government has shown that one of the most pressing issues at the moment is the need to upgrade the locomotive stock.

Based on the Government's instructions, plans include purchasing 770 locomotives in 2013, including diesel, electric and shunting locomotives for almost 85 billion roubles. This is the most that can be produced in Russia. Another 700 locomotives per year will be delivered in 2014 and 2015.

Almost 9 billion roubles will be allocated in 2013 to upgrade the rail car rolling stock. This will help purchase 274 rail cars. Finally, the 2013-2015 investment programme provides nearly 440 billion roubles for the removal of infrastructure constraints, including 143 billion roubles in 2013, as you mentioned earlier.

In accordance with the Government’s instructions, all infrastructure development projects have been divided into those that recoup their expenses and those that don’t. The projects that pay for themselves reach the breakeven point in 15 years and those that do not pay back reach that point in more than 15 years. Speaking about pay-back projects, I have to mention first the approaches to Russian ports in the south of the Gulf of Finland and some projects on the approaches to Black Sea ports. These are projects the company is implementing with borrowed money.

All other spending under the investment programme is estimated at 17 billion roubles in 2013. It includes the introduction of energy-saving technologies, R&D, social development and housing construction for the workforce. The investment programme in 2013 is to be financed with depreciation costs, loans, net profits, proceeds from the sale of subsidiary and dependent entities, as well as contributions to the authorised capital of Russian Railways. We understand that in order to fulfill the declared investment programme in 2013-2015 Russian Railways has to build up its credit portfolio. I’ll say a few words about this. In 2013 the company’s financial debt is set to increase by 176 billion roubles to almost 580 billion roubles, and by the end of 2015 to 820 billion roubles. The debt to EBITDA ratio during this period will be 2.2 in 2013, 2.4 in 2014 and 2.5 in 2015.

On the whole the activities of Russian Railways in the period we are considering will yield a considerable economic effect. The carriage volume will grow by 116.3 million tonnes, tax paid into all levels of the budget system will exceed 860 billion roubles (of which 262 billion roubles will be in 2013) and the direct results of the investment programme will amount to 50 billion roubles. Domestic enterprises in 2013-2015 will receive orders for products used by Russian Railways to the tune of 620 billion roubles under the investment programme. It follows from the above that the draft financial plan and financial programme for 2013 are balanced and have been agreed upon with all the federal executive bodies concerned. Therefore we believe the plan should be approved.

As for the 2014-2015 period, we suggest that the draft financial plan and investment programme be taken note of, and that the Transport Ministry, jointly with Russian Railways and the federal executive bodies concerned, finalise them taking into account the actual results of 2012 as well as with respect to the sources of funding certain projects, such as, for example, organising high-speed train service for the World Football Cup. Thank you.

Dmitry Medvedev: Thank you. Do any cabinet members have any comments on what you have heard? No? Yes, Mr Shoigu, please.

Sergei Shoigu (Defence Minister of the Russian Federation): I don’t have any comments, I have two questions. Question one. The plan speaks of eliminating bottlenecks on the approaches to the Far Eastern ports. I don’t know if this contains details regarding the Mezhdurechensk-Taishet stretch, the main bottleneck. And question two: considering that the production of rolling stock is to increase substantially, what capacity will be used for that purpose? Is the industry ready to increase the production of railway cars to such an extent?

Dmitry Medvedev: Yes, please.

Maxim Sokolov: Yes, as regards eliminating the bottlenecks, the Mezhdurechensk-Taishet stretch is in the plan for next year at the cost of 600 million roubles. But this is because a working project is being prepared for the sections that are to be developed. On the whole, the development of that stretch, Mezhdurechensk-Taishet, will cost about 37 billion roubles, if memory serves (this sum is not included in the programme). That is, it is not indicated as referring to this particular period of time… As for capacity, this has been agreed with the Ministry of Industry and Trade – 700 locomotives a year will be produced, and in 2013, 770 shunters and long-distance diesel and electric powered locomotives are to be built. These are verified figures we arrived at together with our colleagues.

Dmitry Medvedev: Very well, thank you. You confirm that, yes? Where will all this be built?

Denis Manturov: Regarding the locomotives, there are three main big producers, including Transmashholding, in which Russian Railways has a stake. As for railway cars the problem lies elsewhere. We see a drop in consumption, so there will be no shortage of production capacity. Bearing in mind the launching of a new enterprise in Tikhvin, which will have a capacity of 10,000 railway cars a year, that demand will be fully met.

Dmitry Medvedev: We shall see. Yes, Mr Kolokoltsev, please.

Vladimir Kolokoltsev (Minister of the Interior): Mr Medvedev, Mr Sokolov. We at the Interior Ministry, and not only the Interior Ministry, but the Justice Ministry as well, face the problem of the manufacture of railway cars to carry special contingents. This rolling stock is practically all outdated, and sooner or later it may result in a major disaster. Russian Railways does not have the money to renew this fleet of wagons: and we have to decommission about 50-60% of them. Does the programme envisage the building of such rolling stock?

Maxim Sokolov: We have discussed the issue and the relevant instructions have been issued, but under this Russian Railways investment programme we are not subsidising the building of that part of the rolling stock. We understand the problem, but we believe that the money to pay for these railway cars should be allocated by the Interior Ministry or other executive bodies concerned, particularly the Penal Enforcement Directorate (GUIN).

Dmitry Medvedev: How many such railway cars are needed for starters? Obviously, there is always room for more.

Vladimir Kolokoltsev: About 400 cars at least.

Dmitry Medvedev: Four hundred, I see.

Vladimir Kolokoltsev: The Finance Ministry did not earmark that money for us, and the Justice Ministry does not have such allocations. And Russian Railways doesn't have the money. But the fleet is obsolete.

Dmitry Medvedev: It dates back to the Stolypin times. Yes please, do you have something to say on this topic?

Igor Slyunyayev (Minister of Regional Development): Mr Medvedev, Mr Sokolov. There are some alarming trends connected with the current status and decommissioning of basic assets in the period until 2013 and 2015: the bridges and tunnels are growing old and are dropping out of use, the wear and tear factor is up to 80%, and the same is true of contacts and automatic blocking… We understand that Russian Railways’ own money is not enough to solve the problem of modernising these basic assets. What is the outlook beyond 2015 regarding the condition of the track and the funding required for the operation of the rolling stock and the tracks? That is one question.

And the second question concerns the fact that nothing is being said about the tariff policy. We often say that the Russian Federation has colossal transit potential and that the stumbling block is the declared railway tariff and the through tariff for all types of transport. What is the thinking regarding the tariff policy in the medium term? Thank you.

Maxim Sokolov: Thank you for your question. We have discussed the issue of long-term tariff policy repeatedly, including in the recent period. The relevant decisions have been made on the adoption of a long-term tariff policy beginning in 2014. We hope that this will help determine sources of funding for the development of Russian Railways.

The issue of including the investment component is still open, but we have the first half of next year to sort that out. Basically, the issue has to do with the first part of your question, the programme period beyond 2015. Yes, we understand that by 2015 there will still remain tracks that have not been repaired, as I said, about 20,000 km (in terms of length, that is one-sixth of the entire length). And of course, the issue will need to be addressed during that period.

As regards automatics and automatic blocking, substantial funding will be allocated to address these issues in 2013-2016, and I hope this will not be such a big problem. Compared with the overall depreciation of tracks, it will amount to 65% (a depreciation of tracks will reach 84% by the end of 2015). So I think that during these two years we will manage to solve the problem, while the emphasis in the 2016-2020 programme would be on restoration, reconstruction and capital repairs of tracks.

Dmitry Medvedev: Still, going back to the question raised by the Interior Minister: please I need you to work with the Finance Ministry and the company on this problem in order to solve it – if not within a year, then at least in the foreseeable future. These are also types of carriage that need to be attended to.

Maxim Sokolov: Yes, Mr Medvedev.

Dmitry Medvedev: Agreed. If the ministers have nothing more to say, I would like to give the floor to Vladimir Yakunin.

Vladimir Yakunin (President of the Russian Railways Joint Stock Company): Thank you. Mr Medvedev, esteemed cabinet members. First of all, on behalf of the management and the board of directors I would like to thank you for keeping the issues of railway transport under constant review, and repeatedly discussing them at meetings with your deputies, including First Deputy Prime Minister Igor Shuvalov, and with the Transport Minister. This has made it possible to prepare the report delivered by the Transport Minister at today’s cabinet meeting. Russian Railways contributed to this report, and naturally supports the Transport Minister with regard to the figures and benchmarks he has reported.

For its part, Russian Railways is working constantly to improve its own efficiency and to save resources. That includes the use of energy-efficient technologies and new types of rolling stock. We are downsizing the workforce, which has enabled us to keep costs below the inflation forecast in 2012. Maxim Sokolov and others have raised the issue of tariff policy. I would like to add to what has been said. Considering the model that is used to calculate rail tariffs, it is always based on a worst-case scenario in terms of oil prices; as a result, throughout the company’s history our tariffs have hardly ever been higher than the real growth of prices in industry. We have always been below that level. The relevant parameters tend to be adjusted later, but the tariff policy has never been adjusted.

We are also fulfilling your instruction to reduce the cost per unit of work by 10% in real terms. Again, our consumers are not limited in any way, and naturally industry prices are growing faster than expected. Nevertheless, thanks to the measures to enhance efficiency, as Maxim Sokolov has said, we managed to increase the investment programme by almost 64 billion. Any money released is used first and foremost to develop the infrastructure, to eliminate bottlenecks and to renew the locomotives. As for the next period… the fact that in 2013 our investment programme will drop to 411 billion roubles reflects the real state of affairs. This is logical, because we are completing such complicated projects as the building of a combined rail and automobile road, in which the state has been investing through the authorised capital, and it is generally a balanced figure. I would like to stress that when the commission chaired by Arkady Dvorkovich made the decision on increasing tariffs by 7%, it was pointed out that this increase is enough to maintain the industry in the condition in which it currently is. That is why we support the position of the Transport Ministry, which urged the need to develop infrastructure and railway transport, and that requires sources of funding for all this work. One such source, by your decision, Mr Medvedev, and on the instructions of the President, is the possible use of pension reserves for projects that recoup their expenses. Even so, I believe there is one other category of projects that Maxim Sokolov did not mention. These are projects that are intended to break even in 30 or more years. That is a third category. They may be necessary on the national scale, but they do not break even and do not even fit into the second category. Only state investment can solve the problem, if, of course, the state is interested in developing the infrastructure and in developing all aspects of the work of railway transport. We are looking for ways to bring in private investment for developing railway transport. When reporting to your deputies, we stressed that unfortunately, even when we have an idea of how to attract private investment without damage to traffic safety, without damage to the country’s economic interests, nevertheless the current regulatory framework practically blocks private investment in infrastructure projects.

We would like to ask the Government to make the respective entry into the resolution from today’s Government meeting. We would also like to ask you, Mr Medvedev and members of the Government, to see that the issue raised by the Minister of Interior is more precisely formulated. We want this achieved, as the rolling stock has allegedly been transferred to a special company owned by the Ministry of Interior. They do not seem to have the adequate funds or the rolling stock itself for that matter. Clearly, this shows that the investment should go directly to the company that operates and maintains the stock. Otherwise, the situation could become rather tense.

Speaking about our own resources, and this was mentioned today... The situation is as follows... We will run out of funds from two additional funding sources by 2015, as we pursue the tasks set by the Government, the state, and society. First of all, I’m referring to privatisation. We have completed the bulk of the Government-led privatisation, so we will no longer have funds coming from this source. Second, the debt to EBITDA ratio will reach the maximum level of 2.5, meaning that we will no longer be able to tap this resource. Therefore, I have the following important request, so that we will be able to achieve the goals set by the Government and given our tight financial situation. Maintaining the investment programme at such a high level is only possible with direct state support. This is what experts say, and we have reported their findings to the Ministry of Transport. First, the issue is not about supporting the company. The issue concerns supporting the state-owned railway system.  Second, the issue is also about forming a long-term targeted tariff model. Mr Shoigu mentioned this earlier. Such a decision was indeed made, and we hope that this model will be implemented. Third, we absolutely need a network contract between the state and the company to be able to close or subsidise loss-making pieces of infrastructure. Governors and the Ministry of Transport are familiar with this issue – this is a totally unprofitable infrastructure with low numbers of passengers, but the railway is the only means of transport there. In addition, we believe that we can use the experience of developed countries, and I also think that we should keep the absolute unity of  rail traffic process  and infrastructure in mind.

We believe that, once implemented, these measures will help maintain the balance between the interests of the state and the company to ensure the economic growth and the effective functioning of railway transport.

With your permission, I would like to stress the importance of state guarantees for providing passenger rail services. This issue has also been considered on many occasions and the only thing that I would ask you to do – in order to keep things short – is to include specific, clear and compelling guidance with regard to balancing the budget of the Federal Passenger Company, including tariffs and all of the other issues in the draft Government resolution. We also believe that it is necessary to discuss the unresolved issues of the draft federal law on organising regular passenger rail service in Russia. We believe that it will help us to find solutions to many problems. If this law is passed, our relations with the regions and the federal government will benefit significantly.

In closing, I wish to point out that we always keep our promises and fulfil all government assignments and instructions, be it the construction of the Olympic facilities, or in the social sphere, or in terms of infrastructure maintenance. The issue that was raised today with regard to artificial structures is also important. Therefore, allow me to reiterate that tariff adjustments will help to save the company and its fixed assets. Given the Government's plans for economic and social development, we need resources to develop this infrastructure. Thank you.

Dmitry Medvedev: Thank you, Mr Yakunin. A few words about regional developments. Mr Drozdenko, please go ahead.

Alexander Drozdenko (Governor of the Leningrad Region): Thank you. Mr Medvedev and colleagues, while I’m all for the Russian Railways’ financial plan and investment programme, I would still like to briefly touch upon three issues. Building access roads to Russian ports should be a priority, including ports in north-western Russia, where port services are expanding most rapidly and an additional 10 terminals are expected to become operational before 2020 with a total turnover of 160-180 million tonnes. The Government meeting on 21 September 2011 issued an order to provide government support in the amount of 25 billion roubles to Russian Railways to construct the first phase of the Luzhskaya-Sortirovochnaya station and the power supply lines to the Gatchina-Luzhskaya section, which is just what is needed to boost freight traffic. However, the 2012 budget and the projected 2013-2014 budget do not provide for these funds.

The second issue concerns building interchanges across railroad tracks. Today, Russian Railways is implementing several investment projects in the Leningrad Region, but the issue of organising traffic safety at the intersection of road, pedestrian, and rail traffic at various levels hasn’t yet been addressed. Some railway crossings remain closed for 12 hours a day on average, causing huge problems for social and even business development in the region. Since the construction of overpasses is not included in the Russian Railways reconstruction programme, the major issue now is the responsibility of Leningrad Region and St Petersburg officials as the owners of the road infrastructure. However, some areas that need interchanges have a federal status. Thus, the construction of overpasses should be financed using funds from the regional and the federal budgets.

The third issue is guaranteeing commuter traffic in Russia and in the North-Western Federal District and the Leningrad Region. The Government adopted a regulatory decision for 2011-2012 to subsidise a $25 billion preferential tariff for infrastructure services. This is a fairly large amount, which made it possible to ensure transport accessibility for passengers and, most importantly, to level the playing field for railway and motor transport. We would like to see a similar measure in the 2013-2015 budget, and, preferably, codified in the law. Thank you.

Dmitry Medvedev: Thank you. Let's sum everything up. Is there anything else? Please go ahead.

Andrei Belousov (Minister of Economic Development): If I may, I would like to comment on what Mr Yakunin said. I have three points to make. The first concerns the controversial issue of tariffs. I have to say that changes in rail freight rates, which generally make up 10% to 30% of a consumer’s total expenditure, have a bigger impact on production costs than the rise in electricity prices. As for the company itself, I have to report that gross profitability of rail transport, which is directly dependent on the level of rates and fares, will be approximately 10% in 2013-2015. This is high enough, compared with most manufacturing sectors, which have a lower income and can still expand. Therefore, if net profits drop to zero, as mentioned earlier today, it is not related to rates and fares or to the income of the railways but is caused by the rapid rise in non-operational costs. I will quote just a few figures. Bad debts allowance: 80 billion roubles. I repeat: 80 billion roubles! It is true that there is an allowance recovery, but for 2012 that’s 63 billion roubles, leaving a balance of more than 10 billion roubles.

Allocations to social services: 30 billion roubles. What is 30 billion in comparison with the investment programme? The Russian Railways investment programme which we are discussing now is very simple indeed: it is mainly about the maintenance of the existing railway network and upgrading of rolling stock. Infrastructural improvements, if we consider Russian Railways’ own costs, and upgrades of the rolling stock will cost approximately two thirds of 362 billion (I am taking about 2013 now); 50 billion will be spent on safety measures, 22 billion on land management within the Moscow railway system, and another 11 billion on miscellaneous costs like port approach lines, etc. That leaves exactly the 30 billion that Russian Railways must assign to social services. Thus, if we find it necessary to raise net profits – and that is true – we have to look at non-operational costs and allowances first of all. I think this is where we should be searching for ways of dealing with the current dramatic situation.

Next issue: I found it strange to hear that we had exhausted all means of generating revenues through privatisation. I was under the impression that we had not even started privatising Russian Railways. We are planning to sell a block of Russian Railways shares in 2016. Anyway, this is part of the privatisation plan adopted by the Government and Mr Yakunin is fully aware of that. So the allegations that all the ways of raising funds through privatisation are not being explored are somewhat questionable.

The third issue is Mr Yakunin’s assertion that it is impossible to further increase the company’s debt burden. The debt pressure ratio is really quite high: it is (or, more accurately, it will be in 2013) approximately 2.0. But first of all, it will not go up to 2.5 by 2015 but will remain at the same level, and secondly, a 2.0 ratio is very attractive for investors and creditors. We have many companies which are working at the level of 2.0, and 2.5, and 2.7. The critical level is about 3.0. We think, therefore, that it is still quite possible to take on more loans to attract additional funding for the investment programme. We also have the additional resource of infrastructure bonds, which so far have not been used in our investment programme at all. Thank you.

Dmitry Medvedev: Thank you.

Everyone has had their say; some positions coincide, some differ, which is as to be expected. I would like to remind you of the discussion we had when travelling on the train: a number of instructions were given then. There have been more instructions, presidential and governmental. We must take into account what has recently been done. Problems remain, but we must move forward and approve the investment programme. I would like the remarks made during today’s discussion (they were made in public, as I wanted them to be) to be recorded in the minutes for further consideration.

Overall, I propose to welcome the suggestions made today, and to continue refining the mechanism of investment planning for 2013, as well as for 2014-2015.

Are we all in agreement? Then it’s approved.


* * *

Minister of Industry and Trade Denis Manturov talks to journalists after Government meeting


Question: Mr Manturov, could you say a few words on the measures in the programme (On the Development of the Shipbuilding Industry), including financial support? Are there any plans to allow Russian fishermen to more easily lease Russian-made trawlers and to link this issue with fishing quotas? Thank you.

Denis Manturov: First of all, if you don't mind, I would like to answer the second part of your question. The Federal Agency for Fisheries and we cooperated on this issue for a long time. But, unfortunately, our colleagues allocated all the quotas at the start of our discussions in 2008. As for the current situation, the Ministry of Agriculture and we have already coordinated a format for our work to allocate fishing quotas in exchange for boats. Russian-made boats will be a mandatory pre-condition for allocating these quotas. This implies laying the ship keels now or after the approval of the regulatory documents. But a contract for building a ship at a Russian shipyard should be signed based on the allocation of quotas.

As for the first part of your question, specifically, state financial support for the state programme: the Prime Minister mentioned the overall amounts, and I have confirmed, or repeated this, to be more exact. It is about 600 billion roubles, including 337 billion roubles' worth of federal budget allocations. We are talking about funding for the civilian shipbuilding industry. We are not discussing figures within the framework of enterprise-modernisation programmes making it possible to fulfill state defence contracts, or the State Rearmament Programme, to be more exact. This state support stipulates a certain format of subsidies. A Government resolution stipulated a seven-year deadline for providing this subsidy. This was a unique situation when we compromised with the Ministry of Finance, and when the Government made a decision for the period up to 2017. We stipulate lease-payment interest subsidies. Naturally, this also concerned our Customs Union colleagues, rather than just Russian shipyards. But of course, we are members of the World Trade Organisation (WTO) now. Consequently, we don't stipulate direct restrictions. We stipulate these restrictions in line with a clear list of contracts under the long-term programme up to 2020. The shipyards have already signed the contracts, and these subsidies have been calculated in line with the contracts. Naturally, we have specified funding to support the so-called pilot projects, including the RSD44 river-going and sea-going freighters, which are already being assembled at Russian shipyards.

We have also set aside funding to support national science, primarily the Krylov Shipbuilding Research Institute, our main research centre for testing various technologies and ships. We will complete an ice-filled ship model tank next year. This will become the world's best tank in terms of its format and technology. I believe you'll be able to attend the opening ceremony next year. We'll send you a special invitation.

Question: I would like to ask you a few questions. My first question deals with the shipbuilding industry. For instance, it has been noted that 1,400 ships will have to be built up to 2030, right? My question is: What shipyards will fulfill this order?

As for the clusters you mentioned, the Far Eastern cluster includes the Zvezda Shipyard. And what about the Vostok-Raffles Shipyard which fills orders for the Shtokman project and should also be developed? What will happen to this company?

And my next question deals with the automotive industry, rather than the shipbuilding industry. You mentioned Russia's accession to the WTO. What decisions has the Government adopted? And how much in subsidies will the auto industry receive in the next few years? It was recently reported that subsidies would drop from 60 billion to 45 billion. Thank you.

Denis Manturov: Thank you. I'll start with the first part of your question to complete the shipbuilding subject, if you don't have any additional questions.

As for the volume of contracts, you noted that my report mentioned the cluster approach. Most surface ships will be built in the Northwestern cluster.

This has been our long-standing tradition through the ages. Naturally, we'll have to upgrade these facilities to some extent. But we are not having any problems fulfilling the contracts you mentioned. On the contrary, I would like to note once again that we will upgrade these facilities in order to focus on those specific projects and products that have the highest market demand.

As for the Far Eastern centre, or Far Eastern cluster, to be more exact, we haven't ruled out doing projects at the Vostok-Raffles Shipyard because this company is expected to build oil platforms and we depend on the Shtokman project, to some extent. But this shipyard will receive contracts not only from the Shtokman project and Gazprom. This is a separate issue that will continue to develop, and no one is ruling it out. Why have I mentioned and focused on the Zvezda Shipyard? Because the Zvezda Shipyard is our main project in the Far East. In effect, if we compare the Vostok-Raffles project in terms of capital expenditures (CAPEX), then the entire project and the whole infrastructure add up to about 6.5 billion roubles, or seven billion roubles, at most. As for the Zvezda Shipyard, this is from 27 billion to 60 billion roubles, depending on our order of priority. So, all the other companies in the Far Eastern cluster will play the role of second tier vendors; they will supply various components and fill orders in line with this large project.

As for the auto industry... You know, I expected some questions today, and I paid attention to two newspaper articles while preparing for today's meeting... Vedomosti writes about a list, which was made by our department, and it claims that some companies were omitted from that list. In reality, to be honest, we don't have any information that someone is suffering. But we will analyse this separately; we will review the situation and sort things out.

And the second article was in Izvestia. I printed this article especially for our meeting. Is there anyone from Izvestia here?

Remark: Unfortunately, no.

Denis Manturov: It's disappointing that some of our colleagues, unfortunately, read only one part of the report and overlook the second part. At any rate, I would like to say that by 2020 budget funding will increase, rather than decrease, because we will spend about $7 billion on compensating enterprises for revenue shortfalls being caused by higher import duties on foreign made components in 2018, 2019 and 2020, respectively. This amount even exceeds 60 billion roubles, which were stipulated from the very beginning. And now this amount has reportedly decreased to 45 billion, right? In effect, 60 billion and over 200 billion roubles are stipulated for only one measure, due to be implemented in 2018-2020.

Naturally, all the subsidies for interest on loans for corporate modernisation programmes will be retained. Yes, we have recalculated the allocations for this year and for 2013 because the companies have re-estimated their respective investment projects more accurately. We have merely reallocated the funding, which will not be spent by enterprises, and which will not be included in the budget, for our high-priority projects in other industries. But this funding will simply be allocated in 2014, 2015 and 2016, respectively. In effect, the sum total remains the same. Let me quote an interesting line: "The Government has approved a considerably larger budget for subsidising the automotive industry, which was suggested by the Ministry of Industry and Trade, in line with Government Resolution No 1459 dated August 13, 2012." I don't know where your colleagues find these statistics. First, they mention a smaller amount, and then they increase it. In other words, this article is a bit contradictory.

A VTB Capital analyst noted that a reduction in state support is the result of the fulfillment of requests being submitted by the automakers. This is absolutely correct. Another analyst says that the automakers are highly unlikely to not use subsidies on their own. In effect, we are saying that we will provide these companies with an amount that they will be able to spend and: a) no one is asking for more; and b) we will not provide any additional funding.

Question: Tell me, please, did you discuss the possible adjustment of vehicle-scrappage duties? If you remember, there was a related problem with tractor-trailers. Were you able to compromise on this issue? Thank you.

Denis Manturov: I have prepared well for this meeting. I even have two slides from my presentation to give to you. So, you can study these slides, and you'll understand the mechanism for freight-traffic base-costs, which were mentioned some time ago. Today, we didn't touch on the issue of vehicle-scrappage duties. Everyone is completely satisfied with this format. Moreover, we made this regulation in an effort to get rid of used vehicles posing an environmental hazard. The Prime Minister mentioned this issue in his opening speech today, and all of you heard it. The question of vehicle-recycling fees for lorries are no exception in this environmental class, or production deadlines for lorries, to be more exact, because ... Speaking of new tractor-trailers, I will tell you the approximate basic rate, which is about 250,000 roubles. Maximum duties for new lorries will total up to 400,000 roubles. This is the maximum amount. At the same time, Russia currently manufactures class-4, class-5 and class-6 tractor-trailers at KAMAZ. They are manufactured by KAMAZ itself and by a KAMAZ-Mercedes joint venture, by Volvo Trucks in Kaluga, by MAZ and by a MAZ-MAN joint venture in Belarus. We have a common customs space, and in this case, we are talking about a common market. So this totals just 30 kopecks in terms of freight-traffic base-costs per one kilometre. The Ministry of Transport suggests introducing a duty on all lorries in excess of 12 tonnes next year. As compared to that duty, this one is exactly ten times less, due to be charged on transport companies next year. In effect, this does not influence traffic base-costs in any way. As for used lorries, the sums are much higher and can reach one million and 1.7 million roubles. But what are we talking about? If we want to facilitate cost-effective freight traffic, then we must be ready to buy new vehicles. First, we must buy Russian-made vehicles. If you want to buy a foreign-made vehicle, then you must be ready to pay these vehicle-scrapping duties. These duties will subsequently be used to create a vehicle-scrapping system, and they will also make it possible to scrap large lorries.

I will give you these two slides. Do you have any more questions?

Remark: No more questions. Thank you.

More Information