Transcript of the beginning of the meeting:

Dmitry Medvedev: I’ve invited Mr Puchkov (Vladimir Puchkov, the Emergencies Minister) because several complicated situations have arisen due to the bad weather. One of them is in Azov in the Rostov Region. Yesterday I spoke with both the Emergencies Minister and the Governor. Several areas are flooded there. Nothing extraordinary is happening there at the moment, but the situation is still unpleasant. People have been relocated. I’d like you to tell me about the current situation and whether it is necessary to take any extra measures. The situation in Central Russia is not straightforward either – snow storms came there from Europe and vehicles on the roads are caught in the snow. What has been done to clear the roads and normalise traffic? Please give me a report on this, as well. I’d also like all deputy prime ministers who are present here to concern themselves with this, too.

Let’s start with this and then move on to other issues. Mr Puchkov, go ahead, please.

Vladimir Puchkov: Mr Medvedev, ladies and gentlemen. On March 24 a surge in the upper reaches of the Don water-logged 21 areas, home to more than 5,000 people. Some roads were also affected by flooding, as well as 10 socially important facilities. People were successfully informed of all measures and were relocated promptly. All in all, 320 people were moved, out of which 56 have been given temporary accommodation, while the rest have been taken to their relatives. Medical assistance has been organised and granted first to two persons, and later on to another five. All life-support systems are under control. This morning we formed joint groups to assess the damage. The flooding has affected 136 homes. We have involved municipal representatives, experts and public activists in our efforts to assess the damage and organise emergency recovery work. We disconnected seven areas from electricity to avoid short circuits. We have now set up recovery teams to reconnect electricity to each home one by one.

Dmitry Medvedev: Is the water receding or not?

Vladimir Puchkov: The water is already receding. The water level is 70 cm lower than at the peak of the flooding. Now the situation is stable and fully under control. We have launched recovery work and are bringing all vital systems back to normal. We have redirected the traffic to bypass flooded areas which require repairs and are doing everything necessary to support the people affected. The Rostov Region’s Emergencies Commission and the National Crisis Management Centre are also involved in the recovery efforts. I’m confident we will complete this work by the end of the day, with the exception of restoring all electricity supplies. Some houses and socially important facilities have to dry out before being reconnected.

Dmitry Medvedev: Obviously, there are safety standards which must be observed, but it is still cold, even on the Sea of Azov and in Rostov. So all connections should be made as soon as possible. Mr Dvorkovich, keep an eye on it as well, since you are in charge of energy issues. If you need any Government directives to that effect, please get the documents ready, and we will issue them.

Vladimir Puchkov: Mr Medvedev, we are preparing such documents in due course along with the administration of the Rostov Region. As soon as the assessment team completes its work, the draft directive will be ready.

Dmitry Medvedev: All right. How’s the situation in Central Russia?

Vladimir Puchkov: There are emergency situations in 13 regions of the Central Federal District due to abnormally heavy snowfall and sharp fluctuations in temperature. Authorities and personnel were put on high alert in advance. The relevant federal executive bodies are working to provide relief. I have put on high alert the corresponding functional subsystems of the Ministry of Transport, the Ministry of Healthcare, the Ministry of Regional Development and other federal agencies. Emergency commissions are also working in the Russian regions.

Our mobile teams have all federal motorways under control, and the 102 most dangerous sections are under constant monitoring. In addition, we have allocated additional resources and pooled efforts with the Ministry of Regional Development to monitor the operations of urban public utility services in order to help people. Apart from that, shippers and lorry drivers are being provided with constant updates about weather conditions. We are also helping stranded drivers. We have deployed life-support posts, heated tents and technical support posts. We are also managing traffic on congested roads. Not just on federal motorways, but on all nearby roads as well in order to normalise traffic.

In general, the situation is under control. The National Centre for Crisis Management is doing its job. According to the forecast, the weather will get worse, and there may be more surprises coming our way, so we are keeping the relevant authorities and personnel on high alert.

Dmitry Medvedev: You need to maintain contact with all drivers on the road so that drivers don’t do anything that could cause congestion, like it was some time ago. Are airports open?

Arkady Dvorkovich: The situation was fairly difficult at Moscow airports yesterday: over 100 flights were delayed and more than 20 were redirected to other airports. The situation had stabilised by noon today, but not all flights are running on schedule yet. We hope to get this fixed by the end of the day.

Dmitry Medvedev: Are departures and arrivals more or less on schedule?

Arkady Dvorkovich: Yes, they are. We had several flights land at alternate airfields yesterday, but today everything is back to normal.

Dmitry Medvedev: I would like you to continue to monitor the situation and report back to me. Mr Rogozin (addressing Dmitry Rogozin), that goes for you too. Keep the situation under control.

Now a few words about major projects. I approved the Forecast of Russia’s Long-Term Socio-Economic Development to 2030, which is the fairly distant future. This is a strategic document, and it must serve as the basis for developing individual sectors and territories, as well as adopting decisions on implementing major infrastructure projects and strengthening national competitiveness in general. The pace of modernisation of our industry and agricultural development will depend on the budget and, of course, on our economic growth, including GDP. It contains three scenarios, which everyone is familiar with, and the forecast is based on these scenarios. Clearly, forecasting 17 years into the future is always relative. Nevertheless, it is important to understand what we want and what kind of results we want to achieve. I want the Government members to know that I have approved this document.

The Electric Grid Development Strategy prepared by the Government has also been approved. There was a presidential meeting which set ambitious goals in this sphere. The issue concerns reducing operating costs, investment costs, removing inefficient grid operators from the market and, of course, increasing the quality of grid management, which, to put it mildly, is far from ideal. I hope that these measures will slow the growth of electricity tariffs for a large part of consumers, improve the quality of power supply and reduce the number of power outages, so that we can get a clear idea of what might happen in the future. Disruptions in power supply should become only force majeure events. These are our priorities. We have adopted a number of decisions, and the strategy has been approved. Mr Dvorkovich, what are the plans to organise work under this new strategy? How fast will consumers be connected to electricity grids?

Arkady Dvorkovich: The strategy outlines several steps to this end. We will need to adopt 20 regulations. 

The schedule is appended to the strategy. The adoption of all regulatory acts must be completed by the next year. The adoption of all 20 acts is scheduled for concrete months. Jointly, these acts will have the following results – first, reduce the undersupply of power and reduce losses…

Dmitry Medvedev: At times, these terms are odd – “undersupply.”

Arkady Dvorkovich: Yes, this is our Soviet terminology.

Dmitry Medvedev: Remarkable! In legal language, this is non-performance. Undersupply! Let’s change the terminology, it’s a shame. 

Arkady Dvorkovich: Good, that’s right. The fact is that the number of power outages in Russia and the total duration of power outages is ten times higher than on average in European countries. This situation is completely abnormal and it is mostly due to obsolete equipment and inefficient management. Precisely these tasks should be resolved in the strategy. We will adopt uniform technical specifications, uniform technical policy on the whole grid complex – from the Federal Grid Company (FSK) to IDGS Holding and territorial grid organisations. The number of the latter should be reduced several times over. Currently we have 3,000 territorial grid organisations, and the majority of them are not completely functional – they cannot fulfil their tasks in full. They have been founded on top power supply organisations that existed in Soviet times.

Dmitry Medvedev: Not only in Soviet times. In the 1990s, every respectable businessman, every businessman who sought to gain respect, used to create a grid company because Russia had essentially a natural economy. 

Arkady Dvorkovich: And in recent years, when decisions on market liberalisation had been made, there emerged loopholes facilitating relevant legal actions. Under the strategy, we will adopt principles on licensing such organisations. Unfortunately, we have to return to licensing in some areas. And this is one of such areas.

Dmitry Medvedev: It is not bad when different companies produce electricity; this is a common practice throughout the world; they channel this electricity to a common grid. Our problem is that as a result we have different conditions for connecting to the power grid and different prices. This is unacceptable even for a large country. 

Arkady Dvorkovich: This is another task. The number of actions required for connecting to power grids will be reduced to a maximum of five. However, we have set a more serious task to pass over to three actions. In the timeframe, we will seek to achieve the indicators envisioned by the roadmap of the National Business Initiative. But at the meeting, the President set the task of advancing at an accelerated rate; and we are developing additional measures in order to embrace minimum indicators regarding the timeframe and cost of connecting to the power grids.  

And, finally, we will make efforts to eliminate most cross-subsidising. This will make it possible to reduce tariff growth rates and even reduce tariffs for some groups of consumers. This is not an easy task. We will have individualised solutions in different regions in different timeframes – between two and seven years. This is a sensitive subject. We will have to invest more time in those places where they have the highest distortions. However, we have set specific deadlines for some regions. 

And the last point. We have previewed mechanisms providing for standard technological and investment solutions for launching new power generation facilities. These mechanisms will help to prevent a situation where costs or investment for launching uniform facilities differ by several times in different regions. These mechanisms will provide for minimum and optimal spending and will reduce the investment component in the tariff and so will slow down tariff growth.  

Thus the actions improving the efficiency of the grid sector will be implemented within approximately one year in all areas. A unified organisation, Russian Grids (Rossiiskye Seti), being created by Government decision with presidential approval, will work on this. Russian Grids will control the Federal Grid Company and regional grid companies and will implement the aforesaid uniform principles of technological investment policy.

Dmitry Medvedev: These should be uniform principles, and not principles that depend on certain individuals or organisations, albeit very large, such as Gazprom or Rosneft. These should be uniform principles for Russia. Bear this in mind.

Now humanitarian issues – the protection of child rights. Last week there was an outcry regarding insufficient information on the number of newborns in the North Caucasus Federal District. To my knowledge, they have just a bad system of registration. If a child does not go to school, nobody cares. Can you improve this registration? What should be done, Mr Khloponin?  

Alexander Khloponin (Deputy Prime Minister and Presidential Plenipotentiary Envoy to the North Caucasus Federal District): This is a sensitive subject, indeed. My district is a leader in terms of birth rate (80,000 children were born in 2012 – this is among the highest figures). However, about 250,000 people left the North Caucasus Federal District in 2012. Monitoring in real terms where…

Dmitry Medvedev: How many people left?

Alexander Khloponin: 250,000 people. It is rather difficult to monitor the number of children in the families that have left. We have made efforts to compare the Federal Service for State Statistics data with the number of children aged between 7 and 15 attending secondary schools, and we saw large gaps in figures. For example, in the Republic of Dagestan, we cannot establish what schools the 87,000 children born in Dagestan are attending? We cannot locate them in educational institutions in the North Caucasus Federal District. In the Republic of Ingushetia, 20,000 children are missing, and in the Republic of Karachayevo-Cirkassia, 11,000 children are missing.  

Based on this information, each republic created a regional government commission headed by the regional prime minister. We have invited Federal Service for State Statistics bodies, the registry office, the Ministry of Education, the Ministry of Healthcare, the Federal Migration Service, and we will conduct a comprehensive review to learn where the children have gone and to get a real picture of the situation we face. The information base is very limited indeed, the system of registration is practically non-existent. 

Dmitry Medvedev: Mr Khloponin, then it is necessary to punish somebody in these regional governments. This concerns people.

Alexander Khloponin: We will draw up the results on each region and do this.

Dmitry Medvedev: They rightly believe that those who do not go to school may join terrorist groups hiding in the mountains.

Alexander Khloponin: This problem exists. This is not the only problematic sector. There is an additional factor in the financial system too – currently we are paying a great many social benefits and thus creating a bad foundation, exactly the kind that results in a negative environment. 

Dmitry Medvedev: Do bring order to those regions. Ms Golodets, please monitor the methodological aspect of this throughout Russia, as a supervisor of this issue.

Olga Golodets: I’ll just say a couple of words.

Dmitry Medvedev: A couple of words.

Olga Golodets: In December, I issued an instruction to create a unified register of children and children attending schools. This work is being carried out; I have scheduled a meeting for Thursday, and our minister, Mr Nikiforov (Nikolai Nikiforov - Minister of Communications and Mass Media) works on this issue. He had received a technical task and he has worked on this with all ministries, because it is not just the register that matters – what matters are the types of social assistance and social benefits extended to children of various ages. Therefore, there is a portal of medical services (when children are to have a periodic health examination), there is a portal of educational services (when children must go to school)… I hope that by July we will be able to start to organise this work technically.    

Dmitry Medvedev: Good, do it.

Let us share other ideas too. Let’s discuss with you, Mr Shuvalov, and other colleagues what is happening with Cyprus. In my view, they continue to steal what’s already been stolen. We have to understand what this affair could ultimately lead to, and what the consequences are for the global financial and monetary system, and for our interests too.

Thank you all. Good bye! 

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* * *

Briefing by First Deputy Prime Minister Igor Shuvalov after meeting with deputy prime ministers

Transcript:

Question: What did you discuss there? What did you agree to do?

Igor Shuvalov: We discussed many issues. What would you like to know in particular?

Question: I would like to hear about Cyprus.

Igor Shuvalov: What in particular? What questions would you like to ask?

Question: The Prime Minister has said that there are money of state corporations there. What volumes are we talking about and which corporations own them?

Question: We have information that the authorities want to write off 30% from deposits over 100,000. Does this only apply to the Bank of Cyprus so far?

Igor Shuvalov: All right. Regarding the problems in Cyprus, the Government of the Republic of Cyprus started requesting additional financial assistance from Russia more than a year ago. Russia had previously issued them a $2.5 billion state loan. Cypriot banks found themselves in a dire situation when Cyprus faced major problems after Greek debts were written off. As you know, many Cypriot lending institutions used to buy Greek liabilities and debentures. After Greece defaulted on its payments, the European Union adopted a consolidated decision on Greece. As a result, the current situation which we are witnessing now was not because the Cypriot banking system was poorly regulated or because the system of oversight was in a terrible state, but because of their huge investment in Greek debts. However, all decisions on Greek debts were made without Cyprus. As a result, all the current problems now facing Cyprus were essentially caused by the adoption of all the EU decisions.

We have been monitoring developments in Cyprus closely. We have met with representatives of the banking community. The Minister of Finance and the Minister for Energy, Commerce, Industry and Tourism have recently visited Russia. We have discussed various projects, and have assessed the overall situation and national developments in great detail. The Minister of Finance, the Russian Ministry of Finance knows the situation very well. In these conditions, we have decided that Cyprus and the European Union should first agree on a package of decisions. These decisions should be formalised at the EU level, at the level of the European Commission and the European Central Bank. Furthermore, some of the decisions should be formalised by the Parliament and Government of Cyprus. The Bank of Cyprus should also take the necessary decisions.

We considered the initial approach announced by Cyprus to be extremely unfair with regard to those healthy financial institutions which did not haveproblems. The two largest Cypriot banks, Laiki Bank and the Bank of Cyprus, create most risks for the banking system. Most of the problems have accumulated at these two credit institutions. At the same time, the Russian Commercial Bank with VTB capital is the largest local bank with Russian investment. This is a healthy bank and is probably the healthiest bank in Cyprus which and doesn't have any problems. But the very same measures were suggested with regard to this bank as those proposed for all the other lending institutions.

When the Minister of Finance was in Moscow, we told him that it was unfair to adopt the same approach towards banks that are in trouble and those which have virtually no problems with liquidity or current operations. Consequently, we said at a meeting with the Minister of Finance and the Minister for Energy, Commerce, Industry and Tourism that we will wait for final bilateral decisions that are due to be made by the EU and Cyprus, and then we will see whether it is possible and necessary for Russia to provide assistance.

This package decision is currently being modified and we are following it closely. These decisions have not yet been finalised, they are still under discussion. The two largest banks will be reorganised. The healthy and bad assets will be divided. Moreover, it will be suggested that these two banks write off 30-40% of their respective deposits. But all this is still in the discussion stage and we have not seen any final decisions. The relevant proposals concerning other republic's banking institutions are still under discussion. Once this decision has been taken we will find out whether a small share of deposits will be written off or not. Nevertheless, we are following the situation closely. It is our opinion that, regardless of any overall decisions in Cyprus or between Cyprus and the European Union, the Russian Commercial Bank will not be affected, or if so. the losses will be insignificant. Together with senior VTB executives we have carefully studied the entire structure of the bank’s assets and liabilities: the bank’s situation is good and stable.

As for the discussion of Russian capital in Cyprus, it should probably be divided into two categories. The first category includes all those negative aspects which are being discussed all the time, including money which has been taken out of Russia and on which no tax has been paid. We believe that its share is entirely negligible and that official assets which have been officially deposited in Cypriot banks under Cypriot jurisdiction and legislation to prevent double taxation account for the bulk of the assets. This legal framework is being used to officially minimise taxation as part of various transactions, and purchases of assets or securities. We currently lack accurate records about potential losses for Russian investors. We only know which investors have deposited their assets with the Russian Commercial Bank, and we can confirm that this bank has no “grey” (semi-legal) or illegal assets. This is a good and healthy institution with perfectly legal and open schemes.

As for other banks, we don’t know whether these two highly sophisticated banks which are subject to reorganisation have Russian assets or not. Various conjectures are being made and various statistics are being mentioned but we have no documentary evidence that can confirm whether there are any assets there or  estimate their volumes.

On the whole, I believe that this is an extremely unhealthy situation, and that this situation was initiated by a discussion of the first approach. The active discussions in Cyprus of this EU-sponsored approach were to no avail. You also know that the Cypriot Parliament has voted on this issue. And all investors are scared because, in essence, a confiscation payment was suggested, that a certain share of assets be confiscated from depositors or legal entities, including absolutely legal depositors operating within the format of credit agencies which do not have to be restructured in any way. And when we said, including during negotiations with representatives of the European Commission, that the Russian Federation had repeatedly undergone similar procedures, including in 1998, we were told that this was the same thing. No, this is not the same thing. The rouble was devalued in 1998 after all bank deposits became devalued. The approach suggested to Cyprus was motivated by the fact that many depositors were reportedly not paying taxes. Although this approach was considered fair, we see nothing fair in it. If the Republic of Cyprus really believes that many depositors have failed to pay the required taxes in their respective states and economies, then its authorities should have charged the appropriate tax on these incomes. But, in effect, what was proposed was a confiscation of property rights.

What does this mean for Russia in the medium and long term? Speaking of Russia and all those working with Russia, it means that all those constant reproaches about an unfavourable investment climate in Russia … And we often hear from the EU and European countries that we must work hard to improve the investment climate. And this is true, we have to carry out this work, we have the required agenda. But no investor should forget that the EU has a 100% guarantee of property rights, and that current developments are a positive message for those who are ready to transfer their capital under Russian jurisdiction and into Russian banks. We have very stable banks. In fact, not a single major Russian bank has suffered a systemic crisis during the financial and economic crisis which began in 2008. It is possible to transfer all these capitals to Russia and to pay all the required Russian taxes because it is now perfectly clear that the Russian banking system is in fact much more stable than many European banks. In terms of future prospects, those investors who cooperate with Russia and those Russians who work in Russia and who invest abroad should think about the best options for preserving their capital. And they should also think about which institutions they should use. Not everything that is foreign is that good, it turns out.

Question: And what will we do about the $2.5 billion loan?

Igor Shuvalov: We will make the final decision after we see the entire package of decisions by the EU, the European Central Bank, the Government of Cyprus, the Bank of Cyprus and the legislature of the Republic of Cyprus. Once we have studied the entire combination of these decisions, we will propose our own assistance measures, including the restructuring of this debt or some other options. But it is still too early to talk about this today because the current situation means that the Russian Government will not have to make any additional decisions. 

Question: Is it possible that we will refuse to help?

Igor Shuvalov: We have said that no Russian assistance is currently needed while we are negotiating with the Government of Cyprus. This country is part of the eurozone and the European Union. And, on the whole, we regret that such problems are occurring because this is not a problem of Cyprus, this is a problem … Regardless of all the assurances on the part of the European Commission, we fear that this may affect the stability of the euro, the stability of the eurozone, and that the crisis may gradually aggravate the entire situation. Russia has an export-oriented economy so we have to take note of this. In other words, we fear this is a problem which transcends far beyond the boundaries of Cyprus.

That will be all. Thank you.