Transcript of the meeting:

Vladimir Putin: Before we open it up for all the questions that interest you I would like to introduce Mr Sokurov. He is our well-known film director who, I understand, is thinking about a very interesting project, he wants to produce "Faust".

Perhaps he could tell you about it. I would simply like to introduce the project. I think it is an interesting work that belongs entirely to the humanities and is totally unconnected with economics, business or politics. This is something that lies at the basis of the spiritual affinity of Europe, Russia and Germany.

This is just a presentation for you, ladies and gentlemen. Of course we will do everything ourselves. If there is anything Mr Sokurov needs it is contacts with his fellow professionals who may be useful in implementing the project.

Alexander Sokurov: Good evening, dear friends. First of all, we congratulate Mr Putin on this very delicate prize. It is very important for Russian people that our Prime Minister has been recognised in a very special and cordial way. We have all witnessed it today.

I will not take much of your time, let me just say that sitting by my side is Andrei Sigle, producer and composer, we are working together. I would like to say that for us "Faust" is a major cultural project that reflects our profound reverence for the classic cultural tradition of Europe. We need to be in constant contact with Europe. I mean Russian art. I am sure that European and German art also need the Russian cultural artistic tradition.

We perceive Germany as a kindred and close country, as a kindred and close culture. Nothing can ever set us apart whatever may happen. Nazism could not separate us, Stalinism could not separate us, there is no force that can stand between us - I am sure of that.

Our film will feature German actors and European actors. We will look for locations in Germany. The booklet that is available here shows in what direction our search is proceeding. We will treat the German and European national artistic tradition with extreme attention and care. This is characteristic of the Russian attitude to European art.

I have been working with German film-makers for more than 20 years. We have learned a lot from them, and they have learned at least as much from us. Back in 1942, during the Second World War, in the most difficult period, Eisenstein was shooting his classic film, "Ivan the Terrible" in Alma-Ata. Now we are launching a very serious project at a time when there are problems all over Europe and in Russia. That is a measure of confidence in our state, confidence in the assistance that our state renders Russian culture. We hope and believe that we will cope with these problems even in these difficult years. I have no doubt about it. So I am embarking on a very challenging, very major and serious work.

Andrei Sigle: For my part I would like to congratulate you too, Mr Putin. Thank you very much for your support and for the assistance you are giving our film-makers, including our picture. It is very important to us. I am sure that it will be a useful film. We would very much like Europe to see us as members of the European Union. We think in the same way and we work in the same way. I am half-German, to cut a long story short, we cannot live without each other. Thank you very much.

Alexander Sokurov: The latest film will be made in German.

Vladimir Putin: After this presentation I think you will all join me in wishing success to our film makers, I think it is going to be an interesting work. And now, without any further ado or introductory remarks on my part I am ready to answer your questions. I think this approach will be better, especially considering the late hour. Thank you.

Question: Mr Prime Minister. Today you discussed the options for settling the gas problem with the businessmen and with the Federal Chancellor, and tomorrow will see a gas summit in Moscow with the business circles. How do you rate the chances of success, including the trial phase that was discussed today?

Vladimir Putin: In general, I am an optimist. And if you ask me about the perspective, I see that at the end of the day we will all need to come to an agreement. If the President of the Russian Federation, Dmitry Medvedev, invites our partners to come to Moscow, he is doing so in order to enable us to search for a solution, to act in an absolutely open and transparent way as partners.

Now for your specific question as to how long this trial period, as you put it, may last. First, how did the idea of the trial period arise? It arose in fact during my conversation today with our partners, the heads of European energy companies. Why and where did it arise?

Our Ukrainian partners have informed us that in order to resume gas transit to Europe they must have what they call technical gas. They put this request in writing. We have these letters and paper work. They need 140 million cubic metres of gas in the export pipeline, which operates like a piston inside it. That is one thing.

Another thing: They need 21 million cubic metres of gas a day to fuel the work of the pumps. First of all, I must say that in general practice providing these quantities of gas has always been the duty of the transit state. To siphon off gas from the export pipeline is technological barbarism. But let us not discuss now why it happened.

Our partners, I repeat, submitted to us a written proposal: give us 140 million metres in the pipeline; we are due to pump 360 million cubic metres in January, 600 million in February and 600 million in March. The letter they sent us says in black and white (we can show it to you): Gazprom must transfer the entire amount into the ownership of the Ukrainian state company, and the letter goes on to say that afterwards we will sort it out and we will have the right to pay for this gas. Very strange language: not an obligation to pay but the right to pay.

We are to supply technical gas in the amounts I have indicated in the first quarter of this year. At the prices in the first quarter it would cost about $1.7 billion.

Naturally, it would be more than foolish on our part to supply such an amount of resources without any collateral. This is never done anywhere. It is not done and I don't think it will ever be done.

So I have proposed to our partners, the European companies, to share the risk. I proposed to set up a consortium to pay for this gas, but on condition that it would recoup its cost later.

During the conversation today one of its members said: "We will put up the money, but Gazprom will then have to pay it back." But now, wait for the most interesting thing. I said: "Of course Gazprom will have to do it. And if the gas gets stolen on Ukrainian territory?" This gave everybody pause. Eventually one of the participants said: "All right. Let us not supply the whole amount three months in advance, we will feed 140 million cubic metres into the pipeline. As for the daily consumption needed to run the pumps we will provide 21 million every day. We will see how the gas reaches European consumers over the next few days. Two, three or five days." That was how the idea of a trial period arose.

We said for our part: "First we will ensure a certain, not the whole, but a certain amount of supply to the Balkans and Slovakia because they are in the most difficult position today. We will see how it goes and if it flows normally we will gradually increase the amount in all the other directions."

That is all.

Question: Mr Prime Minister, you have spoken many times about the economic damage the gas crisis has inflicted on Russia. How do you assess the political damage?

Vladimir Putin: It is massive. But we have no choice. We have seen the same thing repeated every year for 15 years. I spoke about it at the press conference in Berlin. We approached our Ukrainian friends to negotiate the terms of transit and gas supply to Ukraine for Ukrainian needs as early as January. We try to do it every January. And what do we get as a result? Practically throughout the year our partners avoid having real negotiations. Then, towards the end of the year, we witness a slight fit of hysteria which boils down to elementary blackmail: Either you give us cheap gas, at half the price that you charge Europe, or we will not allow transit to Europe.

We decided for ourselves and in spite of any difficulties we are working towards establishing European prices for domestic Russian consumers. It is not yet at European levels, but it is the European price formula. Number one.

Number two. Together with our CIS partners we have adopted the European price formula. Let me stress, with all of them except Ukraine. Ukraine has always refused and is still refusing. The situation is made more difficult by the fact that in the former years we bought gas from the Central Asian republics - Kazakhstan, Uzbekistan and Turkmenistan - at very low prices, pumped it to the border with Ukraine and sold it to Ukraine, also at fairly low prices. This year the Central Asian republics introduced European prices for Russia. In the first quarter of this year Gazprom pays the Central Asian republics $340 per 1,000 cubic metres of gas on average (depending on the country). Delivering it to the border with Ukraine would bring the price to about $375-380 per 1,000 cubic metres. You see, the situation has changed and we cannot sell at a loss.

Even so, considering the current economic situation, we have offered our Ukrainian partners a price that you may find laughable, $250 per 1,000 cubic metres. They turned it down. In fact I don't mind telling you, everyone should know it, that Gazprom said $285 per 1,000 cubic metres with the right of partial re-export to Europe from which our Ukrainian partners have always earned considerable profit. Ukrainian companies have always insisted on re-export rights because this is hard cash. It is very simple: they buy for $285 and sell for $470. In Romania, for example, the price in the first quarter of this year is $470.

After much arguing they told us that they would not buy for $250 (and $250 is without re-export rights). We said, OK, let it be $250 with re-export rights. In fact $250 with re-export rights works out to $235 on an annual basis. They turned it down again. What were we to do?

We shut off supply of gas for Ukrainian domestic needs on January 1 because there was no contract. I have not added a single word, trust me. I personally proposed to the Ukrainian Prime Minister: come here, sign a contract for $250 per 1,000 cubic metres and we will grant you re-export rights. She refused. She turned down the very thing that they had been asking from us.

Naturally, in the absence of a contract, we stopped supplies to Ukraine as of January 1. But we continued all the supplies for export via Ukrainian territory. Now you are asking me about the political damage. Yes, damage has been done, but we had no other option. The political damage can be minimised if the situation is assessed objectively and presented objectively to the public in Europe.

Question: Mr Prime Minister, would you be prepared to agree with the demand that if you raise gas prices for European consumers and the gas price for Ukrainian needs then Ukraine too can claim higher pay for gas transit?

Vladimir Putin: There is a transit contract Russia and Ukraine signed in April 2007. An additional protocol has been signed, which is valid through December 31, 2010.

The contract has been signed under Swedish law. If a dispute arises it is to be considered at the Arbitration Institute of the Stockholm Chamber of Commerce. In spite of this, the Ukrainian Energy Ministry went to the Kiev court and the Kiev court decided to forbid the transit of our gas to Europe, I am stressing this.

Under this contract, pumping 1,000 cubic metres of gas over a distance of 100 km costs $1.60. In Europe the price is about $3.40. We are ready to switch to a civilised system of settlement immediately. Let them pay us the European price, and we will apply the European formula and will pay the standard European price for transit. Just consider: for Romania the price of gas is $470 in the first quarter, minus transport, it makes up $450 per 1,000 cubic metres, Approximately. But we are talking only about the first quarter because the European price formula says that the gas price changes automatically with the change of the oil price. Because the price of oil and its products dropped sharply during 2008 and gas prices are fixed with a lag of six months, the gas price at the end of 2009 will be quite low. That does not depend on us. I repeat, the price will change automatically to match the price of oil and its products.

Any questions over there?

Question: Mr Prime Minister, I have two questions. First. You have described all these developments so clearly and thoroughly that the question arises: given all these circumstances, can tomorrow's summit in Moscow produce an agreement?

And the second question. Given the highly contradictory position of the Ukrainian Government, which you have described so vividly, can one hope that given this approach an agreement on the issue will ever be reached with Ukraine?

Vladimir Putin: It will be difficult to achieve. We witness intensified political struggles, I would say more, a struggle between clans. First, there is a struggle for access to cash flow, one of which is generated by selling our gas to Europe. You understand that you can use cheap gas to produce chemicals and sell them to Europe at a high price. You can use cheap gas to produce fertiliser (which is being done on a massive scale) and sell it to Europe too. The metallurgical industry burns our cheap gas and gains a competitive edge in European and even in world markets.

Economic and political interests have become intertwined. We ourselves are sometimes hard put to understand who is responsible for what and who earns money from what. We also see that both governing parties and the opposition have economic interests in the same areas, which add up to a mess that is impossible to sort out. There are contradictions between the parties in government. The governing party and the opposition reveal a total unanimity of views and shared economic interests. The President accuses the Prime Minister of betraying the country's interests and the Prime Minister accuses the President of the same thing. It is impossible to negotiate. Nevertheless, two circumstances inspire optimism. One is short-term and the second a strategic, long-term factor. The first is that Ukraine needs Russian gas, without it, it will simply be unable to survive within a month and a half or two months. My point is that we should work together to make this area of interaction transparent and market-oriented.

The second factor is that we must develop transport facilities and diversify the channels for delivering our gas to European consumers. I mean Nord Stream beneath the Baltic Sea and the South Stream beneath the Black Sea. That way the transit country, Ukraine in our case, would not feel that it holds a monopoly. It should be deprived of its monopoly status. This is a classic case demonstrating why economists say that monopoly is always bad.

Besides, new transport opportunities are not taking anything away from anyone. We will continue to cooperate with transit countries. But it would be easier if we can continue a dialogue with them. I repeat: the need for Russian resources should induce our Ukrainian partners to seek some kind of an agreement.

Question: Mr Prime Minister, with your permission I would like to ask two questions which are anyway already being discussed in the German media. The first question is what will happen to the gas reserves in Germany? Did the Federal Chancellor tell you today how long the current German reserves will last? And the second question: if the reserves in our gas reservoirs run out, will you leave us in the cold?

Vladimir Putin: I could perhaps disclose some, though not all of the things that the Federal Chancellor told me.

I object to the form of the question to begin with. Why are you asking me whether we would leave you in the cold? Why aren't you asking whether Ukraine will allow our gas to pass through its territory? It is already known that we resumed gas supplies from Russia at 10 am on Monday. This has been confirmed including by international monitors who are at the crossing point. Other international monitors, who are in Kiev, confirm that the gas transport system on the Ukrainian side is still closed.

The technology involved is as follows: Gazprom sends a request to the Ukrainian company every day to ensure the transit of a certain amount of gas in a certain direction. Over the past week they have turned down our requests every day, including today. This morning Gazprom sent another request for 76.6 million cubic metres towards the Balkans, 22.2 million cubic metres to Slovakia and a little over 19 million cubic metres to Moldova. The reply was, no.

Question: And still, perhaps you will manage to meet the Ukrainians halfway before we are left in the cold?

Vladimir Putin: What I am saying is the absolute truth. If you don't believe me, talk to those whom you trust. Are we going to live in this state of uncertainty, crime and blackmail?

Today Ms Merkel and I discussed the transit problem. She knows the Ukrainian arguments and why they are not opening up their gas transport system and why they turn down all our requests. The Ukrainian argument goes like this. They no longer conceal that they have stolen from the export pipeline the entire amount of the technical gas that must be there and filled their underground reservoirs with it.

But what are they doing now? These reservoirs are intended to ensure transit to Europe. They were all built of course during Soviet times. Now they are pumping back the gas from these underground storage facilities to meet domestic needs in the Eastern parts of Ukraine. They tell us: if you feed a large amount into the export pipeline, which was also built in Soviet times with the express purpose of supplies to Europe, that a large flow of gas will prevent the reverse pumping of gas from underground storage to the east of the country. So they are demanding that we open all the directions immediately and fill the whole gas transport system. We believe they want it done in order to continue stealing gas.

To sum up. The Ukrainians claim that they cannot pump gas to Europe because that flow of gas would impede the reverse flow of gas from western to eastern Ukraine. Gazprom believes that our Ukrainian partners have such a technological possibility: to pump gas to Europe and simultaneously channel it through other pipes to consumers within the country. That argument can go on endlessly. Gazprom says one thing and the Ukrainian technicians another.

So during my talk today with the Federal Chancellor I told her: let us set up a group of independent experts, including representatives of Gazprom and of the Ukrainian oil and gas companies, let them examine as quickly as possible the technical condition of the pipeline system and propose transit directions that would not impede the feeding of gas to domestic consumers but at the same time protect these supplies to European consumers from being stolen. Such monitoring is envisaged under the protocol we have signed at the initiative of Ms Merkel.

I understand that my proposal has been welcomed. That answers part of your question. If today our Ukrainian partners tell us: your huge flow to Europe will impede the movement of our gas inside the country, let the international experts on their side and on our side chart an optimal route. Ms Merkel and I have practically formulated that proposal today and we will of course discuss it in Moscow tomorrow. This is an absolutely new element in the situation which emerged from our negotiations today with Ms Merkel.

Question: Two questions if I may. One contains a request to you and the second is as follows. What do you think of the fact that there was such great enthusiasm for Barack Obama in some European Union countries that it even damaged his election campaign, and what are your expectations and hopes with regard to the new US President?

Vladimir Putin: The enthusiasm in the European countries apparently shows that there is great disappointment with what the Europeans have recently seen in the foreign policy of the United States. But it is my deep conviction that the greatest disappointment arises from excessive expectations. One should see what will happen in practice.

We followed the election campaign very closely. We heard and saw positive signals in our direction. It applies, among other things, to the missile defence system. We have heard that it is perhaps not all that necessary. We have heard that the security of such countries as Ukraine and Georgia could be ensured by means other than admitting them to NATO. We have heard (and we fully subscribe to this) that we have much in common in solving the problems connected with ending the arms race. We have many common problems that we can only solve together in the field of arms control. The same applies to the problems in the Middle East and in Iran and in non-proliferation problems in general. There are many other issues, including economic that we confront today and that need to be addressed collectively or at least discussed collectively. We are ready for such joint work. We will now await the practical implementation of what we have heard during the election campaign. Mr Obama looks to be a sincere and open person, and that of course is appealing. Time will tell.

A question in German as to whether Vladimir Putin had congratulated Barack Obama on his election as President.

Vladimir Putin: I had no contact with him. But the Russian President, I am sure, has congratulated him on his election.

Question: Now a question about Russia's image in Germany. The war with Georgia, just like the gas dispute, has not enhanced it. You say that Russia seeks closer ties with Germany. How, in your opinion can these ties be promoted? At present Russia's reputation in Germany is at a low ebb.

Vladimir Putin: If we are to have good-neighbour relations (and like any European country, this is what we need) we must recognise each other's interests and respect each other. Number one. Number two, we need objective approaches and assessments. We have been discussing the gas dispute for more than an hour. What is there in our position that you do not understand? Is there any single issue that prompts doubts for you? I don't know what you will write, you are free to write whatever you like, but I am sure that each of those present must understand that our position is absolutely fair.

Regarding the conflict with Georgia. Did we attack peacekeepers? There were Ossetian, Georgian and Russian peacekeepers in the region. Did we attack them and start killing them? They did it and now they do not even deny it. If somebody wants to assert the reverse and present Russia as an enemy, of course they can try to do it. But I believe that this policy is totally counterproductive.

We want to have good relations with everyone; that is so. We are always interested in this. We want to develop normally, to build our economy and our country normally. We treat our partners with respect. And we expect to be treated in the same way.

Question: Mr Prime Minister, I have the following question. Russian-German relations are very multifaceted. I remember that Gerhard Schroeder and you created a civil society dialogue forum between our countries called the Petersburg Dialogue. I am a member of that forum, but we cannot help seeing that Russia's interest in this forum is flagging. One sign of this is that the Russian co-chairperson of the forum has still not been elected, and that of course impedes its work. In addition, we see that the Russian participants are not so active in its events. They come to its events, and then quickly leave. What is your attitude towards the Petersburg Dialogue and to the dialogue between the civil societies in Russia and Germany?

Vladimir Putin: First of all, I think it is a very important area of our activities, like all dialogue between civil societies. But as soon as we try to channel the process into some administrative framework, problems instantly arise. That is true. We must of course organise it in such a way that the people who are interested in such contacts should attend these events. After Mr Gorbachev we found it difficult to nominate a figure of a comparable scale. This is not because we do not want to propose a Russian co-chairperson, but it is hard to select a figure of the same stature.

I have just met with a group of German scientists and doctors who work in child oncohematology, and with their Russian partners. You know that a group of specialists, doctors and scientists are working on the German side. Nobody is forcing them to do it, and nobody pays them for it. For many years now they have shown a remarkable degree of diligence and enthusiasm in helping their Russian colleagues and in fighting for the lives and health of Russian children. Now it has become a two-way street, as it were. We have had and we are getting more and more world-class specialists.

We have started building in Moscow a child oncohematology centre with a large research unit, it is the largest such centre in Europe. It was my personal decision made a couple of years ago, partly under the influence of the activities and the cooperation between Russian and German doctors. This is real and fruitful interaction between our civil societies. It is our duty to support it. If we do not always do it effectively, it shows that so far we are working less well than the civil society. But we will do our best.

Question: Mr Prime Minister, the Russian economy has been hit hard by the world financial and economic crisis. I would like to ask you whether the fact that the price of oil dropping below $70 per barrel will force you to curtail social programmes triggering social unrest?

Vladimir Putin: First, building on the positive results of the former years we are implementing all of our social plans. We have not renounced a single social programme. We are meeting all the targets for raising pensions, wages and social benefits. We increased the public sector wage fund by 30% at the end of last year. Yes, we are aware that cuts in production may bring changes to the labour market. We have developed a programme to support the labour market involving various activities: retraining, retooling, the launching of public works, etc., etc. - and we have earmarked the necessary resources for that.

In spite of the sharp drop in the prices for our export commodities we have decided not to sharply devalue our national currency because we have gold and currency reserves. Many experts have recommended it, from the economic point of view. We knew that it may have been right, but out of social consideration we have chosen to spend some of our sovereign wealth in order to enable the citizens (those who wanted to) to freely withdraw their money from the bank, deposit it with another bank, exchange it for any currency they like.

The underlying arithmetic is very simple: the prices for traditional commodities have dropped, the inflow of hard currency has slowed down and the legal outflow as a result of the purchase of goods by the economy and by people has not diminished because the volume of imports is high. In other words, imports have not dropped. There are several ways to reduce the outflow, experts know them. One is to make foreign currency more expensive and devalue the national currency. If, in such a context, the national currency rate is high we should dip into our sovereign wealth to meet the economic needs and enable economic agents to get the currency that they need for export and import transactions.

Why have we decided against a dramatic devaluation of the national currency? Simply because we had a chance to use our sovereign wealth, the gold and currency reserves. But in doing so we were primarily having in mind the interests of ordinary citizens. The Central Bank has now reduced the exchange rate of the national currency somewhat.

The second method is to make exchange transactions unprofitable and simply raise the currency refinancing rate of the Central Bank. This is not the exchange rate. The second method is to limit the legal export of capital. That is, curtailing the profitability of exchange roubles for dollars or euros. The Central Bank has been raising the refinance rate little by little. This does of course create some problems for the economy because credit resources become less accessible. This confronts us with another long-time challenge: to reduce inflation.

We are well aware of the situation in which we find ourselves. We know what needs to be done. Of course we follow what is happening in other countries, analysing and adjusting our position. Time will tell how effective we will be.

Ms Merkel chaffed me today for raising import duties on cars and agricultural equipment. Yes, we have done this; it was a forced measure. Regarding agricultural equipment, it is temporary. We introduced such duties for a period of nine months to facilitate the sale of such machinery by domestic producers. These actions, by the way, are in full accord with WTO rules. Although we are not members of the WTO we stick to these rules.

As for automobiles, we have raised the duties for the import of used cars and not for new cars. Of course we acted in the interests of our domestic producers among whom we include our foreign investors, for example, Volkswagen and some other German companies. Volvo has just built a large assembly plant in Russia. If we had cut import duties for new vehicles or raised the duties for used cars, the firms which had invested hundreds of millions of dollars would not be able to sell their products in our market. That is all there is to it. The same is true of Volkswagen and other German companies.

At the same time we have decided to cut and sometimes introduce zero customs duties for the technological equipment that is used by our enterprises in the process of modernisation, above all of course the equipment that our country does not produce itself. I must say that German manufacturers can take and are already taking advantage of it. Most of the trade turnover, especially imports from Germany, is machines and equipment. However, Ms Merkel did not praise me for that, she preferred to criticise me.

Question: Mr Prime Minister, you have extensive experience in dealing with the European Union. Which brings me to my question: how do you see the strategic goal of the relations between Russia and the EU? What are your thoughts on the development of these relationships? Perhaps you have a vision in this regard: of Russia being inside the European Union or by the side of the European Union or is there some other capacity?

Vladimir Putin: You know that international relations are developing rapidly. Competition in the world is toughening. In that sense Europe and Russia, Russia and Germany complement each other in order to become more competitive in the world. I think that is an objective factor that brings Europe and Russia closer together. It may worry some people and may even impede the plans of some people. But mutual interest is sure to gain the upper hand eventually. I mean the interest of cooperation between Europe and Russia. Security could be one of the main areas of cooperation. For example, we could take an active part in building a European security system. Then of course it is economics and culture: Mr Sokurov here will make his contribution to our interaction in this area. It is hard to say what organisational and legal forms such interaction will take. And I don't think we need to say it today. We should not try to run before we can walk. There is a season for everything. But clearly this is the main area of rapprochement and it will be pursued. We should all contribute towards it and not impede it.

I think it is time for us to wind up. Three more questions, OK?

Question: How do you see the development of the political system in Russia? Some politicians think that Russia has no free press and it has controlled parties and believe that your country is not moving in the right direction.

Vladimir Putin: I would have been surprised if you hadn't asked this question... Do you have capital punishment in Germany? No. Does the United States have capital punishment? And yet it is one of the key humanitarian issues which speaks about unanimity or divergence of values. Still, it does not prevent the majority of European countries from seeing themselves as the main allies of the United States. I think that is right. I do not want to call anything into question there. I could cite other examples of partial or full divergence between a number of European countries and their main partners and allies. The same applies to Russia.

If somebody feels that Russia does not meet certain standards.... Of course all our partners are at liberty to analyse it, but it does not prevent us from asking whether your standards are all that high.

Let us look at everything in a calm and kindly way as partners and make an analysis. Every country has its own path of development. Of course, Russia has lived under tzarism and then for many years under a communist regime. It was only 15 years ago that we started to introduce more modern methods of management and organisation for society and the state. None of the country's leaders want to revert to the old format of administration and organisation of power. But one should understand what Russia is today. It has the largest territory among the world's countries. Unlike Germany where perhaps 90% are Germans -- it is in fact a monoethnic country while all the other ethnic groups are typically foreigners - in Russia there are a vast number of ethnic groups who have no other homeland.

Of course, the simplest manifestation of democracy is to organise the power bodies in such a way that they consist of people of the same nationality and only differ by party affiliation, efficiency, personal traits and programmes. I am speaking about the most democratic forms. Examples are not far to seek. Here in Saxony the Prime Minister is Mr Tillich. What nationality are you? A Sorb. Yet he has not been elected because he is a Sorb. He has been elected because of his personal traits, his efficiency, his political views and his platform - a person who appeals to the voters and they have voted for him regardless of his nationality.

We have the Republic of Dagestan inhabited by dozens of nationalities, speaking different languages, so different that they do not understand each other. There are more than 30 of them. They can only communicate among themselves in Russian. However, four ethnic groups are considered to be the most important there. For decades they have practiced the rule: if a representative of one ethnic group is elected President of the Republic, a representative of another group becomes the Prime Minister and of a third group the Parliament Speaker. Try to explain to these people that this is not very democratic. I will see how far you get. A somewhat similar situation exists in Lebanon. It has been that way for decades and perhaps centuries. It basically contradicts our laws, but we are obliged to respect these people if we want them to respect us. Everything takes time.

Question: Mr Prime Minister, we have spoken at length about trust, good relations, European-Russian rapprochement, and all this again brings us to the question of gas, because this is what it is all about.

When, after your meeting with Ms Federal Chancellor you approached journalists she said that she knew of very few cases in the world when only one country was to blame. These words responded to a widespread sentiment in Europe: perhaps part of the blame for the crisis lies with Ukraine, but part of it lies with Russia.

Vladimir Putin: As you have rightly noted, the Soviet Union has never broken its economic obligations, not even during the Cold War. We have always fulfilled them. Curiously, we are interested in fulfilling these obligations. We get money for this from you, good money that matches the market. Why should we turn down the tap and forego the chance to get that money? This is incredibly stupid. We are trying to sell gas to Ukraine at $135, $250, at half the price that we charge you and you think we want to shut everything up and sustain losses?

Throughout the past 15 years we supplied all the former Soviet Union countries with gas at prices that were two or three times lower than European prices. In this way we subsidised the economies of these countries, between 2005 and now we have subsidised them to the tune of $74 billion. Ukraine alone accounts for $47 billion. I understand that Federal Germany is paying its eastern lands for reunification, but what are we paying for?

I have spoken about rapprochement with Europe, and it is my deep conviction that it should happen and I am sure it will happen (speaks in German). But order is order.

Question: The last question, Mr Prime Minister. How many hours of sleep do you get a day?

Vladimir Putin: (looks at his watch) For today, I have three and a half hours left, but in general I sleep six hours.

Alexander Sokurov: May I say something, Mr Putin? Excuse me.

Vladimir Putin: Sure.

Alexander Sokurov: I would like to address the German journalists and ask them not to politicise life too much. Gas is only gas, and politics is only politics, and the readers of your newspapers and magazines live their own lives, and do not think much about these issues. Every statement saying Russia has lost its prestige is a wry wordplay. This is completely, absolutely wrong.

I think this means that we are facing a new stage of political differences, and nothing else. But we do not think about it. The Prime Minister spoke about "Faust". It is said that in Germany, people have stopped reading.

Vladimir Putin: I would like to defend our German colleagues and I have to admit that in Russia, people's interest in books has fallen, too.

Alexander Sokurov: Therefore, I suggest reading good, solid books.

Vladimir Putin: We will watch movies, Mr Sokurov.