Transcript of the meeting:

Vladimir Putin: Good afternoon, colleagues.

In opening our meeting, I would like to mention the following.

The decree on the creation of the United Shipbuilding Corporation (USC), which was signed several years ago, stipulates that this integrated structure shall be fully formed by April 1, 2009. This stipulation has been met. All the necessary organisational work has been completed.

As you know, Russia throughout its history has had several main shipbuilding centres - the North West and, of course, the Far East. It is significantly clear that the problems currently confronting enterprises in this sector are shared by the country as a whole. But each region has its own peculiarities, its own problems, which deserve separate consideration.

That is why today we are discussing a raft of measures to support one of the key units of the United Shipbuilding Corporation: the Far Eastern Centre of Shipbuilding and Ship Repairs.

This is not a small centre. It is made up of ten factories and scientific organisations, employing more than 15,000 people. What is more, some of these enterprises are the cities' main employers. The social welfare of the region to a great extent depends on the stability of their work.

The corporation's management now faces the following challenges:

Firstly, the companies the centre comprises must be audited and undergo a stocktaking, the factories' area of expertise in military and civil technology production must be defined, and their production bases must be significantly modernised.

At a similar meeting in St Petersburg in March we also discussed the possibility of building new shipyards with state-of-the-art technology. I think that this task is no less relevant for the Far East; it must be meticulously explored. These opportunities exist here just as they do in the European part of the country, where some progress has already been achieved.

Secondly, we seek to organise the production of competitive products that are in great demand. As for businesses in the European part of the country, this could be large-capacity vessels, maritime equipment for use in the extraction and transportation of hydrocarbons from the continental shelf, or vessels for the fishing fleet.

I find it unacceptable for orders to be placed with foreign shipyards if it is possible for similar maritime technology to be built in Russia.

Unfortunately this is not yet current practice. Some companies - I won't point any fingers here - place their orders for ice class tankers, for example, in South Korea, where the production costs are cheaper than they would be in Russia.

I would like once again to appeal to our Russian end users - priority must be given to our Russian shipyards. I expect the Russian Ministry of Transport and the Federal Agency for Fishery to organise and coordinate the placing of relevant orders. Today I would like to hear the corresponding proposals, with relevant figures and deadlines.

Thirdly, it is well known that when the USC was created it incorporated the Ministry of Defence's ship repair facilities. Naturally, they will remain, as before, the main service providers for the repair and maintenance for Russian naval vessels. The corresponding agreement has been reached between the Russian Ministry of Defence and the United Shipbuilding Corporation.

This decision is particularly significant for the Russian Far Eastern region. For its practical implementation, a unified system of long-term state orders for the repairs and modernisation of vessels of the Pacific Ocean Fleet, as well as the Border Guards service, must be established, and measures must be taken to reorganise and restore the steady work of ship repair facilities in the Far East.

And lastly, we are all aware of the tragedy that occurred in the Amur Shipbuilding Plant in November of last year. Lives were tragically lost during the testing of a submarine that was under construction.

It is our duty to take all measures to make sure such incidents are not repeated in the future. What is more, we must also talk in detail about how to help the factory complete its orders and emerge from today's difficult economic situation. As I know, some of your partners have already filed bankruptcy petitions against your plant. Let us discuss all these issues and find the necessary solutions.

Mr Manturov, you may take the floor.

Denis Manturov: Mr Putin, dear colleagues,

We are circulating background materials in the audience, so you can look up everything that interests you as I am making my report.

The Far Eastern Federal District has 25 shipbuilding plants, which account roughly for 6% of the total Russian shipbuilding output.

The shipbuilding industry of the Russian Far East has certain negative aspects. First, it is the absence of major design bureaus and suppliers of basic parts and other equipment. Second, it is great distance between those plants. One example suffices-the Khabarovsk Shipbuilding Plant, which is 2,200 kilometres away from the development base in Vladivostok, including a 900 km waterway along the Amur River.

The region's ship building and repair companies are directly involved in the national security cause.

They build and repair Pacific Fleet vessels. They build cargo and fishing vessels, which are involved in the food security effort. They build unique floating and permanent-type offshore facilities and technical vessels for oil and gas production on the Russian Arctic and Far Eastern shelves. That is part and parcel of national fuel and energy security. That, and the geography and geopolitical situation of those plants make it necessary to carry on the development of the shipbuilding complex in the Russian Far East.

The Far Eastern Shipbuilding Centre, which you have mentioned in your opening address, was established to preserve and develop the shipbuilding industry in the region. It is an arm of the United Shipbuilding Corporation. The centre comprises close on ten companies, including four ship repair facilities passed under the jurisdiction of the Defence Ministry, and a block of shares of three shipbuilding plants. The list of companies and their specialisation are on slides 2 and 3 of the presentation.

In particular, we have eliminated Ship Repair Yard No. 30 from the list the decree concerns. As soon as the company restores its finances and improves its economic situation, a relevant decision will be made by the commission for military-industrial complex relief. The shipyard will join the United Shipbuilding Corporation, its parent company.

I find some regional industrial statistics appropriate here. The plants occupy a total area exceeding 700 hectares with 3,000,000 sq m of production areas, structures and facilities.

Available equipment and technologies allow the companies all kinds of repairs and the building of vessels up to 20,000 tonnes of deadweight.

The companies possess redundant military vessel repair facilities and inadequate civil shipbuilding facilities, to say nothing of the wear and tear, and obsolescence of a majority of available facilities.

The shipbuilding companies of the Russian Far East employ 22,000. The personnel have shrunken by 26% since 2004.

The average monthly wage for 2008 was 14,000 roubles. We intend to increase remuneration by 12% or so within this year.

The total shipbuilding production volume of the Far Eastern Federal District was 9.6 billion roubles in 2008. The Far Eastern Shipbuilding Centre accounted for 6.4 billion of this.

On the whole, the federal district's shipbuilding output shrank by 9% in 2008, while civil shipbuilding production fell by an alarming 38%, though the civil shipbuilding industry increased production by 60% nationwide.

Output forecasts for this year practically coincide with last year's results. The commodity output of the Far Eastern Shipbuilding Centre is characterised by token exports-1% against 30% for the entire shipbuilding industry. Here, however, we should take into account the transnational contract of the Amur Plant, which formally belongs to government military-industrial contracts.

The district's shipbuilding brings small profits. Its finance is unstable. Some plants are on federal target programmes for capital construction-Zvezda, for one, on the programme of the development of the military-industrial complex for 3rd generation nuclear submarine repair, and the nuclear and radiation safety programme for waste elimination. As much as 469 million roubles have been earmarked to finance the programmes through 2015. The Khabarovsk Shipbuilding Plant is building a tug for warships on the federal programme for the development of the military-industrial complex, with 293 million rouble allocations through 2012.

Analysis shows that the available federal target programmes of the Transport Ministry and the Federal Agency for Fishery, with an account for extra-budgetary funding and the Rosneft and Gazprom corporate strategies, promise considerable demand for diverse vessels. We expect the demand of the Russian Far East through 2015 to be for roughly 50 river and fishing vessels, 50 large marine cargo vessels, and 14 technical facilities for shelf development.

The priority building of marine vessels in the Far Eastern Federal District, even with no account for large sea-going vessels and facilities, will increase annual production by 4-5 billion roubles, while large-tonnage vessel building requires a new leading-edge shipyard. Meanwhile, the district has none.

The shipbuilding development strategy envisages project estimation for leading-edge shipyards in the Russian Far East and other parts of the country. A decision was made a month ago for the construction of a mammoth shipyard in Primorsk in Russia's west as an arm of the Vyborg Shipbuilding Plant. Two projects related to the Far East were also under consideration-Sovietskaya Gavan in the Khabarovsk Territory and the Zvezda-based Bolshoi Kamen in Primorye. The concept of construction at the Zvezda plant is the readiest for implementation of all shipyard blueprints available for today.

The project envisages a dry dock 400 metres long and 100 metres wide. It has a major benefit, especially compared to the Sovietskaya Gavan project-the dock will possess a production and transport infrastructure, and trained personnel, to say nothing of a friendlier climate. Construction will take four years and require approximately 30 billion roubles. The prognosticated annual output is 60,000 tonnes of metalware. It will be a real super-wharf for the present-day Russian Far East, while a single South Korean shipyard uses up to a million tonnes of metalware a year. That is the scale we should strive for.

Project implementation will allow build tankers and LNG carriers with deadweight up to 150,000 tonnes, and offshore drilling platforms including above-water structures. This prospect promises to largely meet the demands of the fuel and energy complex as it develops the Far Eastern shelf.

This and other projects under consideration are only embryonic. More calculations are necessary. Investment shortages are the principal problem. We are receiving and considering proposals. I think we will advance practical initiatives quite soon, after we make final estimates. Possibly, we will have a private foreign partner then.

Further development of the region's industry requires ambitious measures. As I have said, the Russian Far East has redundant ship repair facilities, which should be restructured for government military contract management and placement in keeping with every company's specialization. It is one of the necessary conditions for effective spending of budget allocations.

Slide 11 specifies Industry and Trade Ministry initiatives on industrial restructuring. The meeting record should take them into account.

It is essential to stabilise the region's corporate finances and economic activities. The Ministry of Industry and Trade has analysed almost all industrial companies in need of state support with due consideration for the specialization of each.

Ship repair plants Nos. 178, 179 and 92 will be analysed soon. The ministry has earmarked subsidies for their out-of-court recovery. When they are entered on the list of strategic enterprises, No. 22r, the matter will come under consideration of the government commission led by Mr Sergei Ivanov.

As for support of the Khabarovsk Shipbuilding Plant, it also should join the list of strategic enterprises. We will settle the matter with the Ministry of Economic Development soon.

The industry of the Far Eastern Federal District is living through hard times. Special attention should belong to the finances of the Amur Shipbuilding Plant. The commission of the Industry and Trade Ministry, and the Finance Ministry discussed the situation several times. The company owes 14.3 billion roubles to Sberbank alone. Its overall liabilities approach 36 billion. Such huge debts of a company that is finishing work on an extremely sophisticated contract rule out the effect of available anti-crisis and bankruptcy prevention measures.

Mr Putin, we described several variants of tackling the problem to you yesterday. We hope a final decision will be made today.

By way of conclusion, I would like to say that the mentioned measures of state financial and organisational support do not suffice. The United Shipbuilding Corporation should pursue a more dynamic, aggressive market policy. In fact, that was the goal for which the Corporation was established. It should influence principal Russian and foreign clients to secure contracts for the region's industry-which is a must if this industry is to keep afloat and be efficient. Only then will the implementation of all intended measures bring positive fruit not only in a single company but improve the social and economic situation of the entire region.
Thank you.

Vladimir Putin: Thank you. Andrei Krainy has the floor.

Andrei Krainy: Thank you.

Mr Putin, dear colleagues,
This is a very complacent meeting-perhaps, because many participants have come from Moscow. I want to blast a petard.

Vladimir Putin: Yes, let us have it out.

Andrei Krainy: The Amur Plant will not cope with building an up-to-date merchant marine and fishing fleet-at least, for today.

There are technical and economic reasons for that. The present-day exit gate from the building berth is 19 metres wide-the shipyard director will correct me if the figure is wrong. A large contemporary fishing vessel will not get through-just as through the sluice, which is 20 metres wide. So we will never get the vessel out of the shipyard.

What we need is overall modernisation. The company can assemble the ship-and there it will stick. So much for technology.

As for the economy, the entire shipbuilding industry of the Russian Far East has been meant for the navy since its inception-which means it does not know how to manage costly production properly. The same could be said about our northwestern companies. We talked about it during a meeting at the Krylov Research Institute.

When we get a fishing vessel to the building berth, all corporate expenditures are loaded on this one vessel. So it is worth its weight in gold. We are not competitive in terms of manufacturing costs and deadlines alike.

One of the Russian ministries announced a tender recently-and a manufacturing company flatly refused to take part because the terms envisaged a ship built within 14 months. The company found it absurd haste. It surely would not cope, while a similar job takes South Koreans eight months. We are no longer competitive!

What we need is thorough modernisation of technology and mind. Civil shipbuilding should be separated from military. It needs separate financial accounting because production areas, each of several square kilometers, need lighting, heating and guarding. As the result, a kilogram of metal costs an exorbitant sum, which also renders us non-competitive.

The East Wharf in Vladivostok alone copes properly now. Another project has been launched in Nakhodka. It's the Roskor Shipbuilding, a Russian-South Korean joint venture based on the Primorsky Shipbuilding Plant. Its first vessel will get to the building berth in December. There will be two berths for intermediate and small vessels, and a berth for large vessels will be ready in March 2010.

I approve the idea of the Zvezda project in Bolshoi Kamen. This is the current situation, Mr Putin-the Russian Far East possesses 2,125 fishing vessels, of which 902 have outlived their working lifespan. If the present rates of discarding persist, we will have 1,223 vessels in 2012, 998 in 2017, and 818 by 2020-less than a half of the present amount. The Primorye Territory will have mere three of these if we don't do anything about it. We will be hopelessly behind targets in 2020 if we don't build new ships-we will never cope with an annual catch approaching two million tonnes.

Here is a forecast. I want to quote larger figures than what Mr Manturov [Deputy Minister of Industry and Trade] has mentioned. We need to build 34 large-tonnage vessels, 51 intermediate, and 136 small-tonnage vessels within five years from this through 2013. All in all, the Far Eastern Basin needs 562 new ships from big to small before 2020.

If we fail, we will be unable to fish even in the Russian economic zone. Meanwhile, the United Nations Convention on the Law of the Sea says that when a country cannot cope with its own resources in its own economic zone, neighbours might come and help. I don't even mention our presence in the world oceans.

I dare advance several initiatives and add a telling detail. Schools of herring are expected to come en masse in 2015. The Soviet herring harvest was a million tones. We expect the admissible catch to approach the same million tonnes that year-but we have no chance of such a large catch because Russia has not a single purse-seining vessel in the Far East and only one in the North. Purse seining is encircling a school with a huge net to pump it in.
Profits are shrinking. We Russians lag behind whenever we have foreign partners. The Barents Sea provides a spectacular example. Russia shares its fish stock with Norway, and the two countries manage it together. We were fishing for capelin this year. Russian and Norwegian vessels stood a hundred metres away from each other-and the Russian fishing costs were 25% higher. We spend 205 kilograms of fuel more than Norwegians per tonne of fish because our ship engines are wasteful. No wonder-the ships were built in 1975-1978.

We have signed contracts with the United Shipbuilding Corporation. Several consultations have led us to conclude that consortiums are what we need. We should employ foreign designers (they are well known-Norwegian companies, for the most part) and build vessels in our own shipyards after Norwegian design. That is worthwhile-Norwegians are the world's best fishermen.

We propose an amendment to the federal target programme for marine development. The programme, to be implemented through 2016, envisages conceptual projects of fishing vessels.

What we need is not concepts but class projects, complete with work papers-and not by 2016 but in this and next year. Otherwise, we will not cope-our fishing fleet is going unserviceable quicker than we work.

The meeting decision should include a proposal from the Federal Agency for Fishery. It is willing to be a governmental customer for designing fishing vessels on this federal target programme.

We have had a long talk on this topic, and I hate to repeat commonplaces. Still, I want to say that we should zeroise import duties for such fishing fleet equipment as Russia does not manufacture.

I want to say another important thing, and I ask Mr Putin for support. Our fishing fleet possesses quotas or shares of quotas for ten years ahead thanks to a relevant decision you have made. Fishers have a chance to make plans now. They are willing to invest in shipbuilding.

However, we all know the global economic situation. Vessels are the only assets fishing companies possess in the world and other financial markets. Bankers do not take these worn-out vessels as collateral. So the Federal Law on Fishing should be amended to envisage mortgaging fishing quota shares to obtain loans.

Seafood harvest is an asset as any other. Future harvest might appear immaterial-but still it is an asset. Believe me, companies pledging their quotas will be very particular about interest and loan servicing because if they lose their quota, they lose the entire business. They will surely be serious about it.

I have another proposal. The federal fishing development programme is being implemented, and envisages manufacturing research vessels in Russian shipyards. This matter is not open to discussion. Fish inspection ships will be built on an effort worth 25 billion roubles. But they will be government service vessels. As for the fishing fleet, I think it would be worthwhile to build a series of 10-12 motorboats with government guarantees for such lucrative catch as, say, Korean cod. The vessels should be obtained through a leasing company. The users will have to pledge all their material possessions and fishing quotas. Only then will the arrangement work.

We have tried to launch it in Russia twice-and both times offshore branches warped the arrangement. The state was robbed of its fleet and money on both occasions. We should either establish a new leasing company or involve Rosagroleasing. Our shipyards will have new contracts, and our fishing companies a good new fleet. The arrangement requires about ten years-two or three for shipbuilding, and another seven years when the project pays back. Please support the idea. Thank you.

Vladimir Putin: We spoke about the factory's problems during our tour of the enterprise. You know that, in order for these orders to be completed efficiently, the financial problems that lie on the business like a lead weight need to be sorted out. Because banks, and they are duty bound to do this, have to pay out what money comes into the account, to what is owed, irrespective of what that money might have been intended for.

This is intimately connected with the problems of the businesses property. I will not now offer any assessment as to why this has occurred. But the fact remains a fact that today's owners have proved themselves to have been inefficient as owners.

During our tour of the facilities, we had the opportunity to talk with the businesses' workers. Alexander put a request on behalf of the whole workforce, and he will repeat it now. Mr. Astrakhantsev, go ahead please.

Alexander Astrakhantsev: (ship building machine assembly worker, 4th stage): Meeting participants, Mr. Prime Minister. As I already said on the shop floor today, most of our workforce would like our factory to once again be returned to state hands. That's what in general everyone thinks.

If you were to do this, Mr. Putin, if you were to make our factory State owned, to deprivatise it, then I think that the factory would gradually bounce back, we would train young workers.
I think that we would complete those orders that you would entrust to us, with great enthusiasm. We want to go back to how it was, back to the state.

Vladimir Putin: At other times, other moods prevailed. But we have not now set ourselves the goal of de-privatisation. But where the owner is inefficient, we must consider what we can do to alter the situation. In particular in those cases where an enterprise closely connected with fulfilling state defence orders is concerned.

That is why we will do the following. The company's management, and I think the majority of its workforce are all aware that 59% counts as a controlling stake, and that that is currently in the hands of the shareholders. The day before yesterday this group of shareholders and Sberbank signed an amicable settlement on the sale of that share packet for a symbolic sum to Sberbank.

Then, yesterday in Moscow, we agreed that Sberbank would in their turn, and on these conditions, transfer this share packet to the United Shipbuilding Corporation, which is 100% state owned.

Given that USC already has between 17.9%-18%, then in total the United Shipbuilding Corporation will have a share packet of about 77% in the Amur Shipbuilding Factory.

The bank has also agreed to offer the Amur Shipbuilding Factory, that is USC, an additional $ 400 million, expressly for the financial assistance of the Amur Shipbuilding Factory. This figure needs to be adjusted, considered in more detail. Yesterday we spoke about the figure of $435 million over ten years.

The repayment source for this credit has also been agreed with the bank. I am presuming that after these decisions are implemented, from now, the bank will recall those demands for payment through direct debit which are there on the business' account. Is that so, Mr. Korolev (he turns to Mr. Evgeniy Carole, deputy chairman of the board of Sberbank Russia)?

Evgeniy Korolev: I have already rescinded them. But there are about 80 million roubles in payment demands from other companies and organisations, apart from the bank. The banks demands have been rescinded.

Vladimir Putin: Good. You are the main creditor, and that's most important.

Day to day cash flow must of course be ensured. We must keep everything that is "alive" at the factory going. And there is a great deal to talk about here. There is a good order and it is being completed. In a week the factory will receive 201 million roubles from the Ministry of Defence. Isn't that so, Mr. Popovkin (he turns to Mr. Vladimir Popovkin, Armaments Director for the Russian Army, and Deputy Minister of Defence)?

Vladimir Popovkin: Exactly so.

Vladimir Putin: And also by this June another 380 million roubles from the State Defence Order. And another 1 billion 900 million must be sought to complete construction and testing. Mr. Siluanov...(he turns to Mr. Anton Siluanov, Deputy Minister of Finance)

Anton Siluanov: Mr. Putin we will find that sum from the reserve fund in this year's Federal budget for the revival of strategically important industries.

Vladimir Putin: Good. How long will it take?

Anton Siluanov: The source is there. We need Government permission, which we are preparing.

Vladimir Putin: How long will that take?

Anton Siluanov: One week

Vladimir Putin: Agreed. That means that this week there will be an additional 1 billion 900 million roubles. In total that works out as nearly 2.5 billion roubles, or over $400 million for debt restructuring.

All these resources allow the company to fully complete the 518th order, and to create the necessary stock capacity for the completion of other possible orders, including those which are being fulfilled by the company. I repeat, that the main problem was financial in character.

In addition, I would like the company's management and the management of the United Shipbuilding Corporation to pay attention to the fact that these resources will be allocated in parallel with the consideration of plans for the company's revival, modernisation and use. That must be done by the company's management, as well as the United Shipbuilding Company, and the relevant Government agencies. I ask that the proposed measures be presented no later than December 1 this year. There is enough time to work it out, including those issues linked to the additional financing which is so vital for the company's modernisation.

Everything that my colleagues here have said must be carried out: the opportunity to increase the production of ships with larger cargo capacities than those being built currently. And we all understand what needs to be done to accomplish this.