23 may 2009

Prime Minister Vladimir Putin held a meeting with Trade and Industry Minister Viktor Khristenko

Vladimir Putin

Meeting with Trade and Industry Minister Viktor Khristenko

"One of our primary tasks today is to maintain demand, because we won't resolve all the issues with financial infusions, guarantees, debt restructuring or other financial support if there's no demand. This issue depends not only on the Government but on the state of our national and global economies as well. But measures to maintain demand should be planned and gradually implemented."

Transcript of the beginning of the meeting:

Vladimir Putin: Mr Khristenko, during the first quarter of this year we had to go back to real economy issues. I'm referring to the auto, aircraft and shipbuilding industries. We had to adjust our plans following market environment changes. Even so, the situation in this sector is still rather challenging. How are the measures we planned being implemented? What are your objectives in the near term?

Viktor Khristenko: First of all, the anti-crisis measures for supporting the real economy sectors are unprecedented in scale and in other ways. Previously we only worked with a few types of industrial subsidies, now we have 20 of them. In 2008, they totaled around 11 billion roubles, this year the figure is near 30 billion. We are preparing a legal framework for each subsidy type. These are absolutely new approaches and therefore we had to change some budget legislation. A package of Government regulations has been passed. There will be a delay as they won't be in effect instantly. The system we are working with now will produce significant results starting this July.

Vladimir Putin: And the auto industry: We have decided to raise government purchases made by various agencies, providing the latter with additional resources. Is it working now?

Viktor Khristenko: 42.5 billion roubles have been allocated for additional procurement, and federal agencies are making the purchases. This is positive support for the auto industry. The process is moving ahead with federal institutions and is now being implemented on the regional level for municipal and regional transport procurement. The process is under way.

Meanwhile, export subsidies granted this year to aircraft, shipbuilding and the auto industry have nearly exhausted the related budget. We have allocated 5.8 billion roubles of the total 6 billion roubles to support these industries. These are highly effective subsidies.

As far as other industries are concerned, in addition to subsidies, we can expand our stake in corporate assets, with low interest, long-term money. A decision was made to allocate additional funds for the aircraft industry, and 23 billion roubles have been transferred into the sector, boosting our asset contribution. This substantial support will energize the entire production chain, including equipment suppliers, as well as payments and settlements with banks, allowing the extension of existing loans while providing the collateral for continued credit to maintain operations.

All this takes us to where we are now, with the civil shipbuilding sector growing significantly over last year. This happened, in part, because of an earlier order from some fuel and energy companies: Gazprom, Shtokman, Rosneft and others. That's why the Vyborg Plant and Sevmash have a significant civil orders package this year, despite the crisis. Companies haven't cut their orders in this sector, and that's very important for us now.

As for military shipbuilding, the federal budget obligations are also being fulfilled. Here, the situation is clear enough. For the shipbuilding sector, it is important to plan for the modernisation and the development of resources while maintaining a strategic objective. The current situation has improved since last year.

In the aircraft industry things are a bit different. It saw some manufacturing decline, first of all in civil aircraft. Military aircraft production has kept its pace. Currently measures are timely and appropriate for both the supply chain and the main component supplies, including engines.

Today, the most affected sector is the auto industry, where market decline is the greatest. According to our estimates, we are now at the end of the first phase where the inventory accumulated over last year, including imported cars, remains the main source of sales...

Vladimir Putin: ...hindering production.

Viktor Khristenko: ...hindering production in Russia. Yet it is clear that our strategic plans to develop the auto industry and attract other major companies are already working. For the first time in some years, the production of Russian assembly plants outpaced imports. This means vehicle imports are declining quicker than assembly output. Many assembly plants in Russia, including those of Volkswagen and Toyota, have significantly raised their output over the current crisis-hit period.

Vladimir Putin: As far as I understand, these companies don't plan to cut their investment projects, planning to open new facilities instead.

Viktor Khristenko: Exactly. I have just visited the Volkswagen plant in the Kaluga Region with European Commission Vice President Guenther Verheugen. There, we examined joint support options. Volkswagen has expanded its model range compared to the agreement signed with our Government, and also enhanced its production capacities here, as current market conditions are enabling the company to boost its presence in the Russian market, which remains very attractive for investors. They understand that this market will soon recover, regaining its top position in Europe. It is important to offer appropriate support to these investors at this point.

Meanwhile, both financial and regulatory strategic decisions on market access and on used car import restrictions made by the Government have been absolutely welcomed by investors. This is a good incentive for them to maintain and expand their investment presence in Russia.

Vladimir Putin: And Nissan is opening another plant in St Petersburg.

Viktor Khristenko: That's right. Volkswagen is also planning a welding and paint line at its production site in Kaluga.

This is happening not just in defiance of the crisis, but also because the crisis makes experts seek ways to overcome it. That's why we support the auto manufacturers' intentions. Also in this sector, it is crucial for us to encourage the expansion of auto parts supplies here. This is the goal for our mid-term efforts. We need to encourage parts manufacturers to enter the Russian market despite the current environment, thus increasing domestic content and the localisation of the manufacturers.

Vladimir Putin: We also plan to support our old manufacturers, GAZ and AvtoVAZ. We have a list of measures which need to be applied to these enterprises. We will work in cooperation with the owners, of course. How is it coming along there? I mean the agreements with financial institutions, banks, and the guarantees. I've looked through the papers, and I would say we will have to significantly enhance the extent of the guarantees in some sectors.

Viktor Khristenko: In reference to the decisions you made during the meetings in Naberezhnye Chelny and Togliatti, we have resumed business lending. Despite the current difficulties, the designated "backbone" car manufacturers have set up sustained partnerships for current financing with banks. Sure, these are crisis conditions but they allow the work to go on.

Additionally, a governmental commission made a new decision on state guarantees to KAMAZ and Sollers, two of the four backbone enterprises, with 4.6 billion and 5 billion to be granted to KAMAZ and Sollers, respectively. Recently we discussed possible modifications to the conditions on which state guarantees are provided. This was prompted by our current unbalanced approaches towards the banks. Banks need an easier process to use these finance guarantee tools. We are ready for this, and I hope we will be able to agree with the Finance Ministry on this issue.

Vladimir Putin: A general decision is ready.

Viktor Khristenko: The third plan for AvtoVAZ provides for transferring additional resources to Rostechnologii. The draft executive order has been prepared and agreed with the Ministry of Finance and will be submitted to the Government in the next few days.

Vladimir Putin: Don't take too long with this.

Viktor Khristenko: We are also moving forward on gas issues with a vendor group to restructure the existing debt under mutually acceptable conditions to resume our partnership. We are constantly monitoring our backbone enterprises.

Vladimir Putin: One of our primary tasks today is to maintain demand, because we won't resolve all the issues with financial infusions, guarantees, debt restructuring or other financial support if there's no demand.

This issue depends not only on the Government but on the state of our national and global economies as well. But measures to maintain demand should be planned and gradually implemented.

Viktor Khristenko: I totally agree with you. Global financial trouble always brings a crunch in demand to the industrial sector. The current decline in demand is the main problem for industry.

As for the auto industry, and we have already mentioned this, the real government demand is at 42.5 billion roubles.

Another decision currently being implemented is that we have adopted a full regulatory system, including bank subsidies, which provide loans to people for reasonably-priced cars.

Vladimir Putin: Is it working?

Viktor Khristenko: This programme has already begun to work, the first several thousand motorists having received car loans. Three banks, Sberbank, Rosselkhozbank and Vneshtorgbank, are engaged in the process, which we regard as a key for the domestic industry. We could expand this programme by increasing eligible retail prices. We introduced a retail purchase price cap of 350,000 roubles. This decision was made however before the currency rates changed, which means we greatly reduced the eligible model range. It could be more economically expedient for stimulating the industry to expand the eligible model line-up. We have completed the required calculations and our recommendations are ready.

Vladimir Putin: After the subsidised price was restricted to 350,000 roubles, two-thirds of the Central Bank refinance rate, some manufacturers dropped their prices.

Viktor Khristenko: That's true.

Vladimir Putin: If we do enhance it, will there be no adverse effect?

Viktor Khristenko: I don't think so. For many car makers, this has stimulated a price decrease and even development of new models, like introducing a 3-door in place of a 5-door model to fill a market gap.

Another important point is that this programme caused almost all the manufacturers to seek additional corporate tools to enhance lending for more expensive products. We have therefore created incentives capable of reviving these promotional financial services within the new car market. Last year, 40% of all new car purchases were financed. Allowing this segment of the credit market to drop to zero had a great effect on the market.

We don't expect an increase in eligible retail prices to damage price competition, but expect it is more likely to enhance automotive lending.

Vladimir Putin: All right. Then let us calculate the costs.