Transcript of the start of the meeting:

Vladimir Putin: Good afternoon,

Many people have gathered here today. In effect, they represent the links of one and the same type of activity: producers, processors, and representatives of trade chains. In essence, they should be a single family, a united community. However, this is not the case because these links are divided by natural inherent contradictions.

We are all well aware that we are living in conditions of the crisis. We are not to blame for it but this is the objective reality which we must consider. Regrettably, under the circumstances, we are registering a certain reduction in the income growth rate, and even a decline in incomes. In the meantime, prices on basic foods are not decreasing at the same pace. Sometimes, they are not decreasing at all, and are even growing on some groups of products. It goes without saying that we cannot allow this to happen. This is an absolute social injustice.

However, I don't want our meeting to turn into a trial against anyone. We should approach this responsibly find the balance of interests between all the links in the chain together. We should make balanced decisions, which would benefit both businessmen and consumers.

Together with some of those present, I have recently visited a branch of the Perekryostok supermarket chain in Krylatskoye, which is only a 15 minute drive from the White House. We have seen how its work is organised. It goes without saying it is a good thing that we have such a big choice of goods, especially foods. Those who remember, and there are very many people who do, know what a colossal difference this is from what we had 15 years ago, when our shelves were empty. This abundance is no different from what is offered to consumers in any country with an advanced economy.

But allow me to repeat that we must find a balance in the entire chain which I mentioned earlier: producer, processor and consumer because only in this case we will be able to achieve social justice which has long been secured in the advanced economies.

It is hard to imagine a trade markup of more than 70% in a country with a developed social and market system. This is too much. We have looked at some food together with producers and representatives of trade chains. On average, meat products are marked up 45%-50%.

I would like to emphasise that every player has his own truth because trade chains have their own objective problems. In general, retail prices do not depend only on the settlement of problems between the producers, processors, and retailers. In the final count, prices depend primarily on the general state of the economy, and objective costs associated with transportation, energy, lease expenses, under the counter rent, and loans.

We understand that each link has its own difficulties. Nevertheless, by regulating relations within the chain - producers, processors, and retailers - we could make a substantial contribution to stabilising the retail market. It is important to find the right balance between them.

Our meeting is dedicated to drafting the law on government regulation of retail trade. I have convened this representative audience so that everyone involved in the process-suppliers and traders-can speak up because what we need is a balanced law taking all parties' interests into account.

At present we have no such law at the federal level. It was discussed for a long time whether we need it at all and if we do, what questions it should reflect.

What we clearly do not need is further pointless discussion because consumers will suffer as long as it drags on.

So I think that the need for legal regulation of this essential economic sphere is becoming increasingly evident.

The absence of a relevant federal law has created a situation in which trade is regulated very actively at the regional and municipal levels. 600 bylaws have been passed at the federal level alone, and practically every municipal entity has its own trade standards. We have discussed it just now at a restricted attendance meeting.

On the whole, I do not see anything wrong with this arrangement. More than that, the Law on Local Self-Government stipulates local authorities' right to regulate trade, giving them sufficient elbowroom with due account for local requirements.

There are problems, however. Analyses of municipal bylaws show that they not merely vary greatly in content but also clash with each other all too often. Many of them impose excessive restrictions on trade, and are too hard on traders.

Understandably, the passing of a relevant federal law will improve the delineation of the rights and duties of federal, regional and local authorities, fix the responsibilities of each at its own level, and preserve the opportunity of regional and municipal standard setting with due account for local requirements, which I have mentioned already.

That will provide explicit and-most importantly-predictable rules for trade, and diminish the abuse of administrative power.

I would also like to comment on such an essential matter as obtaining permits to establish new sales outlets. Regrettably, local authorities put up endless obstacles of all kinds, and demand endless permits and sanctions, whose existence helps a great many officials to live in clover.

I stress in this connection that a law has been passed, and will come into effect as of July 1, on the notification requirement of the establishment of new enterprise, including one engaged in retail trade. When a new shop opens, no one will have the right to demand any permits, certificates or other documents from its owners, who should simply notify the relevant authorities about their business. That is all. Inspectors will closely supervise compliance with this law. I hope business associations will also be conscientious about the protection of their members' rights.

Next, our main goal is creating a civilised retail market-the customer needs a real choice whether to go to a chain supermarket, a corner shop, a weekend fair or a stall.

Each of these popular forms of trade needs a favourable environment. That is why we should make major amendments in the antimonopoly legislation, and guarantee small outlets and individual traders reliable protection from giant chains abusing their dominant position. We discussed this on our way to the Perekryostok supermarket. On the whole, chain managers see the need for regulation in their business.

There is another problem: traders' relations with manufacturers, who only recently were able to dictate their terms to traders. Now, it is the other way round. Major retail chains have an impact on the market.

The most insecure situation is in food retailing, where many Russian suppliers come against major obstacles. That is why the draft law will envisage norms for balanced and mutually lucrative relations in the entire business from the farm to the counter.

In particular, we should elaborate a model food supply contract to smooth out wholesale pricing, trade markups, payment deadlines, liability for noncompliance, etc-naturally, without any discriminatory terms.

Last but not least, the new law is intended to bring into order the allotment of land plots for non-stationary outlets, such as stalls and pavilions. City halls must demonstrate such outlets on city maps and distribute plots according to explicit and transparent rules based on tenders and auctions, with a great part of the plots reserved for small and medium-sized businesses.

The Government of the Russian Federation has, on the whole, finished drafting the law on government regulation of retail trade. We have made it a point to take all interested parties' opinions into account, proceeding mainly from consumers' and domestic manufacturers' interests.

The State Duma has drafted its own version of the trade law. I think we might use all its constructive ideas. We should do it urgently, next to submit the amended Government bill to the State Duma.

Clearly, its adoption will not help to resolve all problems in one fell swoop, but it will certainly be a step in the right direction. I am going to meet with the State Duma and, if necessary, the Federation Council members later for a more detailed conversation.

That is all I want to say for a start. Let us discuss this and listen to each other's opinions. I repeat once again: I have convened this meeting with such extensive representation to find out the opinions of all the parties involved for the draft law to take them into the greatest possible account. I don't want the new law to be stillborn-it must effectively regulate retail trade and relations between manufacturers, processors and retailers.

Mr Dementyev, the Deputy Minister of Industry and Trade, has the floor.

Andrei Dementyev: Thank you.

Mr Putin, ladies and gentlemen,

Mr Putin has described the goals of the draft law very explicitly. He has even described its structure as determined by the general concept. The Government approved a programme for the development of trade on April 9. It includes the basic measures to implement within the year-in particular, to draft the Law On Commercial Activity and the Trade Development Strategy until 2015.

As for the Law On Commercial Activity, I would like to make some concise comments on the most interesting items in its available draft.

First, it truly is a comprehensive document in which we attempt to settle all contradictions that have arisen between the participants of this business for the preceding four years or even longer, and eliminate the basis for new contradictions.

First of all, we should set out an explicit procedure for allotting land plots for non-stationary trade from with the placement of relevant projects by municipal authorities to tenders and auctions.

We should also be sufficiently explicit with the regulations of relations between retail chains and food manufacturers, which makes a separate section of the law. We are singling out food in a separate preferential field of relations with traders.

We propose to include the approval of the model contract of delivery in Government responsibilities. Such contracts should contain a list of all discriminatory rights to be inapplicable to food suppliers.

We introduce legal regulations for the reimbursement term of food supply expenditures-the so-called respites that have made quite a sensation.

We have a rather harsh approach to antimonopoly regulation of trade. We propose to abandon the quantitative criteria of the dominant position for market power-not only horizontal, so to say, meaning chains' relations with other traders, but also vertical, meaning chains' relations with their suppliers.

The draft law proposes a number of objective assessment criteria, proceeding from which an antimonopoly agency will be able to conclude on the market power of a trade company and recognise it as dominating. As a result, antimonopoly rules on practice and market conduct will become mandatory for the company in question. The law also envisages a system of administrative sanctions on traders.

The draft is not limited to administrative regulation, which we regard as an essential innovation. We think that trade needs self-regulation more than any other sphere. It needs tools of compromise between businesses. We see agreements between associations of food producers and traders as the most effective option for their dialogue.

Such agreements, in our view, could become a sort of best practice protocol. The draft law envisages the pattern for the recognition of the best practice as model, and tools for all traders to emulate it.

As we see it, the combination of administrative coercion and explicit criteria preventing mutual discrimination of businesses with extended opportunities for self-regulation will allow us to establish a basis that would prevent disputes the kind of which we have been analysing throughout the year. We think we will be able to address the problem if we have such tools.

It was rightly remarked earlier that a vast legislative environment is available today, which attempts to regulate trade formally. We will not treat this law as a cure-all. We do not assume that it is an only necessary legislative act which is able to replace all the rest. On the contrary, the new law is meant to create a rigid hierarchy for all legislative and normative acts.

We are not interfering. I stress once again that the draft law does not attempt to regulate business relations with consumers. We think available regulations in this field are effective and stringent enough, though they also leave room for progress.

We should recognise that not all problems will be eliminated even with the adoption of this law because it will require, on our estimation, 15 or so bylaws to be passed at the Government level alone. Be that as it may, the new law will certainly provide the basis for a civilised way out of the current situation to establish trade that would reach the main goal we all share-raise the standard of living in Russia.

Thank you.

Vladimir Putin: Thank you.

Let's hear representatives of the business community. After that, my colleagues from the Government, the State Duma and the Federation Council, who know the situation, will speak their mind. Some of them will probably sum up preliminary results.

Mr Sergei Galitsky from the Magnit retail chain has the floor.

Sergei Galitsky: Mr Prime Minister, ladies and gentlemen, I represent the Magnit retail chain, which operates in 915 Russian cities. Although we have almost no stores in Moscow and St Petersburg, our chain has a strong presence in other Russian regions.

I think I can express the shared opinion of retail chains: We believe that it is extremely important to pass legislation upholding contradictions between producers and retail trade chains because the laws of dialectics imply that only a struggle between the opposites can facilitate affordable retail prices. Such contradictions should not be antagonistic because we are all in the same boat. However, it would be appropriate to uphold the existing contradictions.

For example, let's assess the highly important milk market. Wimm Bill Dann controls 55% of the market in Vladivostok, 53% of the market in Ufa and 47% of the market in Moscow. UniMilk controls 55% of the market in Volgograd, 51% of the market in Krasnoyarsk and 50% of the market in Samara.

It would be hard for us to negotiate if unilateral restrictions are imposed on us because we must act as partners in this sphere. Mutual restrictions are needed.

We must receive answers when we ask why chicken costs 15% less in post-Soviet republics and 25% less in the United States compared to Russia. We must create incentives facilitating their more cost-effective performance because lower retail prices are our common goal.

I hear that you have just visited a supermarket. 10% of the Russian population shops at supermarkets. Technically speaking, net profits are the quintessence of our business. Our company sells its shares on Russian and London stock exchanges. Magnit is the most profitable retail chain, earning 3.5% in net profits. According to the Internet, Wimm Bill Dann, Cherkizovo and Baltika post 4%, 7% and 17% net profits, respectively.

This is normal, we are not saying we should necessarily earn more. But our rigid profit rate is determined by competition. We have serious concerns about possible Federal Antimonopoly Service sanctions in this field because our profit rate is 3.5%, while FAS stipulates fines amounting to 1-15% of the corporate turnover. Technically speaking, even 4% fines could kill the entire retail chain.

We are requesting prior notification here, before fault is found with out company. We are ready to make corrections, if we are not doing something right. I want to mention a recent development in the Orel Region when we asked milk producers to reserve products for our chain under specific contracts because we have a very limited product range. When customers shop in the evening after work and do not see the products they need, it is a major problem for them and us. The customers do not care why they do not see the products. I think all producers who are present here will confirm the fact that our contracts have never stipulated any discriminatory provisions.

Although we work for the sake of customers, the Antimonopoly Service of the Orel Region has fined us. We consider it a major problem when milk plants reserve such products but do not market them at stores.

Although we were fined, we promptly fulfilled the Service's orders and subsequently won a court battle. However, we do not understand some aspects, including what can or cannot be done. We are asking to be notified before they fine us. We are ready to cooperate in this sphere.

We also like the law's Government-written provision because we have read other versions. Naturally, we like the Government's provision better. It contains specific aspects which cannot be predicted from the very beginning.

For example, let's look at 30-day deferrals. Take the New Year holiday season, for one. Our logistics centre starts purchasing products on November 1, and we sell them in late December. Certain slow-selling product categories, including wine, have a turnover time of 90 to 100 days.

And now a few words about standardised contracts. We support such documents. Some people may laugh, but bonuses were invented by suppliers, and not by us. We advocate the lowest possible prices. All bonuses should be considered after we have sold our products. They differentiate bonuses because they need a broader product range. However, our discount stores charge minimal prices and do not need any bonuses which lead to additional accounting, late payments and other problems.

All this is stipulated by optimal corporate profits totalling 3.5%. We are the most effective national retail chain in terms of profitability.

We should analyse all standard contract provisions and omit some of them. This implies product reservation. For instance, milk companies are unable to produce the same amount of milk in winter. We must understand what can or cannot be included. This is very important.

The state should support retail chains because it now requires taxes, a strategic aspect. Last year, we earned 5 billion roubles in profits and paid our taxes. Due to our specific operations, we are experiencing extremely high loads. Our company employs an impressive 70,000 workers. Consequently, it is easier to control retail trade. I believe we should be supported.

Speaking of investment, we need between 1 billion and 1.2 billion roubles to build a distribution centre. It costs about 600 million to 800 million roubles to build a hypermarket. In effect, we are channelling substantial investment. Last year, our company invested $400 million in the Russian economy. This year, we will invest about $600 million. This means that our companies are sufficiently large.

The only thing I regret is that we have failed to convince the law's authors to work at our companies for two days because shop counters are the essence of the job. We operate Russia's largest motor vehicle pool comprising 1,400 lorries and huge logistics centres. This is a large and intricate infrastructure. One cannot assess retail trade by our small shops, which are the final link of the chain. They would see here that a 3% profit rate is quite fair for such retail companies.

I understand that producers will always fight for a place on store shelves. They believe that retail chains are riddled with corruption if their products do not make it to stores. They should realise that people, nonetheless, find and buy chickens and bread from other producers at our stores. Factors like marketing and some other are at work here.

We are ready to make concessions to producers because we are all in the same boat. We would like to reach agreement with them. But we have only two associations basically amounting to one retail trade association, while meat producers have about 20 associations. How can we reach agreement with them?

Speaking of price surcharges, we sell extremely cheap socially important products. Under the law, we have no right to charge prices that are lower than production costs. However, we will throw away some products that are nearing their expiration date, unless we manage to sell them. In effect, we need broader opportunities here.

Basically, this is all. In the end, I would like to tell you that global experience proves that major retail chains hold inflation in check because they link consumers and producers. We are forcing them to print barcodes not just because that's what we want but because we do not want consumers to stand in long lines. We are forcing them to improve product quality because consumers do not buy substandard products. These are consumer requirements with regard to producers, rather than our requirements. Increasingly tougher requirements will be introduced because we must do everything for the consumer.

That's what I wanted to say, Mr Putin.

Vladimir Putin: Thank you.I didn't know it was suppliers who invented the bonuses system (the slotting fee).

Sergei Galitsky: But it's true.

Vladimir Putin: About standard agreements. We discussed it in a more confidential setting in my office before this meeting. We think these standard agreements could be a tool to push smaller retailers out of business.
What do you think of this concern? Do you see what I am getting at? No agreement, no business - but they make it impossible to sign.

Sergei Galitsky: Please, Mr Putin, my position is probably inappropriate, but I am representing a major retail chain. Unfortunately, food retail as it is is a large players' business. Small businesses in retail are mostly expensive boutiques for wealthy customers.

As for large business, to cut costs, one must build a major warehouse centre - worth some $40-$50 million. To build a hypermarket with discount prices takes another $20-$30 million. That is why I don't think a standard agreement will hit small businesses.

On the other hand, small food retailers should operate in specific sectors. But again, mainstream food retail is for large chains. Still, I do not think standard agreements should be a problem.

Vladimir Putin: Good. You also expressed concern over the interaction with the Antimonopoly Service. Mr Artemyev, (addressing FAS head Igor Artemyev), please comment, briefly if possible.

Igor Artemyev: I can say that we decided at a meeting with First Deputy Prime Minister Igor Shuvalov earlier today to introduce a maximum flat rate of a first fine, under 1 million roubles, in the Administrative Offense Code, rather than begin with huge fines of up to 15% of the perpetrator's turnover. That was our proposal.

We believe this should be done now to preserve the established infrastructure, and not to do harm. With time, the system should work as follows: We should work out general guidelines together with the Ministries of Agriculture and Industry, and with representatives of large chains. They will also need a valid agreement, not an imitation. They need to agree on good business practices. Those who violate either of the documents will be getting our ordinances. But they will be able to appeal against our ordinances in court.

As a result, we'll be able to work out what is good practice and what isn't through court rulings over the next three to five years. Many countries have gone through this process. I have just described how I think it should begin. This way, in the long run, we'll have a fair system of control, not a discriminatory one. It will be legalised by the bill we are discussing today.

Vladimir Putin: Good.

Now let us listen to the producers. Mr Linnik, go ahead, please.

Viktor Linnik (head of the Miratorg holding): Good afternoon, Mr Putin, colleagues,

In our opinion, the draft law developed by the Ministry of Industry and Trade will not resolve a number of key problems in the relations between food producers and retailers.

Let me explain our position. For example, one of the law's priorities should be the creation of a competitive environment in retailing, while avoiding the monopolisation of the market by individual chains or their associations.

The wholesale food market has been competitive for a long time, which guarantees fair prices of goods offered for retail sale and fair prices for Russian consumers.

Boosting competitiveness between retailers and different distribution channels will result in fair prices for consumers and a wide choice of distribution channels for suppliers. To do this, the law should lower the monopoly threshold for retail chains to 25% and define market borders. We also need to expand the powers of antimonopoly agencies, which will monitor compliance with the law.

The law should define a number of criteria which the antimonopoly agency will rely on to determine the market share of a retail chain and recognise it as dominating. We need to ensure competition between chains, as well as other food producers, suppliers, and distributors.

Second, this law should define what a trade markup is, and propose a list of services that are provided by a trade organisation and are included in the markup. The margin structure should be transparent and reflect the actual difference between the price at which the product is bought and the sale price excluding the producer's hidden extra charges. Then retail business revenues will show actual profits, from which taxes will be paid.

Vladimir Putin: Were you the one who thought of bonuses?

Viktor Linnik: You know, this is the first time I've heard of this. The structure of trade markups must be transparent. Retail chains should set a markup on everything they want excluding socially important goods. The list of these goods must be compiled by the Government. Retail chains can set markups depending on people's purchasing power and how quickly their goods are sold. We believe that this structure must be transparent and clear. But I do not think that bonuses are our business.

To make the structure transparent, we need to prohibit or significantly limit all kinds of allowances, including those from the turnover, listing, retro-bonuses and marketing charges. In this case, the producer will see the actual cost of working with a retail chain, and what his profits are, and will avoid unexpected losses and bonuses in the end of the year.

Third, the law regulates relations between traders and Russian food producers. But it does not define what a Russian food producer is. Therefore, other key participants in the wholesale market activity - suppliers, processers, distributors, agricultural cooperatives and others - are put at a disadvantage.

Russian producers, especially those in the regions and small companies, often cannot or do not want to work directly with retail chains. That's why special organisations exist that offer logistics, transportation, storage, sorting and configuring services. This is common practice all over the world.

The draft law creates unequal conditions, because it does not regulate relations between retailers and such specialised companies. We need to grant equal rights to all the market participants.

I would also like to mention the standard agreement adopted by the Government. There are tens of thousands of producers who operate in different geographic areas and have their regional differences. It is very difficult to develop a standard agreement taking into consideration all their wishes and interests.

I would like to propose this agreement is reviewed to make it beneficial for all the market participants.

Vladimir Putin: Do you believe it is still possible to develop such an agreement?

Viktor Linnik: On the whole, yes. A number of positive changes can be introduced through such an agreement. But it needs to be thoroughly revised to avoid any harm.

We have several important observations which should be considered in due course. There's no need to discuss them now. But we are well aware that we should not postpone the adoption of the law. We propose completing it as soon as possible with the help of professional associations. We have been working with the Agriculture Ministry, the Ministry of Economic Development and the deputy corps. We hope that the Ministry of Industry and Trade will cooperate, too.

Thank you for your attention.