Speech by First Deputy Prime Minister Igor Shuvalov:

Good afternoon, ladies and gentlemen,

Friends,

It is a great responsibility to speak to you today. This is my first public speech. It is important that it is addressed to the St Petersburg Forum, and I thank you for this opportunity.

First of all, I would like to thank the organisers of the forum. This venue is before our eyes becoming a leading world centre for economic and political discussions on the topical problems of the development of Russia and the whole world.

Russia has been growing for eight years. By the end of the year we will become the sixth largest economy in the world.

Russia has formed the main economic institutions. They create the basis for sustained functioning of the market economy. The challenge now is to fine-tune these institutions and to make them more effective.

Russia has become a fully-fledged member of the club of the world's biggest economies.

We are beginning to forget the severe crisis of the past decade and we have set ourselves new tasks: to become a country with developed modern democratic institutions and with a post-industrial economic structure, and to create one of the world's financial centres.

In their policy statements the country's leaders have set the task of achieving a qualitative change of life in the coming years. The strategic benchmarks of Russia's development call for profound work on the mechanisms of their implementation and the study of the obstacles and challenges that we encounter.

The challenges are many. We all know what they are. But there are problems that should be kept in mind every day when policy is made, when decisions are taken on various issues, current or strategic issues that look to the future.

I would like to single out the key problems. There are five of them. Number one: we are afflicted by the mentality of somebody who always has catching up to do; second, the energy trap; third, the "skills gap"; fourth, an unhealthy way of life; and fifth, the tendency of the state to increase its influence and the wish of many to enlist government influence.

So, problem number one.

In his speech yesterday the Russian President said that we needed new victories. Sometimes successes are fortuitous. Real victories are achieved in life, like in sports, only through constant training, by overcoming one's weaknesses.

Over at least the past 300 years the Russian political and intellectual elite has been obsessed with the idea of catching up with and overtaking the West. In practice it often led to not very successful copying of some forms of foreign economy and the foreign way of life, which was a sure recipe for backwardness.

Foreigners have noted that feature. "The Russians are diligently copying the French ways, but with a lag of fifty years," Stendhal noted in the early 19^th century.

In seeking to catch up with and overtake other countries we usually set quantitative benchmarks that we tried to reach at all costs, be it the output of iron, oil or weapons. The result of the chase of targets was a lopsided kind of modernisation.

We managed to achieve military-strategic parity and develop certain sectors of the economy up to the most advanced level. But we have almost always been oblivious of the social and political aspects of modernisation. As a result, our achievements were not secure, after a breakthrough in this or that sphere, a rollback would occur. We did not have our own model of modernisation based on Russian values and leadership ambitions.

Addressing the State Council in February Vladimir Putin said: "Russia must become a country that is the most

attractive to live in." That means that we should not only have a large GDP, although the growth of the domestic product is in any case the basis for making any other development decisions - but a country that is comfortable to live in. A country that can offer an attractive example of the modern way of life.

We need not so much to achieve quantitative targets as to bring about a qualitative change of the economy and the quality of life. More and more attention should be paid to the parameters that contribute to the achievement of these goals. I am talking about a maximum degree of independence of economic development from factors controlled by the Government, and also about low inflation, the environment, improvement of public health and of course the need for greater trust of society in the basic institutions, above all, the judiciary and the law enforcement activities. Most importantly, we should proceed with an eye to leadership. That means that we should build our economy so that it would set standards for others to emulate. We must create a social model that other nations would want to copy. This is the only way we can overcome the psychological inhibitions and start addressing the long-term tasks of the country's development.

The next problem is the situation in the energy field. I would describe it as "an energy trap". Let me explain why. Many think that this is a thriving sector in Russia and foreign countries sometimes envy the abundance of energy resources in our country. But let us not kid ourselves, we must admit that the situation here is complicated.

The term "energy superpower" is a relatively recent coinage. However, it will take at least ten years to fill it with real content, ten years of hard work in order to turn energy into a catalyst of structural progress and innovations.

Energy is one of the most controversial topics politicians and experts discuss. We want to see ourselves as a key player in the global energy market. On many counts we are perceived as such already. However, one cannot ignore the problem of the "resource curse", when an abundance of raw materials resources has a negative impact on the country's social and economic development. We are launching a programme of actions to make sure that the abundance of energy resources becomes a locomotive of our progress and not a brake on that road.

Russia has been and will remain a reliable producer and supplier of various types of energy. This is an important contribution of Russia to the world civilisation. Can the Russian people be content with that? Of course not.

In the modern world it is impossible to form a fair judgment of a country's success by just looking at the list of the key sectors of its economy. Any sector can become either a point where degradation of the economy starts or a springboard for a leap forward. Energy is a good example in point. Extensive (quantitative) development of the sector resulted in the country that has some of the largest energy resources in the world simultaneously becoming one of the least energy efficient countries. The energy intensity of GDP is multiples of what it is in other developed countries.

One can discern two aspects of hi-tech development of the energy sector. On the one hand, its components should adopt the most advanced standards of production and transportation of energy harnessing the latest scientific and technical achievements for that purpose. On the other hand, the demands of the development of energy must drive demand for new developments in various areas of science and the economy.

In other words, modern energy will become our competitive edge only if it simultaneously drives the transition of the economy to the innovation path of development and is itself the prime beneficiary of innovations.

Difficulties in the energy sector today offer a good opportunity and make it imperative for us to accomplish a dramatic technological breakthrough. The growing price of gas, electricity and coal stimulates the need to fight every inch of the way to save energy.

Among other incentives are the challenges of developing offshore resources, remote fields in Eastern Siberia, building many kilometres of pipelines that cross practically every type of territory. Meeting these challenges requires constant engineering efforts and brings in a large number of related sectors.

To maintain the current rate of economic growth energy consumption will have to grow by at least 3-4%. That spells the need to invest in energy, especially in the development of the sectors that provide resources for power generation, above all gas and coal. Increasing their production is costly and time-consuming. So, by not taking the necessary decisions today we severely limit the prospects of economic growth in the future.

Energy efficiency is a particular concern. To address that task clear signals must be sent to producers and suppliers. We will offer economic incentives to energy-saving projects. We will establish standards of energy efficiency and will gradually liberalise the prices of power and gas. Decisions to the effect have already been taken.

As regards the improvement of the process of innovation I believe that we should be open to welcome the best foreign specialists and entrepreneurs; all that is needed for joint implementation of projects in Russia.

It would be useful to bring in major foreign companies to participate in domestic educational programmes, to create fundamental science chairs at our universities. This is especially true of engineering specialities.

The third problem is the "skills gap". A new quality of personnel is a problem not only in the energy sector. It is the key to the development of the whole economy. Our teachers are among the best in the world in many areas. Our education commands well-earned authority.

That is not a bad "start-up capital", which many today think offers us a serious advantage. But the current state does not match the new challenges of qualitatively changing the economy in the coming years. The available skills are absolutely unsatisfactory and they hold back development.

A person today is emerging as a player in global competition, who compares the living and working conditions in various parts of the world and looks for a place to work. Simultaneously there is a rivalry in the world market to attract that person, to attract skilled personnel. Human resources become the main strategic resource of social and economic development. There is a shortage of qualified workers in all developed countries. Society is passing on from import to export of education drawing in new human resources, young people and skilled teachers to teach these young people.

Russia, whose share in the export of education services is a mere 3% in terms of the number of students, will be losing out in global competition unless it takes decisive steps to attract talented young people. Incidentally, an educational institution's capacity to attract foreign students should be seen as an indicator of its effectiveness.

The Russian education system has managed to produce people with a broad view of the world and broad horizons. The best universities have always been scouting for the best brains seeking to lure the most talented young people and, most importantly, do so regardless of their social background. This may account for the fact that many of the best managers today are people with backgrounds in mathematics, physics and chemistry. But that potential is not unlimited. Today we face the need of a sweeping renewal of existing human resources and fostering new ones. We should do it at the highest professional level. Without it we will never meet the set target of increasing labour productivity in the main areas by at least four times.

First, it is necessary to ensure continuous education for citizens. In an innovation-driven society a person should learn all the time. He should have an opportunity to change his occupation once he has acquired certain skills. To stimulate these processes it has been decided to exempt corporate expenditure on education from all taxes. Therefore we pin great hopes on the initiative of employers. We hope they will launch their own education programmes without waiting for such initiatives to come from state educational institutions.

Secondly, we should not be wary of inviting foreign scientists. First of all, we should create conditions to bring back to Russia the talented scientists and talented people who had left earlier. They could help us to create an education system that meets modern and future needs.

Thirdly, universities should adopt an individual approach in education. That means allowing students to choose from a large number of courses on the education trajectory that they consider to be the most effective for them. This is one of the aims of the new legislation adopted in the education field in recent years.

Fourth, education must play the role of a social lift in society. That has been forgotten in recent years. The range of measures is obvious. The Single State Examination, which is being accredited, will be the number one instrument to perform that function. Other instruments are social grants, the development of education loans, the adoption of a two-tiered higher education system, the restoration of the functions of the preparatory departments at universities, including for servicemen who have completed service under contract for at least three years.

Fifth, it would be reasonable to introduce new principles of management in education. The managers should be people who are specifically trained as managers. The same applies to other spheres of the social infrastructure, for example, public health.

Finally, something that I consider to be very important, and we will do everything to make it happen soon: we will offer new opportunities for young and established professionals to get further education at the best educational, research or production centres in the world. We should send our people to study at the best centres abroad. We are not afraid of the warnings that many of them will stay to live and work there. We are sure that these people will return to Russia.

However, only a healthy person can become effectively immersed in professional activities and provide all the necessary care for one's family. People often get ill here not because of poor medical care but because they do not lead a healthy way of life. That is our particular vulnerability. The situation with the health of the nation is, unfortunately, catastrophic.

If we are to develop a modern public health system in Russia we must create in society an awareness of the value of health, of the value of human life as an individual and simultaneously a national resource.

Thus, not only the quality of medical care but also the lack of a healthy way of life as a norm is a serious challenge. Almost half of young people aged 15 to 19 in Russia are smokers. Over the last 20 years consumption of cigarettes in Russia has more than doubled, while the population has diminished. The situation is even worse with alcohol consumption.

Unless we take care of ourselves not even the most hi-tech medicine can help us.

Furthermore, the wish to be healthy - and that is very important for the development of the Russian economy - creates a demand that stems not from artificially set priorities but from the needs of human development. That is why the health service can play a role similar to the building of railways during industrialisation. Along with energy our wish to be healthy and our potential in the energy sector will generate demand for the development of other sectors to build an innovation economy.

Now about the role of the state in our life and its influence on economic development.

Many today criticise the authorities for trying to penetrate all the spheres of life. But don't many of us simultaneously egg the Government on to exerting such influence? On the one hand we see that the bureaucracy, under the flag of the state and under the pretext of protecting its basic interests, is interfering in the economy more and more. On the other hand, there is a strong tendency to induce the state to act in this way. People expect the state to arrange everything and everywhere because it has huge financial resources.

The subject of building an innovation society is widely discussed at all levels. But what is an innovation society? As I and my colleagues see it, an innovation society is a society of free and creative people, a society open to everything new, including in the economic life.  Such a society can and must go hand-in-hand with our conservative attitude to spiritual values.

In an innovation society too much Government is just as dangerous as too little. In recent years many have again come to believe that the Government can make up for the failures of the market forgetting that it can generate its own failures. The failure of government regulation, as experience shows, turns out to be far more painful than market failures. The Government reacts to the crisis much more slowly than the economic agents do under the impact of market signals. Therefore an important aspect today is limiting excessive government interference in the economy. We have initiated steps to reduce government interference in the life of entrepreneurs. One of the early decrees of President Dmitry Medvedev was the Decree on Urgent Measures to Eliminate Administrative Restrictions on Entrepreneurial Activities. The Government is preparing concrete steps to implement it. What is it about? The focus is on moving on from not very effective supervision and endless inspections of business to modern mechanisms of ensuring liability and financial guarantees. The authorities are coming to grips with the reform of the judiciary system so that the court should really become a place where any citizen can seek redress.

Private property has had a rough ride in Russia. Over more than 70 years the concept simply did not exist in Russia. So it will take time for legitimately created or acquired private property to become an acknowledged value in society.

We should repeat again and again: protecting property rights is the key and the prime task of the state. How it is coping with that function should be the main criterion of the effectiveness of the whole system of Government.

At the same time the state does not confine itself to paying lip service to efficiency and is leading the way in proving the importance of the declared priorities. That is why we will shortly, first, have a rotation of the boards of directors of companies 100% owned by the state to remove bureaucrats and replace them with professionals. We will also introduce modern forms of corporate governance in state-owned corporations. We have said that we have serious intentions and plans to do it in state-owned corporations because we believe we are right in creating them, we believe that they are necessary precisely to regulate the relations in which market agents cannot act independently. We have created and will continue to create them in some areas, but we will do it in a way that would make them act absolutely openly according to the rules of corporate governance. We have decided to reduce the list of strategic enterprises. That is an important decision. The Russian President has directed us to prepare proposals on cutting that list and the Government is already preparing such proposals.

Thus, speaking about the role of the state in modern life the following conclusion suggests itself. On the one hand, government institutions must be able at every concrete point in history to reduce their interference when the tasks they faced have been accomplished. And on the contrary, they should quickly pitch in wherever it is necessary. This is an ongoing process. We are not committed to strengthening the role of the state, let alone strengthening the role of bureaucracy. On the contrary, the state will concentrate on tackling only the most important tasks, only the tasks that we can handle effectively.

On the other hand, individuals and corporations should not expect the Government to step in immediately to solve any problems citing the new opportunities that the international situation has offered us.

Friends,

All the problems I have mentioned have one thing in common. In its daily decisions the Government will constantly synchronise watches on these matters.

The concept of the country's development to 2020 and the concrete plan of its implementation are being widely discussed. It is important that we become aware even today that the plan may change over time and that this is not a sign of inconsistency, but on the contrary, a sign of society's adaptation to the new challenges and tasks.

I am sure that these plans can only be implemented if we are mindful of the traps I have mentioned. We are aware of them and we will be able to avoid them. The main restriction for Russians today is inside them. Only by overcoming that inhibition can we find new motives that propel our development. Only then can we move forward.

Unfortunately, life will set new traps on our path. The main thing is to see them in time. Then we will not commit errors, then we will be able to achieve our goals.