Working Day

23 april, 2012 17:37

Prime Minister Vladimir Putin attends an expanded meeting of the board of the Ministry of Economic Development

Prime Minister Vladimir Putin attends an expanded meeting of the board of the Ministry of Economic Development
“We need to develop an effective and reliable long-term planning and forecasting system which would help us identify growth trends and lay out the steps to be taken in each of the priority areas, which include improving living standards, poverty reduction, creating millions of new modern jobs, economic modernisation, increasing the share of innovative industries and high-tech exports, as well as developing industrial and transport infrastructure.”
Vladimir Putin
At a meeting of the board of the Ministry of Economic Development

Transcript of the beginning of the meeting:

Vladimir Putin: Good afternoon, colleagues. We are all aware that the Ministry of Economic Development plays a special role. You are not merely responsible for current economic performance, proper use of market regulations and the business environment. Your ministry develops concepts of system-wide reforms and calculates benchmarks and future scenarios. Your professionalism and grasp of the subtleties involved in economic processes were on full display during the crisis. We all remember those difficult months. The cost of each decision was inordinately high. We had to focus on the task at hand, preserve the balance of interests of all economic sectors and identify pinpoint solutions for individual enterprises and regions. Back then it was the Ministry of Economic Development that was at the forefront of all anti-crisis measures taken by the government.

I believe that we managed to achieve a lot together. We avoided the temptation of easy solutions and measures at a time when there were proposals to solve all economic problems by handing out money or fully nationalising the economy. We managed to preserve macroeconomic stability and did not give up system-wide reforms and continued to follow the path of development. We did not lose perspective. I have mentioned nationalisation of whole branches of the economy, and of major companies which took place at that time.

Currently, the ministry is working on new measures to continue privatisation. There should be no simple solutions in this area, either. The decisions should invariably be balanced and consistent with long-term economic goals and also be in line with the existing economic situation.

We are currently at a very important crossroads. We are about to take decisions which will set the direction and long-term trend of economic development. Russia’s economy must have higher growth rates than the global GDP in the next decade. In addition to growth volumes, we need a new quality of economic growth, which your minister, your experts and I have mentioned on many occasions.

Good results will be more difficult to ensure than at the beginning of the 2000s, when the foreign economic situation was on our side. It remains quite favourable to this day, actually. But back then, we had a significant amount of untapped capital assets in reserve, and began to grow from a rather low base.

The world’s facing a lot of uncertainties, and their number isn’t decreasing with time. Global transformational processes go on as we speak, so when forming our economic policies, we should be mindful of the whole array of internal and external factors. We need to develop an effective and reliable long-term planning and forecasting system which would help us identify growth trends and lay out the steps to be taken in each of the priority areas, which include enhancing living standards, poverty reduction, creating millions of new modern jobs, economic modernisation, increasing the share of innovative industries and high-tech exports, as well as developing industrial and transport infrastructure.

I believe one of the ministry’s principal tasks is to identify new sources of growth, ones that will enable us to meet our targets. So I’d like you to speed up your work on the Strategic Planning law, so that it could be submitted to the government for consideration before July 1 this year.

And, as we agreed earlier, we should have all major national programmes drafted before the year’s end.

I’d like to call your attention to the fact that we’re not just transitioning to a new budget structure now. We’re also preparing to adopt new, results-oriented principles of state governance and budget spending.  As I said earlier, all national programmes should be in line with the strategic planning system and with the country’s long-term socio-economic outlook. And the ministry has a crucial coordinating role to play.

Federal targeted programmes should follow the same kind of principles. We must cut funding to inefficient sectors and provide priority programmes with sufficient funding. That’s an issue we bring up regularly at our government meetings. As I pointed out at a recent Finance Ministry board meeting, funding requests tend to come in for all kinds of government projects, yet many of those projects don’t get started until mid-year, if at all. So we’d better channel all our resources into programmes that we’re ready to get up and running and that our economy really needs.

Among the developmental factors we need to reactivate, it’s the business climate that should come first, the creation of an open and friendly business environment, constituting the nerve of economic policy. Thanks largely to the Economic Development Ministry’s pro-active approach, some real progress has been made in this area of late: the powers of supervisory and regulatory bodies have been inventoried; there’ve been dramatic cuts on business audits, while the number of sectors where startups need no preliminary authorisation has increased.

The Foreign Investment Advisory Council has changed its format. And the National Direct Investment Fund for supporting various programmes has been set up. Hopefully, this fund will also prove effective. In any case, its managerial team seems quite promising to me. There’s ongoing dialogue with the business community and major entrepreneurial associations. The logic developed as a result has allowed us to set ourselves a task of unprecedented scale and level. It’s about transforming Russia into a country not just with a favourable business climate, but with the best climate. We realise that winning the competition for direct investment and creating highly attractive conditions for business will help us be victorious in our struggle for the efficiency of the Russian economy and for a new quality of growth. This is precisely why our economic policy, our business climate, and our conditions for foreign investment inflows, the creation of new production lines and innovation should be truly competitive – and competitive on a global scale, especially bearing in mind Russia’s imminent accession to the World Trade Organisation. This means we shouldn’t just make our economic policies more effective, we should also constantly compare our moves and their results to what is happening in other countries. We should try to act faster and more decisively than our potential competitors do. This is the philosophy that forms the premise of the national entrepreneurial initiative for a competitive business climate. The Economic Development Ministry and the Strategic Initiatives Agency have become the project’s coordinators and the driving force behind it.

It’s important that the business community should itself formulate requirements for the quality of the business climate, for administrative procedures, regulatory acts, and the application of the law. On May 3, the Strategic initiatives Agency’s Supervisory Council will consider the first four roadmaps on some of the most sensitive issues to the business community. These include administrative barriers impeding connection to power grids, customs clearance, and the support of exports.

I think it would be right to confirm those roadmaps as soon as possible. We should then immediately move on to the creation of other such roadmaps, in sectors that are also crucial to the business climate. They [the roadmaps] should be ready by the end of this year. I’d like the Strategic Initiatives Agency and all other relevant ministries, in addition to the Economic Development Ministry, to get down to business.

Federal government officials will now be obliged to deliver on the business community’s requirements set in roadmaps. What we need is not a report on the measures taken, but a concrete result – the elimination of  excessive formalities and the reduction of financial and time costs for businesses.

In a week’s time, I’d like to hear from you on progress in efforts to elaborate a system of managerial responsibility indices, including for those at the top of government departments and ministries.

We should follow some clear-cut criteria, ones that reveal the input of each particular person. In parallel, we should devise a system of sanctions for [federal officials’] failure to fulfil their obligations. The same principle should form the basis for a mechanism gauging the efficiency of regional managerial teams.

We need to expand the scope of public consultations with the business community, including as part of our regulatory impact assessment procedure, and to work together on expert analyses of regulations currently in force as well as drafts.

In addition, we should make a detailed inventory of our entire body of laws, clearing of all clauses and provisions that unreasonably impede entrepreneurial and investment activity in Russia.

I said in my address at the State Duma that we need to greatly increase the efficiency of our investment efforts and our development institutions.

The Economic Development Ministry and the Strategic Initiatives Agency are to work jointly with Vnesheconombank and businesses to draft a package of measures to enhance the accessibility of development institutions, primarily for mid-sized businesses working in production and innovation.

We should also analyse the conditions we have created in special economic zones. It is definitely a big achievement for the Economic Development Ministry that we have these zones and the regulations and legislation governing their operation. This is clearly your achievement, colleagues, but we must nevertheless determine why business and investors sometimes prefer to organize production abroad rather than in these zones. This sometimes happens, which means that there are some problems which we should consider and deal with. We have already discussed this issue and instructions have been issued, so I am waiting for your response. By the way, we could also think about additional support for startups, for example through tax incentives.

Colleagues, I would also like to talk about several other important issues. One of the ministry’s key priorities this year will be to complete the drafting of the law on the federal system for contracts. The biggest I see is the fact that the existing legislation still does not answer several vital questions, such as why the government makes a specific purchase, what specific results it seeks to achieve, and, most importantly, how efficiently are we spending the trillions of budgetary roubles? As you know, in 2011, nearly 5 trillion roubles, or more precisely 4.9 trillion, were spent on state purchases. The current purchasing procedure and the system for choosing suppliers sometimes discourage professional and reliable companies from participating in tenders.

As a result, people are dissatisfied with the quality of our roads, lunches at preschools and the renovation of healthcare and educational facilities, while at the same time our agencies sometimes buy things that cannot be described as basic necessities for operations. I believe that the Economic Development Ministry should draft an effective system to regulate and control all stages of state purchases, from substantiation, the initial price, the main contractual provisions and all the way to the tender, as well as monitor and audit the contracts’ fulfilment after a tender.

All the information about state contracts must be made maximally transparent, and it should be remembered that it can be used to complain about the actions of the agency that places state contracts.

I would like you to remember that purchases made by government agencies and companies with state money should stimulate the development of new high-tech companies, which is why we should maximally increase the participation of small and mid-sized businesses in state companies’ innovation development programmes. The funding of such programmes, primarily from extra-budgetary funds, should reach some 3 trillion roubles in 2011-2013.

Technology platforms are one more efficient tool to support innovation used by the Economic Development Ministry. These platforms integrate the efforts of research centres, universities and enterprises, dramatically cutting the distance between research and implementation. I want to stress that our companies should be producing competitive goods based on modern technology and enjoying demand both in the domestic and foreign markets.

According to the Economic Development Ministry, we have considerable growth potential for a wide range of goods and services. Our engineering exports should grow by one-third in the next four years and double within five years. These ambitious plans need an efficient mechanism of implementation. We should use the Russian Export Insurance Agency for this, focusing it, in particular, on small and mid-sized companies. But we must not limit our efforts to this measure alone.

I want the Economic Development Ministry to thoroughly consider the experience of the leading export countries. We should develop a comprehensive system of supporting our products in foreign markets, a system which should comprise financial, diplomatic, information and legal support for our companies. We must learn to help business stand up against unfair business practices and quickly and efficiently identify the barriers which other countries erect in the path of Russian companies without good reason – yes, this sometimes happens.

Intergovernmental commissions and Russia’s trade missions abroad should be more proactive. They already know how to work with large companies, but this is not enough. Our colleagues abroad are not always open to requests from small and mid-sized businesses.

I believe that it would be appropriate for key business associations to take part in formulating tasks for state agencies involved in international economic cooperation.

Next, we will now have a new tool for protecting our interests in a civilised manner – at least we hope this will happen. I am referring to Russia’s accession to the World Trade Organisation, as I have mentioned. The accession talks, which took years and were aimed at coordinating our positions, was a very complicated and professional process. I would like to thank the ministry experts and leaders for their contribution. I see these people in the audience today. Indeed, it was a difficult, intense and sometimes nervous work, but you have done very well.

However, we all know that the end of the talks is not the end of the road. In fact, it is the beginning of some difficult work within the WTO framework. We should make full use of the advantages of our access to new markets to promote Russian products, while at the same time minimising the risks which are hindering the work of our companies abroad. We should also work jointly with other ministries and agencies to decide on the really necessary support measures for domestic producers. Of special importance is your work on integration. The political decisions on the establishment of the Customs Union and the Common Economic Space were preceded by painstaking work to formulate a legal basis of cooperation. We created this foundation very quickly, which helped us launch integration much sooner than initially planned. As I said before, I believe that the establishment of the Customs Union and the Common Economic Space are vital geopolitical events in the post-Soviet years.

When developing integration processes, we should take into account the interests of business and of our economic investors. Our goal is to ensure that our business people, the citizens of our countries will be able to fully use the advantages of the common [economic] space. We know that the establishment of these integration structures is a crucial, an absolutely positive event politically and in terms of our strategic perspective. At the same time, they have faced us with new tasks and can be perceived as a challenge. If business conditions are better in Belarus or Kazakhstan, business will gradually move there – this is obvious. Not every company would do this, of course, because there are infrastructure and administrative problems. But if we fail to react to the new economic realities, we will face these problems. So we must start acting right now. We must change the situation in our favour, so that the entire economic space becomes competitive with foreign markets.

We should pay special attention to positioning the Customs Union and the Common Economic Space in the world and ensuring them broad international recognition as equal dialogue partners. All these moves should create favourable conditions for creating the Eurasian Economic Union, which we hope will become a powerful pole of global development attractive to our neighbours.

Colleagues, in conclusion I would like to say the following. We should see more than just economic indicators and statistical data in our projects and decisions.  We must remember that the economy has a huge social, human dimension. The main results of our efforts should be the increasing standards of living for Russian families, modern jobs, the implementation of creative business projects, liberties and the opportunity for millions of our people to start their own business.

The new economy which we are creating should employ and help realise the vast potential of our people. This is the overall goal we are working for. I am confident that we will achieve it. I would like to thank you for your contribution and to wish you success. Thank you very much.

Elvira Nabiullina: Mr Putin, colleagues, in my report I will speak on the results of the ministry’s activities for the past year and for the past four years in general, as well as on economic policy outlines for the upcoming period.

First, I’ll speak on economic results. In 2011, economic growth totaled 4.3%, which is higher than what we had expected (4.1%). GDP grew at some 5% in the last sixth months, hitting an all-time high since the global economic crisis. An improvement occurred in investments, consumer loans, consumer demand and retail. The slide shows that key indicators grew each quarter. During the last six months of the year, the investment growth rate tripled and retail sales increased by 80% as compared to the first six months. Certainly, we have to maintain these results.

This year, we expect 3.4% growth. I would like to note that we expect lower growth than last year’s 3.7% due to a revaluation of the baseline and last year’s additional growth, which turned out to be higher that we had estimated. In absolute terms, our forecast for GDP in 2012 has not changed. By the end of the year, it will total 59 trillion roubles, or some $2 trillion, which keeps Russia as the 6th world economy in terms of purchasing power parity. Among BRICS countries, Russia has yielded to India and China but is considerably ahead of Brazil and South Africa.

According to estimations by the Ministry of Economic Development, during the first quarter of this year, GDP grew by 4%, including 3.2% growth in March. The rate seems minor, but they reveal the change in the character of economic growth. The stage of post-crisis recovery and reserve building are over in the country, and further economic growth is caused by growing domestic consumer and investment demand, with a growing tendency toward import substitution.

But, certainly, not only the growth rates are important but also the character of the change in the economic structure. It should be noted that the years 2010 and 2011 showed that the ability of key Russian sectors to adapt to external conditions through boosting efficiency. In particular, this applies to the processing industry. Here are some figures that illustrate this: Prior to the economic crisis, the industry had employed some 12.5 million people, and following it crisis-stricken enterprises had to lay off workers due to a steep drop-off in demand, with 2 million people losing their jobs. Yet, in 2011 production output at processing enterprises in real terms surpassed pre-crisis volumes. But the number of employed totaled less than 11 million, which indicates an increase in labour productivity in these sectors – that is, with the reduced number of employed we managed to achieve and surpass the pre-crisis level, with the reduction in the number of jobs in the industry made up by the new ones created in the service sector. The number of those employed in the industrial sector increased by some 2 million, which corresponds to the global trends in developed countries. In effect, the structure of the economy is changing.

We expect the inflation rate to continue to fall. In 2012, we expect it to be some 6%. Along with measures to increase wages in the public sector and cash benefits. this will create the conditions for real income to rise, which we expect this year to reach 5% as compared to the last year’s 0.8%. This is substantial growth in real income.

The growth rates and quality depend on the situation with Russia’s economic institutions and business climate. There are numerous problems here, but there have been improvements as well. For example, according to reports by UNCTAD in 2011, Russia ranked 8th among the world’s top nations in terms of attracting foreign direct investment, with a total of $207.7 billion received by the country.

In the World Bank’s well-known ranking Doing Business, which we often cite, in 2012 Russia rose by four points. Russia ranks only 120th among 183, yet the country made the top 25 in terms of progress in reforming the investment climate. Certainly, the roadmaps that we are developing should spur improvements in the investment climate, putting Russia no lower than 20th place.

There are other rankings as well. The recently published ranking by Bloomberg has Russia among the top 50 countries in terms of favorable investment climate out of 160 countries analysed. In the ranking, Russia is in 48th place. In the ranking by the World Economic Forum, which ranked financial systems over the course of two years, we have advanced from 57th to 39th place.

It is clear that all these rankings are relative. There are some negative ones, but their methodology is not always transparent. But for us, they are a major indicator, revealing the weak points in our investment climate – and it is obvious that those measures that Russia used to improve the climate during the previous stage are not enough. We have to implement new measures. In particular, this means drastically improving business safety – which is mentioned by businessmen at every meeting – primarily through strengthening the judicial and legislative and law-enforcement systems. This also includes the transparent implementation of the programme for the government’s withdrawal from business capital in competitive sectors. The measures also include combating corruption and, lastly, consistent progress in competitiveness in all sectors.     

The conditions in which we will implement the next stages of the commenced transformations will not be the simplest and they will depend to a lesser degree on oil prices and to a considerably higher degree than before on our passing through major forks in economic and social policy. In my view, there are seven major forks. I’d like to show the slides and I’d like to focus on these forks.   

The first fork is an acceptable fiscal burden for the economy. Total taxation burden including customs and insurance payments accounts for 35.6% of the GDP. I begin with taxes because taxes are not only budgetary receipts and not only the issues of the Ministry of Finance but are the most important component of the investment climate. And the lack of resolution in the discussion on this issue worries business people: they restrict investment because they are expecting changes. Therefore in the short term we will have to put a full stop in the current discussion, in our view.

I’d like to stress that according to the assessment of the Ministry of Economic Development, in the past twenty years Russia has formed a modern tax system meeting the goals of national development and economic modernisation. And further changes should not be radical. Most importantly, we must maintain the basic principles of updating the tax system. These are the principles: 

First, we must ensure stable rates of basic taxes for five years at least. Second, we must ensure a fair tax burden: a large tax burden on corporate windfall profits, primarily in rent sectors, a lesser tax burden on businesses working on modernisation and creating new quality jobs, additional taxation of the consumption of the rich. Fairness also means equal conditions for competition in which honest taxpayers do not lose against those using various tax evasion schemes.

The third most important principle is the competitiveness of the tax system. The effective tax rates should be compatible with the tax rates in those countries with which Russia competes for investment and administrative procedures should correspond to the best world practices. And we should pay special attention to compatible taxation in the Common Economic Space. In your address you also said that it is very important for us to monitor the situation in Belarus and Kazakhstan.

The fourth major principle is transparent decision-making in taxation, which means the introduction or repeal of tax breaks and changes in the rules and procedures of tax control should follow a public discussion and an evaluation of the regulatory impact.  

The fifth and unconditional principle is the balance between the fiscal and the incentivization function of the tax system.

Based on these principles, we have made our proposals, including a tax holiday for Green Fields – new industrial projects.

We cannot turn a blind eye to the economic sectors (maybe the majority of sectors) in which business people, apart from the fiscal burden, bear the considerable burden of administrative barriers and corruption. According to experts, these barriers increase the burden by withdrawing considerable funds from businesses, and in some cases this burden reaches between 50% and 60%. Therefore tax reform should accompany our policy on reducing administrative barriers. This is really a significant burden on businesses.

The second fork is an economically acceptable level of prices for power, gas and transport. This is the second major component of the investment climate. We realise that the increase in gas and power prices encourages new energy efficiency programmes. But in our view we cannot afford higher prices as compared with rival countries, otherwise industrial production will be placed in these countries rather than in Russia. In addition, energy resources are our competitive advantage, which we should use. In our view, and we have included this in our forecast, gas prices must grow by approximately 15% per year primarily to promote energy efficiency, power prices must grow by about 10%, railway transport prices must grow at about the rate of inflation.  

Meanwhile it is important to take into account the investment programmes of infrastructure companies. We have already begun to conduct this work jointly with infrastructure companies in order to clearly differentiate between recoupable and non-recoupable projects and to use modern funding schemes, primarily the issuance by infrastructure companies of long-term debt instruments with the possible use of accumulated pension reserves. The state can support non-recoupable projects by co-funding infrastructure development, but it must sign regulatory contracts containing mutual commitments with infrastructure monopolies. I want to remind you that according to the 2011 results, the total investment programmes in the power sector, oil and gas transport and railway transport amounted to about 3 trillion roubles or about 28% of the total investment in Russia.

The third fork is the rate of reduction of state involvement in the economy. In 2011, the state sold the stakes in 360 joint-stock companies, which is 2.5 times more than in the previous year. And the budget received 121 billion roubles or five times more than in 2010. The most important sales included the sale of a 10% stake in VTB, as well as the sale of a 75% stake in Russian Railways, and 125.5 billion roubles worth of shares in Pervaya Gruzovaya Kompaniya. This is comparable to the budget revenues received from privatisation in total.    

Here we must take a decision on the rate at which the state relinquishes control over some assets, and not just limit the state to selling minority stakes. I want to draw your attention to the need to conduct privatisation programmes in the regions. The regions are getting subsidies from the federal budget while they have huge reserves for possessing assets in competitive sectors that are attractive for private investors. We have begun this work with the regions but I must admit this work has so far been progressing rather slowly.

And the fourth fork that I’d like to draw your attention to is the ways to strengthen the national financial system. This means the ways to finance our growth and investment. It is no secret that our slump in 2008-2009 was due not only to oil prices but also to an excessive dependence on foreign financial markets. In addition, the weak financial sector also means limited possibilities for financing mid-size businesses. Small businesses often fail to grow to become mid-size businesses not because of a lack of demand but because there are no accessible sources of market funding. 

Here are some figures to contemplate: following the results of the year 2011, Russian securities made up 21% of the turnover on the London Stock Exchange and strengthened the role of London as an international financial centre. Following the results of 2010–2011, 65% of Russian companies opted for foreign jurisdiction in placing their shares and depositary receipts – this is the worst indicator among countries with comparable levels of economic development. For example, in Brazil, only 4% of companies place their securities abroad; in China, 8%; in India, 14%; in South Africa, 29%; only Argentina, with about 60%, is near our level. It is impossible to resolve this problem through bans; we need systemic and absolutely indispensible work to change the legislation (currently it prevents our investors and shareholders from conveniently structuring their deals in Russian jurisdiction), strengthen our judicial system, and develop market infrastructure. In this respect, last year the government took a very important decision to unite exchanges and create a central depositary but this is not enough in our view. The state must provide an example. I think that privatisation of large companies should be carried out as a rule on Russian platforms. We should also have a concept on the extent to which we use accumulated reserves, primarily the pension reserves, for creating long-term loans.

The fifth fork involves decisions in the pension sector. This affects both pensioner wellbeing, the stability of the budgetary system and, to a large extent, the outlook for forming long-term loans in the economy. We see that without reforming the pension system we will not be able to have a deficit-free budget either by 2015 or later.

Given the current rules, we forecast the pension system deficit at 3-4% of  the GDP. To achieve a deficit-free budget the rest of the budget system should have a corresponding budget surplus. Thus there is practically no money left for a development budget. As we see, raising taxes is not a solution either, since it hinders GDP growth and pushes businesses into the shadow sector. Given a $1 increase in the price per barrel of oil, additional budget receipts will amount to 50-60 billion roubles, and the additional GDP growth that we must stimulate, by one percentage point, through increasing the taxation base can lead to a growth of budget receipts of 150-200 billion roubles. This is 3-4 times more!

I’d like, for example, to focus your attention on the situation with payroll taxes, and this situation proves that we cannot increase the tax burden. The ratio between concealed salaries and the official payroll grew (on our estimate, based on the balance between the population’s incomes and expenses) from 54.7% in 2010 to 56.1% in 2011 and practically reached the maximum level of the 2000s, that of 2006: at that time this ratio was 56.2%. The fact that this growth was due to a change in tax rules is confirmed by a slowdown in the growth of legal wages. During the 2000s (including due to constant oil price growth) real wages were growing significantly quicker than the GDP, on average by 3-6 percentage points, and in some years wages grew faster than the GDP and by more than 10 percentage points. But despite a favourable global situation in the last year, the growth of real wages was lower than the GDP growth rate. If the ratio between the shadow sector and legal wages had remained at the level of 2009–2010, then the real wages could have grown by 5.8%. So in our view, to implement simultaneously the goals of development and a deficit-free budget, we cannot consider tax increases, only maybe their structural changes, but in general the tax burden cannot grow.

We need solutions to optimise the pension system, which can include measures on changing the system of early pensions, increasing requirements for minimum pensionable service, encouraging the later retirement from service, and the development of volunteer pension accruals.   

The sixth fork is the extent of economic openness. Against the backdrop of the Customs Union and Russia’s accession to the WTO, we are to develop a policy on signing free trade agreements with various countries. Currently there are about 320 such agreements worldwide. Many countries actively use them to reach new export markets. We should also do this if we want to increase non-commodity exports at least by 2.5 times by 2020.  But we should do it simultaneously with the programme of modernising the industrial and services sectors, because otherwise this can lead only to the growth of imports. And we need a more aggressive – in the good sense – policy for entering the Asia-Pacific markets simultaneously with the programme for developing the Far East and Eastern Siberia.  

And finally, the seventh major issue, this is a budgetary rule, or rather a search for ways to combine development and modernisation policy and the policy of supporting the macroeconomic and budgetary balance. We agree with the position of the Ministry of Finance on the need for budgetary rules, that is, a sustainable, stable mechanism restricting spending on the needs of the moment. The main issue here is choosing a concrete option. In our view, a quality budgetary rule must, on the one hand, protect the budget against abrupt oil price movement, and on the other hand, it must not prevent efforts for economic modernisation and the development of innovations. And in our view, we should base our estimates on a three-year average oil price, because a longer term could excessively differ from the current situation. So a three-year price for 2012 will be $83 per barrel, and a ten-year price will be a $61 per one barrel of oil. 

But in our view, this is not enough. We need a second key that does not depend on oil prices. This is the restriction on the growth of budget spending in real terms by the GDP growth rate, that is, spending should not grow quicker than the economy. Simultaneously the budgetary rule dictates the level of guaranteed budget spending. Above this level, current revenues can also be partially spent, but they should not turn into long-term liabilities, they should be channelled to the projects with a limited term for implementation. 

This is all there is to the forks. In my view, the increased spending on education, healthcare, science and infrastructure jointly with structural transformations in these sectors is not a fork of the policy. In my view, this is a must. Unless we invest in these sectors and carry out transformations there, we are doomed to low growth rates, and within a decade we will not be accepted globally as a leading country with developed education, healthcare and science systems. That is why I have not included these points in the forks. But to achieve balance between budget spending, institutional transformations, structural changes in the sectors that are surely needed, we should adopt state programmes. By the way, the programmes on education and science are almost ready, and the Ministry of Education and Science jointly with us and the Ministry of Finance is finishing up work on these programmes.

This will mean a transition to a programme budget, not only to a programme budget, but also to erecting a functioning system of strategic governance in this country, and there will be a balance between policy priorities and budget restrictions.

And now the second part of my address on the results and goals on the main areas of activity of the ministry. 

The first area is investment climate and, in general, the conditions for businesses. We have launched anew the work of the Foreign Investment Advisory Council (FIAC) and we have actively incorporated the best foreign practices in our legislation. The Office of the Ombudsman (Ombudsman – Igor Shuvalov) has begun its work and it resolves specific problems of foreign investors. The Russian Direct Investment Fund (RDIF) has been created. I have to note that to date this fund has implemented some deals for a total of about $1 billion, and the fund’s $200 million investment has attracted $800 million in foreign investment. We have strengthened the platform of the St Petersburg Forum as a permanent forum for dialogue between the Russian authorities and businesses and the elite of the developing and developed countries on strengthening the global economy and attracting investment to Russia. Jointly with the Social Information Agency and business associations we develop concrete roadmaps on improving the business environment, including in the regions. Based on the joint model programme that we have developed, 77 regions have already adopted programmes on investment climate improvement. 

The work on improving corporate law has continued. Draft amendments to the Civil Code for creating an international financial centre have been prepared with the active participation of the ministry jointly with the working group and were submitted to the State Duma in March. The draft law is very important because it introduces into our law modern tools of risk distribution and investment attraction that are being used by Russian entrepreneurs (so far, they are only used abroad and consequently they are governed by foreign laws).  

Last year a special information resource was created, providing full access to information on bankruptcy proceedings and sale of debtor property. Our plans for 2012 include the creation of a similar resource for information on the activity of all legal entities. This will improve the transparency of everything happening with specific enterprises in the Russian economy.

It is necessary to finally resolve the issues of minority shareholder access to information, to protect their right to get the necessary documents and to simultaneously prevent the practice of greenmail.

Land is a key issue in practically every investment project. In 2011, we uninfied the system of state registration of land plots and property rights. We abolished the duplication of systems that had formerly existed. The work on translating services into an electronic format is concluding, so far without registration of rights. The creation of the institute of cadastral engineers has concluded. To date, about 20,000 cadastral engineers have been certified in the Russian Federation. A public cadastre map has been created. It makes it possible to get information on land plots on the Internet.

In the future we will need to provide electronic registration services, introduce mechanisms of real responsibility for cadastral engineers including through mandatory membership in self-regulating organisations, introduce system-wide changes in the law that we had recently discussed at our meeting and that will  make it possible to sell land for housing construction. This year there is also a separate task to conclude a cadastral evaluation of permanent buildings. This is an indispensible condition for taxing property according to market valuation.

The development of small businesses is a sort of an indicator of the quality of the investment climate. Currently the small business sector includes 19 million jobs and almost a quarter of the revenues of all enterprises in this country. We have prepared a draft law, and based on this law we introduced a system under which all unscheduled inspections are conducted only on agreement with the Prosecutor’s Office. As a result, the number of inspections of businesses at least halved. The list of licensed activities was halved, too. Since special conditions had been adopted for small businesses to connect to power grids, the number of such contracts grew by 1.7 times as compared with 2008. The programme of small privatisation has started and now small companies can purchase the property they use, but unfortunately only 26,000 small enterprises have taken advantage of this option so far. The law still has restrictions and we have prepared a draft law and we think it is necessary to adopt it in the short term.

Unfortunately, there is some bad news for small businesses. I have mentioned insurance payments for small businesses: they were raised from 14% to 30%, and up to 20% for small producers. What do we see? One of the indicators: the small business loan growth rate is being hindered. The year 2010 saw 24% growth of loans extended to small businesses (compared with 12% growth of loans extended to all enterprises), that is, these programmes began to actively develop and small enterprises got twice as much as other enterprises in general, while the year 2011 saw 17.2% growth in loans extended to small businesses (the growth rate was lower than in 2010) against 24% growth in loans extended to all enterprises. This change happened and it is worrying us. We will have to look into it and think how we can financially support these small companies. Here, in my view, the introduction of a patent system (the draft law is in the State Duma), the promotion of the prepared law on lifting restrictions for privatisation of property by small companies can play a great role. We also expect the development of industrial parks primarily under a private control.

The second area of our activity is the state’s involvement in the economy. It includes several directions – both privatisation and state purchases. A three-year privatisation programme has been developed. It seeks to reduce state participation in the economy. System-wide changes have been introduced in the law on privatisation, and they make it possible to improve the transparency of privatisation and use more flexible tools, and to simplify the access of participants to tenders. 

In 2010 the internet site torgi.gov.ru was launched  to improve trade transparency and to enhance competition, and over 120,000 properties were offered for sale, most of them small ones.

Apart from the privatisation programme, we believe that state companies should be commercialised as soon as possible. Limitations should be applied to state-owned companies concerning the purchase of new assets in competitive sectors (as of last year, state owned companies can only make such decisions after receiving the respective directive), and state enterprises should shed non-core businesses.

One of the ways for the state to participate in the economy is procurement. You have already talked about the draft law on the federal contract system. On April, 18th we submitted the draft law to the government and we expect it will be given prompt consideration and will be submitted to the State Duma as soon as possible.

Besides state procurement proper, the law on state sector companies’ procurement has taken effect this year. It could be described as a reputational law so far as its key demand is a transparent and predictable procurement policy on the part of state owned companies. Business Russia has proposed a public rating of state companies’ procurement activities. We support this initiative so that the best practices of state companies could be applied to all companies through legislation.

Another direction in the ministry’s activities related to the role of the state in the economy is increasing the quality of state services for the public. Multi-purpose centres are being introduced here; services are gradually transformed into a digital format. But when we speak about digital services, they are currently the simplest items such as issuing a passport, registering a vehicle, the basic work of the registry offices. Public discontent is not here as much as it is in social services – healthcare, education, utilities and housing maintenance services. However, the positive experience we have gained in IT and the techniques of serving the public can and should be used in more complicated public service systems.

Setting up electronic interdepartmental interaction has become an important step. All the federal executive bodies started using it on October 1. We see the statistics, that now agencies are sending 50,000 to 100,000 interdepartmental requests weekly, a process that was previously required of individuals and businesses.

We are facing a number of milestone dates concerning state services this year. By July 31 the regulation of services should be completed. This is a complex project that has been ongoing since 2005, and we are, in essence, ready to finish it this year. As of July 1 the interdepartmental interaction mode will start functioning at the regional and municipal levels. Also as of July 1 people will be able to send applications for state services electronically through the state services portal. And finally, we intend to have a thousand of multi-purpose centers by December.

In 2010 we introduced a procedure for regulating impact assessment (RIA). Currently over a thousand regulations have gone through that assessment. A third of the regulations were cancelled since they contained excessive and unjustified demands and limitations on entrepreneurs. Besides expanding the RIA programme and introducing it in the regions we also think it necessary for it to be active in the Eurasian Economic Commission to which a number of agencies were transferred that are important for business.

We started bringing order to such complicated and mixed areas as accreditation. Last year a new federal body – Rosakkreditatsia - began operating. We expect that it will balance the tasks of increasing the safety and quality of goods and lowering barriers for conscientious businesses as well as, which is very important, will lay the foundation for Russian certificates to be recognized abroad. This is extremely important when setting goals of increasing non-raw materials exports.

The part of our activitie is stimulating innovation and increasing investment efficiency. In 2011 the Strategy for Innovation Development and amendments to the law on science and state science and technology policy were adopted that had been developed by our ministry in collaboration with the Ministry of Education and Science. They allow us to lower administrative barriers when innovation activity is monitored in view of their distinct character. Last year we initiated a project with the Ministry of Education and Science on designing technological platforms for education, science and business. Forty-seven large state companies have designed innovation development programmes following the ministry’s instructions. 

The basis for funding investment is venture capital. Until recently, actually, until last year, Russian legislation had no provisions regarding venture activity. Last year several laws were passed eliminating  this legislative gap, and now venture capital can be invested in our country in the same formats as those accepted throughout the world. 

Moreover, an information system was launched for federal targeted programmes and the FAIP (Federal Targeted Investment Programme). It increases the transparency and publicity when decisions are made on budget investments, that is, this information resource lets us follow the funding stage and the commissioning stage for each facility. The state programmes alongside the federal targeted programmes will allow us to expand the practice of programme targeting both in planning and in budgeting.  

One of the examples of a targeted approach that was not reflected in Federal Targeted Programmes is the work in developing the auto industry. Viktor Khristenko and German Gref came up with an idea of an “industrial assembly,” and last year we arrived at the second stage of this programme. Already international automobile companies have built assembly plants with an annual capacity of over 1.5 millions vehicles. The percent of domestically assembled cars went up from 40 percent in 2008 to 63 percent while the import of passenger cars and lorries is half of what it was. Industrial Assembly 2 will be directed at increasing the deep localization of technical design centres.  

The automobile industry is in fact one of the first successful instances of the active industrial policy as well as the effects of the state programme in agriculture. In my view, we, along with the Ministry of Industry and Trade have to come up with an opportunities map for evaluating prospects for creating cutting-edge industries in Russia like the one that the pharmaceutical sector has began making, and this could be done within the framework of preparing state programmes. We have to clearly analyse our possibilities and prospects for finding sites for this manufacturing. 

Besides assisting in modernising certain sectors that we have been pursuing, we felt it was important to create conditions for so-called horizontal modernisation. Such projects as energy efficiency that are vital for all companies with no exceptions… the ministry has developed a basic law on power saving and increasing energy efficiency. We have drawn up 47 legislative documents and also – with the Ministry of Energy – a state programme on increasing power efficiency. Our working group has put pilot projects into place in fifteen regions, and following them a database of energy efficient solutions was compiled with different variants for funding. All of the proposed solutions are commercially attractive both for investment and for credit. In our opinion the introduction of these solutions across the country can save from 15 percent to 40 percent in energy resources in physical terms depending on the type of resource, due to measures with a cost recovery of five years. And the total potential for such recovered measures in housing and the social sphere - in residential housing and the social sphere alone! – is over 200 billion roubles a year. So our task for the coming years is a large-scale promotion of those programmes that have already been run in some regions. 

Yet another direction that I can not fail to mention is the ministry’s work on the pension contribution system. As of 2011, the number of people who switched to pension contribution system reached 74 million, in other words, half of the population has already joined the system. The state programme of co-financing the pension plan also works. And now the slide you see shows the number of people joining that. There are 7 million people now, or over ten percent of those employed in the economy. 

Of course, the situation in the financial markets where these funds are going is cause for concern. In our opinion, it is crucial, as soon as possible, to once again look into it and set up an effective mechanism of preserving the funds and guaranteeing yields as well as incentives for the development of voluntary contributions that would increase the pension provision in the future and will let us to keep the pension system r balanced. 

A system of socially oriented non-profit organisations has been organised. Last year we introduced this programme for the first time, and in the very first year of its operation since it was introduced at the federal level, fifty-two constituent entities of the Russian Federation adopted support programmes for non-profit organisations. About two thousand of them are now getting assistance through those programmes and are rendering socially needed services. 

And last, very briefly. The fourth component is integration in the global economy and support for Russian companies as they enter international markets. You have already talked about the significance of the Customs Union, the Common Economic Space and our joining the WTO. We see that the WTO offers opportunities primarily for entering export markets, and we should work hard at sending a signal to foreign investors. 

At the same time joining the WTO means the lifting of tariff protection for a number of industries. However, we have both internal mechanisms and WTO protective mechanisms to cut the possible risks. That is why the most important task for us, of course, in this respect is to help our economy adapt to the new parameters and to use the new opportunities. The task of our departments both in road maps and in preparing inter-governmental commissions, and business missions… By the way, last year we started to use this tool – arranging business missions in specific areas. Last year 150 business missions were arranged with definite tasks for certain projects. And now the task is to take account of all those new realities. 

We have stepped up the negotiating process on Russia’s joining the Organisation of Economic Cooperation and Development. This is being done jointly with all the ministries and agencies, and I hope it will also succeed. In 2011 we started the Russian Agency for Export Credit and Investment Insurance; this is very important for us and it is a project we had been working on for several years – now it is functioning. We will be hearing the head of the export agency speak about the first results. But this is really crucial – setting up a comprehensive system for export financial support.

I should say that, with the help of our programme, a network of regional centres for support of export-oriented small business was set up. Currently these centres are operating in twenty-eight regions. Also, work continued on eliminating  discriminatory practices against Russian companies abroad. In 2011 we managed to lift thirty-five measures directed against Russian companies, and, according to our estimates, this results in a 700 million dollar export increase. 

Our task is to complete the reform of trade delegation activities, you have also talked about this. Last year for the first time ever we assessed the work of our trade delegations according to the KPI using effectiveness indicators. We set up such indicators to assess not just the existing commodity turnover but particular actions of trade delegation when new non-energy exports emerge, technology and investment are attracted to Russia with a real contribution from the trade delegation. This, by the way, also helped with some staff decisions. We believe it is important  to continue this work and make trade delegations an efficient tool for increasing non-energy exports, attracting technology and investment (I absolutely agree with you), so that they will work more with small and medium companies given that larger ones can often deal with it on their own. 

I didn't have time to mention everything in my speech, it was too long as it is, but we issued a report on the results of our work over this four-year period, please, have a look. We tried to describe both our actions and how they and the overall situation were reflected in changing the situation in specific areas.  I would certainly like to thank all the employees of the ministry who work in various areas, the key areas of the economic policy. And I would like to thank my colleagues in the government, the staff of other ministries and agencies with whom we work. Although we might be involved in disputes from time to time, we all have a common understanding of the goals. We tried to be open in our work, and our decisions. Our results were achieved through discussion and were co-authored by members of parliament, representatives of the regions, business and the expert community. I would like to thank all those who took part in our work for their critiques and new ideas, for their support. I have high hopes that your cooperation with the ministry will be no less active and productive in the future. Thank you very much.  

Vladimir Putin: I have not just a comment but a couple of questions; I’m articulating my thoughts. They are plain, it’s not even for the ministerial staff as they are well aware of the matter and everything is clear to them. It is for the invited guests and for the public. You mentioned an overall tax load on the economy of 35.6 percent. But we know (at least I do) of discussions going on inside the government, that some colleagues think that if we exclude the tax load on the oil and gas sector, then the load on the non-oil and gas sector will be much less. What is your opinion?

Elvira Nabiullina: First of all, may I begin with the following: I think it is a mistake to exclude that load because the oil and gas sector is the most important part of the economy. 

Vladimir Putin: Right, that’s true. But we channel the oil and gas revenue to reserve funds and don’t use it for programmes. 

Elvira Nabiullina: Not exactly. We looked at the tax load across sectors (there are varying methods for calculating added value) but there are those sectors where it is rather high, going above the 35.6 percent in oil and gas sector, in certain industries (machines and equipment) it is 38 percent, in the textile and garment industry (I can’t give the exact number) it is over 50 percent. 

Vladimir Putin: How come it is 35 percent? 

Elvira Nabiullina: There are really very large sectors but there are others where the tax load is not so high. And we exclude that load from rent payments, I am not sure that the energy sector will be comparable with engineering. There are sectors such as finance, real estate etc…. That is why, we think that real estate, rental revenue should be taxed at a higher rate. 

Vladimir Putin: Ms Nabiullina is reluctant to answer my question but I will say it. According to some experts, including those in the Finance Ministry, the overall tax load when cleared of what I said is under 30 per cent...

Elvira Nabiullina: I may have misunderstood the question. Less than 30 per cent, and the Finance Ministry regularly compares that load to that in the developed countries.

Vladimir Putin: So it does.

Elvira Nabiullina: But if we compare it to the emerging economies with high growth rates, our tax load is smaller. 

Vladimir Putin: OK, all right. Now, the ministry proposes the indexation of gas, electric power and railway service prices like this: 15, 10 plus the inflation level, respectively. I am just articulating my ideas. I am drawing your attention to the fact that Russian Railways is in a more modest financial situation than that of the oil and gas sector and the power generation sector. Much more modest! And they have too many loans. This is my first remark. And the second is…I am not saying this should not be done, I repeat, I’m just thinking out loud. 

My second remark; you suggested that gas prices be indexed at 15 percent a year. We are aware of our colleagues’ opinions who are thinking: where are the incentives for energy savings and cutting respective costs? They believe there will be no incentive for a power efficiency policy, that’s number one. And number two, from a different perspective: we propose an increase in the mineral extraction tax on gas and to keep the prices in check. The time might come when investment opportunities for gas companies will become very insignificant, and our competitive advantages in power generation will be insignificant. But if this has not been given proper consideration, you just have to move little by little in this direction. I’m just pointing this out. 

Now about the fact that the state should shed its control package during the privatisation processes. I think this is absolutely correct, and in one of my articles I talked about it, and I would like to reiterate it now: I totally agree on that point. At the same time, in practical terms, I would like you to pay attention to the following (it is not a nice subject to talk about but we have to, it’s life): we were soliciting investment in electric power generation, and many of our partners responded to our appeal and invested billions of euros and dollars. Then – bang - we decided to slow the growth of our tariffs. And our partners have every reason to ask: what about your promise? We still keep the rate increases slow, guided by certain considerations. Why am I talking about this? We might face a situation when we leave certain assets and attract investment there and then we’ll keep the tariffs growth  in check, for objective reasons. That’s why everything you are going to do in practice should be given very careful consideration, do you agree? I absolutely support what Ms Nabiullina said about the proactive use of Russian venues for privatisation, IPOs, and so on. Absolutely, totally agree. Our companies should be given incentives for that.  

And now regarding the pension system. We all feel this is a very sensitive, crucial subject. You know my stance on it. There are two major points here: the first is related to the viability of the pension system itself for its deficit to be cut. If memory serves me correctly, we are going to accumulate four, right? – four trillion roubles this year. And the existing rules of using the funds do not let us use them effectively even for the absolutely reliable long-term domestic infrastructure projects: on the construction of the pipeline transport, railways, motorways. They are never going to disappear, they will definitely keep operating and bring in revenue, and the money will not burn – that is evident. Meanwhile, there are not enough tools for using the funds at this point, so I would ask the minister and you, colleagues, to join the Finance Ministry and Vneshekonombank experts in considering the matter and to advance respective proposals. 

Yes, a very important question is the budget rule. This is not the only issue in that budget rule, I agree, but what should be taken as an average price – an average for the past two years, the last three years or maybe the previous year?  Then the price is going to be high, but this will not be a budget rule, that’s true, yes. You know, we should start from some conservative assessments. We should look at the price carefully since we understand the cost of a mistake. What is the cost of the mistake? State funds allocated to nowhere and the growth of unfinished construction – this is where it could lead. We will just have to cut – you and I understand it that if, God forbid, the conjuncture changes… We will not be able to cut social obligations. We will still have to pay pensions, benefits, wages and so on and so forth, and the raised allowance for service personnel. What does that mean? We would cut investments and breed unfinished construction, so let’s have another discussion together, look into it, think about it and then take a Solomon-like approach, a correct one. Yes, surely expenses should not outpace revenues – this is evident. 

The cadastre. I asked you to generally determine from which sources and how fast we are going to solve that problem. This is a top priority! Not only in terms of capital facilities but also others, and also concerning residents, how regions and municipalities are going to be involved and how the federal budget will contribute. 

The industrial assembly experience in the auto industry. It should surely be evaluated and used for other industries. The situation in other industries is different, say, in aircraft building, there just a couple of main companies. If there are many companies in the auto industry and it’s easier to work with them to a certain degree, and the manufacturing time and the number of consumers are different in the auto industry, the situation in aviation industry differs somewhat. But the principles, definitely, could be used here too. This is really a positive experience with our partners and it should be used. 

Actually, these remarks show that your work is hard but very exciting. I’d like to express that the cost of the decisions made is very high for the economy and for the whole nation. I want to thank you for your years of cooperative work and wish you success. Thank you very much!