TRANSCRIPT: Dmitry Medvedev’s interview with European media

(Government.ru – March 21, 2013)

Transcript:

Dmitry Medvedev: Good afternoon everyone. I’m at your disposal. Let’s get to work.

Question (as translated): The first question is about Cyprus. You and President Putin have criticised the EU decisions. Don’t you think that the EU may be displeased with this and that the recent events may undermine trust between Russia and the EU in the long term perspective? Won’t that hurt relations between Brussels and Moscow?

Dmitry Medvedev: This is what I think ­ in trying to settle the debt problem, the European Union, the European Commission and the Cypriot Government are now behaving like an elephant in a china shop. Perhaps they miss the crisis and forgot what happened several years ago… I think all possible mistakes that could have been made under the circumstances have already been made. Among other things, these mistakes have undermined trust in financial institutions and not only on Cyprus. This is the reason for our stark assessment.

Naturally, we support attempts to put finances in order and make banks healthier and more open about account holders and beneficiaries. All these measures are absolutely normal but they should not lead to the destruction of the banking system. Regrettably, now the banking system on Cyprus is in a very difficult position and has actually been suspended, not to mention the fact that this EU member is on the brink of default. Therefore, we believe it is necessary to discuss such decisions with the interested parties, rather than make the excuse that it is inappropriate for Cyprus to discuss this with someone else. So let the EU make all the decisions ­ but I’m not sure this is good.

Will this affect our future relations? We must wait for the final decisions. No doubt, these events are a source of concern for everyone in the EU and may trigger a new series of local financial crises.

Now I will speak about what is happening there. I have already given my assessment and you have mentioned it. The proposed measure is tantamount to expropriation and confiscation. It is absolutely unprecedented. I cannot even compare it with anything except for some decisions made by the Soviet authorities at some period that did not bother about people’s savings. But we live in the 21st century in conditions of a global market economy and we all insist on respect for property rights and basic provisions on bank regulation.

Surprisingly, the idea of this withdrawal blocked the operation of all banks on Cyprus, including the biggest ones and banks with Russian capital that are normal and healthy and have no problems with balances or taxes. But they are unable to operate ­ their activities have been suspended. I am referring to current operations, not withdrawal of some percent from deposits. These banks perform an enormous amount of transactions, and all of them are controlled by the bank management. If their operation remains suspended, they will sustain huge damages, and the entire Cypriot banking system will no longer exist. It will simply cease to exist and some of our colleagues in the EU are outspoken about this. Apparently, the aim is to destroy it. In their opinion, this will benefit the EU economy and will help settle the crisis.

There will be other consequences as well ­ if such problems emerge, a vast number of clients representing government agencies, and probably some private companies, will take the matter to court. I’m sure they will sue the Republic of Cyprus and those who were involved in starting this fairly difficult period.

Naturally, we have our own reasons and national interests when it comes to Cyprus, because some of our banks keep their assets there. Many Russian entrepreneurs operate on Cyprus and far from all of them want to hide themselves behind the screen of its special jurisdiction. No, it is simply convenient to do business there. You know that many companies operate via SPV, and this is common international practice. We have a treaty on avoiding dual taxation with Cyprus but I don’t know whether we will need it under the circumstances. Maybe it will make sense to discuss its denunciation. There may be very many consequences. Therefore, I’d like to repeat that it is necessary to proceed with the utmost caution. A delegation of several Cypriot ministers ­ the finance minister and some other officials ­ is now visiting Russia.

First Deputy Prime Minister Igor Shuvalov met with them in accordance with my instructions. They are continuing to discuss the issue. I hope they end up making a well thought-out decision, one that will help Cyprus out while also preventing our relations with the EU from turning sour. Let me remind you that we are scheduled to meet with European Commission officials tomorrow evening and again for talks the day after tomorrow. And, given the recent developments, the situation surrounding Cyprus will be high on the agenda, of course.

Question: Mr Prime Minister, some progress has been made in negotiations on the possibility of dropping visa requirements between Russia and the EU. Can the Russia-Belarus Union State have any relevance for further talks, do you think? In Belarus, there is a mixed attitude toward that process. How important may this be as a factor, in your view?

Dmitry Medvedev: I’ll speak about the visas first. We have been in talks on that issue with our EU partners for quite a while now; that dialogue got underway in 2007, as far as I remember. We’ve been trying to boost it, and I have personally taken some efforts toward that goal. There are two tracks here. One track is about scrapping visas for EU nationals visiting Russia and Russian nationals travelling to Europe. We’ve made some headway along this track. For instance, in 2011 we agreed on what is known as a list of common steps. But there are also some problems ­ certain areas where our talks are stalled.

EU negotiators say some of the EU member states remain unconvinced about the validity of the objectives that are being pursued. I can only reaffirm that visa-free travel is in the best interest of Russia and the EU alike. Both sides stand to benefit. Five million Russians come to visit European countries every year and as many EU nationals visit Russia. So it would be mutually beneficial. At this point, the ball is in the EU’s court, so to speak. We’re waiting for them to finalise and voice their position, along with a plan of action. We are major trade partners and have a great many ties. The reciprocal benefits are obvious; there’s no need to try to sell the idea to each other.

As for the second track, it’s about easing visa requirements for certain categories of travellers. We’ve come some way on that already, reaching agreements on certain applicant groups. But this second track is no substitute for the first one. Rather, this is an auxiliary path, not the main road. Having said that, we’re continuing to actively negotiate here as well.

As for the Union State of Russia and Belarus, that’s quite an old alliance. Some processes within it move more quickly, others, more slowly. We stage various events. A session of the Russia-Belarus Supreme State Council took place a short while ago, with all the key officials, Russian and Belarusian, in attendance. We are continuing our cooperation; this is a form of integration that allows us to solve a whole number of issues. It cannot serve as a substitute for integration in the Customs Union and in the Common Economic Space, but this is a way for us and Belarus to reintegrate together.

Does this have any impact on visa-related negotiations? I’ve always believed that there’s no direct influence. Because, at the end of the day, it’s on behalf of the Russian Federation that we are talking with the EU, not on behalf of the Union State. Our Belarusian partners have not given us any instructions to this effect. And then again, the Union State of Russia and Belarus doesn’t deprive Russia of its sovereignty with regard to international law, so it will continue its visa dialogue with the EU as a sovereign state. And Belarus, of course, has every right to its own dialogue; there’s nothing wrong with that.

Question: Mr Prime Minister, I’d like to ask a question concerning our closest neighbour, Ukraine. Ukraine is not as important to us as a transit country now that we have the Nord Stream and the South Stream under construction. That said, Russia’s involvement in Ukraine’s gas supply system is on the agenda. Is this still a relevant issue for us? And what kind of format would be acceptable for our potential involvement in such a gas supply consortium? Would you agree to a trilateral model, with the involvement of European partners?

Dmitry Medvedev: First of all, Ukraine is of great interest to us as a partner, that’s for sure. Our interest has not waned, because Ukraine is our closest neighbour and a country with which we have an affinity and close partnership in a whole range of areas. But the topic of natural gas has changed somewhat in recent time. Admittedly, after the Nord Stream was launched and reached its maximum capacity last year, and the construction of the South Stream got underway, also last year, the prospects of our gas relations with the EU changed. And now, indeed, this issue is no longer as relevant as it was a few years ago. Having said that, we’re willing to discuss with our Ukrainian partners any issues related to integration.

As for the consortium, the Ukrainians should first of all try to understand what they really need. If they want this consortium to be bilateral or trilateral, they should make it appealing for us. Because this isn’t a must to us at the moment; we feel no urge to join in. But if some interesting projects are offered, if we get a sense that we are being considered for involvement as full-fledged long-term partners, we will resume negotiating the possibility, of course.

By the way, I recently had a conversation on this issue with the Ukrainian Prime Minister and his deputy in charge of the gas sector. Naturally, this is also discussed at the presidential level. President Yanukovych raised the issue during his latest visit to Russia. But, as I said, the offer they make us should be attractive. And it will be attractive only if we understand that there are guarantees for our interests ­ those of Gazprom and the state as a whole. And how can our interests be guaranteed? By ensuring that we do not enter into a situation in which we risk being excluded from the consortium, or having it qualified as contradicting certain EU regulations, for example, or as not being in line with the Energy Charter Treaty.

So, an alliance between Russia and Ukraine can in this case be formed only on condition of Ukraine’s withdrawal from a whole number of institutions, including the Energy Union accession accord. That is, if Ukraine is interested [in our involvement]. If not, then we’ll go our separate ways and Ukraine could then remain in any international alliances as it sees fit, with this being its right as a sovereign country. But if we enter into an alliance, we should make sure our interests are upheld. Talks on this issue continue; Ukrainian partners send us signals every now and then but the process hasn’t advanced beyond those signals so far. Well, we’ll see as we go along.

Question: Speaking of Cyprus, is Russia willing to provide some additional aid for it, through Gazprombank or some other Russian banks? And what should Russia expect in exchange? Offshore operations with natural gas on Cyprus, perhaps?

Dmitry Medvedev: Cyprus is a member of the European Union, and it is the EU that formulates its proposals. Another thing is that, as I said, they should be formulated with care, otherwise we may become witnesses to a new stage of the international financial crisis. Initially we agreed with our EU partners that they would prepare a set of measures to restore Cyprus’ solvency (the country is, indeed, in an extremely critical condition financially) and we would then consider that package to decide whether our involvement was feasible. Let me remind you I had a $2.5 billion loan disbursed to Cyprus several years ago. That is to say we are contributing to Cyprus’ bailout one way or another. And we’re willing to discuss the issue further. In which form can this be done? Today, our [EU] partners have brought along a whole package of proposals, including a set of material assets that they believe Russia could consider buying.

So it’s EU proposals that should come first, preferably in line with the norms of civilised co-existence and with universally acknowledged norms of international law and national legislation, as well as with the EU member states’ constitutions and civil codes, guaranteeing the immunity of private property. We’ll respond when we have something fresh on the table. So far, we haven’t been offered any fresh ideas.

You’ve mentioned deposits, including gas ones. That’s not so simple. First of all, I have only a vague idea of their value. And, secondly, we know there are some problems with Turkey there. So, as I said, the issue is a complicated one. But we’re willing to hear whatever proposals the Cypriots have and will try to understand their reasoning.

The situation is complicated because… When answering the first question, I forgot to say it’s obvious that whatever decision is made ­ taxing the bank deposits (something I would qualify as theft) or stopping short of that measure ­ Cyprus is in for mass withdrawal of cash and capital flight will weaken its banking system even further. Once again, if that is the idea behind the EU decision, then this decision is a strange one. Very strange indeed. There will be an adverse effect in any case. Our objective now should be to try to reduce those negative implications to a minimum both for Cyprus and the global financial system. We’ve made so much effort in recent years trying to rebuild it, restoring investor confidence. I can remember all those G8 and G20 discussions about the importance of restoring trust. Well, it’s something very easy to destroy and restoring it can take years.

Question: Have you given any thought to the naval base in Cyprus?

Dmitry Medvedev: We’re willing to consider various options. But I’d like us all ­ the journalists, our readers, and all those who care – to understand that Cyprus’ problems are up to Cyprus to resolve. With Cyprus being an EU member state, the European Union could offer a helping hand. And then, there are some third countries with vested interest in Cyprus. These, too, may contribute, but they shouldn’t be expected to play any major role here.

Question: Mr Medvedev, you have repeatedly said that you believe in the future of the euro, and there’s no need to review the share of the euros in Russia’s reserves. Isn’t the Cyprus precedent a good enough reason to rethink this approach?

Dmitry Medvedev: I would like to stay optimistic on this account, but I have to admit that this is something to ponder. If this is possible in Cyprus, why not in Spain, Italy, or any other country faced with financial problems? Next thing you know, they will begin to seize deposits. This is something to ponder. Nothing has changed so far. I mentioned on several occasions that 41% or 42% of our reserves are denominated in euro. That’s a lot of money. Just like any other country, Russia wants to operate in a predictable environment. The proposal that was made is not just unpredictable; it shows a degree of incompetence. I will not go deep into this now, but I’ll say it to my old friend Jose Manuel Barroso when I meet with him tomorrow morning.

Question: Do you think that Russia is being blackmailed by the steps that they intend to carry out in Cyprus? Is there a way out of this situation?

Dmitry Medvedev: I think that the rumours about the specific deposits that are indicative of semi-legal schemes for withdrawing money from Russia are exaggerated; they are not as big as they claim they are, because a lot of our public companies have accounts in Russian and foreign banks, which is convenient for obvious reasons. It has always been a convenient jurisdiction for carrying out standard transactions, including the acquisition of shares and servicing current financial and economic activities. Therefore, this issue should be further looked into. One thing I can say for sure: Russia would benefit greatly if they could give us all of this information about the people who withdrew money from our economy, so that we could assess their actions properly and hold them accountable for their actions. Perhaps, this money would return to Russia. Overall, this campaign could eventually benefit us because some of the money will go back to Russia. But let me stress again: I’m not talking about illegally exported capital. Let them look into the circumstances, establish the beneficiaries and locate them. We are all for it. We didn’t start talking about the need to relieve the global economy of offshore operations for nothing.

By the way, we should look at places other than Cyprus as well. There are many special jurisdictions in the world. We need to understand whether the British Virgin Islands are better or worse than Cyprus, or the Bahamas, or something else? There should be no double standards here. We might as well decide to create a special offshore zone in Russia and lure in lots of international capital. I’m just thinking out loud about offshore zones, but still …

So, speaking about making the situation more transparent, we are all for it. Most importantly, we should avoid the disruption of normal operation of the financial system, because a large number of Russian open public entities are working via Cyprus. They have their money blocked for no particular reason, because the source of this money is obvious. This money is legal and is used by state-owned entities. That’s why we have to take such a tough stance with regard to the events in Cyprus and the Cypriot debt.

Shall we talk about something else? Or will it be just Cyprus?

Question: Last thing about this issue. It may have sounded a bit provocative, but for the German public … Why should German taxpayers save Russian assets and accounts in Cyprus?

Dmitry Medvedev: Here’s the deal. I don’t think you can frame the question in this way and ask why anyone should pay for someone else. The question should be put differently: are we following the rules or not? Why have we created the banking rules and international conventions? What’s the point of participating in the International Monetary Fund? What are our meetings and discussions about the development of the international financial system for? I believe we are doing all this to make it clear, transparent and civilised. Thinking that this is some kind of payment for the benefit of some Russian deposit holders is as valid as an assumption that someone is paying for British deposit holders who also have a strong presence in Cyprus. The number? Well, we need to specify it. I think that this is idle talk based on emotions, not an understanding of the real problem. It’s easy to destroy the financial balance and extremely difficult to restore it. That’s what everyone should keep in mind: those who make decisions in the European Union and individual EU taxpayers.

Question: I would like to ask what Russia thinks about the third energy package. This is an important issue, I think, and Russia does not agree with it. Why do you think Europeans should reject it? The third package, for example, allows Poland to buy gas from Germany cheaper than from Gazprom, and even Ukraine could theoretically benefit from using European gas hubs. Why doesn’t Russia want to adapt to the third package in the gas trade?

Dmitry Medvedev: We are not opposed to adapting. Moreover, we are not opposed to the third energy package. We understand that regulating gas supplies to its territories is the sovereign right of the European Union. But we are against certain provisions of the energy package, which, we believe, undermine our interests, and are, by the way, inconsistent with some basic documents, including the framework agreement between Russia and the EU and some bilateral agreements.

We are talking about the third energy package as a way to resolve certain problems. We are not trying to get into the jurisdiction of the European Union, but we thought it would be appropriate to discuss certain things with us because we are an important supplier of energy to Europe. We supply one third of its gas and oil. But we are not an exclusive partner, of course, because Europe, all EU countries, have an option to buy the remaining 70% from other counties. Therefore, we do not have a monopoly, even though we are a major participant of the European energy market. That is why I have repeatedly told my colleagues during Russia ­ EU summits and during Russian Government – European Union meetings that we want you to hear us. We do not mind that, in some cases, individual states receive cheaper gas based on this energy package, no problem. Of course, we are interested in receiving a fair price for our gas based on existing rules. But if there are any schemes that minimise costs, we are all for them. We are also following new trends and ideas that exist in the energy market, so we cannot ask the EU to reject the third energy package. However, we are strongly suggesting that our partners pay attention to the message that we are trying to get across. If we fix certain things, including, for example, supplies to the EU countries’ territories, including the participation of our companies and the possibility to create holding companies, aka vertically integrated companies, which is not to the detriment of the interests of individual consumers, we think it would be more fair and it will take care of our concerns in the area of long-term cooperation. We are interested in long-term cooperation with the EU that will last for decades.

We understand that we can criticise hydrocarbons from the environmental point of view and from the point of view that it is not the most modern type of energy. But what else do we have? Nuclear energy is not used by all countries, but we are all for it. Hydrogen fuel has a long way to go before it becomes a staple fuel for power stations. There is no alternative to hydrocarbons for the next 30-50 years, so let’s just be polite with each other.

Question: What would you say, if these issues are discussed within WTO?

Dmitry Medvedev: I’m not sure I understand your question. Do you mean our participation in WTO? What do you mean?

Question: It seemed that you said that the European Union is trying to liberalise the market and you are trying to use the international principles of the law to safeguard your interests within the WTO. Can you answer this question?

Dmitry Medvedev: There is no contradiction between our accession to the WTO and the attempts to liberalise trade regimes, such as to fight protectionism and mutual trade imbalances. There are still specific features of the gas market that cannot be ignored. We cannot apply one-size-fits-all schemes to all energy cooperation formats. If we go back to gas, there are rules for dealing in pipe gas. We, Gazprom, for example, are always criticised for gas price formulas that we use. The Dutch came up with this formula many years ago, and it’s been in use for 30 years without any problem, but now they are saying that Gazprom invented it and it is a secret Russian weapon to bleed poor Europeans dry. All countries have always used this formula. For example, LNG (liquefied natural gas) production is governed by totally different rules. It has its own market which is also developing. Next comes shale gas with its own set of rules. We do not see any prospects there for us, but there will be rules because the product is complicated. On the one hand, it helps individual countries, but on the other hand, it has its own environmental problems, so there may be no single model.

Question: Do you expect any revolutionary changes in the natural gas sector? Aren’t you concerned that these changes, in particular shale gas, are a threat to the Russian market and Russian interests?

Dmitry Medvedev: Shale gas production by hydraulic fracturing had to be invented just to make Russia think about its future. Therefore, assuming that this is a disaster after which Russia will run out of its exports money is wrong, because we must work to improve the structure of our exports and stop focusing on  hydrocarbons. That’s our major problem, we just have to adjust our economy. But shale gas is still a fairly complicated and controversial issue. We do not know yet how things will turn out eventually. Whatever they say, its production cost is still high compared to field gas production. But I agree that the technology will change. Importantly, innovative technology shouldn’t damage the environment, because risks are high. Anyone who has ever taken an interest in hydraulic fracturing understands that it has the potential to poison vast areas. I hope we will be able to avoid it, I mean all countries that deal with it, the Americans included. Clearly, this technology is far more complex and dangerous than any other, and we need to make sure that it doesn’t cause harm to the environment.

Similarly, we need to improve nuclear technology as it applies to the development of nuclear power engineering. Fukushima has shown that on the face of it the international community is in control of everything, but isolated technical solutions are not sufficient, so everyone scrambled to check the status of their nuclear power plants. I believe that though this was a tragedy, it still had a positive revitalising effect for the global nuclear power engineering.

Question: What about the consequences of using nuclear power plants vs. shale gas production technology?

Dmitry Medvedev: I do not consider myself an expert in the technicalities of gas production, although I was chairman of the board of directors of Gazprom for eight years. My point is that we are sailing uncharted waters. We have been producing gas from gas fields for many years, whereas shale gas production is still new and uses highly sophisticated production processes. I’m not saying that it’s fraught with anything as dangerous as an accident at a nuclear plant.

Nevertheless, this technology is quite sophisticated. And we all simply have to assess its possible impact. You need to realise that this does not mean that Russia is against it. It probably means that natural gas produced by Russia is the only road to happiness, and that everything else is detrimental to our economic interests. We will therefore resist it. No of course, progress cannot be halted.

Question: If there is a sharp drop in oil and gas prices will your economy cope in such a situation? That’s the first question I wanted to ask.

Dmitry Medvedev: Of course we are not interested in any kind of rapid avalanche processes because any extremely low or extremely high energy prices are equally bad for the global economy and for the Russian economy. Because when prices are low there is no development and if they are high the same thing will eventually happen. We believe that the current situation with price fluctuations reflects the current market balance. This situation can ensure global economic development and on the whole it helps us to accomplish these objectives. But, of course, rapidly falling prices are a problem for the Russian economy. This was highlighted by our experience in 2008 when the weak spots of the Russian economy were exposed. We have to discuss this honestly and in fact everyone understands this. But this does not only apply to the Russian economy. It concerns all economies that rely on supplies of raw materials. Of course they have all been hit hard. Export-oriented economies faced problems, so we must restructure exports, and we must deal with domestic demand so that international developments do not affect our interests so much.

Question: I would like to move on from these complicated technical discussions and focus on political issues. The European Union and Russia plan to implement a number of projects with no final deadlines. This includes negotiations on a new framework agreement between Russia and the EU member states. What is the reason for delaying the implementation of these projects? Do you see any way out of this blind alley?

Dmitry Medvedev: I like the idea of a partnership for modernisation in principle and because I voiced this idea some time ago together with Mr Jose Manuel Barroso. I would like to remind you that, to the best of my knowledge, this idea was originally proposed at the 2009 Russia-EU summit in Stockholm and was subsequently formalised, and we have signed a number of agreements and memorandums on partnership for modernisation with European countries. Do I believe that this partnership has failed? No of course not, because we are working very hard. But I would like to remind you that our work includes three policy priorities.

The first priority is the joint technological modernisation of such areas as communications, space exploration and industry, overall anything that is of interest to us and everything which may be of interest to our partners. This includes energy efficiency by the way. The EU has accumulated substantial experience in this field and we face major problems here.

The second priority is partnership in various social welfare projects, which I also consider to be quite reasonable and interesting, especially when it comes to major cultural projects.

And, finally, the third coopera tion priority is partnership between professional communities, partnership between those working in universities and partnership between specialists. This is about interpersonal communication, so to speak. On the whole, I believe that we have achieved some quite impressive results here. More and more Russian lecturers and students have started travelling abroad and studying at European universities over the past few years. Many more European professors have started coming to Russia because we have started financing this programme and issuing grants so that academics and professors can come and lecture here. We consider this to be very important.

So I think that on the whole this idea has come off but of course the situation is far from ideal. Our partners are probably not very happy in some cases, and we believe that there is no development. But in any case, as I see it, we cannot go back on those positive achievements of the past few years.

Question: On the situation in Cyprus, energy-efficiency and visa issues … Is it possible to work out a smoother and more direct decision-making procedure in the context of cooperation between Russia and the EU? What do you think about this?

Dmitry Medvedev: I started our conversation with some harsh criticism for some decisions. But of course I realise that our European partners find it quite hard to formulate a consolidated stance. I have repeatedly discussed this issue with my colleagues, including Mr Herman Van Rompuy and Mr Barroso and other European Commissioners and, of course, the leaders of the EU member states. There are 27 EU members, is that right? This really is a very complicated process. It is hard to reach any specific decisions, especially on such sensitive aspects as the economic situation, the financial situation and unemployment. The leader of every European country thinks about this. Therefore we do not underestimate the difficulties faced by the European Union. We would like the EU to find adequate, wise and prompt solutions to all problems. This is a vital interest of ours because we have a huge trade turnover with the EU. The EU is our main partner and we live in a common European home. We have one common European identity. So for us it is very important that the EU overcomes all its problems as quickly as possible. And I also hope that it is important for EU that Russia does not get stuck in any problems because this would eventually hamper the development of Russian-European integration and relations between us.

We regularly speak with our partners by telephone. These discussions are held virtually every week, including discussions with individual European Commissioners and the leaders of the EU and the European Commission. We have held numerous summits. Sometimes it seems that there have been too many of these summits but on the other hand it allows us to accomplish various objectives. A summit involving EU leaders, the President of the European Commission and the President of the Russian Federation was recently organised. We are currently set to hold an inter-governmental summit involving the Commission and the Government of the Russian Federation. These events are being held within two or three months of each other. In June, we will hold the next Russia-EU summit, so in effect we are meeting every three months. These events are quite frequent, but most importantly they need to be productive.

Question: Returning to conflict situations, including accession to the World Trade Organisation, the car-scrapping tax and exorbitant tariffs … How do you respond to the threats coming from the European Union in a number of cases?

Dmitry Medvedev: We respond attentively to all EU questions. The fact is we are partners, not irreconcilable rivals. Of course we will discuss all the issues raised by our European colleagues at this upcoming meeting of heads of government, including the above-mentioned tariff issues, if they affect our colleagues and our friends. We will also discuss the so-called car-scrapping tax. Naturally, we don’t view this as a measure for dealing with rivals. We consider it to be a forced measure that is linked with the need to improve the overall environmental situation. But we also hear your arguments, and of course our decisions will be influenced by various factors, including, naturally, prospects for our work, our cooperation with the EU and the WTO obligations which we have undertaken. We are currently formulating our approach towards these issues and we will outline this approach in the near future.

Question: Mr Medvedev, I would like to ask one more question about Ukraine. You said that you consider the three-plus-one formula to be unacceptable. After that, Prime Minister Mykola Azarov said that Ukraine was considering the status of an observer in an advisory capacity. Do you find this option for involving Ukraine in the work of the Customs Union to be acceptable? And how justified are Mr Azarov’s statements that Ukraine might influence the decision-making process inside the Customs Union under this status?

Dmitry Medvedev: The answer is simple. Of course we would be happy to admit Ukraine. And we are currently formulating the approaches to Customs Union and Eurasian Economic Community membership. There will probably be full membership and observer status, just like in other international integration organisations.

However, observers will of course be unable to influence any processes because they are observers. Naturally we will be very respectful of an observer’s stance  and analyse their views. But observers do not vote and they have no specific rights like those exercised by parties to the Eurasian Economic Community or for instance members of the European Union. There are also all kinds of institutions there, including associated and non-associated institutions. But these institutions do not vote. In the long run, their influence on key and crucial decisions is negligible. That is why each country has to understand what it considers to be important because, as a rule, observer status is motivated by two considerations: To sniff the air, so to speak, and to understand what’s happening.

There is nothing offensive about that, but in that case there will be no advantages. And secondly, this is, of course, only the first stage of joining some integration organisation. Viewed from this perspective, you are welcome. But then we must tell our Ukrainian friends once again that until they join fully ­ not according to the three plus one formula, but fully ­ they will not enjoy all opportunities and privileges offered by the Customs Union. They will be an outside party.

Question: President Putin has announced an increase in spending on the military sector of the economy with a view to modernising Russia’s economy. What are the threats which you may face in the future once you have increased your military power?

Dmitry Medvedev: I don’t want to involve President Putin here because the decision to build up the military sector was taken when I was President. That is true. It was I who built it all up so I am the main militarist and I argued with some Government members about it and they expressed their disagreement. At one point I even had to sack one of them because he said that he did not agree with some of the decisions taken on the budget. But, speaking straight and simple, we understand what a military sector is in any country, especially in Russia, which is a huge country and a nuclear power. This is not just a pretext for building up some military muscle, it is in effect a step towards the modernisation of the economy itself. Today I was speaking at an event dedicated to the development of our defence industry sector. All over the world ­ in Russia, the United States, Britain and elsewhere ­ the defence sector has always pushed the development of cutting edge technologies. We have jet fighters, space communications and our beloved Internet because they were thought up at some time by the military for their purposes but later proved to be very useful for the whole economy. So by developing the defence sector we are, of course, developing the economy as a whole. To be frank, we faced hard times in the 1990s, we just fell behind, we now have outdated weapons and we need to replace them. We are a normal big country and our current objective is to replace 70% of our weapons by 2020, we must do that. Everyone is doing that, and we are doing it. We did not do it in the 1990s, and now we need to fill this gap.

I see no contradiction here with economic modernisation. Another thing is that there must be no bias and money should also be allocated to other sectors. There is one point I would like to stress: all over the world the defence industry sector is tied up with the state one way or another. In the United States, it is tied up too but less than in other countries. For this reason the state is always directing more money from the national budget into national defence and into rearmament, while a considerable number of other economic projects are financed by private partnerships, private investment. It therefore seems to me that we have not upset any balance yet.

And finally,it is very important this money is spent wisely. It is the responsibility of the state, the responsibility of watchdog agencies, and the responsibility of the Government to see to it that this money is spent on real programmes and spent in accordance with the guidelines we have set for ourselves.

Question: I would like to ask the Prime Minister about one very specific Russian region ­ Kaliningrad. It is surrounded from all sides except the sea by the European Union. The Union is, of course, very interested in seeing the region develop dynamically. Please could you comment on energy. Is it true that you are discussing with European Union colleagues the possible integration of Kaliningrad’s power grid with Europe’s? Is integration possible with ENTSO-E, which is European?

Dmitry Medvedev: I think if we could reach such a degree of integration between our grid systems and economies, it would be very good news for Russia and for the European nations because we have a shortage of power in some of our regions and shortages in some European territories. Basically, we are prepared to discuss with our European colleagues the issue of local energy shortages, including the supply of our electricity to European countries. That would be a good idea, I think.

Question: Concerning relations between Russia and the EU. There is one issue here which involves many contradictions ­ human rights and democracy. Is there a shortage of human rights and democratic rule in Russia? If so, how can it be tackled?

Dmitry Medvedev: This question is very hard to answer briefly, but I will try all the same. We hear all sorts of reproaches hurled against us. Some of them are completely wrong and even offensive to our country, but some are probably just ­ we are not perfect after all, we make mistakes when taking certain decisions and are then forced to put them right.

The issue concerns fundamental points. We proceed from the fact that we share common approaches to the development of the political system and that these are to defend human rights and freedoms and basic constitutional liberties. We are no different to other European countries. We do not perceive for ourselves any separate or special democratic path based on certain Russian specifics. We believe democracy is in general quite a universal thing. But democracy, constitutional order and the political system ­ and this is also true ­ bear a national character in every country. Even countries that shared a common history lived through different periods and have their specifics in constitutional arrangements, in the form of rule (be it a presidential or a parliamentary republic), or the political system ­ I mean the existence of certain political parties, their formation, their participation in political life, and so on. Such nuances are everywhere.

What are our nuances, if any? Whatever you say, we went through a very difficult 20th century.  Yes, some countries, like those in Eastern Europe for example, indeed around the whole world, also lived through a far from simple century. But their integration into totalitarian systems of rule was to a far lesser degree than in the case of Russia. In the Soviet era there was no democracy for many years, that is no secret. If we turn our gaze to pre-revolutionary life, we will also see absolutism and no democracy there either, and for understandable reasons. There was a revolution, a struggle for modern political arrangements, but no democracy.

This means only one thing ­ we are taking the first strides to developing our political system and democratic institutions in this country. We cannot be judged by the highest standards or from the top positions. I suggest this test: if, 100 years from now, there are still problems left, then something must have gone wrong during these years.

But I have always said and I am saying now: our democratic institutions are only 20 years old. And one has to bear in mind that many traditions did not exist at all. This is what makes the Russian state different and it has to be taken into account.

So I would like my European colleagues, friends and partners to hear these arguments from us. Incidentally, we never shy away from constructive criticism. We can react calmly to some things. I have always listened to what the European partners have told me. For example, the justice system, obviously there is much we still need to build up in the justice system, so from that point of view we are very much interested in how the judiciary structures are working in the European countries. There is no need to be shy: we should borrow some traditions, approaches, legal and political traditions.

Question: A technical question. There is a Russian citizen named Gerard Depardieu, I would like to ask about your attitude to him.

Dmitry Medvedev: As a cinemagoer I have always thought of him as a talented actor. I think he remains that; if anything, he is becoming more colourful every year, if you consider his appearance. As for his decision, well, that was his decision. I think that in some ways, it was an emotional decision, but on the other hand it was probably well considered. He is a grown-up man and an established actor, and if he made this decision he must have had his reasons. In any case, the decision taken by the Russian side ­ it’s the President who grants citizenship here ­ does not pursue any hidden agenda. A celebrity turned to us for help and I think we could hardly refuse help under the circumstances. I think he will have a very full life in various places in the Russian Federation.

The only thing I would say, and that does not apply to Depardieu, everything is all right as far as he is concerned, but in general I would recommend some of our governors not to be so lavish in presenting apartments because we have a long waiting list for housing, not all people can afford to take out a mortgage, and when some well-healed people get a flat as a gift, this causes social tensions, though of course I have sympathy with someone who wants to please a celebrity.

Question: Mr Medvedev, today the President submitted the candidacy of Elvira Nabiullina for Central Bank chairperson. You have already said that you look forward to close cooperation with her if she is elected to this post. Do you foresee any changes in the Central Bank’s policy?

Dmitry Medvedev: You know, the President and I had discussed the best replacement for Mr Ignatyev (Chairman of the Russian Central Bank). He is an experienced man, but under the law he can no longer remain in this post. Now you see the result of these consultations. I think Elvira Nabiullina is the best candidate because she is an experienced professional. She was a government minister, and she has been the President’s economic adviser. She has extensive experience and I think that is important.

Going back to the Cyprus issue, you know, the head of the Central Bank should not only understand the reserve requirements and what Basel II and Basel III are all about, but it should be a person with broad macroeconomic horizons so as not to take decisions that would throw the situation off kilter.

As for the overall approach, I have talked with Elvira Nabiullina and with Sergei Ignatyev and of course the basic policy must not change, if only because we have covered a very long distance over the past years. On the whole our banking system has in recent years, under Ignatyev at any rate, has proved to be stable. Even during the global financial crisis we managed to get it back to normal fairly quickly and the credit for this must go to Sergei Ignatyev and the people who were involved in making these decisions. Why renounce time-tested approaches?

Question: Mr Medvedev, could you speak as a lawyer and not as Prime Minister about the air crash near Smolensk…

Dmitry Medvedev: You know, I still think that in spite of the problems in the inter-state dialogue between Russia and Poland, in spite of the complicated pages in our history and rather recent tragic events, including the death of President Kaczynski and many Polish officials, we have managed, if you like, to create a new framework of relations. In fact I am very pleased that I have been involved in this. My visit and other meetings with the Polish leaders enabled us to look frankly and in a new way at many problems. True, we have not agreed on everything, we are in the process of political dialogue and by and large everything is perfectly normal. If we continue behaving like this, I think that at some point we will be able to say that the former problems in our relations have gone away and everything is normal. Anyway, we very much count on this ­ the Government of the Russian Federation and of course, the President, who is in charge of international policy under our Constitution, will do everything towards that end.