TRANSCRIPT: VTB Capital RUSSIA CALLING! Investment Forum [Putin Remarks with Q&A]

Kremlin.ru – October 2, 2012 – Moscow

The Forum is taking place in Moscow on October 2-4, 2012. Among the main topics for discussion are the strategic priorities of the country’s development in terms of changes in global economic markets, the creation of the Common Economic Space and Russia’s accession to the WTO.

The RUSSIA CALLING! Forum has been held annually since 2009 and aims to develop an effective dialogue between the Russian business community and international investors, as well as to attract foreign investment in the Russian economy.

Address at the plenary session of the RUSSIA CALLING! Investment Forum

PRESIDENT OF RUSSIA VLADIMIR PUTIN: Good afternoon, ladies and gentlemen,

I am very happy to welcome once again to Moscow representatives of major companies, business leaders and investors.

Despite its youth, the forum organised on the initiative of VTB Bank has become a significant event in the economic life of our country and in the international calendar of such events. It serves as a useful platform for open discussions on complex economic issues and elaborating new approaches to the investment policy.

The name of the RUSSIA CALLING! forum reflects the nature of our policy of openness and partnership. Our goal is to maximise the profitability of investing in Russia, working in Russia, creating new jobs and setting up production here. We see this as a real indicator of our country’s competitiveness and the efficiency of all major state and economic institutions.

The main question is what to do first to transform Russia into a centre of attraction for foreign and not only foreign but first and foremost our own domestic investments and capital, to make sure it obtains the necessary resources for modernisation and further economic growth.

Today, Russia has an impressive potential for sustainable development. It is among the world leaders in terms of key macroeconomic stability indicators. National debt, as you know, is only about 10% of GDP, and the debt to foreign investors, our lenders is only 2.5%. Foreign currency reserves at the end of September reached $522 billion. Inflation fell below 7%; we repeatedly cited these figure: 6.1% last year, the lowest inflation rate in 20 years. We expect it to fall to below 5% by 2014. Keeping inflation down remains one of our top priorities.

We did not restrict the freedom of capital flow even during the global economic crisis, although the temptation was there and experts suggested this course of action. We could have introduced such restrictions to protect our interests, but we chose not to do so because we believed that tactical losses could become strategic, and it is better to wait it out, to gather strength and hold out in this difficult situation.

Investment inflows in the period from 2009 to 2011 amounted to 3% of GDP. This is above the average global level. In comparison, this figure in European countries, Brazil, China and India did not exceed 2% of GDP in the same period. Moreover, the main sources of investment in Russia were Germany, France, Sweden and the Netherlands, in addition to the traditional offshore zones. We realise that investment form the Netherlands and Cyprus is the repatriation of Russian capital, but that is good as well.

Today, despite the slowdown in almost all neighbouring regions, our economy continues to grow. According to the Economic Development Ministry, GDP grew by 4% in the first eight months of 2012, and experts believe that this trend will continue on average over the next three years. Although lower than before the crisis, this growth is much more balanced and higher quality. Actually, just the fact that there is any growth at all is a positive development because we don’t see it much in the current global economic climate. I want to emphasise that this growth is not based on a steady increase in oil prices or amassing foreign debt by banks and companies. That is, this growth is not based on oil revenues and debt bubbles. Naturally, I will admit that the commodity market has been doing well and that has had a positive impact on our economy, but it has not been booming either.

However, we also take into account the serious risks associated with the uncertain situation on foreign markets. We cannot but be concerned by the clear signs of recession in some European countries ­ and the European Union, as you know, is our largest trade and economic partner: more than 50% of Russia’s trade is with EU countries. Industrial production and GDP have slowed down in China and social tension is growing in a number of countries, which is a negative phenomenon in itself but it also has a harmful effect on the economy.

We certainly hope that the measures taken by our partners will improve the situation. For our part, however, will be do our utmost to protect our interests against any negative developments in the European and in the global economy.

Thus, in drafting the budget for 2013-2015, we implemented the budget rule for the first time. We began to work on it two years ago and discussed it at length. In fact, the main parameters of this rule were worked out by the end of 2011, and now the Government has finalised and adopted it.

The budget rule logic is based on the premise that the dependence of the Russian budget on oil prices must decrease. This will be a stable long-term trend. Over the next three years, the deficit of non-oil and gas revenues will fall from 10.5% of GDP in 2012 to 8.5% in 2015. I must say that the budget rule is a necessity for us because the revenues from the oil and gas sector will inevitably decline and our fiscal policy cannot ignore this.

In case of a severe change in the global economy in 2013, the budget provides for anti-crisis measures, including redistribution mechanisms for budgetary allocations, for example, the option to invest up to 150 billion rubles [$5 billion] in the recapitalisation of the banking sector should there be a crisis. We don’t expect it to happen but, if required, this can be done through the exchange of federal bonds for bank securities.

In addition, in some important and strategic industries companies can be granted further state guarantees. Together, these measures will help stabilise the economy in almost any scenario. However, we see the main guarantee of stability in the policy aimed at supporting growth and promoting business, trade and investment.

In this regard, I would like to mention the landmark event of the year: Russia’s accession to the World Trade Organisation. For us, participation in this organisation is a key foreign economic priority. We hope that this step will have a positive effect on the investors’ attitude and will pave the way for promising long-term projects. We have always believed that accession to the WTO will make our economy and the rules by which it operates more transparent and understandable to investors from any country around the world that is a member of this organisation. In the coming years, we intend to join the Organisation for Economic Cooperation and Development.

Ladies and gentlemen,

Today the positive dynamic of the Russian economy, the accumulated safety factors and our reserves allow us to set new ambitious goals. At the same time, we realise that there are no simple solutions or easy growth opportunities.

Just three or four years ago, the world believed that global problems could be quickly resolved. Now everyone has realised that we need time and unconventional approaches to overcome the challenges we face.

We must substantially alter the basic economic development model in order to recover from the current crisis. Such changes will affect virtually all economies in the world, and attempts to cling to the old formulas will only preserve the problems. We must stimulate structural change, create the conditions for the emergence of new economic sectors and look for modern sources of growth.

We are aware that this requirement has a direct impact on our economic policy. Against the background of global change, including in the energy sector, we have to radically accelerate the diversification of the national economy and technological innovation, which is extremely important. We must move to a new technological structure.

The potential of growth through the exploitation of long-existing capacities has been practically exhausted. This is evidenced by a low unemployment rate compared to the level of the past 20 years. We certainly believe that this is an economic and social achievement but it also shows us that growth based on the old production capacities is no longer possible. We have a 5.1% unemployment rate ­ one of the lowest in Europe and in the world.

Further growth is possible only through investment in new manufacturing facilities and upgrading the existing ones, as well as investment in human resources development.

We aim to create or update at least 25 million jobs by 2020. By the way, this is an initiative introduced by one of the business associations, and I think it is absolutely correct. At first glance, it seems very difficult, perhaps even impossible, but our experts have made calculations along with this association and have concluded that it is possible. I do not mean the creation of entirely new jobs but rather upgrading and restructuring the jobs that already exist. All of this can lead to 25 million high-level and well-paid jobs.

By 2018, we aim to increase work productivity by 1.5 times compared with 2011 and the share of high-tech and knowledge-intensive industries in the GDP by 1.3 times. By 2015, investment is expected to grow to at least 25% of GDP, and to 27% by 2018.

We have already launched active efforts to achieve the stated objectives. Thus, we are developing roadmaps together with the business community for specific areas of improving the business climate and we will monitor their implementation together with the business community.

The Russian regions will play a central role in improving the business climate and attracting investors. Before the crisis, a healthy competition emerged among our regions in a bid to attract investment. The leading regions were able to dramatically change the structure of their economy. Last year, the Agency for Strategic Initiatives launched an important pilot project with the participation of the business community: the introduction of a regional government standard for improving the investment climate.

Best practices of cooperation with investors should become the norm for all regional administrations. We invite investors to cooperate actively with the regions and with the Agency for Strategic Initiatives, and to determine together the best approaches to the improvement of the business environment.

I will reiterate: Russia is open to foreign direct investment and domestic investment in industry, services, agriculture and the innovation sector. We hope that capital will be followed by technology, management experience and modern models of production, distribution and service networks, which our foreign partners have.

Domestic financial market infrastructure development is a major priority for us. This means enhancing its stability, establishing an international financial centre in Moscow and developing modern investment instruments. All this will allow our companies to quickly and easily raise capital from domestic and foreign sources.

The Central Depository will begin to operate by November. Its goal is to help foreign investors enter the Russian financial market, to make the system of securities title recording more transparent and understandable.

With the adoption of the laws On Clearing and Clearing Activities and On Organised Trading we have created the necessary legal conditions for the development of financial market infrastructure entities: exchanges and the central counterparty. They will operate in accordance with international standards, significantly reducing the risk for market participants.

Our agenda includes the cancellation of full advance payment for securities. In international practice, the practice of delivering and paying for securities a few days after the deal, has long been accepted. This is more convenient for most investors and we are interested in implementing it as soon as possible. Naturally, I hope that all the advantages and disadvantages will be taken into account when we plan for introducing the system so that these innovations do not result in the creation of any financial bubbles.

Such innovations reduce the cost of capital for Russian companies and the economy in general, and increase the capacity of the domestic financial market.

One of the solutions that will determine the future of the Russian financial market is the consolidation of MICEX [Moscow International Currency Exchange] and RTS [Russian Trading System] exchanges. In the future, this will create a single, absolutely competitive world-class trading platform, which will determine the price for Russian assets and resources. I would like to note that the working group for the establishment of an international financial centre in Moscow is currently analysing various aspects of improving this area and drafting a roadmap. We expect that it will be approved by the end of the year.

The efforts of the Russian Direct Investment Fund are also aimed at the diversification of investment projects in our economy. We have agreed to allocate 62 billion rubles [$2 billion] to the fund every year: we allocated 62 billion last year and will give it another 62 billion this year. We will also consider doing this next year. The budget for 2013 does not have the money for that, but we will have to find it because, as I have already said, our budget should not only be socially oriented, but it should also be a development budget. How could this be achieved without using such instruments as the Direct Investment Fund? This is the best and the most effective tool that has proved itself around the world. It will work here in Russia too.

Since its establishment in July 2011, the fund has allocated 7.7 billion rubles for financing investment projects, and the funding it attracted from co-investors exceeded 25 billion rubles [$ 830 million]. Another major step forward was the formation of a consortium which included the Russian Direct Investment Fund (RDIF) and a number of international investment funds ­ almost all of the world’s largest investment funds. It has already begun to invest in Russian companies that are planning share placement in the MICEX-RTS common exchange platform.

We intend to encourage domestic and foreign investors and thus resolve the shortage of long-term money. This issue is of concern to everyone. Our financial system is not yet ready to offer such investment resources to the extent in which it is necessary for economic development, but we are well aware that this is not just an economic issue: people’s trust in financial institutions and in businesses’ ability to implement various projects will largely depend on its solution.

One of the sources is well known: it is the funded part of pensions. I must say that this is a major advantage of the system of funded pensions, which we created some years ago. A great deal of money has been accumulated: this year it will reach about two trillion rubles [$65 billion]. We were promised both by the former and the present Finance Ministers that at least part of the funds will be allocated for infrastructure development by issuing infrastructure bonds secured by these accumulated funds. I hope that concrete proposals are submitted by the end of this year. Throughout the world, this money is provided by the top players in the stock market: insurance companies, pension funds and so on.

The issue of creating a so-called mega-regulator is currently widely discussed. This is another matter I would like to address. The Government proposes to merge the Federal Commission on Securities Market into a mega-regulator agency under the Central Bank. This idea has many supporters, although there are also some opponents (we have just discussed it again with some colleagues). I would like to invite the banking and investor community, as well as all interested parties to join the discussion. The matter should be resolved quickly. The question of radically improving the regulatory system is long overdue, and this decision should be made without delay.

We must admit that Russians do not yet have enough information about the role of the financial market and the opportunities it presents. As a result, people often invest in the few vehicles they understand and trust ­ in real estate or in foreign currency, or just stash their savings away. Therefore, we are going to work on improving financial literacy, strengthening public confidence in the Russian financial sector and creating new tools, including those that provide protection from inflation.

Improving corporate governance in state-owned companies remains an important task. This clearly provides an added bonus for the companies. Management at most businesses, or at least many of them, is not efficient enough. Therefore, the Government has been charged with the task of determining management efficiency criteria for state-owned companies in the near future, including by using the best international practices.

Finally, another important point. The state will continue the privatisation of enterprises but it will do so judiciously. State assets will be sold in accordance with clear and transparent rules to the best and most efficient owners at fair market prices given the current economic environment.

The federal property privatisation plan has been approved. Ultimately, we will sell state-owned stakes in virtually all non-commodity companies. The only exceptions are some natural monopolies and defence companies, where the state will remain the controlling shareholder in the foreseeable future.

I emphasise that banks and other financial institution have the first place in the privatisation programmes of the largest blue chip companies. As you know, in February 2011, a 10% stake in VTB was successfully privatised for $3.3 billion, and in September 2012, 7.6% of Sberbank shares worth more than $5.2 billion were sold. This was one of the most successful deals in the past 10 years. As I recall, for every $100 Sberbank invested 10 years ago it got $700 ­ this really was one of the best deals of the decade. Both of these sales saw good demand and relatively high prices given the current state of the market. This clearly shows that Russian financial institutions retain their appeal despite the challenges faced by the global financial market.

Ladies and gentlemen,

It is axiomatic that capital tends to flow where investors consider the balance of risk and return to be optimal. Today both the global and the Russian economy need trust. To win the investors’ trust means to discover new horizons, and that is what we are striving for.

We hope that foreign and Russian investors will appreciate the achievements of our economy and commit to long-term and large-scale investment cooperation. We will pursue this aim and we are open to it, as I have already said.

Finally, I want to thank the VTB Bank for organising this forum and continuing the tradition of such important and beneficial meetings in our country, in the Russian capital.

Thank you for your attention.

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VLADIMIR PUTIN: We heard from our colleagues just now, starting with our Chinese friend. He noted ­ and our European colleague later noted too ­ that our low government debt is one of our economy’s main strong points. It currently stands at 10 percent of GDP, of which 2.5 percent is external debt. We also have a minimal deficit. This is important too. Last year, we had a primary budget surplus of 0.8 percent. In other words, there are no reasons for an increase in our debt. This does not mean that the Finance Ministry cannot take advantage of the favourable circumstances and a relatively low borrowing cost for Russia to borrow now and then withdraw again in the event of future turbulence and higher lending costs and rely on domestic reserves instead. This kind of move is entirely possible. But the fact remains that a low debt ratio and low inflation, or absence of inflation, are fundamental advantages.

Our Chinese colleague spoke about the Chinese economy’s need to rely more on domestic demand. India offers a good example in this respect. It has been practically unaffected by the global crisis situation of these recent times and illustrates well the importance of being able to rely on domestic demand. Could we achieve this kind of self-reliance? I have some big doubts in this respect because to be able to have this kind of confidence we would need to make big strides in diversifying our economy. As our American friend noted, so long as we still depend so heavily on oil and gas exports we have little possibility of relying on domestic demand. But this is nonetheless an objective, not only for our friends in China, but for Russia too.

I note that our relations with China are developing very well indeed. Our bilateral trade reached a figure of $83.5 billion last year and will be even higher this year. This puts China in first place among our trading partners, ahead by a long way of Germany, and our trade continues to grow, which is good to see. The diversification process is not a simple one, but our trade and economic ties are nonetheless moving in this direction, with goods from the machine-building and other sectors and not just the hydrocarbons but also nuclear energy ­ advanced technology, in other words ­ accounting for a substantial share. We will continue in this direction. We have many big joint projects and good plans, which of course we must not just think about but actually carry out.

As for the situation in Europe, everyone is busy criticising Europe these days, and this event’s host also began by doing so. But Europe is not in any worse a situation than the USA, say, which also has a big debt and not the best macroeconomic situation at the moment. Where the Europeans run into bigger problems compared to others is that, as our European colleague said, they have “17 captains” at the helm. This makes things more difficult of course because it is hard to set rules and find solutions acceptable to all. The problem is not even so much that there are 17 captains, but that they are all sailing under different sails. You’ve got one in a flash yacht and someone else in a dinghy, and altogether this makes a whole flotilla. It’s even worse when someone’s dinghy springs a leak and they have to bail out the water the whole time. This all makes it hard to reach a consensus. Correct me if I’m a little off in the figures, but when France has average per capita income of 3,600-3,800 euros, and Romania has average per capita income of 260-280 euros, it is not easy to find consensus solutions.

Our European friend spoke of the need for budget consolidation in Europe. This is necessary, certainly, given that there are no borders and there’s a common space. People in Romania want to live as well as people in France do. They are all part of the same common community after all. But they hear instead, “No, you were poor before and you’ll be even poorer now.” Of course they don’t want to agree to this. It’s hard to convince the Greeks too, and the Spanish and Portuguese, who have had the chance to taste cheap money. This is a very complicated process that demands a clear understanding of where the common interest lies. In this sense I do not envy our European partners because they really do face some difficult tasks ahead.

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VLADIMIR PUTIN: Following the discussions going on in the European Union and knowing the position of many European leaders, what makes me optimistic is that there is a common understanding on the fundamental concepts. This is very important. I am sure that this consolidation and common understanding of the problems and exit solutions from the crisis will help Europe to find a stable development road and change its situation for the better.

I do not think that the world’s leading economies should have to shoulder the entire burden because they also have limitations, including domestic, political and social limitations.

Everyone knows that I have many friends in Germany. One friend is visiting just now. Her daughter works as a nurse and has three children, I think. Her husband is studying, and she makes a little more than 2,000 euros, and that’s it. There are many people like this in Germany, and they pay high taxes there, and have to pay for their housing. Putting too much pressure on the social sector would be counterproductive therefore even in the world’s leading economies, and could lead to serious consequences.

But the European leaders and the European Commission are clearly set on resolving the macroeconomic problems, consolidating finances, and carrying out structural reforms. Their determination is evident and we wish them success in this work. I am sure that they will succeed.

As for Russia, our colleague noted just before that we have a growth rate of 4 percent, which is a good performance compared to other economies. But this is not enough for us. As I have said on many occasions, and our experts and all of us know, for us to be able to reach our economic objectives we need to grow even faster. Our actual economic planning is based on a figure of 4 percent or slightly more for the period through to 2015-2016, but we need even higher growth.

Our American colleague noted our dependence on energy exports. Yes, this remains the situation and earnings from energy exports have increased. Budget revenue from energy exports have increased of late, it is true, but though oil and gas production is also up, the increase is not significant. Production fell a little during the crisis period, but overall, Russia was the world’s biggest producer last year. Our oil companies are now producing more oil than the world leaders, even ExxonMobil, if we take just oil. If we take oil products overall ExxonMobil produces more.

It is not the increase in production that is the main thing however, but the price rise. Prices have risen to their current level and have stabilised there. It would be foolish of us to sell our products below the market price. It is another matter however that we should consolidate part of these oil revenues in reserve funds, as I spoke about. First, we did this in the past, and second, we have now begun applying the budget rule that I outlined in my opening remarks. The main task is for the Government to keep within the parameters set by this budget rule. This sets strict requirements for planning the budget, but it is a necessary approach and reliable system to protect us against possible future crises.

Regarding infrastructure, I cannot but agree with you, as everyone knows what a longstanding problem this is in Russia. Unfortunately, these problems remain today, things like bad roads. Like you said, if the winter road has ‘melted’, what is there to do? There are only two options: either we abolish summer, or we build proper roads. We can’t abolish summer, and so the Finance Ministry will have to open its purse and put money built up in the pension funds, say, into issuing infrastructure bonds.

There is another method, which we are starting to use now. You mentioned Mr Kudrin, who at one time proposed a 13-percent flat-rate income tax. This was the right decision, we went along with it and tax collection did indeed improve dramatically. Mr Kudrin’s name tag is here, but he himself is not. Having left the executive government he seems to think he can flout discipline and is out and about somewhere now. But it was Mr Kudrin who persuaded me back then to abolish the road funds, so you should direct your complaints to him next time you see him.

We have re-established these funds, although in a somewhat different form now and with different financing sources. The federal and regional funds have been re-established however. They will build up quite substantial funds, far more that the regions had at their disposal for these purposes. I hope that we will make further progress in all of these areas, issuing infrastructure bonds, increasing direct financing from the federal budget, and developing the regional road funds. Resolving this problem will be a gradual process, but we will certainly resolve it.

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QUESTION: Mr President, I have a question about inflation. Inflation was at a record low of 3.6 percent over the first half of the year but has now risen to 6 percent. Is the Government willing to sacrifice to short-term economic advantages for the sake of guaranteeing long-term economic stability and bringing down inflation?

VLADIMIR PUTIN: First, inflation was low in the first half because we decided to raise the prices for natural monopolies’ services only in the second half, and the prices thus started rising in July. We expected that the prices would rise, the monetary supply would increase, and this would affect inflation in the second half.

Second, we see that food prices are rising now. This is related to the drought that has affected big producer countries, including the United States. This also has a considerable impact on the domestic situation. Our grain prices are rising too after all. By the way, I draw to the Government’s attention that in 2011 and 2010 we took quite energetic measures in response, including with the help of the grain reserves. We need to look at how best to respond to this situation, which has arisen from natural causes.

Should we sacrifice something and try at whatever cost to maintain macroeconomic indicators, including a low inflation level, even if it means sacrificing economic growth? This is the choice facing all European countries today. I am sure my colleague will correct me if I’m wrong, but the whole debate today is about precisely this. Some countries get told to consolidate their budgets and cut spending, and they reply that if they do so they won’t have economic growth. So there won’t be growth ­ you’ll just have to bear it a while, the argument goes on. It’s a very difficult choice. We don’t even have to look as far as Europe. Our neighbours in Ukraine are in the opposite predicament. They have no inflation problem but have lending rates at around 20 percent and zero growth. Is this good or bad? Probably it is a problem.

I therefore think that we are going to have to make our way between a rock and hard place and keep a check on inflation of course, while monitoring at the same time what impact the Government’s response measures have on the real sector of the economy. We need to boost domestic demand, but how do we stimulate domestic demand if we do not get the economy growing? This is in many ways an art more than anything, something that requires a very fine touch indeed. Can we do this? Yes, we can. But ultimately, the main thing is to suppress inflation of course.

QUESTION: Most of those present are financial investors. Corporate governance is an issue of concern to all. This concerns various interested party transactions, transfer prices, good faith work on the lending market, and so on. You know that the institutions of corporate governance are still far from perfect today. As part of the work on building the international financial centre you mentioned, amendments to the Civil Code were drafted last year and were passed in the first reading at the start of this year. This was followed by heated debate, with most objections coming from big companies, which, not so surprisingly, oppose bringing order to this area.

Do you have a position on this issue, and can we count on your support?

VLADIMIR PUTIN: Yes, of course I have a position on this issue and am familiar with the discussion. We planned to pass the amendments to the Civil Code at the end of last year, and worked hard on this in the Government and the Presidential Executive Office. But you are right ­ many doubts and reservations were expressed. The Civil Code is essentially the economy’s constitution, and in this sense there is no place for hasty action. We must study all of the market actors’ concerns very carefully and listen to everyone, including the portfolio investors and our own big infrastructure companies. I know their concerns in detail. They tell me about their worries. A decision will of course be made in the end. We want portfolio investors to find a comfortable environment here and will try hard to clear the road for them as thoroughly as we can, but do so in such a way as to not cause any damage the other market actors. Decisions will be made.

QUESTION: I have a question about the budget. Last year, you promised to increase social spending and public sector wages. This is understandable given the delicate economic situation at the moment, but if problems continue in the future, how will you finance social spending?

VLADIMIR PUTIN: We are indeed addressing the social problems we consider the urgent priorities. Let me note however that incomes in Russia are substantially lower than in the main developed economies. Yes, at the height of the crisis we did increase pensions, but our pensioners received so little to start with that despite our hesitations and concerns this increase did not really affect the inflation situation or the budget, which remained within the parameters we had planned. We raised service pay too for our military service members.

If you look at the overall money supply you will see that this has not affected our macroeconomic indicators. Naturally, we now have to bring other sectors in line with our guideline parameters, above all the banking sector. We decided to accord grants in education and raise wages for teachers and professors, and have just taken the decision to raise wages for people in the culture sector, but do you know how much these people actually earn in this sector? In real terms, they earn very little indeed ­ 8,000-9,000 rubles a month on average.

These are therefore steps we must take whatever the situation, because if people perceive society as socially unjust it will not be effective overall and people will not have confidence in our economic measures. We talk about our good macroeconomic indicators and growing reserves, but people do not see this reflected in their own lives at all, and this is an unacceptable situation. What are we living and working for if people don’t see the results? Everything must be balanced, but these wage rises and grants will not harm the macroeconomic situation. There are other issues here that we need to reflect on and resolve.

The average wage in Russia last year ­ not public sector wages, not wages paid for with budget money ­ was 24,000 rubles, 23,700 or 23,800 to be more precise. This year it will be 28,800 ­ close to 29,000. That is the result of natural growth. This is the national average. Knowing this figure, how can we not bring pay for people in the social services sector, for example, teachers, or health workers closer into line with it? It would be a big mistake if we returned to the times when people working in these sectors say, “You pretend to pay us and we will pretend to work, pretend to teach you or treat you.” This is unacceptable. Balanced solutions must be found, certainly, but people in these sectors should be paid in line with real incomes around the country as a whole.

QUESTION: Establishing the Central Depositary has made the Russian stock market more convenient for foreign investors. But without changes to tax laws the procedures for paying taxes will become even more complicated for foreign investors. Do you plan to simplify these rules in any way?

VLADIMIR PUTIN: We are aware of the problem and are making amendments to the Tax Code.

QUESTION: The annual cost of corruption in Russia comes to around a quarter of the country’s GDP and maybe even a lot more. We read in the papers, say, that Gazprom buys large-diameter pipes not directly, but through a specific company, which, according to Interfax, adds on a mark-up of around 30 percent. There are plenty more examples in this vein.

You have five-and-a-half years of your presidential term ahead. Do you want to go down in history as the man who restructured Gazprom so as to make investors happy and have the country working normally, transparently and so on?

VLADIMIR PUTIN: Our infrastructure companies have the same flaws and problems as our whole economy and society in general, of course.

At the same time we see, for example, how a whole campaign against Gazprom has been unleashed in European countries. They are looking for evidence of a monopoly hold on the market and a while ago carried out seizures of documents. Let me note however that Gazprom holds 27 percent of the market in Europe, I think, and Norwegian companies hold 29 percent. So, what kind of monopoly is there to talk about? In this respect we hear more and more reproaches about how Gazprom conducts business and allegations of corruption. There probably is corruption there, but in this case it is the police’s job to catch those responsible and put them in prison. That would be the right thing to do, I think.

This is not enough, however. Looking at the matter seriously, we need to change the economy of a company like this and guarantee its access to transport systems, especially the pipeline systems. This is the main thing we need to do. But we should not follow the approach our European colleagues embodied in the Third Energy Package with their division of production, transport, and distribution into separate businesses, thinking that this will lead to lower energy prices, including lower gas prices in Europe. You cannot separate transport into a viable business all of its own. It usually exists through cross subsidies that come through the production and sales side of the business. Transport as a separate business has no real interest, but the Third Energy Package makes it separate. This is a very dangerous thing, as we have told our partners many times, and so we need to be very careful and thorough in dealing with these matters.

As for bringing down prices for final consumers, including in Europe, I recommend looking at the price formation structure. Look at the share of taxes, for example. The final consumer pays a price that is 60-percent made up of taxes. Why do our partners want us to lower our companies’ revenues while they get to leave all of their taxes in place? I understand of course that these taxes can be collected and put into social spending, and in today’s situation they naturally do not want to lose this source of funds.

You mentioned Gazprom’s contract purchases just before. I am aware of this matter and have given repeated instructions to the law enforcement agencies. They are constantly working on the situation, digging something up, making arrests. In Europe, gas goes through several intermediary dealers on its way to the final consumer. Maybe they should be removed from the chain? Who benefits from their being there?

So, let’s look at the whole chain ­ from the producers to the final consumers. If we can work together to take a real objective look at the whole situation we will probably achieve results. Of course during my time in office as President I want to do as much as I possibly can for Russia. This is my basic aim and I will plan my work accordingly.

To be continued.