OREANDA-NEWS. April 6, 2009. Today, we are going to discuss the problems of Russia's socio-economic development.

All of us understand the nature of the current situation. To put it mildly, the entire global economy, including the Russian economy, are going through difficult times. It would seem that this is not the best time and an unrewarding task to report to the Parliament on the Government's performance. However, I am truly happy to meet with you today because this is an opportunity to discuss national problems and national development issues in an absolutely open and business-like atmosphere, and because we are now creating a new tradition, namely, the Government's report to the Parliament. This is yet another step in the development of our political system. And I think it is very important.

I would like to say from the very beginning that the Government is interested in getting feedback from legislators and parliamentary parties representing the interests of an overwhelming majority of Russian citizens.

Esteemed colleagues, the incumbent Cabinet was established almost a year ago, in May 2008. I presented our programme in this very hall. The programme served as a basis for approving a concept of Russia's long-term development until 2020, the so-called Programme-2020, and the plan of the Government's work until 2012.

I would like to thank all of you who supported these documents.

While determining the logic of our steps, we proceeded from the continuity of our policy and the main provisions of the President's State of the Nation Address. At the same time, we strove to focus on accomplishing specific high priority objectives and to facilitate more dynamic transformations aiming to ensure Russia's leading positions in terms of key socio-economic development parameters and raising the living standards in the country.

Today, we have to act in an entirely different environment and in conditions of a global economic crisis. But we do not think, and I have repeatedly talked about this, that we must renounce our current strategy. Our choice is as follows: We must continue to steer towards reforms, create a new economy and support and consolidate all aspects constituting the base of its top-quality growth.

You often visit Russian regions. You can also see that I constantly travel all over the country. The people often ask whether Russia could have avoided the crisis and all of its negative consequences. Of course not. That was simply impossible. It is an illusion. The problems appeared elsewhere and not through our fault. Although nobody doubts this obvious fact, the problems have affected virtually everyone, including Russia.

Analysts predict that the global economy will post negative growth rates this year for the first time since World War II. In the 4th quarter of 2008, the annual GDPs in the United States, Japan and Germany fell by over 6%, 12% and 8.2%, respectively. Unemployment is climbing towards 8% all over the world; it has already exceeded 8% in the European Union and has reached 8.5% in the United States.

Virtually all sectors of the global economy are suffering from a deep recession. Although some sectors of the Russian economy are faring better or worse, the national economic situation does not differ greatly from global trends.

At the same time, the crisis has aggravated our well-known problems, namely, the dependence on the global markets, weak diversification and the lack of the so-called long money.

We had to parry two blows at once. First, we had to deal with the financial crisis which caused the outflow of capital because Western economies faced liquidity shortages and took away their assets. Speculative capital also started leaving our market. Foreign crediting sources dwindled, too.

Second, demand for our traditional export items and their prices plunged.

Imagine what could have happened if Russia entered the economic crisis with the problems plaguing it only a few years ago. I am talking about huge external debts with non-payment "blood clots", systematic and wage, pension and benefit arrears and stage-by-stage power cuts.

Today, too we cannot be wholly satisfied with the quality of our market and social institutions. But one thing is certain: The crisis has shown us that these institutions are functioning. They remain stable, displaying their ability to resist destructive trends.

Apart from confidence in our abilities, it is precisely this circumstance that allows us to expect success, even to a greater extent than the financial resources we have accumulated.

And now, a few words about the results of 2008. Despite slower growth in the fourth quarter of 2008, the national GDP, industry and agriculture grew by 5.6%, 2.1% and over 10%, respectively. Investment and labour productivity grew by 9.8% and 5%, respectively.

Last year, real wages increased by 10.3%. Minimal wages were raised by almost 100%. 64 million square metres of housing were built last year, hitting an all-time high in modern Russian history.

Our meetings in the regions show that the Housing/Municipal Utilities Reform Fund's programmes to resettle people from rundown and dilapidated housing and to repair residential buildings have won high acclaim. As a result of such programmes, over 120,000 people have either received new flats already or will receive them in the near future. Under these programmes, over seven million Russian citizens will improve their living conditions.

Expedited municipal utilities transformations are another equally important aspect. I would like to add that the Government continues to prioritise the work of the Housing/Municipal Utilities Reform Fund.

We have accomplished virtually all objectives in the sphere of the high priority National Project on Education. Modern education curricula are being introduced. At a meeting with State Duma deputies, it was proposed to make such work more transparent and to involve the public. I think this would be absolutely correct. That is exactly what we are going to do.

Tens of thousands of schools, technical schools, colleges and universities have had their material and technical base improved. The number of computers at schools has tripled. At present, our school students have just as many computers as their peers in many European countries.

On the whole, the Internet was widely introduced throughout Russia last year. One-third of the population, or 50 million Russians, has regular access to the Internet.

In 2008, which was proclaimed the Year of the Family, 1.717 million children were born in Russia. This is the highest number since the early 1990s. Average life expectancy has reached almost 68 years, increasing by three years over the past five years. This means that the quality of life is changing for the better, that we are using correct methods for accomplishing this objective, and that we are achieving our goals.

Naturally, investment in healthcare and physical fitness, in the accessibility of hi-tech medicine, nationwide preventive check-ups and vaccinations, the health of mothers and newborns, and the development of sports facilities has played its role. Sports have become a way of life for 22 million Russians. We must double their number, at least. All Russian school students must be able to regularly exercise free of charge.

Due to more effective first aid, road accident fatalities have decreased by 8% or by over 2,000 persons.

The state is investing more into the social sector and has created favourable conditions for the influx of private investment. For instance, we have exempted a considerable share of corporate healthcare, education, housing and pension expenses from taxes.

We hope that, despite the crisis, responsible businessmen will find an opportunity to preserve social programmes for their employees.

Last year, we also charged lower taxes on corporate R&D investment and production modernisation programmes. A fundamental research programme of the Russian Academy of Sciences and other state academies was adopted for the first time in modern Russian history. We continued to implement ambitious infrastructure and innovation programmes.

A total of 2,300 motor roads were built. We completed a key stage of the power-generating industry's reform. I would like to draw your attention to the fact that the industry was overhauled without a hitch. At the same time, Russian enterprises are becoming less energy-intensive, spending 5% less energy last year. This means that our economy is becoming less expensive and more competitive.

We have ensured the complete renewal of the raw-materials base in terms of virtually all strategic resources, namely, crude oil, natural gas, gold and metals. As you remember, we used to say several years ago that the scale of raw-materials production considerably exceeded the scale of prospecting operations. The situation has now changed. Prospecting programmes received eight roubles of private investment per every rouble of state allocations.

In 2008, commercial oil production got underway at deposits of the new east Siberian oil province, and the first section of the East Siberia - Pacific Ocean Pipeline was commissioned. Although the pipeline still operates in the reverse mode, the CEO of Transneft has just reported to me that it will reach the Chinese border within the next few days, and that its construction will continue all the way to the Pacific Ocean.Industrial production of oil at new fields began in 2008, as I have said before. We worked to develop new routes for the transportation of hydrocarbons such as Nord Stream, South Stream, the Caspian pipeline, and the Burgas-Alexandroupolis pipeline.

Of course, not everyone in the world wants these projects to materialise, increasing Russia's ability to export [hydrocarbons]. But we are convinced that these projects are economically substantiated, satisfy the strictest environmental standards, and will enhance the global energy security. We will continue to implement them.

In this connection, I want to say once again that attempts to exclude Russia from making decisions of worldwide importance, especially in the field of energy, and to ignore its legitimate interests are counterproductive.

As to foreign economic cooperation, we have nearly completed the drafting of the legal foundations for a Customs Union of Russia, Belarus and Kazakhstan. I believe the Customs Union will be able to start working in 2010, one year ahead of schedule; our partners support the idea of accelerating these efforts.

Ensuring the country's defences and the security of its citizens is a crucial constitutional duty of the Government.

This year, defence spending will grow by 15% compared to 2008. We plan to focus on large-scale rearmament and strengthening of the personnel potential in the sector.

I will now highlight social guarantees for servicemen and their families. Many of you probably remember that a year ago in Zhukovsky, a town near Moscow, at a meeting with AF pilots and graduates of pilot schools I spoke about the need to change the system of remuneration in the Armed Forces. This implies above all a rise in the salaries of those servicemen who make the largest contribution to national security, who serve in the key or hazardous spheres, such as Air Defence, the Strategic Missile Force, the Air Force, Space Command, the Navy, and permanent readiness units.

This mechanism of financial encouragement of the officers who show the best service results was put into operation in January 2009. As much as 100 billion roubles will be allocated for this purpose over three years. As many as 34,000 officers, from company commanders to commanders of nuclear submarines, who show the best service results are receiving such payments, which vary between 35,000 roubles to 150,000 roubles per month.

Of course, this is only the first step. I think that by 2012 all servicemen of the Armed Forces should be converted to the new system of payment. A company commander will receive approximately 50,000 roubles a month; some of them already do.

We will also continue working to solve the housing problems of servicemen. Last year, over 22,000 flats were built or bought for them. The plan for this year is 45,000 flats. From 22,000 last year to 45,000 this year - an increase of more than 100%.

This means that by the end of 2010 all servicemen of the Defence Ministry and citizens retiring from military service will have their own housing. You know how important this is and how we have been moving toward this goal. By 2012, we will have formed a fund of service flats in the Armed Forces. This goal will be achieved by other security related agencies in 2011-2013.

The President promised that all veterans of the Great Patriotic War would have [befitting] housing by May 1, 2010. I can assure you that we will definitely fulfil this task. By May 1, 2010, all veterans of the Great Patriotic War will have [befitting] housing. We will fulfil this task. Just to remind you: we have already fulfilled our obligations to provide them with cars or, at their choice, with monetary compensations.

Colleagues,

The biggest part of my speech will be devoted to the analysis of the current situation and our mid-term objectives.
I will begin with the Government's emergency measures adopted in the second half of 2008. They were designed to protect the people and the economy from the crisis, and to preserve the viability of our financial sector. You know that the insured amount of money deposited in bank accounts was increased to 700,000 roubles, that funds were allocated for the rehabilitation of ailing financial institutions and replenishment of bank capital through subordinated loans.

In addition, the Government supported the efforts of the Central Bank to restore the liquidity of lending organisations. We also needed to support banks- and probably above all - because we needed to preserve the people's savings in our banks and prevent the paralysis of settlements between enterprises. We attained both goals.

The threat of collapse of the banking system has retreated, and it was a real threat that was looming large. Moreover, the banks that received support managed to increase lending to the real sector by more than 15% over the five crisis months, and issued loans worth more than 1 trillion roubles. Other financial institutions, which did not receive such assistance from the Government, have also increased the volume of lending, but only by 7%. So the mean figure is 9%.

We should bear in mind that the volume of loans grew by a record figure, over 50% - I think it was 54% - in 2007 and by 34% in 2008.

I want to tell you that these figures were unprecedented in the global economy. Loans are growing at the fastest rate in China, by 19%, whereas the usual figure is 7%-9%, the level we have approached.

I would like to stress that the state has not given out presents to anyone: Private banks received loans from the Central Bank and the National Welfare Fund, which they will have to repay.

Next, we had to protect the national currency affected by the flight of capital and declining export revenues, to ward off the attacks against the rouble. We managed to prevent uncontrollable devaluation. As we promised, the decline in the rouble exchange rate, which was inevitable in the situation, was smooth; that allowed the economy and people to adjust to the new realities.

Moreover, the current exchange rate of the national currency is clearly boosting the competitiveness of Russian producers in the external and, most importantly, domestic markets. Many of you know this very well. During my visits to enterprises, where I talked with the workers and management, they told me openly that that exchange rate changed three days before and now they can sell their products in the external and domestic markets.

The growth rates of tariffs were curtailed in the interests of the economy.

The exchange rate is an exclusive prerogative of the Central Bank, in accordance with the law. The Government maintains routine contacts with the Bank of Russia, and will continue to consider the indexation of tariffs, which I have mentioned, with extreme care.

At the same time, freezing tariffs is a dramatic but not always effective solution.

Along the way, I am going to answer the questions I have received from the parties in writing while delivering this report. The answers are incorporated in it. One of these questions concerned the freezing of tariffs. I repeat that this solution may seem right, but could have serious negative consequences.

What would a total freeze on [the growth of] tariffs mean for, say, Russian Railways? It would mean a shortfall of profits and hence a reduced investment programme. In practice, this means that RZD will not buy more rails, mounted wheels, etc., that steel plants will have no contracts, and miners will not be required to provide coking coal. In short, the freeze will affect the entire chain.

Therefore, we should consider the matter very carefully and in a substantiated manner. We have slowed down the growth of tariffs as it is, but freezing it would be a mistake.

We see a different solution - in creating a competitive environment, introducing energy-saving technologies and modern logistic schemes. And, when we speak about tariffs, we should not forget about efforts to enhance the effectiveness of the natural monopolies, and their transparency to the state and society.

Another anti-crisis measure I'd like to mention is the reduction of quotas for foreign workers. It is a temporary, forced measure aimed at protecting our labour market.

In these new conditions we need rapid response mechanisms. That is why we set up the Commission on Sustained Development of the Russian Economy, working groups in the key federal ministries and departments, and anti-crisis headquarters in the regions.

We are monitoring the situation in the labour market and in the regions. We have compiled a list of backbone enterprises. In fact, we have two such lists, one for the civilian sectors and the other for the defence sector.

As a result, we have embracing information and can take the necessary decisions maximally quickly.

I agree that performance discipline is a problem. The Government routinely hears reports of the federal bodies of authority on the implementation of the anti-crisis measures. We will work to ensure that all the decisions are implemented on schedule and to the letter.

What is the main result of the emergency anti-crisis measures? We have managed to avoid the worst-case scenario. As far as this was possible, we cushioned the effects of the crisis; the economy has proven its viability and also its ability to develop in new, less favourable conditions. However, 2009 will be a difficult year for us.

The State Duma received a new wording of the budget and the government programme of anti-crisis measures was published several days ago. These documents reflect our stance, our vision of a responsible and purely realistic socio-economic policy.

What is the essence of such a policy? It is to ensure an optimal combination of anti-crisis measures and long-term projects, not only to ward off attacks but also to undertake offensives, to build a new, more effective economy. In other words, we must not simply preserve the key enterprises, but also accelerate the transition of the economy to knowledge-based development. We must not simply maintain the domestic demand, but also implement major projects to start creating an infrastructure for the future. We must not only prevent a GDP plunge, but also improve the most important market institutions. We must not only guarantee macroeconomic stability but also make our credit and financial system more competitive.

This is the ideology that underlies the new wording of the budget. I repeat - this is very important - that the budget remains a development budget.

Here are its main parameters: revenues of 6.7 trillion roubles and expenditure of 9.7 trillion roubles. So, we will have a budget deficit of 3 trillion roubles, or 7.4% of GDP. But in reality the deficit will be larger. Taking into account the so-called quasi-fiscal measures, mostly taken by the Central Bank, it will be 8%. I will tell you about this now.

We have stipulated the allocations of 1.4 trillion roubles for the implementation of anti-crisis policies. Taking into account the effect expected from the reduction of taxes, the reserves of the Central Bank, the National Welfare Fund and other sources, we will spend a mind-boggling sum, 3 trillion roubles, on anti-crisis relief and economic rehabilitation.

Our key priority is to implement our commitments to the people. I will speak in greater detail about this a bit later; I will begin with economic problems because ultimately the economy gives us the resources for an active social development policy.

The possibilities of the real sector have grown considerably in recent years, thanks to investment and introduction of innovations. Our objective is to preserve and develop the accrued industrial and technological potential, to help those enterprises that invested in new products and in enhancing their competitiveness, but now have difficulties with obtaining loans and temporary difficulties with marketing their products.

It should be said that federal budget spending on the national economy has been increased by 70% in 2009, to a record-high 1.733 trillion roubles (it was 1 trillion roubles in 2008).

As much as 500 billion roubles will be allocated for state guarantees on loans, additional capitalisation of companies, and support for exports. But state assistance should not replace the responsibility of business. The right to receive [state] support will be granted only to those who can independently attract resources, service debts, and implement restructuring programmes. We will not invest in obviously unpromising enterprises. That would amount to keeping the Russian economy in the past, and squandering the taxpayers' money.

Of course, all of us want to do something good, to be kind and even very kind, but such "kindness" may have extremely negative consequences. It runs contrary to the nation's interests.

This is why I must say that if curtailment or restructuring is inevitable, we should help not the enterprise in question and not its owners, especially if they failed to do something, or stinted money on restructuring their enterprise or retooling it. In this case we should provide direct assistance to the people concerned.

We must ensure strict respect for the rights of the people being laid off, help them to find new jobs as soon as possible, upgrade their skills or get retraining in new professions.

The state is ready to buy into authorised capitals to preserve crucial enterprises. The MiG Corporation, for example, has received 15 billion roubles, and the Khrunichev Centre 8 billion roubles. We may take similar decisions regarding other companies, above all those who are directly responsible to the state, primarily in the defence sector.

To begin with, 70 billion roubles have been allocated for industrial support, and the figure is 170 billion roubles with due account of guarantees on loans. We have greatly eased the fiscal burden on the economy as a whole and on its key sectors. You know that we have increased the depreciation bonus to 30% from 10%. Lowered the profit tax to 20% from 24%, and introduced a new, less taxing procedure of VAT payment (not before but upon delivery). Constituent entities have received the right to establish differentiated tax rates for small businesses ranging between 15% and 5%.

Cuts in export duties allowed oil companies to keep production profitable. We expect to see the basic effect from tax cuts already this year, in 2009. According to our calculations, 600 billion roubles more will remain in the economy. We know that the budget will not receive this money, yet we are doing this deliberately. The Government will continue to try to optimise tax burdens, yet decisions should be maximally balanced.

A few words about the possible transfer to a differentiated income tax rate. We are currently using a flat scale, 13% for individuals. I often receive such questions during my meetings with workers. I have recently met with the heads of grassroots trade union organisations, and they asked the question too. And parliamentary parties ask the same question. So let's consider it seriously, more closely.

At first glance, the situation does not seem fair: Those who receive a large salary pay 13% and those who have a small income also pay 13%. Is this social justice? It appears that this scheme should be changed. But we used a differentiated scale before, and what did we have then? Everyone paid from the minimal wage and received the rest "in envelopes," under the table.