OREANDA-NEWS. June 28, 2012. At a meeting with members of the Government and the Federal Assembly leadership Vladimir Putin announced that he has signed the 2013-2015 Budget Address.

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PRESIDENT OF RUSSIA VLADIMIR PUTIN: Good afternoon, colleagues,

The 2013-2015 Budget Address was signed today, and I will outline its key priorities during this meeting.

Due to our responsible fiscal policies of the past several years, we have been able not only to recover from the crisis, but also to establish a solid macroeconomic environment, a macroeconomic foundation for growth. That includes such factors as a safe level of sovereign debt, stable national currency and the lowest inflation in 20 years. It is vital that we consolidate these fundamental achievements.

However, it is necessary to increase the effectiveness of our fiscal policy, to strengthen its focus on economic and social development, as well as other national priorities.

The budget resources, financial and tax regulation mechanisms should focus on the implementation of our strategic modernisation programme, which was supported by the vast majority of Russians. We are well aware that we will have to implement it at a difficult time. The global economy is experiencing a period of turbulence, and we need to be prepared for any possible manifestations of the economic crisis.

The fundamental task for us is to preserve macroeconomic stability and fiscal sustainability. It is obvious that the main risk factors are still rooted in our high dependence on global energy and raw materials markets. The oil and gas deficit is too big. Our main challenge is that we need to stimulate economic growth and implement large-scale social programmes, and at the same time safeguard the budget against sudden fluctuations in energy prices.

The previous Government has begun a detailed analysis of these issues and proposed various solutions. We have all agreed that we should return to the so-called fiscal rule in drawing up the 2013 budget, and legally establish the procedure for using oil and gas revenues. This policy will allow us to accumulate reserves and still have the necessary means to a stable, unconditional fulfilment of budget obligations for the long-term government programmes.

What do we propose? When planning the federal budget, it is expedient not to base the calculations on current or even projected price quotations, which are constantly changing, but on more fundamental indicators. Therefore, the budget will be based on the average oil price for the past five years, and every year the accounting period will be increased by one year. Thus, in five years the Russian budget will be calculated based on an average oil price for the ten-year period. If the actual price of oil is above the average, then the additional revenues should go to the Reserve Fund, and if the oil price falls below the average, the budget will use the Reserve Fund money to make up for the shortfall of oil and gas revenues.

It is also necessary to legally establish the maximum size of the Reserve Fund, and any funds in excess of this amount should be forwarded to the National Welfare Fund. In addition, as I have said, we should consider a mechanism for using part of the National Welfare Fund to finance infrastructure and other priority projects. However, project financing using the NWF funds is possible only in excess of the amounts needed for transfers to the Pension Fund. It was for that purpose, to support the Pension Fund, that we established the National Welfare Fund some time ago.

At the same time we need a more flexible and diversified strategy for managing sovereign funds. This is especially true in view of the increased volatility of world markets. Simply put, you cannot put all your eggs in one basket. We must seek the best solutions that will improve the profitability of investing our reserves while minimising the risks. I think that investing in infrastructure projects should achieve that objective. Therefore, I ask you to consider all aspects of establishing a Russian financial agency that will implement the state policy in the management of funds and sovereign debt.

I would like to emphasise that the new fiscal rules, strict regulations for spending the interest income is also a powerful anti-inflationary measure. I consider reducing the inflation level to be a vitally important task for the economy as well as the social sphere. Moreover, low inflation boosts our resistance to negative external factors, and we must be prepared for any scenarios in the global and domestic economy, and have the mechanisms and capabilities for rapid response. Therefore, please include a sufficient reserve for anti-crisis measures in next year’s budget, in case such a need arises. In the long term we need to establish an effective system of risk monitoring, forecasting and management.

Colleagues, the achievement of the stated priorities, which are set out in my pre-election articles and Presidential executive orders, should be the main criterion for assessing the effectiveness of our fiscal policy. We are talking about creating a new economic structure, favourable conditions for attracting investment, improvements in education and healthcare, and the entire social sphere.

The funding should be spent on reforms; each ruble from the federal budget must stimulate development, change the quality of our economy and the daily lives of our citizens. The public has every right to be informed not only regarding the objectives on which the budget funds are spent, but also on the results achieved. The current practice is to assess the budget execution and the achievements in the socio-economic sphere separately. We hold one meeting to look at how the money is spent, and another to discuss agencies’ performance and accomplishments. This approach provides an incomplete picture and does not encourage results-oriented work. I think that it is necessary to combine the budget review with the discussion of socio-economic policy implementation. If more money was spent than had been planned, and the goals are not achieved, we must draw appropriate conclusions and make personnel decisions.

I believe that we must assess the personal responsibility of heads of ministries and departments based on the annual analysis of budget spending. I would like to ask you to develop such a system and implement it.

We must also increase the effectiveness of budget expenditures by switching to budget planning and execution on the basis of state programmes. We have been talking about this for a long time but have postponed the decision due to the lack of long-term reference points for financing these programmes. I ask you to include them in Russia’s budget strategy until 2030. Let me remind you that the work on these documents must be completed by the end of this year.

In addition, we must approve all key state programmes by the end of this year, so that the three-year budget plan for 2014-2016 is completely made up on a programme basis. I realise that this will not be easy, but this work must be completed. The individual elements of the programme approach must be implemented in drawing up the budget for next year.

There are several points I would like to draw your attention to. Budget investments are primarily designed to promote the creation of modern transport, engineering and public infrastructure, and to improve the quality of social services. At the same time state investment must not replace or push out private investments. On the contrary, the state funding should serve as a catalyst for private initiative, to promote the growth of business activity and enhance the competitive capabilities of domestic business. This carries special importance with the increasing integration in Eurasia, as well as Russia's accession to the World Trade Organisation. We must take advantage of the new markets for the promotion of domestic producers and at the same time minimise the risks to our business associated with our accession to the WTO. We have been working on this for a long time, our experts negotiated this issue for 16 years, almost 17. They have succeeded in getting everything that could have been squeezed out, to put it simply. Nevertheless, the fears expressed by the business community and real economy, are justified, and we need to think about it.

Therefore, I believe the federal budget for the coming three years must stipulate measures to facilitate the adaptation of our economy to the new conditions following Russia’s accession to the WTO.

Once again, the globalisation of world economy and an increasing competition for investment demand that we are competitive in everything. This is especially true of the investment climate. Its quality depends on our economic policy, our actions in the budget sector, and the stability and fairness of the tax system. We must have a clear understanding that the tax system not only performs fiscal functions, but also helps to diversify the economy and stimulate business activity.

Given our goal to reduce dependence on natural resources, I think we must preserve the existing tax level for the non-resource sector. It would be short-sighted, irrational and dangerous to impose any further burdens on it.

We must also free business from overlapping and often meaningless work in preparing financial reports and tax returns. Fiscal accounting must be simplified and the use of accounting documents in tax reporting must be allowed. We have talked about it on many occasions, especially recently, and the business community has often raised this issue. We discussed it in meetings with the Federal Taxation Service and other federal government agencies.

In general, we have found a number of common approaches. I stress that today our tax rates are comparable to those of the countries with which Russia is competing for attracting capital. But the administration procedures must also conform to international best practices. At the same time, it is essential to exclude the conditions for tax evasion. Companies that do not pay their taxes destroy fair competition and undermine honest business practices.

Improving the quality of management will not only increase fiscal revenues, but also create reserves to reduce the existing tax burden on honest businesses. I believe that the fundamental approaches to the development of our tax system must be reflected in the budget strategy.