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Meeting with Government members

October 12, 2016, Novo-Ogaryovo, Moscow Region

Vladimir Putin held a regular meeting with Government members. The agenda included the draft federal budget for 2017 and the 2018–2019 plan period, as well as issues related to financing a number of projects in the country’s regions.

President of Russia Vladimir Putin: Good evening, colleagues,

Let us discuss a few matters. Today, we would like to address, all of us together, the problems related to financing projects in Russian regions, including the North Caucasus.

Before we do that, I would like to say a few words about the basic parameters of the federal budget for 2017 and the 2018–2019 period.

We regularly deal with this; I would just like to update the current information to see where we are at present.

Finance Minister Anton Siluanov: Mr President, the Government will meet tomorrow to review the recently drafted three-year budget for 2017–2019. I believe it is very positive that we are returning to a three-year budget cycle. After all, this approach makes our budget and, most importantly, our tax policy predictable on the macro level. The business community will know what to expect in terms of budget policy in the medium term and how we plan to implement it.

One goal is to factor into the budget all the developments in the global economy and our latest forecasts so as to deliver a balanced budget. We intend to balance it by focusing primarily on enacting structural measures to adjust spending.

All of our social commitments will be honoured in the upcoming three-year budget cycle: retirement pensions and social benefits will be adjusted for inflation as required by law, and in January, retirees will receive 5,000 rubles, as was promised and announced this year. The budget also provides for increasing salaries in keeping with May 2012 executive orders.

The budget also provides for reducing the deficit by gradually overcoming the imbalance that emerged with the drop in oil and gas prices. We expect the budget deficit to decline from slightly over 3 percent next year to 1 percent in 2019.

What is the purpose of all these initiatives? On the one hand, they are intended to ensure macroeconomic stability, which could lower inflation, bring about interest rate cuts and help us promote economic growth in specific areas. Starting next year, we expect real household incomes to resume an upward trend.

The Government also takes into account the so-called non-oil and gas deficit in its budget projections. Per your instructions, this indicator should be half the current level within five years. The budget for the upcoming period is fully in line with this instruction. In 2019, the non-oil and gas deficit is expected to come in at 6.6 percent of GDP.

Most importantly, by the end of 2019 we will stop using our reserves to offset a budget deficit. This is an important point. Why should we reduce the budget deficit? In order to finance the budget through borrowing, primarily on the domestic market. Another source of revenue will be the privatisation programmes that will be implemented over the next three years.

We are constantly in touch with the Central Back, and by coordinating budget and monetary policies, we have succeeded in preventing any serious shocks to the budget and in overcoming the difficulties we saw last year and this year. Unlike what we saw in 2008–2009, the unemployment rate has not risen. We are now witnessing a speedy recovery despite the current oil prices (although they did rise, albeit slightly), which is different from what we saw in 2008–2009.

Let me tell you that the new budget, and the new rules currently being discussed within the Government, and the budget guidelines, will heal the budget of so-called Dutch disease and help us avoid the possible risks we could face in a changing global economic environment. The budget should be sustainable, and allow us to deliver on all of our commitments regardless of any external factors. This is the main budget policy priority for the upcoming three-year cycle.

Vladimir Putin: I saw you recently at the VTB forum where privatisation was discussed, among other issues. As far as I know, Rosneft has already fully remitted the funds for the acquisition of Bashneft.

This is a very important issue, as Mr Medvedev is aware. I asked the relevant bodies to check whether the necessary funds are available on Rosneft’s accounts. It was confirmed that the company has these funds on its accounts, so Rosneft will not need to obtain any additional funding on the domestic financial market to complete the transaction, including to sell or, if necessary, to temporarily acquire shares or carry out a stock buyback. All the funds are on the company’s accounts and are available to the extent that when they are used it will not affect ongoing transactions or cash flow, and will not require additional borrowing on the open market. This is a very important issue, and I would like to ask you to keep an eye on it.

We have always said that although compliance with macroeconomic stability parameters is very important, and possibly more important than anything else, we must also honour our social obligations. The provision of medicines is one of our priorities.

We have allocated up to 400 billion rubles for meeting federal and municipal needs, which account for 30 percent of the Russian market. At the same time, we know very well that a survey of contracts for 2015 revealed considerable price deviations, up to 20 percent. I know that the Healthcare Ministry and the Anti-Monopoly Service were working on this problem, and so I would like to hear your assessments.

Healthcare Minister Veronika Skvortsova: Mr President, colleagues. As you instructed, the Healthcare Ministry has been working since August with other concerned agencies such as the Communications, Economic Development and Finance ministries, the Treasury, the Federal Anti-Monopoly Service and the Rostec State Corporation to create an information and analysis system for monitoring the purchase of medicines.

The system should be primarily capable of promptly analysing data on the municipal purchase of medicines provided by all Russian regions at the planning stage and following tenders and online auctions. It should also calculate the average market price for each international unpatented (generic) drug name and each brand name, which involves transitioning to a new method of calculating the initial contractual price based on market prices rather than on the highest factory-gate prices set by manufacturers. By doing this, we will also monitor the purchase of medicines and therefore prevent violations of law in this area.

The Healthcare Ministry and Rostec have coordinated the technical requirements for this system. We have coordinated them will all agencies and submitted them to the Government, and the Government Commission on Information Technology will discuss this issue soon at a meeting that will be chaired by Prime Minister Dmitry Medvedev.

This system’s plan has been approved. It contains a whole package of organisational and administrative and legal measures put together in such a way as to have the system ready for test operation by March 1, 2017, in accordance with your instruction.

In 2017, all information on state and municipal purchases will be collected in this system and we will develop our models for responding to price formation violations detected. The system will be ready for full operation as from January 1, 2018.

The result will be that, starting in 2018, experts predict that the difference between procurement prices and the average market price will drop by at least 60 percent, taking into account that market prices are already 10–30 percent lower, depending on the type of medicines, than the minimum registered producers’ prices. This will free up considerable budget resources for increasing coverage of public demand for vital medicines without having to find additional funds.

We already have positive experience in this area. Over the last three years, we have moved entirely over to this method for federal procurement and this has enabled us to achieve a 33-percent reduction in the price of costly medicines such as “7 Nosology” list, anti-retrovirus medicines purchased at the federal level. This saved us a considerable sum of money this year.

The Healthcare Ministry placed the order for this system’s development. It will be developed as a sub-system within the unified state information system in the healthcare sector, work on which is currently actively underway with the support of the Healthcare Ministry and Rostec Corporation.

Looking further ahead, we think this system could become one segment in a bigger, large-scale project to monitor and oversee procurement for other socially important goods and so on. Everything is going exactly according to plan right now and we are doing everything possible to ensure that your instruction will be completed by the set deadline.

Vladimir Putin: Good. Mr Artemyev, what is your assessment?

Head of the Federal Anti-Monopoly Service Igor Artemyev: Mr President, colleagues, thank you very much for this instruction on prices.

Let me say that even before we became a tariff regulator, with the help of the Economy Ministry and Russia’s trade offices abroad, we carried out quite a large study of different countries’ markets and reference prices. This study’s results made it clear that many prices on the Russian market were higher compared to other countries. This was the case even before the devaluation.

Therefore, when the two-fold devaluation happened, all of these companies came to us proposing to register prices twice as high than the previous registered price, and we refused them. What’s more, using the method we approved, also before we became a tariff regulator, we proposed that they take into account the inflation growth that had already become apparent at that moment.

At the same time, we carried out additional studies as we implemented your instructions, and revealed 48 medicines for which prices are higher in Russia than in the other reference countries. The word was then sent to these companies that they should come and reduce these prices. We register the lower price, otherwise we try to de-register them and remove them from the market, but in such a way as that our citizens do no suffer and that we find suitable replacements for those who need these medicines.

We have also succeeded in putting an end to manipulation of dosages. How were prices raised and what was the mechanism used? Foreign companies used this method quite often. They changed a medicine’s dosage. This would usually look as follows: If a one-milligram dose was sold for 100 rubles, they would produce a 2-milligram dose, which you would think should cost 200 rubles, but no, it cost 500, 1,000 or even more.

We changed the legal practice regarding this method and today we refuse to register prices for medicines in around 40 percent of the cases. This, along with the measures I already mentioned, contributes to keeping prices down. We are not allowing them to raise prices by changing the dosage or application method. We have had the courts on our side in disputes arising as a result. This judicial practice has developed now and can be bolstered.

Unfortunately, we have also noticed cases of localisation taking place by simply replacing the packaging, while the medicine itself and the ampoules are produced abroad, as before. Only the packaging has changed, but in accordance with our regulations, these medicines were recognised as local and did not go through all of this complex price registration procedure I just spoke about, and were therefore registered at very high prices. We are now looking at how to deal with this, but the upshot is, of course, that we need to re-examine the situation with these prices, go back to a comparative regime and make these companies bring the prices down. This is our homework, if you like, and we are working on it and will certainly complete it.

But the previous method we used to help keep down prices for original medicines, mostly foreign, was an obstacle when it came to cheap Russian medicines. Under the method we used, you could adjust prices for inflation by 10 percent, say, but for cheap Russian products that cost from one to 10 rubles, this 10 percent gave them nothing because, unfortunately, they most often buy the active substances used in the medicines abroad, from foreign companies. The prices are all in dollars and they do not manage to make any profit. We do need some kind of indexation system therefore, because these cheaper products are disappearing from the market and being replaced not even with medicines costing 10–50 rubles, but with products costing 100–150 rubles, foreign products. This has been happening before our very eyes over these last months for a large number of medicines that Russian consumers are used to.

All of these measures have certainly helped to keep medicine prices down. According to the Healthcare Ministry’s statistics, prices rose by around 1 percent over the first 9 months of this year. There was a jump up in prices when the devaluation happened, but this is no longer the case and medicine prices have stabilised.

At the same time, I note that the entire system of legal practice and laws that we have today requires serious reform. Today, it protects not so much consumers’ interests, that is, the interests of the state and citizens, but the interests of producers, which includes many foreign producers.

We are ready to prepare your additional instructions. Some of these issues should be included in a new roadmap for developing competition in the healthcare system. The Government has already given an instruction on this, after hearing our report on the situation with competition in the country.

Some measures are extremely important. These include, above all, the parallel importation of medications and its facilitation. Here, we depend on the position of the Customs Union countries. They have not accepted our position yet, mostly likely because they simply do not understand it. This refers to procurement from official dealers – not from just anybody but from official dealers in countries where these drugs are cheaper so that they can flow to Russia and thus reduce prices, primarily of expensive preparations.

Of course, this also involves streamlining the new legislation on mandatory licensing in case of violations of intellectual rights. All of that exists in the BRICS countries. But unfortunately, this system does not work here. This is probably also something to think about. And then, of course, what Ms Skvortsova spoke about: state procurement.

Maximum interchangeability, the maximum possible use of medications with the same formula in the same auctions and tenders, which makes it possible to significantly reduce prices. And of course, what was said about working with the Rostec Corporation – putting in place an automated monitoring system. No doubt, this is the wave of the future, and it will primarily involve abandoning absolutely false information about drug production costs and using electronic systems to analyse them with the help of modern comparability methods, the way this should be done in the 21st century.

Vladimir Putin: As we know, knowledge increases sorrow, while experience and knowledge suggest that such manipulations on the market, especially on the part of producers, as well as wholesale suppliers, are, as a general rule, encouraged by unscrupulous officials from corresponding agencies who are responsible for their procurement, for regulation. For some reason, we have not yet seen any [criminal] cases over this issue. I believe that our relevant agencies – special services and law enforcement agencies – are clearly not doing enough in this respect. But please work with them in close contact.

So this work should go on, without allowing this kind of malpractice. Some prices in our country – according to my reference materials – are higher than in Australia, while production is based nearby, in Europe. This goes to show that some clearly unscrupulous practices exist on our market – [prices are] several times higher than in European countries, not by several percentage points, but several times over. Please, this work should continue.

Mr Donskoy told me about the ministry’s plans to toughen enforcement against poaching and trade in wild animals and their derivatives. So what are your plans in more detail?

Minister of Natural Resources and Environment Sergei Donskoy: Mr President, one of the main reasons for poaching is the market demand for rare animal species and their derivatives. Experts believe the global market of their derivatives is worth 17–20 billion euros a year. The damage from poaching exceeds 10 billion rubles a year. Almost 2,000 cases of illegal hunting were registered last year alone.

To counter poaching amendments were made to the criminal and administrative codes and fines for the illegal hunting of Red Book animals were increased in the past three years. Three hundred and thirty people were convicted of illegal hunting. Nine cases involving illegal hunting of tigers and trade in their derivatives were brought before the court.

At the same time new venues for illegal trade are appearing, such as virtual announcement boards, websites, auctions and social media. They are venues for selling species that are registered in the Red Book and appendices I and II of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES).

According to experts over 600 ads selling 2,500 species, including about 30 percent of offers to sell tigers and their parts, mainly skin, were found on the Runet in 2015 alone. Materials that suggest a crime has been committed are sent to the Interior Ministry but none of them led to court decisions.

Mr President, we believe these efforts must be reinforced. In this context we would like to further increase punishment for illegal trade and spell out separately responsibility for online trade in Red Book animals and their parts. With this end in view we drafted amendments to the Criminal Code to classify crimes when illegal trade in Red Book animals and their derivatives is conducted via mass media, including the internet. According to these amendments such online trade will be punishable by community service for up to three years and a fine of up to 1.5 million rubles or from two to four years in prison. Right now these crimes are punishable by community service for up to three years and a fine of up to one million rubles. If a crime is committed by an organised group, which is often the case, its members will be sentenced to serve a prison term from six to nine years and to pay a fine of up to three million rubles. The draft amendments are currently undergoing approval in different departments. We plan to submit them to the Government as early as in October and request your support.

Vladimir Putin: Ok. I will support your proposal, of course but you are right – tougher punishment isn’t everything. Punishment must also be inevitable as the current rules and laws require. The Interior Ministry obviously fails to do enough in this respect.

I will ask the Prosecutor-General’s Office to monitor this as well and to conduct relevant checks. The Ministry of the Interior must report on what it is doing. Almost nothing is done in this area.


October 12, 2016, Novo-Ogaryovo, Moscow Region