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The ninth annual conference of the Valdai International Discussion Club on The Future Is Being Made Today: Scenarios for Russia’s Economic Development is being held on October 21–25 in St Petersburg and Moscow.

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President of Russia Vladimir Putin: Good afternoon, friends, ladies and gentlemen,

You have already had the opportunity to speak with my colleagues, as in the previous years, and I think they have told you practically everything, so I don’t know what we're going to talk about. I suggest we just enjoy our dinner, we are going to have some wonderful wine and good food. But if some questions arise that still remain unclear, I will do my best to answer them. I say “do my best” because you have met with ministers and representatives of major companies. Each of them is an expert in his or her field, whereas I focus on the bigger picture, if you like. But, I repeat, if something remains unclear, I will try to satisfy your curiosity as far as I can.

In any case, I would like to say at the beginning of our conversation that we highly value (and I personally truly appreciate) our regular annual meetings. I am very pleased that the international expert community still retains a keen interest in Russia, and I am glad that such esteemed experts on our country as those represented here can state Russia’s objective position in a timely manner, and interpret it with full knowledge of what is really happening in the Russian Federation. There are few people, other than Russians themselves, who understand it.

Therefore, I am at your disposal. I am very glad to see you. Welcome, and enjoy your meal.

Russian News and Information Agency Ria Novosti Editor-In-Chief Svetlana Mironyuk: Mr President, can I take over for a while? Do I have your permission?

Mr President, colleagues,

This is our ninth meeting. The club’s 10^th anniversary is approaching. Next year we will hold our anniversary conference.

This year the club has worked on a scenario of Russia’s economic development under the slogan The Future is Being Made Today. And, as Financial Times wrote today, we have made some changes to the format of our work in the course of the year (i.e., how the discussion club works over the course of the year) and we would like to invite you to change the format of our conversations and discussions and to move on from the usual Q&A format that we have every year to a slightly more structured discussion.

I would like to present three of my co-hosts. They are well-known Valdai old timers Toby Gati, Alexander Rahr and Piotr Dutkiewicz. We would like to take a traditional Russian approach and divide our discussion into three sections: What is happening, Who is to blame, and What is to do be done.

Vladimir Putin: In Russia no one is ever to blame.

Svetlana Mironyuk: Just a few words about the club’s activities in between our annual meetings.

The grant system has begun to operate and some eleven studies are being conducted by Russian and international experts and political scientists on a variety of topics, from Russia’s role in the global nuclear power industry to Russia’s image on non-Russian websites or the political aspects of developing the Arctic. All of these issues are very important, topical and interesting for both Russian and international audiences.

Over the course of the year, the club’s members gather for the so-called mini-Valdai conferences and produce thematic reports, which I have brought here. Following this conference, a report will be published on scenarios of Russia’s economic development. It will be the basis for the discussion on the theme Russia at the Davos Forum. This shows that the club’s expertise is recognised at other venues.

I would like to cite a few figures. This year's conference features 90 people from 20 countries, 35 of whom are experts from Russia and the rest are our foreign colleagues. We have around 20 new members, including from countries that were not represented previously, such as Belgium, Finland and Mexico, and the representation of our colleagues from China and India has increased significantly.

That is all I wanted to say. I give the floor to Alexander Rahr.

SENIOR ADVISOR ON RUSSIA FOR WINTERSHALL HOLDING, CONSULTANT FOR THE PRESIDENT OF THE GERMAN-RUSSIAN CHAMBER OF FOREIGN COMMERCE (GERMANY) ALEXANDER RAHR: Mr President, first of all I would like to wish you a happy birthday. Sixty is a round number.

Vladimir Putin: Thank you.

Alexander Rahr: We have discussed the global economic crisis in some detail and concluded that its development is not following a U or W trajectory, as we all expected, but that it is L-shaped; that is, the situation is getting worse. Global institutions are not working and it seems that they need to be changed. The best example is the European Union, which is being rebuilt more radically than ever before in the past 60 years.

We can see that your policies have led Russia out of the gravest crisis of the 1990s. Ten years later, Russia is making a more or less successful recovery from the financial crisis. Nevertheless, the Valdai Club conference has noted that institutions in Russia are not working well either, and we devoted a great deal of time to this matter. Experts believe that Russia has been lucky thanks to its fuel and energy complex.

I would like to begin our discussion with a general question that at least 20 people wanted to ask you: What is your current vision of Russia’s energy policy and global trends in the world? In this context, if you could comment on the consolidation of the Russian oil market through Rosneft, through the events surrounding Rosneft and the adaptation of Gazprom to the new realities of the gas market. Here we should probably talk about the fact that gas demand has been falling on the whole in Europe while new sources are appearing in America. Thank you.

Vladimir Putin: If we speak at length on the subject raised by Mr Rahr, we won’t be able to talk about anything else. You can start and finish with it. So I’ll try to be brief.

First of all, about how we are lucky or unlucky because of our hydrocarbons and other mineral resources. Some believe that the Soviet Union’s economic development began to stall when it started to produce vast quantities of oil. When there was a lot of oil, it became cheap while oil and gas revenues grew, and the Soviet economy lost the impetus for development. It was all there anyway, these riches fell down from the sky or rather came from underground. This is partly true.

However, it is true only in part because the main problem was the non-market nature of the Soviet economy, the lack of competition and so on. A large amount of cheap mineral resources only aggravated the situation.

As for modern Russia, it is a challenge we face as well. The challenge is the temptation of cheap mineral resources, which we have in abundance. This is true. But that is why we are making efforts to diversify the Russian economy. We talk a lot about it and I’m sure you discussed it with my colleagues, the ministers, with whom you met. Do these efforts bring about any positive changes? I think they do.

Of course, 50 percent of our budget revenue comes from oil and gas sales. But if we take it as a percentage of our overall GDP, the oil-and-gas sector revenue is declining. And we plan for this revenue to drop even further against the GDP total. We believe that this extensive economic development model, which is based on mineral resources, has largely worked itself out. But naturally, if prices remain high enough, it would make no sense for us to sell our raw materials below world prices. That would simply be absurd. And if we sell them based on the higher global prices, the federal budget will get higher revenues from those resources accordingly. This is obvious.

But given that we need to be thrifty and stimulate the economy as well as various sectors toward diversification, what are we doing? First of all, we are implementing stimulating measures. For example, we are introducing tax incentives for high-tech companies. And overall, they generally work quite efficiently. As you know, the tax component for workers and their salaries is very important for this sector of the economy, and the tax rate for small innovative enterprises in this sector is much lower than in other sectors of the economy. This is just one of the examples, one of the measures.

At the same time, we are reducing budgetary expenditures that are financed out of oil-and-gas sector revenue. We implemented this for the first time, as we discussed last year, and beginning next year, we will be implementing the so-called budget rule, which we will use to calculate the average oil price for the past few years and, based on that price, plan our budget revenues and expenditures.

Currently, as you know, the average price of our Urals blend is $111 per barrel. We take the next year’s oil price at around $104 per barrel, but applying the budget rule, we will only take into account that part of budget revenue that corresponds to the oil price of $91 per barrel. The planned budget expenditures would not result in a deficit if the oil price is $104 per barrel, so we are planning on having a slight deficit and feel it is justified. And most importantly, we have sources of financing if that deficit does occur.

I will point out that last year and this year, we also planned on having a slight deficit. Last year, we ended up with a surplus of 0.8 percent, and this year, we have also had a surplus for the January-August period, and are likely to have a surplus at the end of the year as well. Nevertheless, we will calculate our expenditures based on oil price of $91 per barrel in 2013, $92 per barrel in 2014 and $93 per barrel in 2015. Overall, we will be very careful, and when we reduce our revenue and, accordingly, our expenditures, this spurs all the other sectors to be much more efficient.

Moreover, we have adopted a whole programme on energy efficiency and the development of nanotechnology. We are taking separate stimulating measures to develop the aviation sector, the aerospace sector, and biomedicine. We have a separate programme with an allotment of, I’m not sure but I believe 120 billion rubles, to develop medical equipment and the pharmaceutical industry.

We are taking a broad approach, creating infrastructural incentives in the form of tax breaks and giving additional resources for the development of promising high-tech sectors. We expect that we will be able to diversify the nation’s economy.

Alexander Rahr: And Rosneft?

Vladimir Putin: Rosneft. It is true that the Cabinet and I had mixed feelings when this project came up, specifically Rosneft’s purchase of BP’s interest. Indeed, the project began from that point, rather than the purchase of interest in TNK, i.e. the Russian stake. What was the cause of these mixed feelings? I will answer this very honestly.

First, what did we consider as the downsides? The fact that a company with mainly state participation was increasing its presence on the market through a foreign partner. There was concern that the second part, i.e. the Russian part of TNK, could also be absorbed by Rosneft, a state company. And overall, that does not correspond to our trend of curbing government sector growth.

But there was also another component (and the overwhelming majority of the experts present here know this): the fact that there was absolutely no unity between TNK-BP members; instead, there was a constant conflict lasting many years that occasionally came to blows. And I once warned that this was not a functional structure, when former Prime Minister of the United Kingdom Tony Blair and I attended the signing of the documents establishing this joint company (they did it on a “fifty-fifty” basis). Even then, I stated that the Russian Government and I would not object if our foreign partner were to hold controlling stakes. Just as we would be happy if the Russian side received the controlling stakes. There must be somebody to manage the company. They told me, “No, we will come to an agreement, we will settle this all amongst ourselves.” Well, they didn’t come to an agreement! They didn’t settle it! And all of their work was advancing from conflict to conflict.

The foreign partner – the BP company – has turned to us many times for help. We tried not to get involved in their corporate disputes, but when BP came to the Cabinet, the BP executives came to me and said that they would like to cooperate with Rosneft (and this is the second part I wanted to talk about), we could not say “no” to them because otherwise, it would be perceived as if we were putting them in the same category as TNK, with which they have a constant conflict.

We had a difficult choice to make. But ultimately, we nevertheless agreed with Rosneft and BP’s suggestion, their joint suggestion that they could work together.

As for the second part, the possible sale of the second part of TNK to Rosneft, this would be an initiative that should come from TNK shareholders themselves; they have expressed their desire to sell their part as well.

And the third component is that this is not just a purchase and sale deal, but also an exchange of shares, including both shares that belonged to Rosneft itself as well as, I believe, a 5.7 percent stake in Rosneft held by the state. And that is basically a part of our strategic plans; this is pretty much a privatisation, allowing a private foreign company into a Russian state company. At the same time, they, our partners from the UK, are taking on a fairly big stake, I can’t recall right now the exact figure, but I think this information is freely available. In any case, it gives them the opportunity to have a representative on the board of directors, which is a separate issue.

At any rate, I am assuming that if there is a representative from a major shareholder on the board of directors, this will ensure additional transparency in activities of our biggest oil company, Rosneft, which incidentally is the world’s biggest crude oil producer. In terms of overall production volumes, including oil products, ExxonMobil is much bigger, but when it comes to crude oil production, Rosneft has taken first place worldwide.

Alexander Rahr: Thank you.

At the conference, we also discussed how perhaps Europe is suffering from a kind of schizophrenia. There is a part of Europe that wants to cooperate with Russia very closely, while the other one does not. Why is that? I would like to pass this question to former Prime Minister of Poland, Mr Oleksy.

DEAN OF INTERNATIONAL RELATIONS DEPARTMENT AT ACADEMY OF FINANCE AND FORMER PRIME MINISTER OF THE REPUBLIC OF POLAND JOZEF OLEKSY: Mr President,

We have talked at length over the last four days about the crisis in the European Union and Russia’s attitude toward it. Could you please share your thoughts on overcoming this crisis?

My second question is whether you feel it would be possible for Russia to enter the European Union, since you spoke about the issue of Russia’s accession to NATO, but those are two different things.

And a third question. Would you be so kind as to compare your concept of the Eurasian Union with the European Union model? We feel that the European Union is at least partially a model for the Eurasian initiative. Can you talk about the long-term goals of this Eurasian Union? Because without Ukraine, for example, it will not be a strong organisation. Without an independent currency like the euro it would also be difficult to talk about economic coordination and joint economic policy.

These are the three questions I would like to ask you.

Vladimir Putin: First, as far as the crisis in Europe is concerned, this is ultimately not our problem. I feel that it wouldn’t even be entirely right for me to comment on all of this, because I have a great deal of respect for my European colleagues. They are facing extremely difficult economic, social and political challenges, and I do not really want to throw in my own comments which, one way or another, might put some sort of pressure on them.

I can only repeat what I have said at international meetings, and our position is publicly known, so I will not go into details. I will say the following. Naturally, what we are seeing now in Europe is a systemic crisis, and it is not caused by debt alone. I think the problem goes far deeper. It is partially political in nature, partially technological, and partially pertains to problems with the integration process itself.

As for its political nature, I think it’s on the surface. To paraphrase Churchill, the current system of power is a terrible system, but it’s the best we’ve got. Where does it lead to in practice? We all understand that. A party striving for power, promising everything unsparingly. That is the nature of today’s civilised world. They keep making promises, and then try to fulfil some of them. If they don’t, that’s it; they stand almost no chance in the next election. So they do it at any price.

What should be done if the level of development (this is the next problem, a technological one), the level of productive power, the level of technological development and technological structure in today’s world does not allow us to quickly ensure fast-growing and increasing drive for consumption? At some stage, this was ensured through technological development, but it is no longer the case. So during such periods, I always recall Kondratyev, our scientist who spoke about long waves of crisis. It seems this long wave has come. We need a change in technological structure so as to ensure a growing demand for consumption. And this change in technological structure has not yet occurred.

The political system is such that it promises everything, but is not able to deliver. Citizens are used to living at a certain level, and there is nothing that could convince people in Spain, for example, that they should live the same way as people in rural China. China is ensuring its growth rates by using technology and a constant flow of millions of workers to large cities. That opportunity does not exist in Europe. So what’s the source of growth then? Debt, debt, debt. They have turned on the monetary printing press. And these are the results of the problems that lie deeper. That is what caused the debt crisis.

I think that Germany’s leaders are taking a very pragmatic position that the systemic problems which led to this state must first be eliminated, and then additional resources should be injected. If the opposite is done then the additional resources will simply be dissolved, they will only provide a temporary ‘kick in the butt’. But there will not be sufficient acceleration in order to overcome the entire distance that would allow Europe to get out of crisis. Indeed, I think that this is pretty evident.

Yes, of course, the position must be flexible. Naturally, certain monetary measures – additional issues, attempts to artificially heat up the economy – have a short-term effect, but you know, that’s like a pill that simply reduces a fever but does not cure the disease itself.

So I think that systemic measures are necessary. In my view, those are exactly the kind of measures that EU leaders are inclined to use. And in any case, everyone within the EU leadership – and the people in all the EU nations in general are very competent and well-versed in economic matters – they all understand what needs to be done. The question concerns the political frameworks in which they find themselves, and whether these frameworks give them the opportunity to work in the right direction or hold them back. As for what our colleagues will ultimately do, that is, first and foremost, a European choice.

As for the idea of Russia joining the EU, we all understand perfectly well that this is not realistic either from the point of view of our size or our economic organisation. But I think we should most certainly look for means of rapprochement so as to make use of the synergy to be gained from combining the efforts of Russia and its European partners.

Someone like you is already very much aware of the fact that Russia has a highly educated population and a strong base in the fundamental sciences. We have abundant mineral resources and well-prepared human resources capable of learning new skills quickly. Look at the way our automotive industry is developing. Companies have opened up almost overnight and human resources training is rapid and effective. Everyone I speak with from among the company directors, the heads of German companies such as Volkswagen and others, the Japanese, they all say that they have absolutely no trouble finding local staff and training them very quickly. This is one of Russia’s advantages.

If we could combine the European Union’s technological capabilities with Russia’s huge territory and the opportunities our country offers, the resulting synergy would be tremendous and would make us all more competitive. Sadly, however, we are moving only very slowly in this direction.

Coming back to an issue I already spoke about before, Russia proposed joint work on a satellite navigation system a few years ago. Our colleagues expressed interest in the idea but in the end decided not to go ahead. What is the result? Russia has a fully completed satellite cluster of 28 satellites in operation now, while the Europeans have only launched 5 satellites, as far as I know. But if they had used the opportunities we offered for space launches and our development of the GLONASS system, both GLONASS and Europe’s Galileo system would be working effectively today and would be a real competition for GPS. Would this be a good or a bad thing? It would be a good thing of course, not because it would let us bite off a piece from someone else’s pie, but because it would develop this sector of the global economy in general. Greater competition would make the sector more effective and give it more weight. This is just one example.

We have made no progress towards introducing visa-free travel. Really, this is just laughable. Europe has visa-free travel with some Latin American countries. Is the crime situation there really any better than in Russia? Of course not. This is all quite absurd, you understand. I am at a loss really to understand our colleagues’ motivations here. These are things that are holding back rapprochement between Russia and the EU, and this is not a good situation.

Coming now to the Common Economic Space, in large part, we took the integration achievements in Europe as our reference model here. We do have a few advantages of our own though, because, as many of you no doubt realise, start discussing anything in the EU and the 27 countries with their 27 languages all make for such a bureaucratic nightmare that you feel like you’re never going to make it alive to actually getting to the point of what the various speakers are saying. No one has the strength to sit through it all. But we have the Russian language that unites us as a natural common language of interstate communication, and this is a huge advantage.

Furthermore, the infrastructure system – railways, energy sector infrastructure, aviation links – though we consider it still in need of further development, lays a solid base on which to build integration. This was our common infrastructure during the Soviet period. The countries that made up the Soviet Union then inherited its various parts, but we can use it in our common interests. There are railways for example that first cross Russian territory, then enter Kazakhstani territory, then come back onto Russian territory. Indeed, the situation is such that the heavens themselves incite us to integrate, and so this is what we are doing.

We decided that each country would use its national currency. On the one hand, this is bad because it does not let the ruble strengthen its position, but at the same time it is good, because each country can implement its own economic policy. When it comes to this area we need to take the European Union’s failures into account. We need to look at the debt situation there, the macroeconomic situation, the situation with the other main economic development factors, and the effect the common currency has had in the EU. It seems to me that in terms of their economic development level, not all of the participating countries have always measured up to the demands of the common currency system.

Argentina at one time decided to peg its national currency tightly to the dollar, and they then had great difficulty coping with problems in their main economic sectors. They were practically unable to carry out any kind of devaluation. If Greece had still used the drachma they would have been able to devalue the currency in time and might have avoided such serious problems. This would have been a good signal that macroeconomic corrections needed to be made. But they ended up with no option other than getting themselves into debt. And so, before we ever contemplate introducing a common currency between Russia, Kazakhstan, and Belarus, we would first need to harmonise our macroeconomic and financial policy.

We would need to draw up common and strictly regulated policy with regard to the main economic development factors and only then start looking at the possibilities for introducing a common currency. As it happens, we already use the ruble in a fairly large share of our non-cash settlements with Belarus. We would need to summarise and analyse all of this, look at how our economies are developing, and not just sign agreements, but put in place mechanisms for supervising common economic policy. Only then could we move on to a deeper stage of integration. 

I think that Europe, acting out of political considerations, got ahead of itself. It tried to apply the common rules that could work in developed market economies to countries that in terms of their economic development level were not yet ready for this. It is not that the idea itself is wrong, but simply that perhaps it should have been carried out under different conditions.

Finding the solution to this situation however, as I said, is a matter for our partners. We can but sincerely wish them success and say that we hope they will find the best solution because the EU, after all, is Russia’s biggest trade and economic partner.

Alexander Rahr: Thank you. That was a question from a ‘new’ European. Now let’s have a question from an ‘old’ European – John Peet from The Economist.

European Editor of the Economist (Britain) John Peet (retranslated): Mr President, I will put my question in English, if you don’t mind.

Svetlana Mironyuk and Mr Rahr said already that we are talking about economic development scenarios in Russia. The question is one of industrial transition of a kind that would reduce dependence on energy resources. Russia would probably like to expand development of its processing and manufacturing industries. Some have expressed doubts about the need for and chances of success of such a policy, but Russia does have quite strong experience in these sectors, though it would have to compete with China in areas such as raising the quality of its goods. But perhaps, rather than manufacturing something, Russia could focus on developing agriculture, forestry, the pulp and paper industry, develop Siberia, and develop provision of services, because services after all are a fundamental part of any modern economy. Russia could attract small businesses, and could improve its business climate by reducing corruption and bureaucracy and lowering taxes.

Do you think that advocates of these views are right, or do you think that Russia should concentrate on developing its manufacturing and processing sectors?

Vladimir Putin: Russia should concentrate not on manufacturing and processing, but on economic sectors with a future, sectors based on new technology and with prospects for growth in this twenty-first century. One of our scholars, Academician Tamm, said that the twenty-first century would be the ‘century of biology,’ just as the twentieth century was the ‘century of physics’. He was absolutely right, because we see now how nanotechnology and biotechnology have come to the forefront and are being used ever more widely. It is hard to even imagine all the potential results of using new technology.

We will therefore develop all of the different sectors, agriculture too. Russia, after all, has a lot of black earth and land that is good for agriculture, and we will naturally try to make use of this competitive advantage.

We need to use our territorial advantages to develop services above all in transport, trans-Siberian flights and flights between the USA and Asia, and between Europe and Asia, for example. These are the most economically effective routes. The Northern Sea Route, if properly developed, would also be the most effective route for transporting goods between Europe and Asia and would work out a lot cheaper than going via the Suez Canal.

But we need to stay focused on the future. We have the possibilities for this. As you know, we set up a special nanotechnology centre a few years ago and it is developing well in general. I already mentioned our targeted programmes for developing medicine and medical technology. I think these are areas with a future, and it is on sectors such as these that we should concentrate our attention. But we should do this not so much by relying on state resources as on putting in place the conditions that will open up these sectors to private capital and private business. This is not an easy undertaking, and I cannot say yet that we have already managed to put these conditions in place, but this is our goal.

Alexander Rahr: Thank you.

I will now give the floor to our Chinese colleague, another of the Valdai Club’s regular participants, Mr Feng, a well-known historian and political analyst from Shanghai.

DEAN OF THE SCHOOL OF ADVANCED INTERNATIONAL AND AREA STUDIES, EAST CHINA NORMAL UNIVERSITY, DIRECTOR OF THE CENTRE FOR RUSSIAN STUDIES FENG SHAOLEI: Mr President,

It is a great pleasure to meet with you again.

You have assessed highly the development of economic ties between Russia and Asia. This is very important. But as you know, great change is underway in Asia too. The geopolitical situation has become a lot tenser. The Asian economies continue to grow, but growth rates have slowed down somewhat. Will you continue to advocate developing ties with Asia, or will you make some adjustments to the concept for developing the Far East and Siberia? I think this is an important issue, though we realise that it is not a simple matter. Time will be needed. I would like to know, now that you have taken this big initiative, what specific progress has been achieved so far, and what are the prospects ahead and the opportunities for international cooperation?

Vladimir Putin: You said just now that growth rates in Asia are slowing. This is indeed the case and we see it and are aware of the fact. I imagine you were thinking primarily of the slowdown in growth in China, your country. But let me say that I do not think this is such a worrying signal. Let me explain why I say this. Of course we would like China, the world’s second biggest economy, to maintain high growth because China is Russia’s biggest trading partner today with bilateral trade of $83.5 billion. This is followed by Germany, with bilateral trade of $72 billion.

Naturally, we would like to sell more to China and buy more from China, but there is one circumstance I want to point out. I think that Chinese specialists are taking the right step by restraining the growth rate a little, because otherwise there is the risk of producing a bubble. You can run into problems if you artificially overheat the economy, and so I think China is doing the right thing by slowing the pace a little. That is my first point.

Second, we know that China is taking measures, including administrative measures, to rein in lending to the economy, and I think this is also absolutely correct because these are things that need to be kept under control. 

Third, China trades with the entire world, with the USA, with Europe. If economies face problems elsewhere in the world this automatically has an impact on the Chinese economy too. Fortunately, I think nothing disastrous has happened so far and the situation was quite foreseeable, but it will not stop Russia from developing its relations with China over the medium-term and strategic perspective. Indeed, we have already agreed on the objective of bringing our bilateral trade up to $100 billion. I think we will reach this goal. We can do this by increasing our trade operations and increasing our energy exports to China. I think we will reach agreements not only on sales of oil but also on gas exports. Exports of Chinese goods, including mass consumer goods, to the Russian market will also boost our trade. Let’s not forget that Russia is now a full-fledged member of the World Trade Organisation, as is China.

We will continue this policy of increasing trade through big projects too, among which is our cooperation in peaceful nuclear energy. The Tianwang nuclear power plant is already in operation, the first unit has come on line, and our Chinese colleagues are happy with the facility, which was built using the latest technology. We will continue this cooperation and have already agreed on this with our Chinese friends. Chinese companies and specialists will perform a substantial share of the contracts under these projects. Chinese specialists are already carrying out 25–30 percent of the total share of work.

We will continue our cooperation with our Chinese partners in aviation and rocket technology. These and other sectors all offer opportunities that make me optimistic that our trade and economic ties will continue their steady development.

In this respect, I hope that following on from our first steps in using the ruble-yuan pair in settlements we will move on to the next step and start using our national currencies as the real basis for servicing our bilateral trade. This is not as easy as it looks at first glance. We have already taken the first steps, however, and will continue to move in this direction, all the more so as Chinese specialists are very interested in the idea too and welcome the use of our national currencies in mutual settlements. As you know, the ruble is now a fully convertible currency and we set no limits or timeframes on outflow of capital, nor do we burden our partners with additional reserves when taking capital out of the country or converting it into dollars or euros. The yuan is not yet a fully convertible currency, but this is all a matter of time. I think we will come up with the cooperation mechanisms that will enable us to develop our financial sector relations.

Svetlana Mironyuk: Thank you very much, Alexander.

We have finished work on the first conceptual block and are moving on to the second, which is devoted to economic development scenarios in Russia that our colleagues discussed at the sessions in St Petersburg. I pass the floor to Piotr Dutkiewicz.

Please, Piotr, go ahead.

Director of the Centre For Governance and Public Policy At Carleton University (CANADA) PIOTR DUTKIEWICZ: Thank you very much.

Mr President, over the last several days, the Valdai Club has been discussing four scenarios for Russia’s economic development. And the scenarios were built on a combination of two types of factors.

One group of factors involved the nation’s domestic resources, which we felt were very good. Russia has great resources – both human and natural. But it was noted that they are not fully utilised.

The second group of factors involved the rules and conditions that allow these resources to be used effectively for the nation, such as institutions, the law, political decisions and so on. These scenarios have been split into two groups so that one group includes all the growth opportunities that are built on mobilising domestic resources, mainly by increasing governance efficiency, helping small and medium-sized businesses, and involving the creative class.

And the second group discussed possible options for growth on the basis of an increased dependence on external factors such as capital. For example, whether capital flows in or not, whether oil prices remain stable, or they rise or fall, etc. And of course, these are external factors that, on the one hand, can promote the nation’s development, but on the other hand, they can affect its economic security.

Based on that discussion, the following conclusion can be drawn.

Overall, the nation’s macroeconomic situation, as our experts say, looks significantly better than many imagine. We began with a relatively negative scenario, but it turned out that it wouldn’t be that bad. And by 2030, Russia can certainly reach Switzerland’s current level. This version of the future greatly depends on how well the nation’s domestic resources are utilised. There are three issues involved.

First is the quality of governance at all levels – at the top, beginning with you, and all the way down to local self-governments.

Vladimir Putin: Well, it’s all just fine on my end.

Piotr Dutkiewicz: There will be questions on this matter as well.

Vladimir Putin: Oh, here we go.

Piotr Dutkiewicz: The second is building a true partnership with creative class. Engaging local businesses, the intelligentsia and medium-sized businesses to a much greater degree than right now.

And the third is ensuring detailed and stable conditions for domestic and foreign capital. But it’s one thing to ponder this at the expert level, as we have been doing with our colleagues, and it’s entirely different to make decisions that affect the quality of life for tens of millions of Russians.

Thus, I would like to ask you: what will you consider to be negative and what will you consider to be a good scenario for Russia’s economic development? Or to put it another way, in what areas would you give yourself a grade of A or B+? And in what areas would you give the Government a grade of B or D? And what aspects of your own society, Russian citizens, would receive a C or an A grade?

Vladimir Putin: You know, it’s somewhat hard for me to get my bearings and focus on an answer, it’s very multidimensional.

Piotr Dutkiewicz: The report was quite complicated, sorry; it was hard to predict.

Vladimir Putin: First of all, it is fairly complicated to grade the Government, and even more so the entire society. But I can tell you that we will employ external factors and domestic factors – we should and will use everything that will promote the development of our economy. If the domestic factors are favourable, they should be taken advantage of; it would be absurd not to. If the situation is good, why would we work against it?

But we must keep in mind that the situation will not always be as favourable and we’ve had such examples in the recent past. So I absolutely agree with you, Piotr, indeed, you yourself partially answered this in asking the question. We need to employ the domestic factors and rely on domestic demand, but in order for this domestic demand to develop, we need to make quite a bit of effort, first and foremost, to improve business conditions. I don’t know how fair it was when the World Bank put Russia in 120^th place in terms of conditions for running business, but I already spoke about this publicly, and I imagine some of you heard me: our goal is to become among the top 20 or 30 nations that are considered best for running a business.

But I should tell you that just recently, the World Bank conducted a study and Russia has already risen to 112^th place. And if we consider tax administration, for example, it’s even higher. It turns out that we are even ahead of the United States of America in terms of our tax administration. In other words, the objectives we are setting for ourselves are not just possible to fulfil, they are actually being implemented.

We are moving forward. We have formed a whole plan in this area, to improve business. And we were not doing this alone, behind the scenes, in our offices; we were working together with members of the main business associations. Actually, they drew up our system of values and suggested a set of measures to reach the goals we are setting for ourselves. We now have this plan, and it is being consistently implemented through the enactment of laws and bylaws. We have outlined a whole list of these concrete steps. We have published them all so you can easily browse them.

I feel that this should lead to a significant increase in labour productivity – about twofold. This is a very difficult challenge. But if we do not set ambitious goals for ourselves, we will never achieve them. And in this regard, and I have said this before as well, we need to think about increasing the number of high-efficiency and high-tech jobs. We feel that we can increase the number of high-tech jobs by 25 million. (Actually, it’s not just the Government or myself who think so, the businesses also feel this way, and these figures were initially proposed by members of business associations.) This does not mean creating new jobs, but rather, retraining existing employees for new working conditions and standards. Perhaps this figure might seem a bit exaggerated, but I think we must strive toward it. And if the figure ends up being 20 million, I assure you that this would also be a significant change for Russia’s entire economy.

As far as the “creative class” you spoke about is concerned, naturally, it is impossible to do anything without it. It is impossible to do anything without highly trained professionals in general. This is true for both highly trained engineering professionals as well as, incidentally, people who are simply working on modern assembly lines. Unfortunately, we do not have many such modern educational institutions, but they are emerging. I was happy to see how, for example, in St Petersburg, in a vocational school, they are training modern workers using the most advanced equipment, which, by the way, they bought in Germany and Switzerland. These are good professionals – absolutely world-class.

So our goal is to diversify, and I tried to give a broad overview of the ways for diversification. I repeat, one of the key areas is improving business conditions. On this basis, on this foundation, we hope to attract capital: both our own domestic capital, even if it involves the repatriation of our domestic capital from abroad, and purely foreign capital.

We created a Direct Investment Fund very recently. We agreed to capitalise it every year over the course of the next several years, and next year, we plan to inject add another 60 billion rubles in capital. The Fund has established direct contacts with all of the world’s major investment platforms and has just about begun its work.

I think that this might also bring some very good momentum to the development, first and foremost, in high-tech areas of the economy.