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Before the meeting, the President inspected scale models of the facilities planned for construction in Kemerovo. In particular, Vladimir Putin was shown a project of a cultural, educational, museum and exhibition complex, which will house branches of the Mariinsky Theatre, the Russian Museum, the Gnesin Russian Academy of Music, a multi-purpose concert hall. He was also updated on the construction of the Kemerovo presidential cadet academy.

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Excerpts from transcript of meeting of the Commission on the Strategy for the Development of the Fuel and Energy Industry and Environmental Safety

President of Russia Vladimir Putin: Colleagues, good afternoon.

We are holding a meeting of the fuel and energy industry development commission in Kuzbass for a reason. We all understand that Kuzbass is one of the world's largest coal mining centres, I mean global centres. And, among other things, yesterday was a professional holiday for those who work here and in the industry as a whole – Miners’ Day. I want to congratulate the miners personally and on behalf of all those present here on their professional holiday, wish them good health, all the best, and success in their difficult work that our country needs so badly.

Colleagues, today we have a packed agenda. Together with business representatives and regional leaders, we will discuss the current situation in the Russian fuel and energy industry, consider the key areas and guidelines for the development of the industry and, of course, evaluate how the earlier decisions of our Commission are being implemented.

The fuel and energy sector plays an important part in increasing the pace and quality of the country’s economic growth. It accounts for about 22 percent of the country's GDP, almost 60 percent of exports and 40 percent of federal budget revenue.

Amid a complex market situation and artificial external constraints in recent years, the Russian fuel and energy sector was able to effectively overcome the challenges facing it. As of the end of last year, Russia once again confirmed its status as a leader in the global energy market. We are number one in the world in terms of oil production, and second in gas production. Russia is among the leading countries in electricity generation and coal production; we are the world’s fourth largest producer of electricity and the sixth largest coal producer in the world.

Russian energy companies are investing more in expanding their capacities. Last year, investment increased 10 percent to 3.5 trillion rubles.

New oil and gas fields are being developed, and the transport infrastructure is being expand accordingly. However, I want to emphasise that the provision of gas supply in the region, including rural areas, is not moving fast enough. We were to the Chernigovets open-cut mine with the acting governor just now. There, we met with a small group of employees and one of them had a question about provision of gas supply. This is a natural question, because the progress is, unfortunately, not moving as quickly as we had hoped. There’s need for coordination between the federal authorities, Gazprom, independent producers and the local authorities because the ”last mile“ is usually the problem. We need to coordinate everything. We need better dynamics on this issue. I propose that we discuss this particular matter at one of the commission’s subsequent meetings.

Russian energy companies are maintaining consistent positions on foreign markets. So, natural gas exports have been growing at record levels for two consecutive years now. We need to develop the Russian energy sector’s export potential.

Notably, competition on the global energy market has become noticeably sharper in recent years, so it is extremely important to use our competitive advantages efficiently, to diversify supply routes, and establish ourselves in new markets.

As we are all aware, the Asia-Pacific region is one of the most attractive areas with growing demand for a wide range of goods, which opens up great opportunities for Russian companies.

In this regard, I would like to note one important initiative. In June of this year, during my visit to China, I agreed with President Xi Jinping on organising a Russian-Chinese energy business forum. I am confident that this platform will expand our cooperation, help us find new areas for mutual investment, and launch promising projects in the energy sector. The first forum is planned for November in Beijing. I know that about 40 companies have already expressed interest from the Russian side. Prominent representatives of China are also expected to attend. Please report on the progress of this forum today.

Russia is certainly open to cooperation with all countries in the East and the West. It is important not only to gain new markets, but also to feel confident in our traditional markets. Today within the framework of our Commission, we will specifically discuss the prospects for the development of such cooperation in coal distribution. Last year, domestic companies exported more than 190 million tonnes of coal. This makes Russia the third largest coal exporter in the world. The current market situation gives Russia an opportunity to expand its presence in the global coal market, consolidate its positions and increase our country’s share. To take advantage of these opportunities, we need to resolve a range of problems – we have to increase the profitability and safety of coal mining and modernise production in traditional coal mining regions (Kuzbass, Khakassia, Yakutia) and in the new ones (eastern Siberia and the Far East).

We also need to improve logistics, expand export channels, especially the capacity of the railways, for which coal companies are anchor shippers. As you know, the development of the eastern railways, the bottlenecks on the BAM and the Transsib are viewed as priority objectives for the development of Russia's transport infrastructure in the coming years.

I would like to stress again that there needs to be ongoing coordination, the mutual adjustment of planned coal production increases with Russian Railways’ development programmes and seaport investment projects. It is important to ensure a balanced, integrated approach to expanding the capacity of the railways, to take into account the needs of the coal mining industry, as well as the shippers of bulk and bulk container products. We need to consider creating mutual obligations between carriers and buyers with long-term contracts in this area. This approach will serve the successful implementation of both shippers’ and transport companies’ investment plans.

Let me point out another matter of principle. We should solve development issues in coal mining with the aid of cutting-edge technology that must be efficient but, above all, must improve the miners’ working conditions and safety. We should introduce more advanced standards in the industry and pay more attention to environmental protection, especially at ports and coal-handling places. Concern for people’s lives and health as well as environmental welfare in cities and towns must be our unquestionable priority. The entire chain must become environmentally sound, from the mining to the handling of coal at sea ports.

I ask the commission to monitor these issues constantly and propose that it consider an audit of how mineral developers are complying with the approved models of deposit exploitation, the legal base and its use in environmental and industrial security in order to improve legislation in this sphere.

And another topic before we proceed to the reports: modernisation of thermal power plants. In recent years, we have managed to significantly increase our heat generation capacity, upgrade its structure and improve plant stability and efficiency. The agreement mechanism on capacity supply has played the key role in this process. It was based on investors’ responsibilities to introduce new capacities after privatising the energy facilities on terms that were rather comfortable for businesses.

Today we are speaking about resource-saving environmental stations, which will replace the obsolete and unreliable equipment with low ecological standards and cost effectiveness. In addition, we should do this using the equipment produced in Russia as widely as possible, including 100 percent localisation if our foreign partners are the original producers. We must identify stable sources of funding modernisation in the thermal energy sphere. I ask the Energy Ministry to focus on this issue and analyse all the market reserves.

In addition, I would like to stress once again that capital investment must not be passed along to consumers. Today certain regions lobby for unjustified rate increases. As a result, the money does not go to the development of the regional energy sphere but rather to certain people close to the decision-makers. There is a proposal to change this situation by introducing a standard rate-setting principle. We will also discuss this approach today.

This is what I wanted to say at the beginning. Thank you for your attention. Mr Novak, the floor is yours. Please, Mr Novak.

Minister of Energy Alexander Novak: Mr President, colleagues,

A number of fundamental decisions and strategically important documents on promoting the coal industry have been adopted over the past several years. One of the first, the Long-Term Programme for the Development of Russia’s Coal Industry to 2030, was approved by you, Mr President, here in Kuzbass, in January 2012.

Certain measures have been taken to promote this programme and, most importantly, all stakeholders, such as ministries, departments, coal and energy companies, Russian Railways and the administration of the coal regions joined their efforts to achieve that goal. All this has had a significant effect, and the coal industry has successfully overcome a period of a major fall in prices on global markets and is expanding steadily.

I will give you several numbers. From 2012 to 2017, Russian coal production increased by 15.5 percent to 410 million tonnes. This year, we will produce over 420 million tonnes, and we are likely to surpass the record set in the Soviet Union in 1988. The volume of coal preparation is also expected to increase to 195 million tonnes, up 28 percent. The investment will reach 130 billion rubles a year, and taxes will amount to over 100 billion rubles.

As a result of the measures taken on your instruction, Mr President, the production targets for 2030 have already been achieved. That is, we are moving ahead of the long-term development programme. To compare with the updated programme of 2014, we are three years ahead of schedule. So, of course, the programme itself needs to be adjusted, and more ambitious goals need to be set regarding commissioning capacities, the quality of coal, and the share of exports in supplies.

Coal mining is shifting to a safer, open method. The share of this kind of mining has increased from 70 to 75 percent in five years. Production is becoming concentrated at the most efficient enterprises. The load on the coal face and mining transport equipment is growing. Coal miners’ productivity has increased by a factor of 1.5 over the past five years. This year alone, the Russian miners set seven world records.

The capacities in traditional coal regions, primarily in Kuzbass, are being modernised. New coal mining centres are being created in eastern Russia, and coal fields in Khakassia, Transbaikal, Yakutia, Khabarovsk Territory, and Sakhalin are being developed. Since 2012, over 40 percent of production capacities were upgraded, nine modern mines were opened, 14 open cuts and nine coal preparation plants have been commissioned. New centres of coal mining in eastern Russia account for one-third of the newly commissioned capacity, which is also important and is included on the list of our priorities.

Fundamental changes to ensure occupational safety, especially in terms of reducing the risk of major accidents, mandatory degassing, and introducing multifunctional safety system at mines had a positive effect. Suffice it to say that in 2017 the industry had the lowest specific index of fatal injuries and the highest spending on safe conditions in its history. Following the work of the interdepartmental commission sponsored by the Ministry of Energy, coal companies developed medium-term measures to improve industrial safety in 2016 and are now implementing them.

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Now, a few words about further plans regarding the strategic development of the coal industry. It is fundamentally important for us to assess prospects for strengthening Russia's position on global export markets. Exports have been a key driver of the industry's growth over the past decade, and will remain such a driver.

The analysis of the situation on global coal markets shows that as the world's third largest exporter of coal Russia has a new window of opportunity in the medium term.

Last year, global coal consumption resumed its growth, including in Southeast Asia, India, Turkey and a number of other countries. The international trade in energy coking coal increased and exceeded 1.3 billion tonnes.

According to experts, the steady growth in demand for coal, primarily in the Asia-Pacific region, will continue to 2025–2030 and amount to at least 100 million tonnes.

It is in our interests to make the most of this potential additional demand, especially since Russian coal has significant competitive advantages due to its high quality, high caloric content, low sulphur, nitrogen and ash content which can be seen from the steady increase in Russia’s share in the international coal trade. Over the past 20 years, it has increased by over 3.5 times and reached 14 percent.

According to our estimates, we expect the export of coal from Russia to exceed 200 million tonnes this year: about 100 million tonnes to the west and about 100 million tonnes to the east. Right now our prospects for the western direction seem limited due to the EU countries’ plan to decrease coal consumption and the forecasted competition from Colombian and US suppliers. In general, we should say that today Russia’s share on European markets accounts for about 40 percent, which is rather high.

Speaking about the eastern direction, our share there is 9.3 percent, and we see an opportunity to double our exports by 2025 and increase Russia’s share to 20 percent. In general, our total share on the global market will increase 6 percent. We have the necessary production capacities to reach these export volumes.

The Energy Ministry together with colleagues from other federal bodies and coal producing companies have determined the probable increase in production according to the approved programme. The numbers may reach 560 tonnes by 2025 against the approved 460, and 590 against 480 by 2030. This means 23–25 percent growth. In order to do this, we need almost one trillion roubles of private investment in coal mining.

Our colleagues from coal companies say that they are ready to invest that much to develop production capacities. First of all, an increase in production is expected in Kuzbass, Khakassia, Yakutia, Tyva and the Khabarovsk Territory; we are also factoring in projects in the Trans-Baikal Territory, Buryatia and the Irkutsk, Novosibirsk and Amur regions. Of course, the main boost for this investment was the decision to set long-term rates for rail transport until 2025 that you approved at the end of last year. This is especially important and we have discussed this many times, considering the high share of transport costs in coal pricing.

Based on the forecasted demand increase on the coal market and businesses’ confirmed investment plans, we have determined the total volume of coal exports from Russia to the east. They can increase from 100 to 207 million tonnes by 2025, including up to 195 million tonnes carried by railway. Of course, here we return to the key issue you also mentioned at the beginning of the Commission’s work today: removing restrictions on the transport infrastructure’s transit capacity considering the need to supply it with electricity.

The first stage of the Eastern Range's development programme being implemented by Russian Railways involves increasing coal export haulage in the eastern direction to 125 million tonnes by 2019. The second stage involves boosting the volume to 180 million tonnes by 2024.

Through the efforts of the Ministry of Energy, Ministry of Transport and Russia's regions together with coal companies and Russian Railways, the project envisages, at the latter's own expense, further expanding the infrastructure's carrying capacity in the eastern direction to 210 million tonnes, including coal cargoes of 195 million tonnes by 2025. We propose making this task a target parameter of the second stage of the Eastern Range railway development programme today.

The long-term development programme envisages investments amounting to about 700 billion roubles for developing the infrastructure in the eastern territories. These figures are reconciled and substantiated.

Assessments have been made of the capacities of coal terminals at the ports in Russia's northwest, south, and the Far East. According to our estimates, the rate of development of these capacities will allow us to fully supply the expected volume of Russian coal exports through private investment.

The fastest capacity growth will be observed at ports on Russia's Pacific coast, given the proximity to core growing markets. Major transport hubs will be the Vanino-Sovgavan hub in the Khabarovsk Territory and southern Primorye Territory.

While addressing this issue, we also paid special attention to the development of energy infrastructure. It is expected that the investment programme of the Rosseti company and its subsidiaries will allocate funds for this purpose as well.

Mr President, colleagues, The practical implementation of these proposals will become a major investment process in the next few years to come. This is fully in line with your executive order on developing railway and energy infrastructure signed in May. Total investments will amount to over 1.5 trillion rubles during six years, including the investments up to one trillion rubles in the production and processing of coal, construction of ports, purchasing railway cars, as well as some 700 billion rubles to be invested by Russian Railways and investments in the development of the Eastern Range's electrification. This will have a massive multiplier effect on other economic sectors as well, such as metallurgy, heavy equipment and transport manufacturing, and shipbuilding, increase tax revenues to the federal and regional budgets, and create a foundation for our country's long-term socioeconomic development. Our proposals are also reflected in the Commission's draft resolution.

Mr President, I ask you to support the outlined approaches to solving more ambitious infrastructure tasks and the corresponding adjustment of the programme for the coal industry development.

CEO and Chairman of the Executive Board of Russian Railways Oleg Belozerov: Mr President, colleagues,

Transporting fuel and energy sector cargos is one of the most important components of our work which accounts for almost half the volume of the cargo carried by Russian Railways and about 60 percent of the turnover.

We ensure dynamic growth of coal transport in close cooperation with shippers and consumers, as well as industry regulators. This year alone, coal loading increased by an estimated 4.5 percent on 2017. Over the past 15 years, total coal loading increased by almost 1.5 times. Much more dynamic growth was recorded in the eastern direction where it amounted to more than 3.3 times over the same period.

The importance of coal for Russian Railways can be seen in the following figures: since 2003, the share of coal in freight turnover of railways has increased from 28 to 43 percent while the share of the fuel and energy complex in freight turnover has already exceeded 70 percent.

A high degree of coordination among transport participants, such as shippers, railways, operators and dock workers, helps increase the share of Russian coal on the international market.

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Mr President, in your Address to the Federal Assembly and the May Executive Order you set the task for the Russian economy of becoming one of the world’s top five largest economies in terms of purchasing power parity and to increase the gross product per capita by a factor of 1.5 by 2024. We estimated the necessary dynamics of cargo transport for this purpose. The average annual growth rate of loading should be 3.8 percent, and coal is the cargo which can support such an increase in the future. The forecast righty allows us to consider coal one of the most important drivers of economic growth. We fully agree with the forecast provided by the Ministry of Energy, according to which the demand for coal will steadily grow in the long term. This uptrend is also confirmed by coal companies and port terminals.

For smooth transit of cargoes of the fuel and energy complex, priority development of the railway infrastructure and streamlining of traffic are required. We are actively working in all these directions. I would like to draw your attention to the fact that in some cases the railway investment cycle takes longer than our colleagues, that is five to seven years for design planning, then about five years for construction, while our colleagues can develop faster. We should implement our ideas faster, so as not to become a bottle neck. Meanwhile, our colleagues know that we go to great lengths, which includes last year’s 9.2 percent rise in labour productivity and over six percent this year.

In 2012, we launched modernisation projects for the Baikal-Amur Mainline and the Trans-Siberian Railway to implement key decisions made at the meeting chaired by you, Mr President, here in Kemerovo. Implementation is proceeding ahead of schedule. Mr Novak said that the deadline was set for 2020 and we will try to hit the target in 2019.

Today we can see that coal exports are increasing and the traffic flow geography is changing. As you said, according to the May Executive Order, we mapped out a plan to increase the transportation capacity to 180 million tonnes. Still we need to do our best to carry more, so we agreed upon 195 million tonnes of coal only. At the same time, as you noted absolutely correctly, we will also increase the volume of container traffic.

The project of upgrading the Baikal-Amur Mainline and the Trans-Siberian Railway. The total investment volume up to 2025 is 696 billion rubles. At the same time we need to accelerate design planning, which is 3.4 billion rubles that are included in the budget. It is important that we develop the whole network looking beyond the dynamically growing Eastern Range and overhaul all key directions of transportation to the ports of the Azov-Black Sea basin, to the North-West and others.

In total Russian Railways’ investment programme until 2025 accounts for more than 7 trillion rubles. We need corresponding sources to implement the draft programme. We believe that the best solution would be to use our own profit because it also creates a multiplier effect: one ruble of ours attracts three rubles of loans that we can invest in the infrastructure development. To make the most effective use of the profits for investment, we propose paying dividends only for the preference stock, transferring the profit into the investment projects approved by the Russian Federation Government.

In the opposite situation, if we do not apply this mechanism, it will result in a reduction in the investment programme. We suppose that about 330 million tonnes of cargo would remain where they are. And we are very scared of becoming a bottle neck for global logistics processes. In addition, we understand that the state will be able to earn more from the results of infrastructure development than dividends, because this is how the multiplier effect is created in the economy.

Of course, the new infrastructure will require the corresponding development in the electricity sphere as well. We work in close cooperation with the Energy Ministry and we are grateful to our colleagues who are coordinating the development even in the first stage of the Baikal-Amur Mainline with us. In addition, the company is one of the largest consumers of diesel in Russia and pays excises in the corresponding volume. This sum will come to about 120 billion rubles in 2018–2025. The excise revenue is invested into constructing and repairing roads that Russian Railways’ rolling stock does not destroy.

At the same time, we have the problem of crossings between roads and railways, such as the construction of overpasses and grade-separated crossings. We asked the road fund to allocate money for this especially. We discussed this with the Ministry of Transport; we discussed the priority overpasses.

We have also prepared a number of proposals included in the draft protocol, such as giving us an opportunity to provide for accelerated financing to develop project documents because it would take a lot of time and issuing an instruction for us to draft a set of measures to prevent local deficits in the universal rolling stock in the Russian Railways’ network using electronic platforms. This means digitalisation. We could use more carriages from our operators to increase the cargo.

Mr President, our main problem today is not the limited freight base, but the limited throughput capacity of the infrastructure. Therefore, we asked that the draft protocol reflect the following: we need measures to improve the mechanism for taking and executing the shippers' orders for the transport of goods in conditions of limited infrastructure capacity. We spoke with both the Anti-Monopoly Service and with our colleagues; we will need to make a number of changes to ensure non-discriminatory access to our services.

For my part, I am absolutely convinced of the need for faster development of infrastructure to create conditions for the dynamic growth of the Russian economy. We are ready to implement the long-term programme drafted in the interests of all market participants.

I want to ask you to support this. Thank you all for your attention.

Vladimir Putin: Mr Belozerov, two questions.

The first one about the shortage of rolling stock and the use of online platforms. You and I have discussed this many times, and you reported to me that this can and should be done. Naturally, everyone supports that. But I met with Mr Fedyayev [president of the Siberian Business Union holding company, chairman of the board of directors of Chernigovets] today, and you know what he tells me? He says he is shipping coal, while the railcars travel back empty. The shortage of rolling stock could be minimised significantly if one were to use the cars available efficiently, including those from private companies.

Oleg Belozerov: That is exactly what we stipulated in the protocol. On the way back, the rolling stock should be sent to the nearest locations via the online dispatch platform to take more cargo.

Vladimir Putin: All right, very well.

And the second question our colleagues have already raised today, is the Severomuysky tunnel. What do you think about this project?

Oleg Belozerov: I believe now we need to start the initial feasibility study. I just want to remind you what the Severomuysky tunnel is. It took the Soviet Union 25 years to build that tunnel. At present, only 16 pairs of trains run through it, which means 16 million [tonnes of cargo] – it is the BAM bottleneck. Accordingly, to develop the Russian Far East, we will need to increase traffic. If we build a second tunnel, it will enable us to transport not 16, but 100 million tonnes of cargo. This is what we need. But there will be a natural limitation arising from the duration of construction, because it is 15 kilometres long, and even with modern technologies, as we report to you regularly, it will take around ten years. Therefore, we need to launch the study as soon as possible, the feasibility study, and discuss how to approach this issue.

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