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President of Russia Vladimir Putin: Mr Kuznetsov, we will discuss the Ministry’s work, of course, but let us start with the situation on the ground in the North Caucasus region itself.

Minister for North Caucasus Affairs Lev Kuznetsov: Thank you, Mr President. In general, you are aware of the situation in each region, as the regional heads brief you on what is happening, but I will give you an overall picture of the state of affairs.

The state programme for developing the North Caucasus Federal District is our main instrument for implementing our overall policy in the region. Of course, this is not the only instrument at our disposal and we have been making active use of sector-based development instruments, but this programme is nonetheless the foundation.

The programme’s first stage, which is due for completion this year, has focused on eliminating basic social inequalities, which have been a persistent problem in the Caucasus. There is, for example, the problem of a limited capacity of the education system and problems with the quality of education, which is reflected in the results of the national final school exam. Then there is the shortage of healthcare facilities, which has led to higher mortality rates in the region, particularly infant mortality. There is the unemployment issue, which has a big impact on overall income levels. Of course, alongside all of this is work to develop the real sector of the economy, because the social sector and the budget are limited, and we can really only resolve issues like unemployment and raise real incomes if we develop the real sector of the economy.

We therefore put the primary focus on these areas. Our first task was to effectively resolve social issues and at the same time find niches where the Caucasus can establish a balanced presence on the country’s economic map, without resorting to artificial projects. Of course, you can force people to do this or that if you try, but in the current situation, we realise that this does not work.

Mr President, if you look at the social sector, you can see that over 2014–2016, we have built 113 new facilities in total, including 62 schools and 13 healthcare and engineering infrastructure facilities.

Here are the results we have already obtained. We will create an additional 30,000 places in the education system. In 2014, we tightened the screws in the positive sense on the quality of the national final school exams in the North Caucasus. Previously, there were problems here because the number of medals awarded was improbably high and you even had students receiving the full 100%. We see that an initial sharp drop in results was followed by a steady increase in all subjects – Russian, maths, physics, and foreign languages. This shows that students are becoming genuinely competitive now, are receiving a proper education and are ready to integrate into adult life.

In the healthcare sector, on the one hand, the region has always been able to boast a good demographic situation, but what is important now is that these demographic results are the result not only of a high birth rate, but also of a significant drop in mortality rates, particularly infant mortality. The region was a long way behind the national average in this area. The ratio was 14.7 in 2012, but it was down to 10.3 in 2015 and we had an even better result – 9.5 – in the first quarter of this year. Let me touch wood that it will continue, but we will certainly continue this effort.

We see a similar pattern in bringing down the unemployment rate, Mr President.

Vladimir Putin: There has been a noticeable drop in the region as a whole.

Lev Kuznetsov: Yes, the drop is noticeable, though this has been achieved primarily through active investment in the social sector. By building schools, kindergartens and healthcare facilities we have created new jobs, of course, and this dynamics has had an impact on the overall situation. We were lagging behind the national average at a ratio of 1 to 5 in 2013, but it was down to a 2.8-fold difference in 2015. This is still a serious challenge, of course, because for the students who go to school and receive a proper education the question of what to do next is a big issue. We realise that, taking into account our limited possibilities for budget investment, the only way we can resolve this task is by developing the real sector of the economy.

Vladimir Putin: You need to raise private investment.

Lev Kuznetsov: Yes, especially private investment on the basis of public-private partnership. Frankly, we realise that the investment climate in the North Caucasus is not the same as elsewhere, unfortunately. The region does not have large deposits of natural resources, and big business, whether private or public, is not present in the region. Rosneft operates in the region, but only at old fields that are reaching exhaustion point. Our task now is therefore to identify areas in which we can be competitive and projects that are focused on the long term. Mr President, we have found the niches in which we think the North Caucasus can offer projects at the federal and regional levels.

If we look at the federal level, there are three main areas of work. The first is tourism, winter tourism primarily, but also health resorts and health-spa tourism. Taking into account the particular features of the Kavminvody resort, the region’s unique climate and the goal that you set of improving the nation’s health in general, we see that if we put these unique resources to work, we can be competitive in Russia and attract tourists from abroad as well. Our niche is not seaside beach holidays, but health-spa tourism. Statistics show that we have an annual growth of 7–8 percent in the Kavminvody resort even without investment.

There are also the ski resort projects. We have Elbrus, Arkhyz, and now we are starting work at Veduchi. There is steady growth in this sector. These projects are creating jobs too, which is very important. They are having a big indirect effect.

The second big project is the Caspian trans-border strategic logistics hub. The Caspian route has not been used much for a long time and is still rarely used, but it is above all an alternative to the Black Sea and Suez Canal routes and can act as a hub on the North-South transport flows between India, Iran, China and the Central Asian region.

Vladimir Putin: The other Caspian countries are also working actively on developing this area…

Lev Kuznetsov: Yes, unfortunately, we lag a long way behind. Astrakhan and Olya are important ports, but what makes the Caucasus unique is that it has Makhachkala, the only port that never freezes over and the only port that can handle ships of more than 12 tonnes. I think that integrating these three ports and competently organising a logistics model, combined with Russia’s geopolitical location in general would give us opportunities for positioning ourselves on not only North-South flows, but West-East flows as well.

The third big project fits in with the needs of the machine-tool industry and our defence capability demands. It involves developing a cluster to produce machine tools and hard alloys using the resources of the Tyrnauz deposit.

Vladimir Putin: Is there tungsten there?

Lev Kuznetsov: That is right. Our reserves are dwindling and if we do not start mining again, we will simply become dependent on imports of this raw material, which is critical for various sectors. No other deposits have been discovered in Russia yet.

These are the federal projects that we think would offer the Caucasus the chance to attract investors and achieve a long-term competitive edge.

There are regional projects too. Many of them are in agriculture, where we also have our niches. You set the goal of ensuring food security by 2020. We need a million tonnes of vegetables and a million tonnes of fruits, and these are two areas in which we have the right natural and climatic conditions. This is our segment. The sector’s unique feature is that it uses a lot of manual labour. This is not a negative thing; it rather ensures quality and takes into account environmental issues. Most importantly, it provides jobs for people in the mountainous regions, and one of our big goals is to ensure that people continue living in their places of traditional settlement.

Vladimir Putin: But you nonetheless need to use modern equipment and technology.

Lev Kuznetsov: We are using modern methods everywhere, without having everything done manually. However, apples are still picked by hand, if we want to be able to store them and have them keep for a long time. Otherwise, there is the relevant processing.

Vladimir Putin: As far as I know, Russia produces three times less apples than it consumes.

Lev Kuznetsov: Yes, this is an area in which we have a unique niche. We are not asking for an alternative, we are saying that we can resolve the [food security] task in all the regions of the North Caucasus: in Stavropol Territory, Karachayevo-Cherkessia, Kabardino-Balkaria, North Ossetia, Dagestan, Chechnya, and Ingushetia. This is a comprehensive task that encompasses all the regions of the federal district.

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