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Developing regional air transport, establishing zones of advanced economic growth in the Far East, de-offshorisation of Russia’s economy, and other current tasks were discussed.

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Excerpts from transcript of meeting with Government members

President of Russia Vladimir Putin: Good afternoon, colleagues,

Today, we will discuss what is happening with de-offshorisation, but there are several other issues to look at first. My first question is to Maxim Sokolov on the transport situation. The summer holiday season is at its peak now after all, and people are heading off for their holidays or returning home. What is your assessment of the situation? 

Transport Minister Maxim Sokolov: Mr President, we have just received the air traffic statistics for the first half of the year. To date, the number of passengers carried comes to 41.5 million people. This is an increase of nearly 11 percent on last year’s figure.

Last year, international air traffic grew a lot faster than interregional traffic, but this year we are seeing the reverse: regional traffic is growing around three times faster than international traffic. Russian airlines alone have carried around 20 million passengers on domestic flights.

This was made possible thanks to the regional transport support programme. There are five such programmes in all, and the Transport Ministry has earmarked around 9 billion rubles in its budget for supporting interregional air transport. These support measures will enable airlines to carry another approximately 1.5 million people and open around 80 new domestic routes. 

Vladimir Putin: We took a decision to develop regional air transport and routes, and this means establishing a company for the purpose. The Government already made its decision on this matter, but it seems that the work is going slowly. What is the problem?

Maxim Sokolov: Mr President, the Government already decided this year to increase the number of airports operated by Russia Far East Airports company. A decision is also ready on organising the Krasnoyarye Airports company, adding 7 regional airports to this company.

We are currently working on the budget, and if the necessary decisions are taken within this process, starting next year, these airports can be approved and merged in a single federal state-owned company.

Vladimir Putin: Don’t delay with this work. And you really do need to reflect on support measures for the regions, because if these measures are not in place, it will not be in our advantage to produce our own small aircraft.

There is seemingly big demand, but no orders are being placed, and the reason there are no orders is because it is expensive. We therefore need to propose mechanisms that would enable us to develop traffic on these regional routes and thus have the incentive to build our own planes.

Maxim Sokolov: The task is clear, Mr President.

Programmes along these lines already exist in part within the package of support measures I mentioned before. A total of 3.5 billion rubles was allocated for supporting regional air transport, and around 600 million rubles from the federal budget (there is also a regional component) for a pilot project in the Volga Federal District. This was a big help in developing regional air transport. We opened 100 new routes last year, and this year, as I said, we will open around 80 new routes. 

We think this would make it necessary and even possible to develop a modern new regional plane that would replace older planes on these lines.

Vladimir Putin: We need this market and we need it to have reliable demand. If we do not have the demand, no one will make the planes. We will buy a couple of planes here and there abroad, but this is not what we need to develop our own aviation sector.

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Vladimir Putin: Since you mentioned the Far East, let me ask Alexander Galushka to say a few words about the work underway there. We made the necessary decisions on the zones of advanced economic growth. What is actually happening on the ground? 

Alexander Galushka: Mr President, the work is divided into three parts: work in the field, marketing, and legislative work.

As far as work in the field goes, a team from the Ministry for the Development of the Far East, together with the regions, has examined more than 400 proposed sites for the advanced economic growth zones. The criteria we are using are the sites’ attractiveness to investors as places to build new facilities that focus on the big and fast-growing markets of the Asia-Pacific region.

Given that the Far East faces some well-known limitations in terms of logistics, infrastructure, and human resources, there are not many suitable sites. Only 14 were selected. Each of these sites is important to us as a potential source of accelerated economic growth. Work is underway now to draw up comprehensive plans for each site’s engineering and infrastructure development. This work will be complete by September 1. We will then have a clear idea of which specific decisions we need at each site to bring them fully into line with investors’ expectations.

As far as the marketing efforts go, we have put together a database of 4,400 big manufacturing companies with exports worth $10 trillion to the Asia-Pacific region countries. We have held talks with more than 300 of these companies on investing in the advanced growth zones, and have presented the potential sites that we selected and the main provisions of the draft law that we prepared. 

So far, 5 memorandums of understanding have been signed with foreign investors on investing in these sites: three with Japanese companies, one with a Chinese company, and one with a company from New Zealand. The heads of the biggest South Korean companies, Samsung, Lotte, LG, and Daewoo, and the biggest Japanese companies, Sumitomo, Kawasaki, Hitachi, Mitsubishi, and Mitsui, have personally expressed interest in the advanced growth zones. 

We have also developed a model for extending tied loans to residents of the future sites in the Far East with the Japan Bank for International Cooperation, Export-Import Bank of Korea, and China Development Bank. 

Overall, the work with foreign investors potentially ready to enter the advanced growth zones shows that our policy of developing competitive growth hubs in the Far East and radically improving the investment climate is probably the best economic response to attempts to create foreign policy difficulties for our country’s development. 

As far as the legislative work is concerned, we have drawn up a draft federal law on the zones of advanced economic growth. The draft law’s two key provisions are deregulation and tax incentives.

As far as deregulation goes, the key principle is to use the one window system for investors in the zones. This makes it possible to greatly simplify and reduce the amount of administrative formalities involved. It offers a free customs zone at the sites, reduces the time it takes to conduct the necessary checks, offers preferential rental rates and connection to engineering networks at the sites, allows investors to bring in the needed qualified workers outside of quotas, and offers a simplified procedure for land allocation. 

As far as tax breaks go, we have approved the following provisions: investors who enter the advanced growth zones during the first three years following their establishment will benefit from an insurance deductions rate of 7.6 percent for the first ten years; tax holidays on profit, land and subsoil extraction taxes; and a simplified and fast-track procedure for reimbursing VAT.

The various government ministries and agencies have already approved the draft law, and its key provisions have been approved too with the Presidential State-Legal Directorate and the Presidential Experts’ Directorate. 

The only remaining conceptual issue to be settled is the draft law’s scope. The State-Legal Directorate and the Presidential Experts’ Directorate think that the scope should be limited to the Far East and perhaps (as the Experts’ Directorate suggests) to single-activity zones. We have come up against this conceptual objection, but we think that we will be able sort out this one remaining matter and will be ready to submit the draft law at the autumn session.

Vladimir Putin: So the draft law will already be in the Duma for the autumn session?

Alexander Galushka: Yes.

Vladimir Putin: Of course, I ask the Finance Ministry above all and the Economic Development Ministry to ensure the necessary financing, because without it, these plans will not be able to go ahead.

You must take a careful look at our priorities and the budget’s possibilities, but you need to do this in clear and sober fashion. There must be no pretending to do something when all you are really doing is just writing up plans. Isn’t that so? 

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Vladimir Putin: I ask Mr Siluanov to say a few words about the work on the draft law that will improve taxation for companies registered in offshore jurisdictions and with Russian citizens as their final beneficiaries.

Finance Minister Anton Siluanov: Mr President, the draft law has been prepared. We are currently discussing it with the business community. Under the draft law, income received by Russian tax residents should be taxed in accordance with Russian law and not hidden in offshore zones.

At the same time, the draft law aims to make operations more transparent. Russia has signed double taxation treaties with many countries that offer various tax breaks. Many businesspeople use this today and do not disclose information on the beneficiaries of profits and the extent to which use of these tax breaks is justified. The draft law aims to remedy this situation. 

As things stand today, what we see is that a lot of the investment in the Russian Federation comes from offshores, and interest, dividends and royalties that are exempt from taxation under the double taxation treaties flow back out to these offshores.

Our principle is that businesspeople will be able to make use of these tax breaks only after they have disclosed the relevant information. This way we will know who the final tax recipient is, who the recipient of the income is, and whether or not they paid taxes into the Russian budget. This is what the law aims to achieve.

We are losing quite a lot of budget revenue, because if you take the annual figure, around $50 billion leaves Russia for Cyprus and the Netherlands alone. If you take into account that around half of this amount is income belonging to Russian tax residents, this could bring in around 30 billion rubles in much-needed additional revenue to the budget.

Overall, as I have said, we have approved the main provisions and are working on specific issues with the business community. By the end of August we will have the draft law ready to be submitted [to the State Duma]. 

Vladimir Putin: Good.

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