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Taking part in the meeting were Prime Minister Dmitry Medvedev, Chief of Staff of the Presidential Executive Office Sergei Ivanov, deputy prime ministers and several federal ministers, and the heads of the Accounts Chamber, the Central Bank and the Federal Agency for Tourism. 

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Excerpts from transcript of meeting with Government members

President of Russia Vladimir Putin: Good afternoon, colleagues.

Today, we will discuss the targeted socioeconomic development forecast for the Russian Federation, given that the Finance Ministry and the Government have already begun drafting the budget for 2016 and the 2017–2018 planning period. This is a big and complicated undertaking, but we know that it is the first step for all work on the budget. Before we start though, let me turn first to a number of current issues of inter-ministerial and even international relevance.

Mr Ulyukayev, the Economic Development Minister, and his colleagues were in Brussels and met with European Commission officials and our Ukrainian partners on the subject of Ukraine’s Association Agreement with the European Union. We are all aware that this agreement in one way or another touches on Russia’s economic interests.

We reached an agreement with our colleagues that a moratorium would be put on Ukraine’s Association Agreement with the EU and the agreement would not go into force until January 1, 2016. Meanwhile, we would use this time to hold more talks to settle all of the differences. Unfortunately, these talks have yet to begin. Mr Ulyukayev, did this latest visit to Brussels bring any results?

Economic Development Minister Alexei Ulyukayev: Yes, Mr President, you could say that a sense of cautious optimism has emerged. The ice is starting to melt, in the sense at least that they have started listening to us and are actually hearing what we say.

Overall, more than half of the 15-month breather that we agreed on has passed now, and sadly, this time was not used very productively. But there was an expert meeting at the end of April, and the day before yesterday, I had a meeting with the EU Trade Commissioner and the Ukrainian Foreign Minister.

We noted the possibilities for making rapid progress to settle the concerns we expressed by the end of July. We take the position that we have real grounds for taking response measures right away concerning most-favoured nation status, because our Ukrainian colleagues are practising a policy of latent introduction of some of the [EU Association] Agreement’s clauses, which goes against the agreement that we reached last September.

But we do nonetheless see possibilities for a positive solution. We put six basic points on the agenda, and these were discussed at the meeting.

The first concerns tariff regulation of goods of a sensitive nature for our economy. We propose setting transition periods before tariffs for these goods are liberalised in accordance with the Ukraine-EU agreement.

The second is customs administration and organising the relevant electronic documentation and information support, and identifying the goods’ country of origin, so as to make proper use of the preferential regime and exclude from it goods that come from third countries. There is also the matter of technical regulation. Here, we think it right to maintain the possibility for Ukrainian companies to choose between European standards and the standards in force under CIS agreements. Health and phytosanitary control is another matter here, too.

Yet another issue is Ukraine’s inclusion in the electronic certification system in operation in the Eurasian Economic Union, so that we can be certain of the relevant information’s authenticity. We want to keep in place the certification system currently in operation, so that businesses will not have to spend extra time and money on getting all their certification redone.

In the energy sector, we want to preserve the parallel operation of Russia’s and Ukraine’s unified energy systems, so as not to have to bring on line reserve generating and grid capability.

Overall, our approach met with our European and Ukrainian colleagues’ understanding. We agreed that the experts will start working in groups to prepare by the end of July the documents, the status of which will be clarified later.

The documents could take the form of protocols to the Ukraine-EU agreement, or they could form a separate agreement that would make a single package with the [EU-Ukraine] agreement and would enter into force simultaneously with it.

Once this work is completed at the end of July, we will have to make an important decision, namely, whether this set of documents suits us, or whether we need to take other decisions.

We did not raise the issue of extending the 15-month period because there is no point in having time simply to waste it. We need results: either we actually have been heard now and will obtain legally binding documents that satisfy us, or we will be obliged to act in accordance with Government Resolution No. 959.

Vladimir Putin: Good. When is the next meeting scheduled to take place?

Alexei Ulyukayev: The date has not yet been set. The experts will start their work within the next two weeks and should report at the ministerial level by the start of July. In July, once the experts have presented their report, we will set the date for the next political meeting.

Vladimir Putin: Good. Continue this work. Our aim is to find solutions that are acceptable from Russia’s point of view.

Since we are on this subject, I also have a question for the Finance Minister. We have heard various conflicting reports from Ukraine on the return or unwillingness to return the money obtained through various channels, including from private investors, although to say ‘private’ is putting it mildly.

As you know, our banks have a loan portfolio of around 24–25 billion in Ukraine. They have lent approximately this sum to their clients in Ukraine. I would like to know what is happening in this area.

Second, we hear officials saying that they are looking at the possibility of not repaying the loans taken out by the country’s previous leadership. But, as we know, we are talking here not of physical individuals, but of sovereign guarantees from the Ukrainian state itself. I would like to know what our partners’ intentions actually are. I ask the Finance Minister to hold the necessary consultations.

You know that at the end of 2013, for example, we accorded what amounted to a loan – invested $3 billion in reserves from our National Welfare Fund in Ukrainian government bonds, and at a very preferential rate, too. At that time, Ukraine would not have been able to obtain such a sum at less than 10 percent interest, but we agreed to 5 percent, which was a very preferential rate.

Furthermore, we have long since had the right to call for early repayment of this money, considering the terms of the agreement we concluded. This agreement was concluded in accordance with European law and stipulates that if Ukraine’s total level of state debt exceeds 60 percent, we would have the right to call for early repayment.

However, at the request of our Ukrainian partners and the IMF, we have not made use of this right, not wishing to add to what is already a difficult economic situation that our partners and neighbours currently face. I would like to know though, just what our partners’ intentions are. This is an odd statement they have made. But do you have any information or clarifications on what is happening there?

Finance Minister Anton Siluanov: Mr President, yes, the Verkhovna Rada [Ukrainian parliament] has adopted a law giving the Ukrainian Government the right to decide on settlement of Ukraine’s debts to commercial and other creditors. At the moment, our banks do indeed have loans that were made to commercial borrowers in Ukraine and also to the Ukrainian state. Russia, as a state, also invested $3 billion of our National Welfare Fund reserves in Ukrainian bonds.

Up until now, Ukraine has fulfilled its obligations to service this debt. The last payment was made in February this year. The next payment is due on June 20 and comes to $75 million. So far, there has been no violation of the terms of the agreement, with the exception of the covenant that you mentioned.

But we will need to analyse the consequences the Verkhovna Rada’s decision could have, the consequences this new law could have. If we see that Ukraine is violating the obligations it took on when we invested our money in Ukrainian government bonds, we will use legal recourse in the courts to protect our interests and ensure that our interests are not harmed.

Vladimir Putin: It is an odd kind of statement. We are not even halfway through the year after all, and to essentially declare an upcoming default shows a level of responsibility and professionalism that is not very high, judging by what we see, and this is despite the fact that the country has been placed under external management. Furthermore, correct me if I am wrong, but it seems to me that the IMF does not accord loans to countries that have defaulted or are bankrupt.

Anton Siluanov: Yes, this is the case, Mr President.

The IMF programme always takes into account and works on the assumption that creditors’ demands have been more or less settled. The programme cannot therefore lend to a country that has not settled its debts with its creditors.

We will therefore hold consultations with the IMF on carrying out the programme and on protecting Russia’s interests when according further financial aid to Ukraine.

Vladimir Putin: Mr Medvedev, I ask you to take this situation under control, so that the Government is clear about what is happening in this area.

Prime Minister Dmitry Medvedev: Yes, of course, Mr President.

Naturally, we are not only concerned about what happens with the sovereign debt, but also with the commercial debt, which, as you rightly noted, comes to around $25 billion. A large part of this sum was lent to Ukraine by Russian commercial banks in which the state is the main shareholder. We will therefore be monitoring this situation no matter what happens.

There are also banks in which the state is not a shareholder, but these are big Russian banks, the pillars of the banking system, and they have placed their money in Ukrainian sovereign instruments. As was noted perfectly fairly, this essentially amounts to a default with declaration of force-majeure circumstances, and in this situation, the Russian state and Russian commercial banks will need to make the appropriate response. This is the case with commercial debts, at any rate, if such a decision is taken in their regard. We will need to use all possible means of protection, including the courts.

Vladimir Putin: Good, thank you.

Mr Tkachev, over half of the spring sowing is already completed. In what phase does all of this work currently stand? I am referring to all its components: agriculture crediting, fertiliser and fuel – everything associated with the campaign?

Agriculture Minister Alexander Tkachev: You are right, about 60 percent of the planned spring sowing has already been completed in Russia, and the pace is good. We are a bit behind in the Volga, Siberian and Urals federal districts. This has to do with weather conditions – a high level of precipitation. But naturally, this will pass and the situation will even out. I believe we will be able to complete the sowing campaign in these regions within the optimal timeframe.

The situation with winter cereals is also encouraging. Agricultural companies have been fully supplied with high-quality seeds. Agricultural producers currently have about 1.5 million tonnes of fertiliser available. This is 82,000 tonnes more of the active substance than last year.

We are continuing work to purchase fertilisers. I must say that the price agreements with companies producing fertilisers are being followed. Moreover, this year, prices were 15–25 percent lower compared to export sales. So we hope that over the course of this year, these agreements will be similarly adhered to.

As for crop protection, we do not have any problems with pesticides, everything is progressing on time, and overall, at reasonable prices.

With regard to availability of agricultural equipment, I must say that we have a negative factor here: there is a trend to reduce production of this equipment. There are about 500,000 tractors and over 100,000 harvesters simultaneously operating in Russia. Even the measures stipulated by the Government, subsidised rates for purchasing new agricultural equipment, and even the 15 percent discount for buying from companies producing this equipment, have not produced the desired result.

We very much hope – the Government has already made a decision, and next year, compensation for the cost of acquiring equipment will be up to 25 percent, and the amount of equipment will naturally once again increase. We are counting on this because this year and next, it is imperative for us to increase the amount of sown areas in order to increase the volume of grain production. Naturally, the invested money affects timing, quantity, cost and efficiency. So these are key issues and I hope that we will find the means to provide substantial support to the agricultural machinery sector.

Currently, fieldwork is in full swing locally to care for the crops. A total of 119 billion rubles have been transferred to the regions, of which 44 billion, or 37 percent, went directly to agricultural producers. I must say that the volume of funding to the regions is higher this year than last.

The situation with loans today is at about the same level as last year; the volume of loans is about 70 billion rubles. Sberbank and Rosselkhozbank are most active in this. The preferential interest rate, taking into account federal and regional subsidies, is no higher than 7 percent. This is convenient, this is acceptable, and agricultural producers are happy to use such loans which allow them to carry out this volume of work quite successfully.

Overall, I want to assure you, Mr President, that in general, we already expect to produce about 100 million tonnes of cereals this year, as well as 37 million tonnes of sugar beet, 9 million tonnes of sunflower seeds, 30 million tonnes of potatoes and 16 million tonnes of vegetables.

All this is entirely realistic, and we can also make serious progress in livestock farming import substitution, so the current objectives and plans of the Agriculture Ministry, as well as an enormous number of collective farms and farmers, are entirely realistic.

Vladimir Putin: You talked about financing. We will not go into it now, but I just want to point out that some financial institutions have decreased their volume of financing for agriculture. Sberbank has decreased it slightly, and Rosselkhozbank has decreased it. We won’t discuss it now, but I just want to point it out.

Alexander Tkachev: Slightly, yes, but there has been a decrease. There are various objective and subjective reasons…

Vladimir Putin: Keep an eye on this.

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Vladimir Putin: Our tourist season has begun. Last year, we had a significant increase in domestic tourism and the domestic tourist flow. What is your forecast for the upcoming season?

 Head of the Federal Tourism Agency Oleg Safonov: Mr President, colleagues,

Indeed, we feel there has already been a change in the structure of the Russian Federation’s tourism sector, with a significant reduction in outbound tourism and an increase in the domestic tourist flow.

Last year, 41.5 million people travelled within our country. This is a very significant increase compared to 2013, of over 30 percent (compared to 32 million people in 2013). We believe this trend will continue this year, because already at the beginning of this year – and this is data from our European colleagues – they recorded a 30 percent drop in the outbound tourist flow from Russia.

I would like to say that active work to promote tourism opportunities in the Russian Federation has led to an 18-point increase in Russia’s ranking in the competitiveness of its tourism market; this ranking is assembled by experts from the World Economic Forum. We were in 63^rd place in 2013, and now we are in 45^th place.

I would like to point out that for the first time in Russia’s recent history, a comprehensive tourism product has been created, and it was created by companies that had only dealt with outbound tourism earlier. This comprehensive tourism product includes transport, accommodation and transfer – in other words, this is a world-class, world-quality product.

Currently, our tourists are getting this product within Russia which, of course, leads to a decrease in the price of domestic tourism, promotes the development of competition and we believe that it will lead to an increase in tourist flows in our country.

I would also like to note that we are actively developing children’s tourism. Last year, the Government created a coordination council for children’s tourism. We are creating various trails on a massive scale: walking trails, bicycle trails, and others. We are doing active work in this area.

According to World Tourism Organisation’s data, Russian tourists had previously spent about $50 billion abroad. So we feel we must make every effort to ensure that a significant proportion of that money stays in the Russian Federation and works for our nation’s economy.

We are making every effort to achieve this, and we are carrying out a federal targeted programme to develop domestic and inbound tourism effectively and actively. This is a very complicated programme, because we must attract three rubles in non-budgetary funding for every ruble of federal funding.

But it is working successfully; we already have 17 of the country’s regions participating in this programme and another 12 regions are ready to join – and, we hope, will do so this year. So this certainly helps the continued development of tourism infrastructure in our country.

Overall, we feel that the growth of tourism will lead to the creation of new jobs and employment issues are being resolved. The development of tourism has an enormous multiplier effect, because this sector is linked to and actively cooperates with 53 sectors in our economy, so this large-scale, vibrant growth of tourism in our country will lead to major strides forward in the Russian economy.

Vladimir Putin: Good. Thank you.

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