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The current economic situation and measures to support the Russian economy and industry were discussed.

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President of Russia Vladimir Putin: Colleagues,

I had agreed with each of you on separate occasions to meet and talk on the topics that are of interest to you, the issues that you deal with professionally.

We have already stated that the Russian economy has entered the trajectory of fairly sustainable growth. How sustainable is that growth, what are the reasons for us to believe so, and what are the forecasts in this respect? What internal and external risks are there, and the key issue, which additional measures should be taken to preserve the current trend and make the Russian economic growth exceed the average global growth by 2020? We kept talking about this as a task we have set for ourselves. I would like to hear Mr Oreshkin’s assessment.

We are well aware that investment is certainly a crucial growth factor. We state that growth reached 6.3 percent in the second quarter of this year. At the same time, let me remind you that a number of initiatives were unveiled at the St Petersburg Economic Forum that are to boost investment activities. I am talking about the development of public-private partnerships for attracting capital to construction and infrastructure, to the so-called infrastructure mortgage, and also the development of project funding mechanisms.

We also spoke about the possibility for  Background information Vnesheconombank Vnesheconombank to set up a “project factory.” I would like to hear from Mr Oreshkin how this work is progressing, and what has been happening in real terms since we spoke about it.

I discuss industry development issues with the Minister of Industry on a regular, day-to-day basis. It is well known that we supported a number of industries and programmes, as well as industrial production during the hard times for our economy. And it is very good to know that the anti-crisis fund assets were not wasted and industrial growth has resumed. Quite recently during a meeting with business leaders I noted that it amounted to about two percent in January through August, practically two percent.

Yesterday I visited a very interesting exhibition in Ulyanovsk, an attractive and interesting one. I hope the product line in transport engineering will keep growing, strengthening, and will make our people happy and contribute to economic development, both regional and national.

A number of other industries apart from transport engineering are also posting good results. But since the next budget is being actively discussed now, we have addressed the issue a number of times.

You do not have your opponents here since, as a rule, you work in tandem on these issues. I will discuss it with the Finance Ministry separately, and later we will get together and talk it over. Today I would like to hear from you about the support for the industry as drafted in the budget. It is important not just to get the money, but also to spend it efficiently. That is why I would like to hear how the industry development fund is going to be used.

Recently at a meeting of the Military-Industrial Commission we said that military industrial complex enterprises show remarkable labour productivity growth, which is certainly a positive development. But we also have another task – to diversify that part of our economy. We have to ensure that labour productivity does not grow through military goods output alone, but also during transition to civilian produce. I would like to hear about what is being done in this area.

Overall, as we all know, no qualitative breakthrough in labour productivity growth has occurred, unfortunately. I know that the Government has drafted a programme on labour productivity growth. I would like to hear from Mr Oreshkin how this work will be organised, since it is basically your job, to a considerable degree, at any rate.

Next, to boost high technology development, a decision was made to establish investment-technology partnerships. To do that, it was agreed to radically upgrade the special capital investment contract (SPIC). I would like you to report as what specific agreements have been reached.

I hope that both ministries, as you work in close contact, will also keep giving the necessary attention to the support of high-tech exports. We have set up relevant mechanisms but I know that there is occasionally a lack of financial backup, so let us discuss this topic as well today.

Finally, small and medium-sized businesses. I am not going to talk about how important it is. This has been said many times. I have two specific questions in this regard. As you know, I have recently met with head of Opora Rossii Alexander Kalinin. He raised two issues, actually, many issues, but two of them are crucial today. They are putting off the introduction of cash register equipment, and making individual entrepreneurs’ insurance payments independent of the minimum wage. We have practically settled the first issue, and we have to think over the second one. I would like to hear your opinions. As of today, a one-time minimum wage increase within a year impacts their deductions. They want to strip that dependence altogether. Let us discuss this; I would like to hear your views.

We have set the task of passing legislation to define the legal status of self-employed individuals. This was discussed at length as well, yet some issues have still not been resolved. Let us talk about this today.

Let the Economic Development Minister begin. Mr Oreshkin, please.

Economic Development Minister Maxim Oreshkin:

Thank you very much, Mr President.

If we take a look at the latest statistics, in August GDP growth stood at 2.3 percent, it dropped below 2 percent in July, agriculture looked bad, mainly due to the weather, of course. What we see in August, the good weather in August and September will help to compensate for the July drop.

Vladimir Putin: It looks like we will have another record harvest.

Maxim Oreshkin: Yes, because the beginning was not very good, but now we have ideal conditions for harvesting. The yields are at the same level as last year, and the losses have dropped considerably.

It is significant that inflation has gone down: the latest figure is 3.1 percent. This has allowed the  Background information Bank of Russia (Central Bank) Central Bank to cut the interest rate. Their latest decision was to cut the interest rates by 50 basis points. In general, this opens the way to further increasing lending operations by the banking system. We are already witnessing a record-breaking dynamics in mortgage loans, if we discount seasonal factors. And increased economic activity in the autumn months will lead to an actual, nominal increase in lending volumes. This must provide good support to the construction and construction materials industries during the autumn and up to early next year. The industries that experienced a plunge in the past two or three years are actively recovering now. The mortgage boom we are expecting will help recovery here and will on the whole contribute positively to economic growth.

Vladimir Putin: How much is an average mortgage currently?

Maxim Oreshkin: The latest rate was about 11 percent. But in the past months Sberbank and other top Russian banks have cut the mortgage rate considerably, and their basic rates dipped below 10 percent. This is why I believe it will be in fact offered at under 10 percent by the end of the year.

Vladimir Putin: Now that you have said it, people will wait until the end of the year.

Maxim Oreshkin: Those who will wait will miss out on the best properties.

Regarding the risks. Firstly, there are external risks, of course. Oil price volatility remains, and a trend towards risk in the global markets my decrease, so we must be prepared for that. In this respect the actions taken by the Government in the macro economic policy, namely the February launch of foreign currency purchase by the Finance Ministry, and new budget, which, certainly, fends off the risks considerably, allowing us to feel confident, and the inflation targeting by the Central Bank, – all these mechanisms are designed to minimise the possible negative impact on the situation in the country. Thus there is confidence here that we will be protected from most risks.

Concerning long-term growth, I would stress three very important topics. These are investment process support, labour productivity growth (you have mentioned this) and the third very important element is apparently creating conditions for human development, because the modern economy is primarily about the individual, and the only winners in the global competition are nations where people can realise their potential inside their countries and that become the most comfortable places where global talents want to reside. This is the reason why the three topics and the current programmes, and further movement should head along those directions to ensure long-term growth.

You have asked about the two programmes that we were drafting throughout this year. The first programme is the infrastructure mortgage. The current state of affairs is as follows: we have sent a detailed roadmap to the Government and we are about to get to a thorough discussion of each element inside the government. The deadlines we have set per separate elements are the end of the year or the end of the first quarter. I hope that the programme will be ready by the end of the first quarter, and we will be able to launch it in the middle of next year.

Vladimir Putin: We have to make it earlier. We spoke about it in summer in St Petersburg.

Maxim Oreshkin: At present we are going to look into the details and will try to have it done as soon as possible.

Preparations are moving ahead on the project funding factory. This mechanism has already been completely agreed upon, respective funding and state warrantees are included in the 2018 budget. We are already passing over to the final stage here. There a number of draft laws that have to be passed during the autumn session.

This is primarily about draft law on syndicated lending. This is an important part of the overall mechanism. And, according to our estimates, January and February will be the months when the first loans under the programme will enter the economy and will be used to finance projects.

What is crucial is that the programme does not replace the industry-specific support measures, it is a sort of foundation for project financing. Some very good combinations can result from this. We have agreed on everything both with the Ministry of Industry and other ministries. It works very well with the existing programmes. One supplements the other, and it will allow for increasing project financing proper which is important for investment growth.

There was also a question regarding non-raw material export trends. In general, our non-raw material exports have seen a positive trend of around 7.5 percent on last year. The situation varies in different industries. For example, Mr Manturov will tell you in detail about the auto industry where we have seen 30 percent growth. Some examples are not as good; exports are falling in some areas.

We have to understand that the significant effect of the lower value of the ruble has been largely taken advantage of. And in order to move on, we must increase effectiveness, that is, make more competitive goods. And the second key issue is, certainly, joining global production chains, including those of major companies. For example, this kind of process is underway now in the auto industry where some components are made abroad; the added value takes place in Russia, and then the finished cars are exported.

This is why system-wide measures are so important. For instance, this year we adopted a law on suspending VAT on processing within the customs territory of Russia, which relieves them of the tax burden on those components which will be exported later. Thus, we have these measures, including industry-specific ones; I think, Mr Manturov will talk more about them. In fact, we have very close cooperation here – from system-wide cooperation measures to industry-specific measures which create the contour for companies to develop more efficiently.

And the last issue, the last item you mentioned is small and medium-sized businesses. There is indeed a proposal to shift the mandatory introduction of cash register equipment for one year from July 2018 for those small businesses which are engaged in manufacturing, who do not have any employees, i.e., self-employed businesses. This is necessary to look specifically at each business activity and understand where and in what way the requirement will have to be executed.

Vladimir Putin: They have raised the issue of dropping it for some categories altogether, including the self-employed. It could be added to their permit fees.

Maxim Oreshkin: We will review the issue in detail, because it requires complete understanding so that nobody drops out, and so that all cash flow can be tracked, by the tax service as well. I think a proper balance needs to be found here.

As for insurance premiums, we had a heated discussion in the Government. We have agreed that we will cut the dependence of individual entrepreneurs’ insurance premiums from the minimum wage, and will attach it to one pension score, because it will be more logical since it will be a deduction that would allow individual entrepreneurs to execute their rights on insurance pensions, i.e., to be protected after they retire. This is what we will use as our goal. At present, we are polishing up the draft law.

Vladimir Putin: We must explain to people what exactly this is all about.

Maxim Oreshkin: We will do that, by all means.

Regarding self-employed individuals. To be honest, the issue has been lingering in the Government for too long; we just cannot reach final decisions. But it is evident that people must have a clear and understandable explanation. And it is important that they understand what will happen after the three-year suspension of tax liability that was introduced this year. Because people should not have to worry about this; they should understand how the situation will evolve, and the situation must be transparent to them. This is why I believe we need to finish this discussion within one or two months and come up with understandable proposals.

Vladimir Putin: What is the situation like with household incomes in the country?

Maxim Oreshkin: Household incomes, especially in terms of wages, have started to improve. The latest statistics indicate a 3.4 percent growth in real wages. Nominal wages increased 6 to 7 percent year on year. Real wage growth has been achieved because of lower inflation.

Vladimir Putin: When will people feel it for real?

Maxim Oreshkin: This will be a progressive process because both wages and incomes are below the 2013–14 level. I always say this, but it is important to note that wage growth is now healthier because it is based on labour productivity growth, whereas before it was largely related to high oil prices. This is the reason the situation is more stable. And gradually with each new year, for example, next year we expect real wage growth to accelerate to 4 percent. Higher wages in the public sector will certainly help. In the coming quarters, wages will be adjusted, which will also be positive.

As I mentioned, labour productivity is indeed a very important issue. This is also a joint effort; we are working with the Ministry of Industry and Trade. This year a pilot programme was launched in six regions: Perm, Tula, Samara, Tyumen, the Republic of Bashkortostan, and the Republic of Tatarstan. In the first stage we focus on processing industry enterprises. Here we are using mechanisms that exist already. For instance, the Industry Development Fund will play a part in the programme. What is this about? It is clear that investing in new equipment, provided it is made properly, always includes a hike in labour productivity. But management technologies which are used in industrial organisation are also crucial.

When we visited the Russkaya Kozha Group plant in Ryazan, we saw how they raised labour productivity by several dozen points through a more efficient arrangement of equipment in the shop and streamlining the way their products move around the shop. This is a story that should be promoted, presented as an example of how it can be done, an example of existing modern technologies.

Vladimir Putin: At Yandex they told me how they work with steel manufactures, and how productivity goes up almost immediately.

That is, the use of the latest technology – a machine training technology. Indeed, the project they were implementing by introducing new technologies only, that did not require large-scale investment, cut costs by several percent, which is definitely very significant for metallurgy.

Mr Manturov, please.

Minister of Industry and Trade Denis Manturov: Thank you, Mr President,

First, I would like to thank you for the support this year. The industrial sector did have strong support in terms of new measures. We had an additional 107 billion rubles allocated to certain industries, primarily the automotive industry, a major driver of the industrial sector in terms of multiplication since it effects the growth and development of other industries. The outcome of all the measures taken is evident: both the market and manufacturing are showing growth, all in double digits, and this includes all sectors, including automotive. We had more modest expectations when we were planning these measures. But we see that the economy is recovering, and that has a positive effect on these industries. For this reason, we presume that average growth in the automotive industry will reach at least 10 percent over last year, I mean manufacturing proper.

Vladimir Putin: Who are the leaders? Which industries are the growth leaders?

Denis Manturov: Growth leaders. Railroad car manufacturing in transport engineering grew 78 percent compared to last year. This is a combination of factors, of course, the timely decision taken back then…

Vladimir Putin: On car fleet renewal.

Denis Manturov: On car fleet renewal, on banning the extension of work service years. Along with the subsidies, this certainly had a positive effect. The freight car fleet is being renewed rapidly.

Agricultural engineering saw a 30 percent growth. And this has been a trend in the past two and half years. We have retained the support measures for next year, too, 8 billion will allocated to compensate the discounts to our agricultural producers.

Pharmaceuticals sector is growing.

Vladimir Putin: Which channels are used to distribute support?

Denis Manturov: This resolution is being carried out by the Agriculture Ministry, but the Government has been allocating substantial amounts to that measure for over two years. With the additional volume, this has already amounted to 13 billion rubles. And as I said, growth reached 30 percent.

Against the background of the growing market, total production has increased 12 percent. The chemical industry is also developing, showing positive growth too. Road construction equipment manufacturing is growing at over 15 percent. So all industries are enjoying progress.

The only industry that has not recovered since the crisis so far is metallurgy. But taking into account that the mortgage sector and construction industry are steadily recovering, this is the segment that will bring about growth in metallurgy. Because we rely basically on domestic consumption.

As for next year's budget, together with the Ministry of Finance we have found an overall solution to the key industry sectors and all state programmes, including, as I mentioned, the agricultural engineering, automotive industry, road-building machinery, and traditionally, the aircraft and shipbuilding industries. In particular, we have noted that with regard to the Industrial Development Fund, a total of 1,900 requests have been received (just in case, I have provided a folder with the materials), and we get a weekly report from the fund. A total of 62 billion rubles has been provided for financing purposes. This concerns key industrial sectors: equipment engineering, the chemical sector, pharmaceuticals, and the medical industry in general. This concerns light industry as well – you issued separate instructions in Ryazan on supporting this sector. Next year, along with the Ministry of Finance we will provide 2.2 billion rubles, partly for the recovery of expenses for manufacturing school uniforms. This is a social issue. We are the first to have addressed this issue this year.

The Ministry of Education considered our request. We have planned 16 billion for the fund only next year, but the Ministry has adopted a decision to allocate funds ahead of schedule in December to give us the opportunity to continue financing as soon as next year without waiting for the spring budget adjustment.

As regards the diversification of the military-industrial complex, we have envisaged it in all state programmes as one of the key aspects, one of the main areas. There are separate programmes for all sectors under the Industrial Development Fund. Through Vnesheconombank, a separate organisation named Konversiya (Conversion) has been created to continue to promote what is produced. You know that military-industrial complex companies have expertise in medical equipment and medical products. This also applies to oil-and-gas machine building as well.

As regards the indicators you instructed us to implement until 2030 and the overall parameters of 50 percent in the civilian sector of the military-industrial complex, we are slightly ahead of schedule. Regarding the figures you gave us, I believe that we will accomplish 17 or even up to 20 percent by 2020, as we have the necessary tools for this. We expect this to have a significant impact on diversification.

As regards special capital investment contracts (SPIC), back in May, you set us a goal to improve this mechanism. Together with the Ministry of Finance, we are completing this project and next week upon its completion we will introduce to the Government the coordinated amendments to the law on industrial policy and other accompanying laws concerning the improvement of SPIC, which will allow us, first, to extend the period to 20 years. This will primarily concern those special investment and technological contracts that require developing additional competences in case they are lacking or in case we are planning to further expand the opportunities. We are working on this with the Ministry of Finance and plan to complete work soon.

Regarding exports, as Mr Oreshkin mentioned, non-resource exports are growing. This year, for the first time we have reached a milestone figure in automotive components, with Russian exports at $1 billion. This is an indicator that has never been seen before. We also expect that the support measures to be taken by the Government through the Ministry of Economic Development – 30 billion rubles in total, which we have allocated with the Ministry of Finance – will go to compensate logistics expenses for industrial enterprises, expenses for certification and homologation of products and exporting them to foreign markets.

The new area of activity we will implement soon is a measure well-proven in the domestic market – subsidised auto loans. We want to implement it in foreign markets as well, that is, to compensate foreign bank loans for those who buy Russian cars. This is a good measure, and given the growing shipments by the automotive industry, we expect it to be an effective addition. And in general, we expect next year to bring further growth in industrial production in a wide range of sectors.

Vladimir Putin: I have two specific questions regarding the Il-114 regional aircraft and the 35-tonne increase in aircraft engine capacity. How are these projects proceeding, are there any difficulties and what has to be done to support these projects?

Denis Manturov: Mr President, as for the projects that you ordered us to implement last year: these include a new version of Il-96–400, the Il-114, the PD-35 engine, the TB7-117 engine for the Il-114 aircraft that will also be used for the cargo version of the Il-112, and for the Mi-38 helicopter. These projects are proceeding on schedule. We have the funding allocated for 2018, and are now working with the Ministry of Finance to seek funding for 2019–2020. This has yet to be resolved. But as regards 2018, the required funding has been provided in full.

Vladimir Putin: As for 2019–2020 funding, these programmes are important and needed, and everyone expects them to be implemented. Let us arrange it this way: we have funded the spending from Rosneftegaz through 2018, while the expenses for 2019–2020 have to be paid for from the budget. I will arrange for this with the Ministry of Finance.

Denis Manturov: Thank you very much. We will definitely build these aircraft and, most importantly, the engine.

Vladimir Putin: These are the things that need to be done methodically and as planned; I understand that for 2019–2020 there are going to be issues that need to be balanced, but you have to choose your priorities, and this is one of them. We have to build our own regional aircraft, otherwise we will always have to buy foreign aircraft in this segment. And we need a powerful engine, we need the PD-35, as you know full well. There are many aviation projects and ideas related to this engine.

Denis Manturov: It will be used both for a wide-bodied long-range aircraft and a heavy transport aircraft. But we are going to use this engine in the small-scale power generation sector as well; we will use it for ground stations as we simply do not have this capacity today.

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