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State Council Presidium meeting on developing Russian regions’ industrial capacity

February 1, 2018, Rostov-on-Don

Vladimir Putin chaired a meeting of the State Council Presidium in Rostov-on-Don on developing the industrial capacity of Russian regions.

Excerpts from transcript of State Council Presidium meeting

President of Russia Vladimir Putin: We have gathered at Rostselmash, one of the flagships of the domestic machine-building industry, to discuss approaches to developing the industrial capacity of the regions, to identify concrete measures and steps to ensure that new enterprises, new factories are built and high-quality, high-paid jobs are created in Russian regions, and that Russian industry in general achieves the stable, high growth rates that we need.

I would like to note that last year industrial growth in Russia amounted to one percent. We cannot be satisfied with this. Of course, we are aware of the positive aspects of this growth, the positive side. A number of sectors show good dynamics: transport engineering, the automotive industry, pharmaceuticals, textiles, food, and chemicals.

For example: in 2017, the production of railway locomotives and rolling stock increased by 33 percent, of motor vehicles – by over 13 percent, medicines by 12.3 percent, textiles by 7 percent, food products by 5.6 percent, and chemicals – by 4.3 percent.

I would like to stress that stimulating industrial and economic growth is the most important task for all levels of government, and a key condition for developing the social sphere and improving the quality of people's lives. We need to support promising projects to make highly processed products, products that will be in demand both in the domestic and foreign markets, and we are also talking about providing adequate staffing for the real sector of the economy and creating conditions for the application of modern technologies in production.

We are now at Rostselmash. We have taken a tour together with the head of this plant Konstantin Babkin and discussed what is going on here. Despite the difficulties, the dynamics are unmistakably positive if we are talking about promoting products on foreign markets.

Only just recently, no one wanted to buy our equipment in Russia, and now this equipment – both combines and tractors – is sold in 37 countries. In five years, if it goes the same way, according to the background materials I looked at, they will be selling in at least 60 countries.

I have also spoken about personnel. I just mentioned something at the videoconference with the Rostov Nuclear Power Station: 41 percent of Rostselmash employees have higher education and many of them in vocational areas.

Starting this year, a programme to improve labour productivity will be introduced in the regions. I call on the heads of all Russian regions to cooperate with both employers and employees.

Next. It is necessary to improve companies’ access to financing. Our Industrial Development Fund is hard at work. Its portfolio includes about 270 projects with 170 billion roubles of private investment in total; 35 new enterprises have opened with the support of the fund.

I have to say we often discuss – most often, probably – the problems, as Denis Manturov [Minister of Industry and Trade] knows all about. He is often justly criticised. But I have to say that the Fund under your leadership does satisfactory work, let us say, so as not to heap praise on anyone. As of today, the fund has approved 268 projects with 170 billion rubles of private investment in total. These projects receive 66 billion rubles in soft loans.

In general, as I have said, I believe that the Central Bank’s work is also satisfactory: it carefully follows the money movement, and the results are assessed positively. About 262 billion rubles were allocated from the federal budget to support the aviation industry, shipbuilding, radioelectronics and other industrial sectors.

At the same time, it is necessary to create greater opportunities to stimulate industrial growth at the regional level. The regions have the tools for this, including regional contracts, tax incentives, and direct support and subsidies. I am aware that many of our colleagues are doing these things.

All these tools need to be used competently. It is fundamentally important that the use of these opportunities does not restrict competition, but rather develop it, and that the effect of the application correspond to the strategic goals of developing the Russian regions and the country in general.

In order to expand the authority of the regions to ensure economic growth, I propose including funds to be allocated for the development of the economy into the model of the regional budget, that is, to consider them compulsory expenses by the regional authorities.

I also consider it necessary to work through special measures to support small manufacturing businesses, to reduce the risks of startup companies, and to encourage high-quality employment in the regions.

I am aware that the Central Bank has discussed improving the financial stability of micro- and small enterprises with the regions. We will focus today separately on the solutions that are proposed in this area.

In closing, I would like to note that businesses would grow and invest in upgrades and in opening new production sites only in places where they are met halfway, where they do not run into barriers, but are provided with convenient and comfortable operating conditions. This applies to a modern social atmosphere as well, which is important for employees and their families.

I want the regional and local authorities to focus on the need to resolve the key issues that plague industrialists in a timely and prompt manner, including the allocation of land plots, providing utility infrastructure, developing the road system, and commissioning new power capacity.

We have just toured the new Rostov airport. This is a good example, I believe: the infrastructure is in place, everything was done on schedule and with great workmanship. The areas necessary for future development have been set aside. All you have to do is get your hands dirty, and the results will come.

Just before our meeting, as I said, the fourth power unit of the Rostov NPP was commissioned. It is one of the largest power stations in southern Russia, which has huge potential for further economic growth in southern Russia and for providing a sustainable energy source to residential and social facilities. Once again, I would like to thank everyone who was involved in this vast and important effort.


Vladimir Putin: Mr Manturov, please.

Minister of Industry and Trade Denis Manturov: Mr President, colleagues,

Over the last few years, we have been building comprehensive cooperation with the regions as part of implementing the law on industrial policy and the cooperation agreements we signed with all Russian regions.

The main goal of our cooperation is to increase state and private investment in regional projects. Our goal is also to synchronise industrial development tools with the regions. And today, 119 federal and 494 regional support measures and subsidies have been included in the specially established support measure navigator.

As part of carrying out your order, we have also coordinated industrial and regional import substitution plans. Thanks to this, 345 billion rubles of extrabudgetary money and 75 billion rubles from the budget have been invested in new projects.

Our regional industry development funds are becoming another mechanism to attract private investment to medium and small businesses. And thanks to the initiative to include the industry block in the regions’ model budget that you have supported today, they can use this to plan their expenses, which provides for the economic growth of the regions. This will make it possible to replenish regional industry funds and help improve the investment climate.

The next important area we are focusing our efforts on is the development of industrial infrastructure, primarily at the local level. During the last five years, the number of industrial parks and techno parks has increased almost four-fold with support from the federal centre. Today, there are 157 such venues in Russia and another 76 are under construction now. This means that the goal we set for 2020 has already been implemented.

Nevertheless, we will continue working with the Finance Ministry to implement a joint programme to support the regions that invest in modernising their industrial infrastructure. Federal allocations for the next three years have been approved at 11 billion rubles. This will help the regions expand their taxable bases by creating small and medium-sized companies in the vacated industrial zones and settle the problem of single-industry cities.

In addition to industrial and technology parks, there will be industrial clusters, which will help develop cooperation ties between companies from different regions and also offer an opportunity to reduce producer costs.

As of now, 29 regions have created 50 clusters comprising 1,800 companies that employ over 700,000 people. We propose paying subsidies for the expansion of clusters and believe that this model will help streamline the distribution of capacities throughout the country. It should be said that over 50 percent of our manufacturing companies are now located in the Central and Volga federal districts, and they manufacture over 70 percent of innovative products in Russia.

To moderate this imbalance in the region’s industrial development, the government offers tax incentives for nine special economic zones and 45 priority development areas. In addition, we have complemented all the state programmes with special chapters on the development of the Russian Far East and the North Caucasus Federal District, as per your instruction.

To continue to balance industrial and interregional development, we have created a State Industry Information System (SIIS). Unlike the State Planning Committee, which issued instructions to producers, the SIIS only provides information on oversupply or market gaps, which companies can use to take independent decisions.

This does not only concern businesses since we do not always see companies’ opportunities in the regions from the federal perspective – and, in fact, the regional heads themselves do not always have objective data on what is happening locally. I will not name anyone specifically among the regional heads but there have been cases when, for example, somebody would come to me with a proposal to build an electric steel-making plant in the region. When asked where they were going to get scrap metal, they said, “in the region next door.” But there is already a million-plus city with strong electrometallurgy in that region. Certain questions arise and this information system will allow us to avoid such issues.

This system now comprises almost the entire catalogue, high-tech products that our companies are producing or will be producing. We also plan to develop a directory of investment projects for private investors and a digital platform for companies to be able to access regional trading sites with subcontracting opportunities. Thus, each company will have access to the entire domestic market.

In addition, we also propose developing a common regional industrial policy standard. All regions will use this standard as guidance in developing both technology and, most importantly, their export potential. Last year, we worked with the Russian Export Centre to test general approaches to increasing non-commodity exports in the first 22 regions. There is a total of 17 federal support programmes being administered by three separate bodies: the Russian Export Centre, the Export Insurance Agency of Russia (EXIAR) and Eximbank of Russia.

We propose establishing a “one-stop shop” based at the Russian Export Centre, across all regions, and consolidate all resources and mechanisms available today for export support. The Russian Export Centre will become the administrator of the budget funds. This will ensure comprehensive promotion of the regional products in external markets.

Thank you. Please support our proposal.


Central Bank Governor Elvira Nabiullina: Mr President, colleagues,

The accessibility of financial resources, including bank loans, is certainly an economic growth factor. Previously, when market lending conditions deteriorated, the Central Bank worked to promote special low interest loans to support non-commodity exports, project financing, as well as small and medium-sized businesses. Overall, limits on the use of these reduced rates exceeded 500 billion rubles in that period of time.

However, this is a temporary measure, and we are gradually abandoning it in light of the falling interest rates in the economy and the increasing accessibility of loans. But still, we have only used two thirds of the approved allocations in the key areas, which means that we have some unused capacity.

Of course, our strategy is to make market rate loans accessible to the people. There are grounds for attaining this goal, considering that basic indicators in our banking sector returned to the pre-crisis level last year. We also have sufficient funds, sufficient liquidity, and there are grounds for our banks to increase their loans to the national economy in current conditions.

The Central Bank’s priority is not just to ensure the stability of banks and financial institutions. We want financial institutions and banks above all to play their role in financing economic growth and to be efficient intermediaries between saving and lending.

Although the overall volume of loans in the economy grew by 4.7 percent last year (net of the exchange rate), there is a problem in this area, first of all in the lending structure. Retail lending is recovering very rapidly. Loans to individuals are growing seven times faster than corporate loans. Last year, retail loans increased by 12.7 percent, while loans to non-financial organisations grew only by 1.8 percent.

Of course, the revival of retail lending is a good factor, because it means the demand is recovering as well, and increased demand for industrial goods is evidence of consumer confidence. However, we must not allow overheating, because consumer lending should grow at a comparable pace with the growth of people’s incomes, and it must also be commensurate to loans in the real economy sector. Therefore, we will adjust our regulation system so as to encourage banks to provide not only retail loans but also loans to the real economy sector.

We have recently held many discussions on performance or incentive-based regulation at banks. What does this mean? Not all loans, including corporate loans, have the same effect in terms of economic growth. Our analysis shows that a considerable number of banks issue a major part of loans for merger and acquisition transactions.

For example, four banks allocated nearly 2.5 trillion rubles in corporate loans, while in fact this money was not used for development but for the purchase or sale of assets. This entails greater risks, because the borrower must use part of its profits not only to pay interest on production loans, but also interest on loans taken out to buy assets.

This is why we plan to introduce differentiated reserve requirements. <…>

I would like to say a few words about other methods, in addition to bank loans, for attracting financing for new projects, investment projects and industrial development.

You have issued instructions on bonds, and measures have been taken to simplify the bond offering procedures. It should be said that there were some positive changes in 2017. In addition to borrowing loans, our non-financial entities, that is, real economy companies have reported a growth of 1.4 trillion rubles through a 26 percent increase in the value of their bonds.

The value of loans has increased by 1.8 percent, while the value of bonds is up 26 percent, although the overall share of bonds is not very large, some 15 percent total, but it can grow, and many large and medium-sized companies can use this instrument to attract funds. We are considering a system of loan-backed securitisation for small businesses.

Equity financing is where we have fallen short of our target so far. Investment projects are often implemented not with borrowed funds but with the company’s own equity. The share of equity financing is only 8.5 percent in Russia, while it is 52 percent in China, 57 percent in India, 26 percent in Brazil and 21 percent in South Africa. I only provided the figures for the BRICS countries.

The use of this instrument can be facilitated by increased transparency and a higher level of corporate governance. It is a financial resource we could make use of, and this is how non-state pension funds can help us develop our companies.


Vladimir Putin: Mr Katyrin, go ahead, please.

President of the Chamber of Commerce and Industry Sergei Katyrin: Mr President, colleagues,

I would like you to address two aspects that are not perhaps global in scale, but are still, in my view, sufficiently important.

First, the exhibition and fair activities; this is an important tool for promoting products in local, federal and international markets. Today Russia hosts 2,500 exhibitions per year and the services rendered amount to about $800 million. We have one million square metres of indoor areas. This is the seventh result in the world, despite the fact that we have started developing this infrastructure only recently. Nevertheless, the effect is significant, as we can see.

We hold 38,000 fairs per year, with sales amounting to 500 billion rubles. What I mean is that this exhibition and fair industry is sufficiently large-scale and important, but it lacks rules and regulations. At the Chamber’s congress two years ago – I think you remember this, Mr President – you supported our initiative to create this regulatory framework.

Jointly with the Industry and Trade Ministry, we have prepared an exhibition activity development concept and a relevant draft law. The concept has been approved, while the draft has been held up somewhere. It has not been adopted up to this day. We would like to ask you to give this matter a push, because, in our view, it could strengthen our regions’ industrial potential.

Vladimir Putin: Where has it been held up? With Mr Manturov, I suppose?

Sergei Katyrin: No, Mr Manturov drafted this law together with us. It is somewhere in the Government, as far as we know.

Vladimir Putin: All right, we will look for it, it isn’t a needle in a haystack. We will find it.


Economic Development Minister Maxim Oreshkin: You have mentioned labour productivity in your opening remarks. In fact, we launched this programme late last year. It includes seven regions and a further nine regions are joining it later this year. At the first stage, it involves 84 enterprises. There were some very striking cases at some of these, where better organisation managed to boost labour productivity by tens of percentage points. I will tell you about this separately.

We feared that this productivity growth would lead to redundancies, but at these enterprises we see a situation where productivity growth leads to a win in competition and an increase in revenues. As a result, they hire additional staff and forge forward. We are cooperating with the Industry and Trade Ministry on this project, which is why it is making strides.

Generally, we believe that inculcating culture, efficiency culture, and promoting steady [labour] productivity growth is among our main tasks. Under this particular project, we focus on training teams. When people start seeing what it is all about, they just realise what opportunities in terms of optimisation are available and achieve fantastic results.

Now let me address the project funding business. We are planning to sign the first deals at the Investment Forum in Sochi two weeks from now. Companies will receive 10–15-year loans at 8–9-percent interest and 170 billion rubles.


General Director of the Federal Corporation for Developing Small and Medium Business Alexander Braverman: I have a small comment. My colleagues said that the accessibility of funds is now the main problem for companies, especially small and medium-sized ones. Over a year ago, we introduced, together with the Central Bank, an encouragement programme which offers an interest rate 3 percentage points lower than for loans in other sectors. However, it is focused on industry, primarily the high-tech sector.

The Government has allocated 652 million rubles in bank subsidies, which will allow us together with the Economic Development Ministry – we are implementing this programme together, and we are grateful to the Finance Ministry for its prompt assistance – to allocate 25.1 billion rubles in loans to a targeted group of industries, namely, biotechnology, microelectronics and robotics. This is why funds have become more accessible.

Second, we spoke about the business navigator. Kazakhstan, Belarus and Armenia have requested access to this instrument, because they have nothing of this kind. They have asked for the methodology of using this instrument. The Government has approved the free transfer of this instrument, which will expand our integration opportunities.

And lastly, Mr Manturov, I suggest that you align the State Industry Information System with the business navigator so as to create a synergistic effect.


Finance Minister Anton Siluanov: Speaking about the model budget, we support this proposal, because it will allow regions to include their expenses in industry development funds. We will take these expenses into account when calculating inter-budget transfers. I think that we should also use modern methods for stimulating industrial development, such as special investment contracts.

We have devised a new format of special investment contracts. We have extended the list of sectors that can use this instrument to include agriculture, transport infrastructure and modern technology. In addition to tax incentives, investors are offered conditions such as tax base stability and tax incentives for investment in infrastructure.

Also, when discussing state procurement, we will take into account the priority importance of products manufactured within the framework of special investment contracts. In essence, special investment contracts are contracts between the state and investors that stipulate stable terms and the marketing of products that are manufactured as the result of this investment. View this as an important method of facilitating industrial development. We have drafted a bill to this effect, and it is being coordinated now. We will strongly rally for its adoption during the Parliament’s spring session.


Vladimir Putin: We have drafted an instruction and have it coordinated with nearly all participants. Are there are comments regarding it? No?

I would like to thank all our colleagues who have contributed to drafting our decisions and today’s meeting.

Today we discussed the development of the Russian regions’ industrial potential. The industrial potential of the regions constitutes the industrial potential of the country as a whole. In fact, the main goal of this meeting, as well as of the work that has been accomplished by the working group, is to stimulate the regional teams to work together with the Government and businesses by adjusting their legal framework so that the financial authorities and the Government can join in this work and support the regional authorities in this crucial work of priority significance for economic development.

I would like to thank the working group again and to urge all our colleagues to meticulously implement the decisions which we have prepared and will sign today.

Thank you very much.

February 1, 2018, Rostov-on-Don