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President of Russia Vladimir Putin: Good afternoon.

It is a pleasure to welcome the participants of the expanded meeting of the bureau of the Russian Engineering Union and the League for Assisting Defence Enterprises of Russia.

I have been well acquainted with many of you for a long time and I know that you are realistically assessing the situation in the economy as a whole, in the industry and at your enterprises. Therefore, I hope that this meeting will be substantive, detail-oriented and productive and will allow us to reach specific decisions that would provide an additional impetus to the development of the national economy and the growth of high-tech production lines.

Today we have gathered in Izhevsk, a city that is known for its large machine building enterprises and its defence industry. For many decades, they have been producing quality and reliable hardware for our Armed Forces and many key industries, thereby making a contribution to the consolidation of the country’s defence capability and its economic and technological potential.

I must say that in recent years the majority of machine building enterprises – both in Izhevsk and other regions – have managed to adapt to external restrictions and other difficulties and concentrated their resources on priority areas of their work.

New technological competences and intellectual centres are appearing in the country. Russia is establishing advanced science-intensive centres and production that meet the requirements of the global market.

I can say for reference that in the first five months of this year, compared to the same period last year, the output of freight cars, for example, grew by 86.8 percent, passenger railcars by 56.9 percent, buses by over 30 percent, lorries by over 18 percent, passenger cars by over 20 percent, and tractors by 15 plus percent.

We have traditionally had strong positions in military machine building. In the past years, its manufacturing capacities have undergone modernisation and a policy has been adopted to diversify and expand the manufacture of high-tech civilian products. As a result, the output of military goods in the military defence complex grew by 9.5 percent last year whereas the output of civilian goods went up by almost 17 percent.

Apparently, there are also some problems in the engineering industry. I have said this more than once, and so have you in different formats, yet I would like to repeat a few things: we are ready to support domestic machine building, there is no doubt about it. We are going to do so through a number of state programmes and by providing significant budget funding.

Let me remind you of just some of the programmes we have up and running. These include state programmes like Developing Industry and Increasing Its Competitiveness, Developing the Shipbuilding Industry to Utilise Shelf Deposits in 2013–2030, Developing the Electronics and Radioelectronics Industry in 2013–2025, and Developing the Aviation Industry in 2013–2025. The overall funding under these programmes in 2017 totals 283.2 billion rubles, 187 billion in 2018, and 172.3 billion in 2019.

We shall continue using such support tools as the Industry Development Fund and special investment contract mechanisms. Apart from that, we will partially subsidise research and development costs and the interest on loans taken out to implement new comprehensive and investment projects.

Colleagues, I will mention very briefly some of the tasks on which we should concentrate our efforts. Firstly, machine building enterprises should substantially build up their export potential. In the first four months of this year, exports of civilian and engineering products went up by 17 percent to reach $4.5 billion. However, we certainly have an opportunity and the reserves to increase this figure.

For its part, the state will continue providing comprehensive support to exporters. We are already carrying out many measures in this area. To support industrial exports, 20 billion was allocated to fund a package of measures for 2017.

You know what this money is spent on via the Russian Export Centre: transportation, certification and so forth. I know that this is not enough. Industry leaders talk about this all the time – Mr Rogozin [Deputy Prime Minister] and Mr Manturov [Minister of Industry and Trade], during our meetings you have said the same more than once.

We will think about how to expand these opportunities. We will think about what else we can do to strengthen the positions of domestic machine builders on the global markets.

Secondly, it is important to speed up the technical renovation of the engineering complex, primarily by introducing programmes for the innovative development of enterprises, improving the environmental standards of production and broader use of digital technology that helps to considerably reduce costs.

A meeting of the Council for Strategic Development and Priority Projects is scheduled for July 5. I would like to ask Minister of Industry and Trade Denis Manturov to present proposals on how to more efficiently organise this work.

Furthermore, it is necessary to diversify the defence industry more actively and increase investment in this area, in particular by using public-private partnership mechanisms. Let me repeat that the Ministry of Industry and Trade has already launched this work – it is running its course and producing results.

However, more can be done with the capacities of defence companies. Last September, as you will recall, at a meeting in Tula we discussed measures to utilise the capacity of the defence industry to manufacture high-tech civilian products.

I suggest meeting again this autumn to make sure we are on the same page, so to speak, to see how the plans are being carried out and to discuss the situation in the industry once again.

Finally, the training of personnel is a very important core task. I know that you are paying serious attention to the training of young and talented specialists, seeking them out and encouraging them, and organising different academic and creativity competitions. But this is what I would like to tell you: quite recently I met with school teachers from different regions of the Russian Federation – maybe you saw this meeting since it was covered by the media. All of them agreed that there are not enough contacts with small and medium companies, especially high-tech ones. They do not even notice them because they are so few. However, I know that those present here are working on this problem.

I would like to ask you again to devote more attention to this issue, and not only via your flagship enterprises but maybe via your industry peers, your partners. They should be encouraged to work with young specialists not only in universities but also in the higher forms at school.

Openness and readiness for cooperation are important for young people by motivating them to choose an occupation. I hope you will continue pursuing your thoughtful, far-sighted personnel policy.

Let me recall that Russia has joined the international association WorldSkills that seeks to popularise blue-collar professions and introduce high professional standards. Machine building enterprises should play a more active role in this movement.

In conclusion, I would like to wish you productive work. I would also like to congratulate the Russian Engineering Union on its 10^th anniversary. I hope that it will continue playing a major role in consolidating and developing domestic industry.

I wish you success.

Thank you for your attention.

Excerpts from transcript of a meeting of the bureau of the Russian Engineering Union and the League for Assisting Defence Enterprises of Russia

Rostec State Corporation CEO Sergei Chemezov: Thank you, Mr President,

Indeed, we held our founding congress in the Hall of Columns, which you attended 10 years ago. Thank you for your support.

The Russian Engineering Union has grown into a large organization of engineering companies from many industries. Today I would like to focus on the five key trends that constitute the agenda of our industry’s development. I certainly take into account the experience of the Russian Engineering Union and the Rostec companies that are members of this Union.

I would like to begin by saying that industrial production is on the rise in Russia. Growth in the first three months of this year was almost one percent. This is a modest figure, but it is evidence of positive dynamics, which, I hope, will persist.

Of course, the Western sanctions have influenced the development of our industrial companies. However, the crucial thing is that some of them have used these sanctions to their benefit and have advanced to new export markets. For example, the order portfolio of the Kalashnikov Concern, where we are meeting today, stands at $300 million or six times its portfolio before the sanctions. This achievement is especially important considering that the company has lost its main foreign market – the US market for civilian and service weapons – and actually had to start its search for partners from scratch.

An additional impetus to the development of our exports of civilian and service weapons will be provided by the draft of a new federal law, which has already been submitted to the State Duma. Under this law, Rosoboronexport, a Rostec company, will be given corporate powers to export civilian and service weapons.

Today, only the producers of these weapons can export them, but since Rosoboronexport has strong ties in the market, it can provide marketing support for our commodities, including those of the Kalashnikov Concern, in foreign markets.

Our import replacement programme is an important component of our long-term industrial development strategy. We are implementing this project in sectors such as engine and aircraft manufacturing, avionics, electronics, the electronic components base, information technology, medicine, pharmaceuticals, robotics and others.

Military goods production plays a particular part in the import replacement programme. By 2018, we plan to have completed full replacement of goods previously produced in Ukraine. We will complete the import replacement programme for goods from NATO and European Union countries by 2020. This is my first point.

Second, making successful use in our economy of the achievements of the fourth industrial revolution is another important component of our industrial development. We still lag behind developed countries in this respect. The digital economy accounts for 5.5 percent of their economies, but less than 3 percent in Russia, according to last year’s figures.

To speed up growth, we have set key development directions and comprehensive projects that facilitate digitalisation. They include the Smart City project, putting the healthcare sector online, an industrial internet of things, and data storage systems for large and super-large data volumes. Rostec recently signed an agreement with the Yaroslavl Region on the Smart City project. Elements of this project have already been put in place in Nizhny Tagil and Ulan-Ude.

Attracting private shareholders and technology partners is a big priority for industrial development. There are companies and businesspeople today ready to carry out long-term investment. They are interested in these opportunities despite the fact that high-tech sector projects take a long time to start turning a profit and it is not possible to make a quick return on investment.

A good example here is the partnership between Mikhail Shelkov and Rostec with VSMPO-AVISMA, one of the world’s biggest producers of titanium and titanium goods. This alliance resulted in the company’s net profit under international financial reporting standards increasing by close to 80 percent – from 14 billion to 26 billion.

Another good example is here, at the Kalashnikov Concern. Here, Andrei Bokarev and Alexei Krivoruchko are the shareholders, together with Rostec. Kalashnikov’s transfer to private hands has brought the company new growth opportunities. Last year, they opened five new production facilities and all are turning a profit.

We also have an interest in cooperation with foreign partners. There are quite a few examples here: Pirelli and Boeing, to name two. They continue working with us despite the sanctions. We are establishing joint ventures such as those with Renault Nissan and a number of other companies.

In which areas must we work? We need to increase the share of civilian goods. This is something you spoke about, Mr President. Rostec’s updated development strategy calls for raising the share of civilian goods to 50 percent or more by 2025.

With regard to defence industry conversion, let me note a recent agreement signed with Vnesheconombank setting up a joint venture – NPO Konversiya. This organisation will ensure transfers of technology and production from defence industry companies to civilian sectors. It will identify market needs and look for ways to promote defence enterprises’ civilian goods and facilitate efforts to attract financing.

One trend that we cannot ignore is bringing in new resources into companies’ human resource pools. The work accomplished so far has produced results and we see a positive trend. The average age of workers at defence enterprises and corporations is 42–43 now, and the average age of employees has been coming down by around 12–18 months every year of late.

It is enough to cite the case of Kalashnikov, where the average age is 35–36 years. There is no question that one of the big factors attracting young people are the decent wages offered. With this in mind, we are raising average wages on an ongoing basis at our companies. Last year, the average wage was 44,000 rubles, which is really quite good for industry.

The Russian Engineering Union, together with Rostec enterprises, are pursuing a number of interesting projects and are working together closely with the country’s leading technical universities.

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Among the Union’s long-term successful projects is the international forum Engineers of the Future. This project has been going on for many years now. More than 1,000 young specialists, including from abroad, take part in this event every year.

Another project is the multi-profile non-state engineering competition Zvezda. This is the biggest of such events and attracts around 300,000 participants.

One of the problems for carrying out the 2018–2025 State Armament Programme is ensuring regular orders for defence industry enterprises. This is a particular problem in the aircraft-manufacturing and shipbuilding sectors. There are fluctuations with big orders one year and two or three times fewer orders the next year.

This creates a whole range of problems, including the need to allocate funds for supporting production facilities during the quiet periods – the same facilities into which considerable investment was made in modernisation. We have carried out large-scale modernisation, purchased modern equipment and machine tools, and they are not always being used in full measure.

We need to optimise human resources, and this involves the risk of creating social tension. We have trained specialists, but when there is no work, we either need to cut numbers or to reassign them to lower paid jobs. There is also the risk of losing cooperation ties that have developed within work on state defence order, and higher production costs due to low series production and lower profitability.

Today, the industry is getting stable and regular orders. Overall, the 2018–2025 State Armament Programme will support and keep the defence industry enterprises active.

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In conclusion, let me thank you, Mr President, for supporting our proposals on enhancing the federal law on state defence order as regards control of budget expenditure on it. We see this too in the amendments to the law that you introduced to the State Duma on June 18. This resolves a substantial problem.

We have discussed this law in great detail at our bureau, at the companies, and in our Union’s cells. All of our proposals were taken into account and the proposals are now before the State Duma.

Colleagues,

I want to congratulate everyone once more on the Union’s 10^th anniversary and wish you all new successes in your work and new victories for the sake of our industry’s continued growth.

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Vladimir Putin: As I said before, I meet regularly with many of those present today in Sochi, twice a year, in autumn and in spring. I think your mood was similar to mine 2–2.5 years ago. We did feel some worries inside about what would happen and whether we would be up to the major tasks in difficult circumstances. My own mood has changed since then, and I imagined that yours has too, because we see that we are up to the task. You are coping and your teams are coping. This demonstrates that our machine-building sector and our industry do have quite a solid fundamental base.

There are still a good many problems, yes, but we are confident that we have overcome past difficulties, and with the needed efforts from your part and from the state authorities, we will continue moving forward. I have no doubt of this today. Of course, we must do this at minimum cost and with maximum effectiveness.

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