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Vladimir Putin:

Good afternoon,

It is not by chance that Naberezhniye Chelny has been chosen as the venue for this meeting. When Mintimer Shaimiyev said that the roof of this facility has an area of 40 hectares, and the space beneath these hectares is filled with equipment and people and technologies, and most importantly, that the results are obvious, one cannot help being impressed. That is true.

But for years now KamAZ has been experiencing problems. It is beset by a host of problems, just like the whole industry.

I do not need to tell this audience that in the context of the present-day Russian economy the engineering industry has to be the key industry. So, the issue must be revisited. For us, for the Government members and for me personally, such meetings are extremely important.

From time to time we have to synchronize watches with the people working in production. It is not by chance that we have with us the President of the Central Bank, Viktor Gerashchenko, and representatives of our leading financial entities – Sberbank and Vneshekonombank – and top officials of the Finance Ministry.

So I expect that during our discussion you will speak about the problems of concern to you. If you have questions, we will be prepared to answer them. I will just give you a general overview before we pass on to a less formal communication format.

Clearly, we cannot live by the moment. It is necessary to develop high technologies, the intellectual resources, human resources and to retain personnel. In all our activities we should bear in mind the overall shape of the national industry and its position in the world in the new century.

And of course, the Government should have a brand new industrial strategy and adhere to modern approaches in supporting the domestic producer. Needless to say, nothing can be achieved without supporting the domestic producer. You may say whatever you like and air any liberal ideas, yet the common practice throughout the world is to support the domestic producer, and I suppose we should do the same.

Some steps have already been taken in that direction and there are some good results to report. The country’s economy is gaining strength. We have proved, above all to ourselves, that Russia has great potential for economic development. Most importantly, we have acquired a new confidence that we can achieve success by relying on the country’s internal reserves.

After many years of decline in production in machine-building, we are witnessing some growth. The sector has grown by an average 16% during the past year – twice as fast as the industry as a whole and 7% faster than in the pre-crisis year of 1997. Let me draw your attention to the fact that this indicator is calculated not only in comparison with the crisis. We have exceeded the 1997 performance indicators.

There is now demand for Russian-made machinery on the market. Some success has been achieved both inside and outside the country. The ground has been laid for a qualitative modernization of the sector. But we are very well aware that our production still falls short of modern requirements, of the standards of other countries. This is confirmed even by quantitative factors. Overseas, machine-building accounts for more than a third of the total industrial output, and in today’s Russia, it accounts for just 19%.

Basically, what should be the main concern? The rate of growth. It may sound like a fantasy today, but on the whole our industry can grow more dynamically, can grow faster than in the West. We have all the prerequisites for that. And it is not largely because of huge internal demand for machinery. It is not by chance that I have mentioned the growth rate.

Average growth rates would not be enough to be competitive. What are the obstacles? I won’t speak about large-scale matters, although I will say a couple of words about the Government’s industrial policy. However, there are the long-standing, typically Russian causes such as negligence, inefficiency and red tape.

To take a fresh example. The Economics Ministry still has not prepared a list of technological equipment for which there are no Russian-made analogues and which are covered by VAT exemptions under the federal law signed back on January 2.

Tax benefits are not the royal road for economic development, including the machine-building sector. On the whole, we will be phasing it out. I think we should understand that our economy must be built into the world system. But having made this decision we must fulfill it. And in general, all the decisions must be carried out. They should be carefully weighed at the preparatory stage. But once a decision is made it has to be carried out because the market reacts accordingly. Once a decision is made everybody expects it to be carried out.

A few words about other pressing issues. Today 80% of machines and equipment in the country are obsolete. The average service life has been exhausted by more than 70%. That is a major problem for the sector and for the economy at large. Economic growth, unfortunately, has not yet become irreversible. What I said in the beginning is true. But there is a lingering feeling of anxiety and a sense of stagnation. If we slow down the pace, which is not all that fast anyway, we will again be in trouble.

The import of machines and equipment dropped by 36% in 1999 alone. But I would not describe that as a total plus.

At the same time a whole cluster of industries which potentially can be major consumers of machinery – chemistry, oil, transport, communications, construction and the food industry – have seen their financial situation improved. So, there is a potential demand for the industry’s products in the internal market.

The Government of the Russian Federation jointly with the regions has taken measures to support agriculture and related industries. I would like to make a special note of this.

This boosted demand for agricultural machinery by 60% last year. All this creates favourable conditions for the development of the machine-building industry. What is needed now is vigorous action by companies and the Government, and it should be taken without delay.

First of all, it is necessary to make the products more competitive, to improve their quality. To this end, more should be done to introduce new technologies. This has always been a challenge for the machine-building industry. But today it is particularly urgent because we cannot afford to close our market. We will pursue a flexible customs and tax policy in order to support the domestic producer. But we are not going to close our economy. So, quality must be ensured. Otherwise nobody would buy your products.

I have visited agricultural regions. I was shown a domestic-made combine harvester, and side by side, an imported one. I don’t think further comment is needed. In spite of the price, they won’t buy our stuff, even though our equipment is cheap there is no demand for it.

Yet, the civilian machine-building industry has a solid research base. It comprises five research centres and 330 various scientific organisations. It has access to the economic potential of the defence industry. But all these opportunities are not fully used.

It is necessary to introduce international quality standards at enterprises. Without it we would not make our way into the external market and we will face the problems I have just mentioned on the domestic market.

In this respect our achievements have been modest so far. Only three automobile plants and just one of the 173 agricultural machinery plants have introduced these quality control systems. And it is the same at other factories. In the meantime the farmers prefer foreign machinery.

Obviously, as the incomes of companies and households grow, quality will determine demand on the internal market, while the price factor, however important, is beginning to take a secondary place. It is the same almost everywhere.

Let me repeat that we have a very short time left to rectify the situation. And I think it is clear to everyone that unless we come to grips with the issues of product certification, technological discipline, introduction of resource saving and non-waste technologies, our competitors will “gobble us up”. They will trample us down. There won’t be another “breather” like the one afforded by the 1998 crisis. And in any case we don’t need such a “breather”. We should seek to stabilize our economy as a whole. In a stable economy there will be no “breathers”.

Of course it calls for initiative and substantial financial outlays, especially on the part of industrial enterprises. The Government is ready to contribute its share.

I see several areas of effort.

First, creating a favourable investment climate. For many years our economy resembled an economy of time-servers. No serious investor would want to deal with such an economy. So, while attracting investors, we should prove by deeds that Russian enterprises have a long-term growth potential.

Everything is interconnected there. If we want to attract investments we must create an equal playing field for everyone. It is very important. It creates a competitive environment, but it also imposes certain obligations and puts a certain strain on the domestic producer.

Very often a cumbersome decision-making procedure prevents successive implementation of many projects. We will be resolute in removing unnecessary bureaucratic barriers.

I would like to inform you that the Government has been instructed to streamline the procedure of decision-making on Government support for major investment projects in the automobile industry.

Secondly, we are planning to have talks on attracting funds from international financial institutions and the domestic banking community for the needs of the machine-building industry. That applies in particular to those Russian banks in which the Government has a stake. We have certain levers of influence and we will make more active use of them.

I have to say that the Central Bank, for example, has worked out a certain arrangement with the major banks in the country on some schemes, for example, on leasing. I am referring to leasing in the aviation industry. I am sure that similar schemes can be applied to other sectors.

Thirdly, we would follow the rule: budget money should be used to purchase domestically produced goods and services. We will do everything to encourage it. We are not going to do any arms twisting. That would not be right. But we will create requisite conditions.

Fourthly, the Government must contribute to domestic products outreach. I mean proper marketing, an information and reference data base, organization of fairs, exhibitions and the market infrastructure in general. Customers prefer imported products partly because they know nothing about quality goods produced by the Russian plants for the Russian market.

Next. Serious work is necessary to improve legislation. Among other things, a special provision might be passed that would oblige a company which has bought a foreign product for which there is a similar domestic analogue, to compensate part of the domestic producers’ losses.

We should be very careful in introducing such innovations, in what I have just said. The market should not be undermined.

I anticipate criticism on the part of liberal-minded economists. I am sure some of those present might challenge pronouncements of this kind. But let me remind you that the United States has such a law. And yet it is a country with the most liberal legislation.

Sixth, we should aggressively seek to enter foreign markets. That calls for joint efforts of producers and the Government. Our producers should always feel the powerful support of the state behind them.

The Ministry of Trade, the Ministry of Foreign Affairs and the Ministry of Economics should actively help our industrial enterprises working on the foreign market. This applies not only to machine-building. We have discussed this issue a lot with government agencies and ministries.

This is particularly relevant to developing countries’ markets. We have gained a foothold there and should not yield our positions.

At the last meeting of the Government we discussed foreign trade. The main problem there is well known: a highly unsatisfactory ratio between exports and imports. This imbalance highlights the fact that our industry is non-competitive, including machine-building. The fuel and energy sector contributes 40% of budget currency earnings.

The share of machinery, equipment and transport vehicles in our exports further dropped during the past year and now stands at a little over 10%.

At present only large integrated structures comprising the entire technological cycle from development to production, can be effective. And I would add another stage, sales. Actually, they should integrate everything from development to sales. Our rivals are well advanced in this area and we risk falling behind. We are already lagging behind.

Finally, another problem I consider to be very important. Industrial enterprises need effective owners. Such owners do not suck the last remaining resources of plants and factories, but think about the future. This problem has become outstanding in the course of the major transformations that have been carried out recently.

When I discussed the problems facing your sector, other sectors and specific enterprises with the President of Tatarstan, he cited several examples: they replaced the CEO, replaced the owner, and a lot of things changed. But the Government should oversee this process and ensure that market instruments are applied. They are available, all that is needed is to use them correctly proceeding from the interests of the state.

We will do everything to make sure that the instruments now available to the government for renewal, bankruptcy and so on should be used not for rivalry, but in the interests of the economy. To this end, a lot needs to be done, notably to create an equal playing field for everyone and to combat corruption. We will pursue that aim persistently.

Thank you.