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Vladimir Putin: Prime Minister,

Mr Chairman,

Ladies and gentlemen,

Gathered here today are leading figures of the German economy, politicians and businessmen for whom cooperation with Russia is a priority. Among them are Mr Rau and Prime Minister Clement. Such meetings are very important to me because we can frankly discuss all issues related to our business cooperation.

We appreciate the German business community’s steadfast and consistent attitude to Russia. We know that you are demanding and uncompromising. We for our part seek to have businesses in Russia that are transparent and based on legal principles.

Ever since the time of Peter the Great, Russia has not only felt itself to be, but actually has been part of the European continent in the broadest sense. Solid European economic and cultural traditions have taken root in Russia since those times. One can in fact add, traditions of European secular life.

Today basic European values are becoming an integral part of the Russian way of life. By following the European path, Russia will strengthen its position and assert its individuality.

We are well aware that the process of strengthening the state can be closely linked to the development of public and civil institutions. This is, at the end of the day, the “European path” for Russia. But the economic dimension, Russia’s participation in building a common European economic space, is at least as important.

Already the European Union countries account for up to 40% of our trade. They are the source of 64% of direct investments. This is tangible proof that our countries are moving closer together and that they complement each other. There is a huge need for modernisation in Russia. Most importantly, there is a will and a commitment to modernisation.

What has been done in the last year and a half to develop the economy was thought inconceivable until recently. Never has our country flung its doors so wide open for reform as they are today. Let me just cite some facts to prove it.

Last year the country’s GDP grew by more than 8% and industrial output by 11.9%. This is the highest rate of economic growth in Russia in the last 30 years or so. This year growth is expected to be at least 5.5%. It is driven partly by the tax reform, whose main aim is to reduce the fiscal burden. Starting this year, the tax on the incomes of individuals is 13%; it used to be 30%.

As a result – the main result – budget revenues have grown, and have grown beyond our expectations, by 54% in the first seven months of this year. And the total tax collection in the country increased by 30% as a result of a more balanced tax policy and improved administration.

We intend to continue work in this direction. A recently passed law cuts the corporate profit tax from 35% to 24%, and for banks, from 43% to 24%, by almost half. That too is one of the lowest tax burdens in Europe. We hope that these measures will stimulate investment activities in the Russian banking sector.

We have just been discussing the issue and we understand that things will not stop there, especially in the banking and financial sectors.

Many tax breaks have been abolished, which is very important for making our tax system more transparent. I would like to stress that along with reducing the tax burden, the elimination of all sorts of preferences granted on obscure grounds is also a serious step towards a civilised market economy.

I must say that much of the package of legislation aimed at reducing red tape has this in mind. To use traditional terminology, it is nothing if not liberalisation of the economy.

Beginning on July 1 of next year it will take no more than five days to register a new business in Russia, instead of three months today. In addition, the licensing system has been streamlined and codified. The number of types of activities that need to be licensed has been cut from 2,000 to 104. That is still too many, but we shall see how it all works out.

I consider efficient use of the state budget to be very important. We had a budget surplus last year for the first time. There will be a surplus this year too. We are committed to preserving it in the future. The draft 2002 budget has a surplus built into it, and it is a considerable surplus (1.2% of GDP).

Another important thing to note is that the budget is consistent with a liberal economy and has been formed on a largely new legal basis. Its underpinnings, as I said, are low taxes and a reduction in red tape. In spite of what I have just said, we are committed to pursuing a balanced social policy. We must raise the living standards of our population to generate popular trust in what the Government and the country’s leadership do and to build on that trust. So, major shifts are planned to raise wages, which will not in any way jeopardise the main budget parameters.

I would like to stress that the budget envisages the servicing of our foreign financial commitments. We regularly pay our debts, practically single-handedly, without any financing or assistance from international financial institutions. We reduced our debt by $2.6 billion during the first half of the year. Our GDP this year will top the $300 billion mark. As a result, debt as a percentage of GDP will diminish to 60% compared with 120% in 1999.

Another important component of our economic course is accession to the WTO. We understand that it will bring not only benefits but also additional obligations. This is the subject of heated debates in this country; not all economic sectors are ready for open competition on the world markets, and we are aware of that. But we are convinced that our business community should share with the Government the burden of responsibility and the costs.

I also hope that patently impossible demands will not be made on Russia during the process of WTO accession. Unfortunately, in the negotiations on Russia’s accession to the WTO we see the use of standards that have not been applied to other potential members of the organisation during the negotiating process.

Ladies and gentlemen,

Positive trends are gaining momentum in our bilateral economic ties. Our mutual trade hit a record 41.5 billion Deutschmarks last year. Further growth of 24% was registered in the first half of this year. You will agree that this is an impressive indicator. If things continue like this we will be able to report very good results at the end of the year.

In this connection I would like to extend my gratitude to the Federal Chancellor, Mr Schroeder. With his serious political manner free of any theatricality, he has not only preserved what has been created between our two states during the past decade, but exhibited political courage in a situation several years ago in order to move our relations forward. If our relations continue to develop in the same positive way, our mutual trade will reach 44–45 billion Deutschmarks a year. Considering the downturn in the world economy, that could be very useful for the economic development of Russia, Europe and Germany, and indeed have a positive social effect on European countries, and Russia and Germany.

We are ready to continue studying the issue of gradually adopting the euro for payments in our trade relations. This question has been brought up frequently, and I would like to report to you that we are ready to work on this. I think the German side should be interested in making this form of payment more attractive. We will count on your proposals in this field.

But our goal should not only or even largely be to maintain the progress in our mutual trade. I think the time has come to consider qualitative changes in our cooperation. Especially among this audience, it is important to avoid the misconception that Russia intends to build its prosperity mainly on the export of oil and gas. Needless to say, we are not talking about cutting supplies. Russia is interested in broader cooperation on issues related to European energy security. Moreover, if regional conflicts arise somewhere, Russia is ready to supply additional amounts of hydrocarbons to compensate for a possible drop in supplies to the European market. I am saying that in earnest.

But I must say that our cooperation in the sphere of high technology is potentially as beneficial as cooperation in the energy field today.

Russia is a world leader in the field of aviation and rocketry, with many original scientific ideas. We took a step in the right direction by signing an agreement on cooperation in peaceful space exploration in St Petersburg last April.

We already have 66 joint projects, most of which belong to the hi-tech sectors. These are projects in the field of nuclear and thermal physics, geochemistry and molecular biology. I am sure that they have a bright future ahead of them.

Investment is another key issue. The dynamics are promising. The amount of foreign investment in Russia in the first half of this year was almost 40% larger than in the same period in 1999. Your country shares with the US the first and second places as the biggest investors in Russia.

Today Germany has a stake in more than 1,900 enterprises in Russia, and there are more than 900 representative offices of German firms. There are some examples of successful investment projects lasting many years. This year, in response to the wishes of investors, including German investors, we organised an agency for foreign investment which is already operating a “one-stop” system. It has a unit working with German investors which will have a permanent staff representing the interests of German industry.

But on the whole, investment cooperation is lagging way behind the growth in trade. Annual German investments in Russia are 2.5–3.5 times less than in the Czech Republic, Hungary or China, and 4–6 times less than in Poland.

Russia, as we all know well, is a huge potential market. But in order to get into it one has to reserve places in advance. We understand that in business, much depends on us. Success on the Russian market has been critical for the future of a whole number of German concerns. I am sure that history offers us a good example and it will be emulated today.

If German companies gain a firm foothold in Russia, it will give you a head start in developing the markets of neighbouring states. As for our plans of reforming the economy and creating a favourable investment climate, I will mention just some of them.

First, there will be a radical change in the system of customs administration and customs law. We are going to pass a new Customs Code.

As regards the Customs Code, we will try to maximise the number of self-implementing laws so as to minimise the opportunities for corruption of any kind, so that regulations do not take the shape of departmental instructions and various circular letters.

Secondly, we will speed up the passage of bills to protect the rights of owners and creditors.

Thirdly, we will continue to cut down on red tape, which impedes the development of business. And I should stress the importance of the legal reform and the court reform, which should increase the responsibility of the courts for their rulings and enable these rulings to be enforced.

Ladies and gentlemen,

Our main shared capital is the experience of many years of Russian-German cooperation and the fact that we know and trust each other.

Today much is being done by our strategic group on economic and financial cooperation, set up under our agreement with the Federal Chancellor in Berlin last July. Its main task is to develop a strategy for bilateral economic interaction. But you should not expect government guarantees for any investments.

I think you can try to build your relations with Russian business on the basis of trust and within the framework of the laws that operate in any decent economy.

I think that the issue of trust in business, like in politics, is the core issue both in internal and external policy. That brings me to another important thing I would like to mention. I mean the start of compensation payments for the victims of nazism in Russia. I think this is a very welcome gesture and it has been highly appreciated in Russia, and it creates a very good atmosphere in society, including for business.

I thought I would say that even though it has no direct bearing on the subject of our meeting.

Ladies and gentlemen,

Our bilateral ties today can be described as highly promising. We are analysing our experience, building up our strategy, and deriving lessons from various mistakes that have been made. Our relations are solid and long-standing, but in many ways absolutely new. It is important that the huge potential be translated into practical plans and joint projects.

From the bottom of my heart I wish success to all those present and all those who hear us today or are engaged in concrete work to promote our economic partnership which, undoubtedly, must and will provide a good basis for cooperation between Russia and Germany in the political, cultural and all other fields.

Thank you.