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Vladimir Putin: Good afternoon,

This is our first joint meeting. This format is prompted by the topic of discussion today: “The state and the development prospects of the defence industry”.

The problem involves many issues: national security, foreign policy, the economy and social stability in the country and its regions. So we must calculate precisely and carefully balance our actions in this sphere.

The Presidium of the State Council discussed the reform of the defence sector in February. That discussion revealed some controversial topics, notably problems connected with ensuring the social and economic interests of Russian regions. A common position was hammered out by the joint working group of the State Council Presidium. It is spelled out in the basic principles of policy in the development of the defence sector until 2010 and beyond, which has been presented to you for discussion.

The defence sector has always played a key role and has been the backbone of the economy of our country and the life of entire regions, a phenomenon which had its pluses and minuses.

Now that market relations in Russia are in place, we should take another hard look at how to use the advantages of the market economy to ensure a breakthrough in the development of the defence sector, which traditionally has been dominated by a rigid management system and state paternalism.

The past years have been hard for the country’s defence sector. This is not only due to the cuts in military spending. Unlike many other sectors of the economy, restructuring of the defence sector has proceeded in a slow and controversial manner. Many still laboured under an illusion that demand for obsolescent products would continue, and that defence companies could continue to ignore such economic categories as efficiency and competition.

The structure of the defence sector is unfortunately archaic, and does not meet the military and political challenges facing the country. One shouldn’t forget that today we face new threats and live and work in conditions that present greater challenges to national defence reliability than before.

Obviously, the Government must conduct a thorough inventory of the defence industry and clearly formulate its interests and priorities in this sector.

Let me name the most important tasks that need to be addressed without delay. First, the creation of effective modern mechanisms of control in the sector, real instruments for protecting the interests of the Government and the people who develop defence assets, among other things, the protection of intellectual property.

The second urgent task is internal consolidation of the defence sector to cut out some deadwood. An average company today operates at no more than 20% of its capacity and the bulk of the defence industry survives thanks to the high export potential of a few companies.

The inflated structure of mobilisation capacity is largely intact, preventing companies from becoming more efficient and modern. The production assets and the research base of key defence companies are becoming more and more obsolete.

The last meeting with the Defence Ministry already stated the need to shift resources significantly in favour of research and development if we are not to lose that necessary technological asset, which would inevitably affect the quality and competitiveness of modern weapons and civilian technologies as well.

Not only technology is becoming obsolete. We are beginning to lose valuable personnel; so I think the problem of training personnel for the defence industry should be a separate topic of discussion.

The third problem is the persisting mismanagement of defence industry companies and the low economic returns on the government property in the sector. It may sound odd, but dividends from government stakes in these companies can barely cover the rent of the property of these organisations.

Invoking the non-market character of the defence sector, as is typically done, is not convincing. Throughout the world, and in this country too, as I have just said, the production of weapons and defence technologies has long been a highly lucrative and thriving business. It is not for nothing that competition in this market is so fierce.

So we need a valid programme for integrating the defence industry into the market infrastructure to make the defence sector economically more attractive. That would attract private investments, including foreign investments, strange though it may seem at first glance, considering the requirements of national security.

All this does not rule out organisational change. One of the key instruments there can be the creation of integrated research and production complexes combining different forms of ownership. We have some positive examples, including in the aviation industry.

I think such structures can form the core of the new Russian defence industry. It will maximise returns on the existing resources and put an end to wasteful spending.

In conclusion, I would like to stress that if we are to achieve a breakthrough in the defence industry and make it much more effective and competitive, we must consistently and competently introduce market instruments. There is no other way. That is in the interests of national security and in the interests of the economy as a whole.

Let us now move on to discuss the prepared documents. They will be presented by Ilya Klebanov. And I thank the press for being with us.

Thank you.