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FT (ANDREW GOWERS): Thank you for finding the time to talk to us.

Vladimir Putin: Thank you for your interest.

FT: You have had a really busy day today. We would like to ask you a question about the Anti-Ballistic Missile treaty.

We are particularly interested in the statement you made today on this issue. You seem to have accepted the decision made by the US Administration to withdraw from the Anti-Ballistic Missile Treaty without any strong feelings or disappointment. You said it was a mistake, but there is nothing dramatic about it. Could you comment on the situation please?

Vladimir Putin: I said what I think. What is more, even earlier I stated that, in our view, unilateral withdrawal from the treaty would be a mistake. But I also said that should it happen we would have no intention of raising any anti-American hysteria.

Nor do we think this step could result in the emergence of new threats to Russia's security – for several reasons. First of all, there is no nationwide missile defence system. Second, we do not know whether it could be created. And third, if the attempt to establish it is successful, it is not clear when that could happen.

I would like to point out the fact that Russia, even today, has all the necessary means to penetrate any ABM defences. Therefore, the principal imaginable negative consequence of this unilateral withdrawal, which is upsetting the balance of forces, is not a serious threat for Russia.

And while national anti-ballistic missile systems are considered defensive weapons systems, in effect they enhance the potential of offensive strategic arms. Therefore when we speak of strategic arms there is little difference between defensive systems and offensive systems from the point of view of their effectiveness against the potential adversary.

Finally, there is one other consideration which we cannot fail to take into account. I do believe the world has changed in recent months, and the change has been fundamental.

If we intend to change the nature of the relationship between Russia and the West, Russia and the US, and if we take the road suggested by the British Prime Minister, Mr Blair, concerning changing the relationship between Russia and NATO, then this overall question of confrontation will lose its relevance.

It is true we were opposed to a unilateral US withdrawal from the treaty. But that was not because we feared for our own security. It was simply because we are proponents of a different concept, a different philosophy, of how international security should be built.

We did believe that this treaty was one of the fundamental pillars of the overall security and stability system in the world as established in recent decades. More than 30 other international agreements were based on that foundation – agreements in areas of arms control and arms reduction. That is why we insisted it should be maintained.

In principle, we were prepared for certain modifications of the treaty. We asked to be given specific parameters that stood in the way of US objectives to develop defensive systems and implement programmes. We were fully prepared to discuss those parameters.

But nothing specific was given to us, no specific parameters to be negotiated. We heard only insistent requests for bilateral withdrawal from the treaty. To this day I fail to understand this insistence, given our position, which was fairly flexible.

I am very much concerned about the most negative development or implication of this step, which is the extension of the arms race to outer space. If the leading nuclear powers embark on this road, we will not be in a position to say ”no“ to any other country.

But on the whole, as I said earlier, our US partners had the right to withdraw under the treaty. We recognise this right. They acted in accordance with the Treaty. They did not violate anything and they did not do anything surreptitiously.

Their position can be contested, one can disagree with that position, as I do. But one cannot say that in acting the way they did, they violated anything or did anything in secret. On the contrary, they acted consistently and quite openly. There is a certain logic to that approach, we were aware of that logic, there was nothing surprising.

Our response was very calm, very constructive, and it was in line with the overall approach pursued by the Russian Federation. I believe the US-Russian bilateral relationship is of major importance for our two nations. But it is also of great importance, taking into account that these are two leading nuclear powers in the world, for overall international security. We will try to profit from the level of relationship we have achieved so far to resolve all the outstanding issues on which we have not yet reached agreement.

FT: You say that you have no intention of raising anti-American hysteria, that the US has acted within its rights, that US-Russian relations are very important. But at the same time you say that between our countries there are differences of opinion on principal approaches to the issue of how international security should be built. It’s only natural that you can’t help feeling disappointment over the outcome of negotiations on this theme. But will it be more difficult now to pursue the close relations with the US that are clearly your objective?

Vladimir Putin: No I don't think so and I will explain why.

In the course of our contacts with President Bush, on no occasion did he deceive or mislead me. He always does what he says, and in that respect he is a reliable partner.

I repeat, of course, we have differences of opinion on some issues. But nevertheless on some issues, even complicated and difficult issues, we succeed in convincing each other. The fact that our opinions sometimes diverge on major issues is only natural.

If we treat each other as partners, solutions can be found – as with the reduction of strategic offensive arms, where we have reached agreement in principle. I think this is a major issue, not just for our two nations but for the entire world – whether two countries will each have 7,000 nuclear weapons, as now, or 1,500–2,000 weapons. It is a difference.

Of course, here too, we do have some questions that need to be discussed further, to be negotiated. And we do believe that the accords we reach should be translated into a legal treaty form. They should be transparent, they should be verifiable.

I believe these agreements should have legal treaty form. I think without that, it could so happen that partners would have suspicions and misgivings about what was happening with the other party's weapons – whether they had actually been reduced, what were the actual numbers, where the weapons were, had they been destroyed or had they just been dismantled and put in storage somewhere. If they are stored they constitute so-called ”reconstitution potential“. In other words, the possibility would remain that those weapons could be put back on missiles.

In other words, if we do have such a legal treaty, legal agreement, a transparent one with proper verification measures, the entire world could be safer and at peace.

FT: How can you obtain that, when the US wants something much more informal?

Vladimir Putin: It is subject to negotiation. So we have to convince and persuade our partners, find a convincing argument. We have to be convincing enough in adducing arguments and getting them to understand that compliance with the principles we suggest will not only benefit us, not only meet our interests, but theirs as well.

Of course, there could be other arguments. For example, the reason we did not agree to withdraw bilaterally from the ABM treaty was because the arguments provided by the US side to justify their position to us looked unconvincing.

After all, what were the arguments they used to convince us? The first argument was the possibility of terrorists' using nuclear weapons. The second was that so-called 'rogue states' could use nuclear weapons. But the object of the 1972 ABM treaty is strategic ballistic missiles, and that is something that neither terrorists nor rogue states have at the moment and are hardly likely ever to have.

A justified position, a well substantiated argument, is the best foundation for any agreement. I hope that the arguments that we will use in our further negotiations with our US partners will be convincing.

But the most important thing that underlies any sort of agreement is the level of mutual trust, mutual confidence. That is why I would very much like to have our current level of mutual confidence with the US maintained. It is a basic foundation for agreement of any kind, particularly in this field of strategic stability.

FT: If you fail to get a legally binding treaty on arms reduction, will that damage confidence between Russia and the US?

Vladimir Putin: It will depend on the final result we achieve. It will depend on the way we develop our relations across the board. If relations between Russia and the West, Russia and NATO, Russia and the US continue to develop in the spirit of partnership and even of alliance, then no harm will be done.

But given the present state of international relations, given the international situation, we do believe that our proposals, our suggestions, are more justified and more substantiated. And there is another important point: the actual level of our nuclear deterrent. The state of our deterrence is such that we feel safe and secure, and this is the most important thing to us.

FT: The Russian foreign minister, Igor Ivanov, said Russia had contingency plans if the US withdrew from the ABM treaty. Does that mean Russia may put multiple warheads on its missiles, as has been discussed?

Vladimir Putin: As a result of the ABM treaty's being abrogated, and all the relevant constraints being abolished, Russia will have the right to install multiple independently targeted re-entry vehicles (Mirvs). But this is not to say we will actually do that. In the foreseeable future there is no point, no sense for Russia to do that but Russia will acquire such a right.

If we are talking of a missile defence system, then we may have a ”success ratio“, a capability of such a system to intercept, one, two, 10, 20, or — a most fantastic option — 100 missiles. But even if Russia in a few years goes down to a level of 2,000 weapons, it is unimaginable, totally unrealistic, to think that such a number of missiles could be intercepted.

As I already said, the velocity of a ballistic missile in flight is about 7.5 km per second. An interceptor missile should have at least the same velocity. It is as unrealistic as expecting to hit a bullet with a bullet.

If we add to that the fact that missiles could be equipped with Mirvs, and they would have special systems enabling them to penetrate missile defences, then we can easily understand that defensive systems of this kind could not be regarded as a serious obstacle …

But now we are following the line of a logic that could be called a logic of confrontation. If we do not pursue this line, if we do not talk in terms of confrontation, but rather come back to a point I made in the beginning, then the main principle which could inspire a sense of calm and security and safety in the hearts and minds of Russians and Americans and people all over the world would be a changed quality in relationships between the major nations of the world. This means primarily the leading nuclear powers of the world, a changed relationship between Russia and the West, Russia and NATO, Russia and the US. This is the main thing from the point of view of strengthening international security. That is why I want to re-emphasise how much we appreciate and how positively we view the initiative taken by the Prime Minister of Great Britain with respect to changing the nature of relations between Russia and NATO.

FT: How can these hopeful signs with regard to NATO be turned into political reality? Although Prime Minister Blaire has indeed expressed some ideas there are no signs of practical steps in this direction. Are you disappointed by the lack of progress on that front? Do you need something to show for your readjustment towards the West in the past three months?

Vladimir Putin: All the disappointments and frustrations are born out of undue expectations, exaggerated expectations. But I didn't expect anything extraordinary. I know that the processes of ‘estrangement’ have their own inertia. It is quite hard to reverse them. We have to be patient, proceed cautiously, and act in a professional way, resorting, by the way, to help of such respected periodicals as The Finacial Times.

As regards the things that could be presented as the results of the policies pursued by the Russian leadership, let me say the following. The most important thing for us is to create safe and secure conditions for the people of our country, for the people of Europe, for all humankind, and also to develop and establish favourable conditions for economic growth in this country.

The recent evolving nature of relations between Russia and the West is already creating favourable conditions for international security, for stability, and for positive economic growth in this country. This is quite obvious, quite evident.

Second, in pursuing this policy (and I would like to stress this point), we are not asking for some kind of preferential treatment. We are not asking for any indulgence. We are simply drawing the attention of our partners to the simple fact that it is in their interests to treat Russia as an equal partner. The sooner our partners come to understand this logic, the better it will be both for us and for our partners. And in pursuing these policies we do not at any time prejudice the national security interests of Russia. One of the best cases in point is our position on the ABM treaty. From the very outset we were in favour of maintaining it and we consistently defended this position. To this day we believe this is the right position.

Russia still has the generation that suffered and still has fresh in its memory the hardships and sacrifices of the Second World War. Our people still remember it quite vividly. Russia is a peace-loving nation. The people of Russia share a policy that is designed to achieve friendly relations with Russia's neighbours, with major powers, and generally speaking with every country in the world. Therefore we have a well considered and well balanced position which is designed on the one hand to safeguard our national interests, and on the other hand to achieve friendly relations with other countries. This policy is fully supported by the people of the country.

When everything is going well in the area of security, people focus their attention on the economy. They expect positive results there. It is from this point of view that they judge the results achieved by the leadership of the country.

We still have many difficult outstanding issues. But still, it is quite obvious that there has been progress, and it is tangible. This is something that inspires confidence in us.

We are not asking for debt relief or debt write-offs, we are paying everything back. This year we are repaying our debt to the International Monetary Fund ahead of schedule. We are developing our market-oriented institutions and seeking membership in the World Trade Organisation. We are very actively pursuing economic reforms. We have paid back all our debts to the people of the country. In the recent past, wages to workers in certain branches of the economy and in certain regions of the country went unpaid for months. And of course that caused very serious social tensions. Today we have succeeded in paying all those debts, everywhere, including in the armed forces.

Not only that, we are enhancing, modestly but confidently, the living standards of the population. The real incomes of our pensioners have increased by 22%. Wages have grown roughly by 19%. Real per capita incomes have grown by 6–7%. GDP growth is expected to reach 5.7%.

The most important thing is to have a favourable external situation, something we would seek to create and ensure for our country. But of particular importance is positive development of the economy. This is something we will seek to attain. We believe this is a most important thing.

FT: One indicator of international confidence in an economy is foreign investment. Here you are not attracting as much as you probably want. What are the two or three big things you have to do in the coming year to keep the economy on course and to attract more foreign investment?

Vladimir Putin: We have seen a major growth in investment this year – both domestic investment and foreign investment. I would like to point out that foreign investment has been growing much faster than domestic investment. We are making our economy more attractive. But a lot has still to be done, and we envisage a whole package of measures in this regard.

We are going to keep pursuing our liberal tax policy. We have significantly alleviated the tax burden on the economy. Our flat rate of income tax is now 13% (irrespective of incomes), the lowest in Europe. The profit tax is going to be 24%, it was decreased from 35% to 24 % for banks and a bit less though still considerable decrease – for industry. We have pretty much done away with the sales tax and with the turnover tax.

We have adopted a number of measures to de-bureaucratise and liberalise our economy. The range of activities subject to licensing has narrowed in number from 2,000 to a little over 100. Recently we adopted a whole package of laws on legal reform. This should make our legal system more efficient and help it meet the needs of the market economy.

We are also adopting a new labour legislation. And we have adopted the land legislation. All this should start working beginning from next year.

That is not all. We are planning further measures to make our economy more dynamic and efficient. These are primarily measures for restructuring, including the major areas that we call the 'natural monopolies'. If we pursue and implement this whole range of policies comprehensively, only then will the economy become more attractive.

There are no magic wands to wave here. This all calls for systematic work. We are full of resolution to pursue this plan. What we expect from our partners is only that they deal with us on partner-like terms, and treat Russia on standard terms like everybody else.

It is high time we stripped our economy of the political content of the previous years. High time both for us and for our partners. I remember my last discussion with colleagues from the European Union. Also I recall the discussion among experts regarding Russia's accession to the WTO. The logic of the last discussion was as follows. Russia has not been granted market status. I asked my colleagues, why did you grant market economy status to the Baltic States? They were recognised as market economies a few years ago. How are they different from the Russian economy? I asked them to explain to me the difference between the Russian economy and the economy of these countries. I was told that when they were making this decision they were proceeding from the following logic. These countries have very small economies, and Russia has a huge economy. Naturally I asked them, are we discussing the quantitative or the qualitative aspects of the economies? And the reply was: we should change the subject. I'm quoting our discussion almost verbatim. I will not say exactly who said this, but present were delegations of Russia and the European Union. All those present heard this. Pretty much the same is true of Russia's accession to the WTO. It is still a question who will benefit more from Russia's accession – Russia itself or the industrialised countries. Our experts are naturally still arguing about this. Some experts firmly believe that some industries in the Russian economy are not ready to compete with the cheap and high quality products produced by our partners.

In such a situation, perhaps our partners from the WTO should try to draw Russia into the organisation. But strange as it may seem, nothing like that is happening. And I believe this is also due to political considerations that were characteristic of the times of the cold war. It would be hard to explain otherwise why it is demanded that Russia brings all of its legislation into conformity with WTO standards before we start negotiations on Russia's accession. And we should do it even without knowing whether we will be accepted or not. Such demands have not been posed for any other country ever.

But I also think it is good that Russia is not yet a party to the WTO, because in this way we are not tied up too closely with the world economy and we are not drawn into recession with whole of world economy. This has allowed Russia to achieve rather good figures for economic growth. Last year it was 8.4 per cent. This year it is 5.7 per cent. Seriously speaking, we are resolved to continue our negotiations with the WTO, but only on standard terms.

FT: You are implying that Russia is being treated worse than China?

Vladimir Putin: I am implying that Russia is being treated like no other country. Such conditions have not been posed for any other candidate. In this I can see a politicised approach that would be more characteristic of the cold war era and quite detrimental; I mean, detrimental to the western countries.

FT: Oil industry is in the heart of Russian economy. It is clear Russia can now play a central role in the international politics and diplomacy of oil. How do you plan to use that power? In your view are oil prices too low at the moment?

Vladimir Putin: I always fear conversations about Russia playing a central role in something – because it may be followed by persistent requests to do something that we may not want to.

Russia has always had an established role in this sector of the world economy. Its role is going to increase, first of all because we have a stable situation in this country, and also because the world economy is interested in diversifying risks in the energy sector.

I should say in this regard that in this sector of the world economy we are interacting especially intensively with the United Kingdom. Of course, we are working with other partners. But in terms of the energy sector, relations between Russia and the UK are especially strong. British Petroleum and some other oil companies are involved in major energy projects in Russia.

We have a lot of oil fields that are explored, that are new, and we are going to develop this area further. But in carrying out this policy we will do our best to maintain the price corridor that will be fair both for producers and consumers. And the fair oil price in our understanding would be between $20 and $25 per barrel.

As for the fall in prices, we are not especially happy about it, but nor are we especially concerned about it. Unlike some other oil producing countries, for us the oil sector is important but it is not the only source of revenues. There are some experts, some economists, who believe a price drop will result in a redistribution of resources and in a growth of other sectors of the Russian economy. However, that would require that our economy is first made more attractive. But as you can see from what I said earlier, this is exactly the aim we are pursuing.

FT: Where is the war on terrorism going to go next? What would happen if it moved on to Iraq?

Vladimir Putin: In what sense? That Iraq would be involved in this as a fighter against terrorism, or that somebody would fight against Iraq?

FT: The latter.

Vladimir Putin: We believe the fight against terrorism will not be over with the military operation in Afghanistan. It cannot be finished by this. Primarily, we need to look at ways of blocking the financing of terrorist activities. And so far I have no confirmation, no evidence that Iraq is financing the terrorists that we have in mind. Judging by information that we have at our disposal, the financing comes from other countries, and we know what countries these are.

As for Iraq, the international community is still concerned about the possibility that weapons of mass destruction may be produced on the territory of Iraq. In my opinion, we should tackle precisely this problem.

Our proposal is as follows. We should convince the Iraqi leadership to allow United Nations observers and controllers to inspect the sites and facilities inside Iraq that are of interest in this regard, in exchange for a lifting of sanctions.

As for a possible use of force, we should look at the productivity of what has been done in this regard so far. If you can name objects or problems having raised concerns of international community that have been destroyed by the bombing, I will be grateful to you. I don't know if any have been destroyed. There have been bombings, but nobody knows whether there have been any results so far.

We believe we should act within the UN framework. I've explained the option that we think would be most effective. However, our proposal has not met with understanding on the part of the Iraqi leadership. We have not received any positive response from them so far. So we are going to continue our joint work, our consultations with our partners in Europe, in the US and in the UK. And of course we are going to continue this work within the UN framework.

FT: For the war on terrorism, do you expect more support from the international community in your actions in Chechnya?

Vladimir Putin: We believe that this would be reasonable and fair. And we should be honest about what has been happening there all this time, and what is happening there now.

In 1996 Russia withdrew all its military and law enforcement forces from the territory of Chechnya. Thus de facto, and not de jure, we granted independence to Chechnya. So nobody can accuse us of suppressing the aspiration of the Chechen people for independence. We have already given them such an opportunity once.

And you know what the result was. What happened was that this legal and ideological vacuum was filled immediately with international terrorists and fundamentalists. What we got instead of a new state entity was a quasi-state of a terrorist nature.

Today our armed forces are not pursuing any large scale military operations there. What is happening there is the rehabilitation of peaceful life, of the social sphere. This is a complex process that will require much more time. Of course this will call for the continuation of our dialogue with the Chechen people.

Within the framework of the constitution of the Russian Federation, Chechnya can be granted a rather broad autonomy. But we cannot afford to make the same error a second time; we cannot repeat what happened in 1996, when an enclave was created which destabilised the whole Russian Federation. We cannot afford this any more. The vast majority of the Chechen people want to live peacefully, in harmony with each other, they want to have a normal life to bring up their children.

The best example of our dialogue with all groups of the Chechen population is the fact that the head of the current Chechen administration is someone who before 1996 fought against Russian federal forces with arms in his hands.

As for disruptive forces, there are two major groups there. They are not numerous but they are there. There are international terrorists, mostly from Arab countries. And there is the residue of separatist bandit formations. The international community never supported and I don’t believe would support both.

As for the international terrorists, it is clear that these are people raised and trained in Afghanistan in military camps run by Al Qaeda, financed by bin Laden, and neither the Russian nor the European, nor the US intelligence services have any doubt about it.

As for the second group, the separatists, they are certainly linked to a great extent with the first group. Russia does not support separatism in other countries and we hope that no other countries will support separatism in the Russian Federation. If we allow people to try to re-delineate borders, especially in Europe, then Europe will tumble into an abyss of continuous confrontation and ethnic wars.

There is a humanitarian aspect – the support for human rights. In this regard we are ready to co-operate with international organisations and do our best to prevent problems. A lot is being done in this regard. The judiciary is operating in Chechnya. The prosecutor's office is in operation there. Our law enforcement agencies are fighting not only terrorists and separatists but also the military who violate the law. Criminal actions have been instigated against 20 Russian servicemen. They have been sentenced to various punishments.

We will do our best to provide everything necessary to prepare the public for parliamentary elections and the elections of an executive.

FT: Would you expect the US to consult you before embarking on any further military actions beyond Afghanistan in the war against terrorism?

Vladimir Putin: Yes, we expect this. And if this is the case then the decisions will be more mature, they will be better grounded, and the implementation of such operations will be more effective.

FT: If you have two terms in office, eight years, what sort of Russia would you like to have created at the end of that time? What sort of evolution do you foresee in the role of the regions, of the parliament?

Everyone knows about your initiative regarding regions and the appointment of plenipotentiary representatives in federal districts. You are also using legislation to create stronger political parties in Russia. So how do you want Russia to change economically and politically by the end of your second term?

Vladimir Putin: Let us not look too far ahead in terms of the number of my presidential terms. I still have my first term to cope with. But of course this does not prevent me from entertaining some ideas about the future of this country.

Of course the most important thing is to ensure a developed market and socially-oriented economy, as well as a reasonable economic growth rate within the next few years. Based on this, we would seek to resolve Russia's social problems.

I have told you what we can be proud of Russia's economic development in the past two years. But I have to say honestly that we cannot be satisfied with the level we have achieved. We should at least maintain the current pace of economic growth, and that will be hard to do. And the second thing that has to be said is that the level of national well being does not look bad in terms of percentage growth. However, in absolute terms it is rather low and we cannot be satisfied with it. I want people in Russia to be better off, to enjoy a better quality of goods and services at lower prices. I want that along with the development of democratic institutions, without which the future of Russia is unthinkable, Russia be more predictable, more transparent, more manageable. It is based on this rationale that we have introduced such new tools as plenipotentiary representatives of the President in the regions. Their responsibilities include co-ordination of the activities of federal authorities in the regions. By no means are they allowed to intercept responsibilities and privileges of the regional authorities that have been elected by the region’s population.

I want Russia's civil society to develop further. I want our public organizations, trade unions and various associations to become a real force capable of influencing the process of adopting political and administrative decisions. I want our new laws on political parties to be translated into real practice. I want the people to have the choice in the elections not among personalities who they may like better or worse, but among representatives of political parties that adhere to a certain vision of the country’s development, a certain theory of the nation’s development, a certain political movement.

All of this should make Russia more organised, more stable and more prosperous in economic, political and social terms.

FT: Hand the very last question. How would you describe you leadership style? It is said that you hire many people from St Petersburg, and that you are reluctant to fire people.

Vladimir Putin: If we look at the percentages of representatives of various regions in the government and the presidential executive office you will not find many natives of St Petersburg there. Of course there are some. But not all of them were invited to their current office by me. When I came to work in Moscow a few years ago there was a pretty large group of people from St Petersburg here already. Of course I know all of them. But they had got their jobs in the government or in the capital in general, through channels that had nothing to do with me at all.

I try to hire people for jobs in the central authorities based on their moral and professional qualities. I have been trained to adhere to this principle.

Frankly, I have been here in this capacity for less than two years. Of course I would hire people with pleasure not only from St Petersburg but from other regions. But to this end I have to know these people well. I need to see how they work, the results of their work. And of course it is much easier for me to take decisions about hiring people based on what I know about them from our joint work in St Petersburg.

Speaking about the future of the state I would also like to add a further point. No full-fledged state can exist without a free press. It’s very important for the future of the country. We should create economic conditions for the development of a free press. If you look at the economics of any major media organisation here you will see it cannot exist on its own without any external influence or investment. This is impossible for a mass media organisation here. If you look at the expenses that any media organisation bears in renting premises, utilities, communications, taxes, then you will see it is unable to pay a decent salary to its journalists. It can only pay a few cents to them. Without major outside investment, national and even regional media organisations simply cannot exist. Then they are often run by major energy companies or by trading firms, or by other private institutions. The objective of the state is to create the right conditions.

Andrew Gowers: Thank you. We are very grateful to you.

Vladimir Putin: Thank you very much.