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Vladimir Putin: Ladies and gentlemen,

I would like to greet all the participants in the meeting, above all our foreign partners.

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The problem of implementing the production sharing agreement is a major challenge for Russia, especially in the Far Eastern region. Over the past years it has acquired an urgency and even, as has been noted, some political overtones.

The practice of such agreements has shown that the mechanism is effective and widely used throughout the world. The practice allows large-scale and long-term investments in the extractive industries. To us, too, the production sharing agreement is a key part of our investment policy. At any rate, it can and indeed must become a key part of the Government’s investment policy.

The Government of the Russian Federation discussed this problem the other day. We will seek to ensure that all the links of the PSA mechanism work harmoniously, without disruptions and failures. Starting from the legal framework and ending with the fulfilment of the financial, economic and technical obligations by all the parties to these agreements. Only then will the PSA become a truly effective instrument in attracting investment and stimulating the growth of the Russian economy.

Current legislation and the terms of the production sharing agreement in Russia provide the legal framework for the extraction of up to 30% of proven hydrocarbon resources entered in the Government balance.

I am aware that you discussed changes to this procedure yesterday. It has been suggested that the reserves already covered by the corresponding agreements be increased to 40% or excluded from the balance. This is a subject for discussion. In any case I believe discussing it is quite relevant.

Minister of Economic Development and Trade German Gref spoke at our meeting yesterday. I am aware that he has been instructed to urgently prepare proposals for installing the mechanism of implementation and functioning of PSAs in Russia. These mechanisms have already come in for discussion.

I have looked at the recommendations presented to me. One of them is in favour of setting up a special Government body and a coordinating centre. I am not sure that such a bureaucratic approach will be useful. I believe that it merely hinders your work. I think it would be correct to relegate this problem to the Government. We have a whole ministry which should be dealing with it. I think that is enough.

A broad exchange of opinions is very necessary today. We should together compare notes and determine future steps. Trust between the partners is a guarantee in the delicate sphere of investment.

I need hardly explain how important it is for Russia to attract investment. But an equal playing field should be created for all the investors. So, an overriding task is a cardinal improvement of the business and investment climate. Obviously, without solving that problem modernisation and economic growth will be extremely difficult and slow, if not impossible.

Today this is an approach shared by all the branches of government. One of the speakers said that political stability currently prevailing in Russia gives grounds for a measure of optimism. I must say that it has been achieved through the efforts of all the branches of power in the country, above all the executive and the legislative, and that does indeed inspire optimism.

The Government’s overall policy is protecting the legitimate rights of the shareholders and investors, both foreign and domestic. There must be no discrimination on that count. Perhaps there could be only one exception. Considering that foreign investors find it harder to work here, they need moral and perhaps organisational support.

Implementing that policy is sometimes hampered by the gaps in Russian legislation. We are aware of that. The problems standing in the way of foreign investment in our economy, including through PSAs, are well known. Unfortunately, they cannot be solved overnight. Just to optimise the operation of PSAs in Russia, 25–30 regulatory acts are to be developed or amended. Of course, these issues must be addressed without delay.

In this connection I want to launch an appeal to the Duma. They are influential people involved in law making. And progress of this legislation would depend to a great extent on their personal position on these problems.

As for investors, they rightly expect certain guarantees of a stable business environment in Russia. We understand their expectations and we are working on the problems that hamper cooperation.

I hope that favourable changes have not been lost on investors. In the seven months of this year investments in basic assets have increased by 17.2%.

For us the PSA is a key mechanism of attracting investments into the economy, especially in the extraction of minerals. The proven reserves of raw materials in Russia are vast, but the country does not have enough resources for exploiting them. And I think it is time to stop the talk about the political character of this business because such talk is useless.

The PSAs and the development of the fuel, energy and mineral production should give an impetus to the Russian engineering, chemical, metallurgical and other sectors.

Ultimately it is a recipe for creating jobs and improving the living standards of the Russian people, that is, it is a comprehensive instrument that has multiple financial, economic, social and technical effects. So, it is not in Russia’s strategic interests to delay the conclusion of new and the implementation of existing agreements.

But I should point out another side of the matter. Hasty and ill-thought-out steps cannot be tolerated. For instance, we know that about two dozen mineral deposits have been put on PSA schemes for development, whereas in reality only four such agreements have been signed. And only three projects are being implemented. Why does it happen? Of course, a lot, almost 100%, depends on Russia.

But all of us, all those involved in this process should analyse what is happening in this sphere. Sakhalin-1 and Sakhalin-2 were signed on an understanding that their coming into force has been deferred. It means that they could have come into full force and effect after a corresponding exchange of notices between the parties. Such an exchange was to take place after all the Russian legislation needed for these agreements to work had been harmonised.

The parties to the agreement decided not to wait for such harmonisation. They exchanged notices without waiting for the process to end. Understandably, they couldn’t wait. We know what the outcome has been. It resulted in losses for the state, for the investors, in chaos and mutual mistrust…

…No matter how eager we may be to cover that road, we have to be patient.

I am sure that the Government’s decisions on the PSA will enable us to put an end to stagnation in the sphere that we have witnessed during the past month.

Problems with the implementation of current PSAs on Sakhalin and in the Nenets Region should be addressed. The Government, of course, must honour its commitments under the existing agreements. And on particularly complex issues consultations must be held with investors to work out mutually acceptable forms for meeting our obligations. There is no other option.

But in preparing new production sharing agreements the Government should more clearly state and uphold the financial and economic interests of Russia as a whole and the interests of the Russian regions. In such a harmonious combination the interests of investors will undoubtedly be reflected. That will generate a confidence that everything will be fulfilled.

We will also take a close look at the proposals voiced here at this conference. Undoubtedly, both the investors and Russia should derive benefits from the implementation of PSAs. So the economic, environmental, social and other losses and gains from the development of resources under PSA schemes should be thoroughly assessed in advance.

I hope that the meeting which has taken place here has not been a waste of time and will mark real progress in this sphere.

Now I would like to say a couple of words about the recommendations prepared here. I would simply like to make some comments.

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Now the third point. “To speed up the drafting of a separate chapter on the taxation regime that would envisage, among other things, the payment of the profit tax both in cash and in kind, as well as a mechanism of VAT exemption”. As regards the mechanism of exemption from the VAT, that, we understand, is a special topic for every Government. We have to think about it, considering that the money should be used to develop these regions. We have to think about it.

As for the payment of tax in kind, I have mixed feelings. Who will deal with these problems? How will this be done? The head of Rosneft, Mr Bogdanchikov, has turned his head in my direction; he will sell the products. That’s the spirit, that’s the right reaction. (Laughter.)

Still it would be better if all the payments were effected in cash. That would be more honest, clear and transparent and therefore more effective. And I think it would generate more trust.

“To develop a mechanism ensuring the necessary conditions and guarantees of Government support for Russian investors when they receive credits to finance their share of participation in a PSA project”. No questions arise regarding the words “necessary conditions”. And I think the clause about Government guarantees also makes sense considering the large scale of the projects. But in general, Government guarantees should be phased out, because these are commercial projects.

“To review the competence and powers of the constituent members of the Russian Federation”. I subscribe to that. We need a clear idea of what are the prerogatives of a constituent member and what are the obligations and rights of the Federation. “Ensure legal regulation at the level of the Government of the Russian Federation of issues connected with the transportation of hydrocarbons extracted under PSAs via Russian long-distance pipelines, including those managed by Transneft”. I absolutely agree with that. It is a direct duty of the Government to ensure equal access to all potential users of the pipeline.

“To create the necessary conditions for Russian and foreign investors conducive to successful extraction and marketing of oil and gas”. No questions there.

“To solve the issues arising from the imbalance between world and domestic prices of hydrocarbons”. This is a noble goal. The reference of course is to gas. Here in Khabarovsk we sell it at $10-$12 per 1,000 cubic metres. And in the world market the price, I think, has hit $100. A huge imbalance. But if we start charging $100 in Khabarovsk, I don’t have to tell you what will happen.

Things are more difficult with gas. But I want everyone to know that we will persistently seek to expand the domestic market. Otherwise we won’t be able to preserve our gas sector, that is, if we seek to sell all our gas abroad, to export it. What is the point of it? If we have no imbalance, then we will have no need to export gas. We are all well aware of it and we will seek to implement our plans.

Thank you.