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Vladimir Putin: Dear colleagues!

This is our last Security Council meeting in 2005. As a whole we can be satisfied with the results of our work. I would like to thank you for the work we did together in 2005.

It is true that we have not yet resolved all the problems facing the country. And unfortunately, in the sphere of the economy—we just discussed these problems with the Prime Minister—we could not reach the performance indicators we had hoped for. Instead of an inflation rate of 8,5 percent we will have a rate of 11 percent. We were not able to cope with the strengthening of our national currency, and I mean that to a certain extent our domestic producers have been put in a difficult position due to the increase in imports.

But on the whole I wish to emphasize that I consider the results of governmental activity in the sphere of the economy to be positive ones. The growth of the country's GDP is higher than forecast—instead of 5,9 percent it will be 6,4. I think that after additional calculations at the beginning of next year it may increase a little more. The real incomes of the citizens of the Russian Federation are growing, unemployment is falling, and capital investments are increasing. All these are absolutely positive tendencies and it is necessary to maintain them.

The modernization of the armed forces is continuing. The number of contract servicemen in the armed forces is growing. Updating equipment and the development and testing of new weapons systems are going ahead. It is especially gratifying to see that this year significant attention was given to precision high-tech strategic weapons. This is a very important result for ensuring our state's security from a long-term perspective. Training in the armed forces, the army and the navy is improving. More military exercises, including some with our foreign partners, have been carried out. All of them took place at a high organizational level and with good results.

We were dealing with social problems. At the samr time social problems in the army, the navy, the armed forces and in all law-enforcement agencies remain basic problems which must be resolved. As of tomorrow the payments to servicemen and retired veterans will be increased by 15 percent. The housing problem remains the most acute one. I ask the Government of the Russian Federation to execute unconditionally my order regarding allocating additional financial means—15 billion roubles—for servicemen's housing.

In 2005 the special services and law-enforcement agencies improved their work but a great many problems remain. I am happy with the increased coordination and cooperation between different law-enforcement agencies, as well increased capacity for receiving early warning information.

I wish to draw your attention to the necessity of improving the Internal Ministry's activities which, in the fullest sense of the word, must support and protect citizens' everyday interests, so that they citizens will have more trust in the Interior Ministry agencies and the police. Here there is still a great deal to do, a very great deal. I hope that we all remember how acute the threats to the Russian Federation still are, threats from organized crime, terrorists and criminals in the very widest sense of that word. I hope that positive developments will take place in the law-enforcement sphere in 2006.

Finally, the Foreign Ministry defended our interests in the international arena. It did this in quite a professional way building partnership relations with all governments in the world. I would like to thank you and all of your colleagues. I hope that this same tempo will be preserved in 2006.

And since we have now reached the topic of cooperation with our foreign partners, I must address a theme that is worrying us all, namely our cooperation in the energy sector with our close partner and neighbour, Ukraine.

For this reason, I have invited Gazprom's chairman of the board of directors, Aleksei Borisovich Miller, to our meeting. I would ask you to report on how the negotiating process is unfolding. Today the President of Ukraine called me and we discussed the issue together. Naturally, he is concerned by the situation. I know that talks are continuing. I would like to ask you to report on this situation.

Aleksei Miller: Yesterday the Ukrainian side unilaterally interrupted the negotiations with Gazprom and flew back to Kiev.

Vladimir Putin: And what?

Aleksei Miller: And flew back to Kiev. The last proposal that the Ukrainian side made was to continue deliveries of Russian gas at 50 dollars per 1000 cubic metres, far below market price. At the samee time Russian gas is being exported from Ukraine to Europe at market price.

Recently all of the Ukrainian side's actions demonstrate that obviously Ukraine is trying to artificially create problems for European gas consumers and, in this way, improve its negotiating position with Gazprom. The contract for Ukrainian gas purchases has not been concluded; therefore there is no basis to make gas deliveries from the territory of the Russian Federation for Ukrainian consumers as of 1 January 2006.

Vladimir Putin: Ukrainian partners want us to make a ten-day pause in the negotiating process. After that we can start discussing gas deliveries once again. What do you think of this suggestion?

Aleksei Miller: After your talks with the President of Ukraine in March 2005, the Ukrainian side rejected negotiations. And this proposal is a proposal along the same lines. Such a delay will not result in anything.

Vladimir Putin: Mikhail Efimovich, I charged the Government to develop the possibility of offering Ukrainian partners the necessary credit resources to help Ukraine's transition to market-based gas relations with Russia, and to help the Ukrainian economy as a whole enter the market.

Mikhail Fradkov: Vladimir Vladimirovich, that order has been executed. Now governmental agencies are working out the details and looking for additional financial resources so that they can propose acceptable loan conditions. We want to do this transparently and provide appropriate guarantees. This is a way of helping our Ukrainian partners and simultaneously guaranteeing the loan repayment. We are realistically evaluating the situation. And of course this suggestion would resolve one of the issues. Because we simply have to help our colleagues pay for gas at new market prices. We understand that it is difficult to do so, because it is such a lot of money. And probably it would be difficult to increase the prices on the domestic market immediately. We understand all of this. And we believe that your proposal regarding a loan is an way out, or at least one of the possible ways out of this situation. And this would substantially facilitate and ease the situation, and give us the possibility to make the transition to market-based, healthy, open, transparent relations smoothly and on time.

Vladimir Putin: Will our offer prove onerous for Ukrainian finances?

Mikhail Fradkov: It is just as onerous for our own finances. This is a very significant sum. When we talk about how we can find such financial resources we start from the premise that these additional resources must be taken out of our budget, if we are talking about the intergovernmental financing. And if this will be onerous for Ukrainian state finance, there are plans for these financial resources to be guaranteed by internationally renowned banks from other countries.

I think that our western colleagues will not remain on the sidelines when faced with the resolution of such an important issue. I hope that they will be understanding and participate either through guarantees or investments, financial or other.

Vladimir Putin: That is clear. How does the Government feel about Gazprom's position?

Mikhail Fradkov: It seems to me that Gazprom's position is consistent. As they say, it didn't come from nowhere. We remember that these negotiations started almost a year ago. Unfortunately, we must point out that our efforts to conduct them in a constructive way have not been successful. And in this sense I would ask our colleagues from the Ukrainian government to look again more carefully at the relations that are developing at the level of corporations, and to make a clear response. For our part we are making a reasonable offer and expect an appropriate reaction.

Vladimir Putin: Have I correctly understood you? Does the Government support Gazprom's position?

Mikhail Fradkov: Yes, we support Gazprom's position. I think that it is in Russia's national interests and gives us the opportunity to combine our interests with those of our Ukrainian partners.

Vladimir Putin: I think that the positions of the Government of the Russian Federation and of Gazprom are firm enough. Along with this I would like to draw your attention to the fact that Ukraine is not an abstract authority, nor a collection of oil and gas barons who always defend their corporate or private interests in any way they can. Rather, Ukraine is first and foremost the fraternal Ukrainian people. And we must think about all aspects of Russian-Ukrainian relations.

For this reason if by the end of the day Ukrainian partners sign the contract that Gazprom is proposing on the transition to market-based prices from the second quarter of 2006, then the Government and Gazprom must deliver gas to Ukraine in the first quarter of 2006 under the same conditions as in 2005. If there is no clear answer then we will consider that our proposition has been rejected.