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Vladimir Putin: Good afternoon, dear colleagues!

Today our meeting is devoted to measures designed to implement the Annual Address to the Federal Assembly and we will discuss three areas in detail: technological modernisation in the economy, improving the demographic situation and Russia’s national security.

I shall say at once that all these tasks are closely connected. As such the level of military security directly depends on the economic growth rate and level of technological development. In turn, the demographic situation develops more fortuitously in a country which has a heightened sense of social responsibility and, especially, in a country where people care about the long-term and feel secure when making their life plans. For this reason when working in each of these areas we must see them as interdependent and solve problems by looking at all of their aspects.

Today, we must plan concrete, realistic measures designed to radically change the situation in all the areas we have already discussed and those we will discuss today. Simply analyzing the state of affairs is not enough.

I shall begin with measures designed to help us overcome the technological lag. This is a key issue in increasing our economy’s competitiveness and we must resolve this problem not only at the federal level but also with the active participation of the regions, various corporations and companies.

It is obvious that a crucial part of any country’s success on the world market consists in constant renewal and continuous innovation in all sectors of the economy and social life. It is only then that a country has the chance to take on a leading position and move ahead of others owing to new technologies and a competitive academic environment.

In this respect, one might ask what is our country’s position today? Its position is far from brilliant. It is difficult to state that Russia’s economy acts as a leader in technological development. The average age of our industrial equipment is more than 20 years old. According to experts’ evaluations Russia’s share in the world trade of high-tech products is somewhere between 0,3 and 0,8 percent. This unpleasant figure is about 15 or 20 times less then, for example, China’s share. And little is being done to overcome this technological lag.

I shall remind you that, first and foremost, the Address laid out the task of using our areas of competitive advantage. These are the space industry, aviation, energy and communications. We are competitive in materials science, physics, nuclear energy, chemistry and metallurgy. It is also well-known that Russia is able to concentrate its efforts with a view to resolving the most difficult technological problems.

I ask that today we present specific proposals to support the sectors in which Russia traditionally holds a strong position, and first of all in the high-tech field. Only by ensuring this market’s development will we be able to considerably and quickly change the economy’s structure and growth rate. To achieve this goal we must develop an efficient model that allows for cooperation between the state and national business communities and, as I said before, ensure that they gain access to the world market.

I ask that we propose economic stimuli that can increase businessmen’s participation in technological modernisation and therefore to help create an environment that generates both knowledge and technology. Today only six percent of Russian enterprises participate in research and development while in the U. S., in EU countries, in Japan and in China the number is closer to 60 percent. It is obvious that this potential which, incidentally, was well-used during the Soviet Union is just being wasted today. However, by using this potential we could increase the number of areas in which we produce high-tech international level products up to 10–15.

Along with this Russia must not diminish its role and significance in delivering energy resources to the international market. In this sector the most important task consists in increasing exports of goods based on processing natural resources. We must also increase the intensity of processing to benefit from high added costs. In other words, we must increase the competitiveness of our products, produced in modern refining and processing facilities.

I believe that to resolve all these urgent problems the government must develop and adopt a comprehensive programme for the technological development and modernisation of the economy.

Dear colleagues, the most important issue that was presented in detail in the Address involves measures to improve the demographic situation. Here our task consists in lowering the death rate and increasing the birth rate as well as increasing the effectiveness of our migration policy. This will allow us to stabilize Russia’s population in the coming years.

Russia’s population has drastically reduced for the first time in 1993 and this process has remained steady until now. Today we are facing a crisis situation. Over the last 13 years the number of Russian citizens that died exceeded the number that were born by 11,2 million people. If we do not do anything then by the end of the 21 st century Russia’s population will have dropped by half. It is obvious that at present we are benefiting to a certain degree from active migration, something that has helped to counterbalance the negative processes. We must develop this tendency in a harmonious way and determine what kind of immigration is beneficial for Russia and its citizens. And influencing migration is easier than influencing the birth or death rates.

Already in 2007 we will start introducing measures designed to stimulate the birth rate, something I discussed in detail in the Address. Let me remind you that I proposed concrete measures to support families who have decided to have a second child. We are proposing to drastically increase financial aid given for each child, provide compensation for the expenses families pay for pre-school childcare, and provide a so-called maternity capital. These and other proposals contained in the Address must have a clear legal basis and effective mechanisms by which they can be implemented.

I believe that today we will determine the crucial directions of our long-term demographic policy. Our policy must take into account all aspects of the situation, including lowering the high death rate. We must analyze its causes extremely carefully. Today the Russian death rate is the highest in Europe. More than 700 thousand people of working age die each year in Russia. Along with this I would emphasize that we have few in-depth studies of demographic problems in Russia. We must undertake this work in a systematic and purposeful way. We need this kind of information and analysis.

I would also suggest that we transform the Council for the Implementation of Priority National Projects into the Council for National Projects and Demographic Policy. This would allow us to better coordinate our work in this sector.

Our discussion must produce concrete results that will act as a basis for our further work.

The third theme consists in improving military security. A year has gone by since we made a decision on the development prospects for Russia’s Armed Forces by 2015. A number of measures have already been implemented. In particular we have provided support for strategic nuclear forces and we are continuing to form combat-ready units in the regular forces. A significant part of regular forces is now staffed on a contractual basis.

We were able to stabilize the Armed Forces’ financial situation. We have started taking action to resolve the problem of providing housing for servicemen. We have started a mortgage loan system. General tendencies all show that we are emerging from the crisis situation which plagued Russia’s Armed Forces for a long time.

However, while the general dynamic is a positive one, the process of equipping the army and navy with new modern equipment is proceeding poorly. We are still lagging behind in our efforts to provide the army and the navy with modern weapons systems, and I would like to stress it — weapon systems.

In connection with this, in the third quarter of 2006 the government should determine a list of fundamental crucial military technologies and, in the interests of allocating budgetary resources in the most effective way, determine how these technologies will be financed and to what extent they support developing and maintaining the Armed Forces. I also believe that it is expedient to create a new section of the budget entitled “The Modernisation of the Armed Forces and other Forces”.

Analyzing the state of affairs in the defense industry has shown that this industry does not guarantee that the Armed Forces receive the necessary equipment. There are many reasons for this and I will point out just two of them: the deterioration of technological equipment and the lack of diversification within the defense industry’s major structures. In a number of branches such as shipbuilding, ammunition, special chemicals and hardware components, there is no strategy for development or for reform. It is obvious that urgent measures are required. Unfortunately, the government is not working quickly enough and has still not completed the target programme for the defense industry’s development.

I suggest that we complete all these measures in the third quarter of 2006 and plan on financing measures contained in various programmes as of 2007.

Finally, one last important issue consists in personnel for the army and the navy. I believe that in view of the difficult demographic situation we must start allocating the positions of sergeants, master sergeants and above-water craft crews on a contractual basis. At the same time we must continue improving our draft system.

It is extremely important to pay special attention to the system of preparation for service in the Armed Forces prior to conscription and the military and patriotic education of Russian youth. Certainly, the tasks that lie before us can not be solved by any department. Both regional and local authorities and, of course, public organisations should engage in this work.

And finally we must provide convincing answers to all modern challenges, such as measures to prevent the proliferation of weapons of mass destruction. We must precisely determine Russia’s interests in the fields of nuclear, biological and chemical disarmament, and prevent an arms race in outer space. I talked about this in sufficient detail in the Address.

Now, before passing to the reports, I would like to say in conclusion that since the beginning of the 1990s, throughout the 1990s, and right up until today we have basically been engaged in filling holes and ensuring our survival. We now have the opportunity to look at tomorrow and to create a long-term strategy to ensure that the country develops in all crucial areas.

Please, who will go first? Mikhail Efimovich, please go ahead.

Prime Minister Mikhail Fradkov: Thank you!

Dear Vladimir Vladimirovich!

Dear Security Council members!

Colleagues!

I shall try to avoid mentioning numbers in my speech. The figures that Vladimir Vladimirovich just mentioned in his opening address were an eloquent introduction to the situation. And now I believe that we need not go into more depth on this issue, but rather evaluate the situation to determine what we need to do and how we can overcome this technological lag in the shortest possible time.

To start off I would like to emphasize that this issue is being examined by the Security Council quickly enough and as dictated by today’s realities: we must act in a strong and purposeful way to accomplish the complicated tasks associated with Russia’s technological modernisation.

I will say more but, as Prime Minister, I have no doubts that we are simply obliged to resolve these problems – they are simply inevitable. As a matter of fact, this will determine the future sovereignty and integrity of our country. Therefore time is short, extremely short, and time waits for no man, as they say. Otherwise we might simply lose the advantages and reserves that we have accumulated and not be able to create an economic environment that encourages innovation. Of course this does not mean that we must stop work on increasing trade and forming market institutions and mechanisms; we will continue to work actively in these fields.

Actually, work is proceeding in all directions. We have determined priority areas for the development of science, technology, technical equipment and a list of crucial technologies. We have also prepared a strategy to develop science and innovations until 2015. In the investment sector financing is increasing and legislation is improving, and the Military Industrial Commission and the military industrial complex’s Council for Science and Technology have started working actively in this field.

We are implementing measures that will create favourable tax conditions. We are introducing technology parks, as well as special recreational and economic zones. We are forming venture and investment funds and creating development institutes. We are examining federal target programmes concerning technology to determine how we can increase their effectiveness. Within the national projects we are finding out just how we can best concentrate our attention in the high-tech sectors.

It seems that all the correct things have been said, we have formulated the necessary orders, and work is proceeding. However, large-scale qualitative changes have not yet taken place. Therefore the technological gap is growing; this has helped entrench negative tendencies and created a technological lag for current and future competitors. What are the fundamental problems? I will list them.

First and foremost they consist in losing crucial technologies, losing lines of production and, as a matter of fact, it is national security that suffers from increasing gaps in the high-tech market. Industry’s technological base, especially in manufacturing, remains backward. Russian companies are not sufficiently innovative. The research and development sector is not properly integrated into the economy because there are no effective structures designed to encourage innovation. In essence this technological lag creates a closed circle, a vicious cycle of technological backwardness, from which only a few companies can escape and enter the world technology market. In other words the technological lag has taken on a systemic character and become one of the primary factors of low competitiveness and security threats.

In-depth analysis, including that which was done before today’s session with the leaders of the regions and representatives of business communities shows that the system of supervision is this field’s weakest point – such a system simply does not exist. One other important observation is that insufficient financing continues to act as the main hindrance to activities in the fields of science and technology. And the main problems are that the government is not paying enough attention to this field and that it is plagued by poor organisation. The main hindrance consists in the low effectiveness of our work and our inability to carry something through to its completion. Along with this it is obvious that the systemic character of our technological lag requires that we undertake systematic and purposeful actions.

The necessary conditions for such an approach exist. The macroeconomic stability that reigns in the country has natural advantages, and scientific and technical reserves allow us to already pass to an active stage of introducing modern technology into our industry. It is obvious that now that we have attained macroeconomic stability, technology policy must be a key part of our economic policy.

The state must rise to this challenge by precisely defining its position, and must include both national business and foreign partners in its sphere of responsibility.

The state’s sphere of responsibility consists first and foremost in the strategic and concrete advantages that define Russia’s position within the global economy. By using political, economic and other powerful means to strengthen and expand Russia’s possibilities in the global economy, the state will implement key priorities of national development and security.

We must develop the mechanisms to ensure a partnership between public and private sectors. Business must be the state’s ally and implement the state’s technology policies in an effective way. We must start this alliance at the earliest possible stage, when we need to realize the most advanced and promising directions for development in science and technology. We must then use this as a base on which we can establish nation-wide long-term priorities.

One result of teamwork could be forecasting the country’s development in science and technology until 2025. When implementing its technology policy it is very important that the state define and determine how its policy corresponds to the whole cycle of technological developments, and how it functions within the partnership between public and private sectors, and which areas will be entirely left to the private sector while the state continues indirect supervision.

It is obvious that in order to coordinate our efforts we need to concentrate our administrative resources on further implementing the state’s technology policy. It is possible that this will enable certain sections of ministries and departments to directly work towards developing particular sectors of the economy. Moreover, the Economic Development and Trade Ministry, the ministry which is responsible for developing the overall strategy in this field, must better coordinate this work and therefore the Finance Ministry’s role is increasing and consists in ensuring fiscal balances and supervising expenditures.

We must still reflect on and consult each other on these and other structural proposals. And as a first step we could establish a governmental commission to coordinate the activities at the federal level with those undertaken by the executive branches in the regions, with representatives from business communities, academia, and experts on the issue of technological development.

Within technological development emphasis must be placed on cooperation between the state and private sector in accomplishing key strategic tasks that will ensure economic development. The public and private sectors must define the possibilities that exist in these fields and reveal which barriers hinder their development. We must develop joint action plans in each of these priority areas to increase research and development, strengthen competition, reduce the barriers preventing entry into the market and support programmes of professional training.

As a matter of fact the industrial policy of developed countries often has such a component and allows them to carry out an active policy in the world market.

And now a word about the most pressing measures.

It is necessary to undertake a large-scale initiative in tax policy which includes lowering the rate of VAT on production to 13 percent on equipment that will help the country’s technological development. We must eliminate the VAT for technological equipment imported into the country that does not have a Russian equivalent. We also require favourable tax conditions to increase the amount of research and development work that companies do, and be able to amortize equipment faster.

The Finance Ministry is preparing proposals. This work must proceed even faster.

We must implement plans to create technology parks, special recreational economic zones, and venture funds more actively in order to create the necessary institutional environment. We must create an effective, functioning development institute, that includes a trade bank, a development bank, leasing companies and an investment fund. We must start the programme for targeted credit amendments and producing high-tech products.

In order to create a sufficient demand for technology we must accelerate the development and adoption of technical rules, progressive standards and norms. We need to finish quickly modernizing the state sector of sciences, that is the institutions, including the Academy of Sciences, that benefit from the status of state organisation and actively promote the development of corporate science and nongovernmental scientific organisations.

We must develop transparent systems for state requirements for applied and basic research.

We must accelerate the rate of modernization of high and medium-level vocational training and develop this system according to the requirements of the high-tech branches of the economy.

We must pay special attention to the fact that our economic and political support to high-tech exports remains insufficient. We require help in obtaining foreign certification and with respect to international patents and protectionist measures. We also require an effective insurance system for export contracts and credits, and assistance to those wishing to purchase foreign shares in manufacturing and in everyday consumer products.

We can also provide effective support for the export of whole ranges of products produced by Russian companies that have establishments abroad.

We have such experience. I am referring to constructing energy installations abroad, including nuclear energy, metallurgy, chemicals, petrochemicals, transport infrastructure and a number of other sectors in which the potential for innovative development is concentrated. And the most interesting international market for these purposes is, first and foremost, in the CIS and in developing countries.

Russia’s possibilities for participating in global integration trends in the fields of science and technology, and developing joint enterprises to develop products with foreign countries is far from having reached its full potential. I am referring to creating joint research and technological organisations and even cooperation when purchasing foreign organisations that will then develop the technology produced by Russian corporations.

Countries with high levels of industrial development are the main consumers of Russian high-tech products. By using various channels of cooperation in the economy, academia and in the educational and cultural spheres, western countries have the possibility to explore the most promising fields of research so that that the most qualified personnel in science and technology can then be used for their own future interests.

At the same time these countries maintain discriminatory policies towards Russian high-tech products. In most cases exporting high-tech products goes along with transferring all research and development rights to the customer. In practice this means that nothing can be released into western markets without equivalent compensation for a substantial part of the ideas and technologies involved. In connection with this there is an imperative need to develop a number of measures to improve export control.

A few words about various areas of technological break-through. By holding a number of leading positions in the technology market we are obliged to act in areas of technological break-through. Our country must define its technological profile in relation to our main competitors. And this profile must be based on our strategic and competitive advantages. We must really understand just how we want to see ourselves in 10 or 15 years.

We must create a number of development programmes in branches which hold the greatest innovative potential. For example, high-tech products can allow us to implement projects such as extracting hydrocarbons from the shelf of the Northern Sea, develop deposits and extract minerals in an environmentally-friendly way, as well as create new ways to work in the Arctic and other extreme environments, develop hydrogen energy, produce new types of fuel for automobiles. These products will allow us to embark on projects in nuclear energy, including a new generation of nuclear reactors, break-through projects in aviation based on technologies that will create a new generation of aviation technology, projects in transportation based on technologies that will direct new types of transportation systems, establishing a new generation of energy efficient engines, projects to explore outer space based on a new generation of rocket technology, creating intelligent navigation systems and communications systems, and new methods for medical diagnosis and treatment in which we will use the achievements of biotechnology and nanotechnology, and, finally, establish long-range weapons systems.

We do not need a large number of such programmes. To start off we could limit them to five groups of programmes that will produce the greatest cumulative effect. We can start with energy. As a state Russia is trying to play a leading role in the world energy market and developing energy technologies is therefore in Russia’s interests. This effect would be heightened if we pay special attention to tasks designed to develop technologies linked with energy provision and energy effectiveness. In addition to this there are also new technologies available for the extraction of energy resources, their transportation, refining them and consumption. This also concerns related industries such as energy engineering, making equipment, chemistry and petrochemistry. Our resources in this field are Russian Unified Energy Systems’ and Gazprom’s large-scale investment programmes. Each year these programmes should examine the possible ways these branches can be reorganized so that they use newer technology and establish new contiguous technological production centres.

We must pay separate attention to the development of nuclear technologies and nuclear engineering. This is a sphere where Russia has traditionally held a leading international position and where Russia’s advantages must be exploited to the full.

In addition to the energy sector we must also take into account public health services. As a matter of fact, this is a branch which must use high-tech products and services. In principle all national projects could contain a high-tech component. By using the state’s purchases in this field we can support the demand for innovation. Indeed, such work should be undertaken.

It is expedient to quickly create programmes in promising areas that, in many respects, will define Russia’s technological culture until the middle of the coming decade. First and foremost I am referring to nanotechnology and biotechnology.

Developing new territories, and first and foremost eastern Siberia and the Far East, is a key task for a country that aspires to technological development. We must implement a number of measures to create a modern, high-tech industry in these areas, while taking into account the importance that raw materials present for these territories. The potential revenues from new oil and gas deposits could act as an important resource for economic diversification in these regions.

Comprehensive measures for the social, technological and economic development of eastern Siberia and the Far East must be united in a separate priority national programme.

In conclusion I would like to say that we are able to change the present situation. We must take advantage of the favourable conditions that our energy potential gives us and the favourable macroeconomic context. The fact that over the past few years we have achieved macroeconomic stability is thanks to our strong national resources. But the most important thing is not to waste our citizens’ potential to unite and resolve nation-wide problems.

Thank you for your attention.

Vladimir Putin: Thank you.

Dmitry Anatolevich, please go ahead.

First Deputy Prime Minister Dmitry Medvedev: Dear Vladimir Vladimirovich! Dear members of the Security Council! Colleagues!

Improving our country’s demographic situation is really the key factor in ensuring our country’s steady development. A diminishing population reduces Russia’s social and economic potential and creates real threats for the future security of our state and nation.

Today in many central regions the population is aging and diminishing while many territories in Siberia and the Far East are emptying because of the population outflow. I will not overemphasize this issue but the situation is depressing: in 2005 2,3 million people died in Russia and 1,5 million were born. For every 100 women of reproductive age 134 babies are born. This is considerably lower than the number that would be necessary to ensure that the population’s level remains constant.

The federal and regional authorities have already taken certain measures to improve the demographic situation especially as a result of the work done to improve medical services over the last five years. In obstetric clinics we were able to lower the rate of death among mothers and newborns by about a quarter. However, we did not see a substantial improvement in the demographic situation and the most important reason for this is the absence of a systematic approach and insufficient financing for demographic programmes.

This year’s Address to the Federal Assembly laid out the basic problems and proposed measures that would radically change the situation. Just now Vladimir Vladimirovich named three of these measures: lowering the death rate, efficient immigration policies and increasing the birth rate.

Of course the measures we have designated should be incorporated into the state’s main priorities. One crucial element that influences demography is the high death rate. Its main causes are heart disease, alcoholism, drug use and traffic accidents. About a third of the people who die in Russia today are of working age. And 80 percent of these people are men. Each year about 40 thousand people die in traffic accidents; this amounts to the population of a small central European city.

As you well know, these indicators have a negative effect on life expectancy. In Russia today the average life expectancy in 65,5 years – for men it is 59 years and for women 72.

We must point out that a number of annual addresses have emphasized improving the health care situation as a way to improve our population’s health. It is obvious that today our citizens do not take sufficient care of their health and we can only expect positive changes once we have inculcated a normal, healthy lifestyle and respect for good health among Russian citizens. The measures stipulated within the national project on health are of key importance in this respect. In this project we are already working on preventing heart disease, infections and other diseases. We are also preparing separate programmes designed to decrease the number of preventable deaths and injuries, including those incurred in the work place. We are also preparing to further develop maternity clinics.

We are going to provide modern and high-quality medical services for victims of traffic accidents. To do so we need to develop a number of measures designed to provide special training for medical personnel and services to ensure road safety, equip emergency sections of hospitals with the most modern equipment, and ensure that ambulances have reliable, functioning communication services.

Migration is an important aspect of demographic development that must be discussed separately. I will only point out that today we have created a special interdepartmental working group to develop a state programme to provide assistance to compatriots abroad who would like to resettle in Russia. This is a subject which requires a separate report. As a whole our immigration policy must be oriented towards attracting qualified experts, law-abiding citizens, who respect Russia’s traditions and culture. Migration is the sphere in which the state must adopt a precise position and take into account market requirements and the levels of development of various territories.

Dear Vladimir Vladimirovich! Dear members of the Security Council, dear colleagues!

The Annual Address contains a number of measures designed to increase the birth rate. On 7 June 2006 the government formulated an order and thereby approved a comprehensive plan for measures to implement the Address’s basic provisions. In the section on Resolving Demographic Problems we are preparing a project consisting of federal laws and governmental orders to increase the financial means the state allocates to people who have children, increase compensation for pre-school childcare, as well as for placing children in foster families. This includes income for foster parents. In addition to this we will develop the necessary documents to improve the medical examinations that orphans undergo. And the most important legislation consists in providing a certain amount of income – maternity capital — to women who give birth to a second child.

We are suggesting that next year 81,7 billion rubles should be allocated from the federal budget and the budgets of state funds to implement these measures. This is the total amount that will be spent. And this is without taking into account the so-called maternity capital. We expect that expenditures for maternity capital from the federal budget for a demographic project will amount to 195 billion rubles per year and this is without taking indexation into account. These are important financial means and we must develop a very efficient system to supervise how they are spent.

We plan to make the first payments of maternity capital to mothers who give birth after 1 January 2007 and these payments will come into effect as of 2010 when the child is three years old. These financial resources can either be used to purchase housing by using a mortgage or other forms of credit, for children’s education, or for their mother’s pensions. We should also organize provisional measures that will apply to mothers who give birth to a second child within an allotted time with a view to strictly implementing the obligations the state has taken on.

Nearly 53 billion rubles will be allocated to increase the grants that women receive before their child is one and a half years old. We are proposing that working women receive an amount that corresponds to 40 percent of their salary. Along with this the maximum sum that could be obtained should not exceed 15 thousand rubles. This is the same cap we use when we calculate the temporary disability allowance. Non-working women will receive sums of one and a half thousand rubles for the first child and three thousand for the second and following children. A corresponding draft law has already been prepared and is being discussed within the relevant federal departments.

The Annual Address provides that eight billion rubles will be allocated as compensation for children’s pre-school childcare. However, allowing women to return to full-employment will depend to a large degree on coordinated actions between all levels of authorities to prevent an unreasonable rise in prices for children’s kindergartens and allow each family to find the place they require in childcare facilities. It is no secret that today about 900 thousand people use these establishments. And in view of the forecasted birth rate in 2007 and 2008 the numbers will only increase.

The regions and municipalities of the Russian Federation must devote efforts to creating a sufficient network of pre-school establishments and measures that will ensure that they are staffed by well-trained personnel and benefit from modern programmes to improve children’s health and education. Parents must be convinced that the appropriate conditions to ensure their child’s full-value, high-quality development exist in their kindergartens.

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One of demographic policy’s main tasks consists in reducing the number of orphans and children who are in children’s homes or orphanages. The government is preparing a programme that will provide financial incentives to take care of orphans and children whose parents are unable to care for them. This includes a one-off payment to families taking in children for all types of child support. This also includes increasing the amount paid to foster parents and guardians, and increasing the income of foster parents according to the amounts stated in the Annual Address. We are planning to allocate almost seven billion rubles a year for these purposes.

A key task remains determining the guardians and foster families for approximately 80 thousand orphans. I will emphasize that in the first instance it is the regional and municipal authorities that must oversee this task. They should act carefully when choosing the families that will care for these children. At the same time adequate orphanages must be built. It is necessary to create the conditions so that these establishments recreate those in a normal, loving family. It is important to create a data base with information on the children who have lost their parents and organize supervision and guardians for these children in both state structures and within foster families. We still have not accomplished these normal, necessary tasks.

In 2007 more than 200 thousand orphans in orphanages will take a medical examination. At the same time we must evaluate the quality of medical services that these children are receiving. Following that we will develop a number of measures to improve their health and education. These measures must allow the children to better adapt to society and prepare them for becoming part of a family.

Dear Security Council members! Colleagues! It is obvious that in order to resolve problems as complex as demographic ones we must pay attention to all their component parts. The government is proposing to use a programme-oriented approach which will be reflected in primary measures designed to improve the demographic situation. Special attention will be given to problems encountered by families, especially young families. Within the national project Affordable and Comfortable Housing we are making proposals to increase the number of mortgage credits that young families with children can receive. We are proposing incentives and to introduce the so-called credit system designed to reduce the tax load on the borrower who has children, and even to decrease the interest rate in the event that the interest rate on the Russian loan market decreases.

Along with this I will emphasize that it is impossible to eliminate families’ problems simply by providing them with housing. As a whole the state’s task consists in increasing the prestige of families that have children, adopting new working methods, and therefore helping propagate family values. And the federal authorities must involve the regions in this work.

We have planned special measures to drastically change the demographic situation in rural areas and first and foremost by improving rural inhabitants’ level of health care, increasing the availability of medical services by using the most modern kind of information technologies such as, for example, medicine involving telecommunications. We must not forget that despite all the difficulties in rural areas, the tradition of having a large family continues there. And we must help people living in rural areas to strengthen and support these traditions.

Many of the measures we have listed are closely connected with the tasks that are being accomplished within the national priority projects. In connection with this we are going to work according to the plan that the President proposed when he suggested transforming the Council for the Implementation of Priority National Projects into the Council for National Projects and Demographic Policy. This way of working has already been initiated. And there are many reasons to continue working in this way.

It is also obvious that a large-scale demographic programme must be based on a good system of gathering statistics that provides full information on demographic processes, well-founded predictions, and is supported by a substantial amount of information. It is clear that it is impossible to improve the demographic situation in three to five years. We need long-term measures along with more urgent ones. The most important long-term measure consists in changing the impression citizens have of giving birth, increasing the amount of care they take of their own health, and creating the conditions for a comfortable family life that includes raising children.

In conclusion I would like to emphasize that as early as next year we can start accomplishing the said tasks, and that already in the near future we must complete work on basic legal acts and national laws formulated both by the government and supreme judicial authorities. We must also refine basic financial and social mechanisms and make them clear and comprehensible. The decisions that the Security Council will make today will act as the guide for our future undertakings.

Thank you for your attention.

Vladimir Putin: Thank you.

Please go ahead, Sergei Borisovich.

Defense Minister Sergei Ivanov: Dear Vladimir Vladimirovich! Colleagues!

It is obvious that along with economic development and demographic policy, national security is a fundamental condition for ensuring Russia’s prosperity. In this respect it is vital that the state recovers the military power that would allow it to ensure strategic deterrence, to effectively defend our national interests and to protect our fellow citizens.

Along with this I shall point out at once that I am not referring to achieving a quantitative parity with leading world powers. As President Putin said in the Annual Address to the Federal Assembly, Russia’s responses must be based on intellectual superiority. They must be asymmetrical and not as costly. Such an approach constitutes the basis of the Security Council’s decision, taken in June 2005, concerning the Armed Forces’ development prospects until 2015.

The chief of General Staff, Iurii Nikolaevich Baluevskii, will provide a short analysis of how this agreement is being implemented so I shall not discuss the question in detail.

I would like to draw your attention to something for just one moment. Despite the obvious necessity of optimizing the number of military units and preventing any overlap between the various power agencies, we have not yet achieved concrete results. And the results we have achieved are simply symbolic ones.

And now about plans to develop the Armed Forces. It is natural that developing our nuclear deterrence forces is a major priority. We perfectly understand that in the future our nuclear arsenal is going to remain the basic criterion that ensures the defensibility of our country. Let me remind you that the President formulated a decree ‘On the Forces and Means the Russian Federation will use to Ensure Nuclear Deterrence until 2016’ which contains the provisions to implement this. This is also reflected in the Armed Forces’ development plan for 2006 to 2015 and in the State Weapons Programme for 2007 to 2015. These documents provide that we will establish a modern system to engage in combat and also increase the level of equipment of our nuclear triad by providing it with modern weapons and weapons systems. As a whole we plan to increase the quantity of these missiles so that they constitute 70 percent of our weapons. If we include the planned increase in the amount of strategic submarines and launchers of strategic missiles, they will amount to 80 percent.

In the foreseeable future the Topol-M missiles and the navy’s Bulava missile system will constitute the backbone of our nuclear forces. We are developing promising strategic high-precision weapons that have an unpredictable trajectory and are therefore able to overcome any kind of missile defense system, as well as maneuverable combat units.

In addition to this we are planning measures that will modernize our long-range aircraft. We are paying a great deal of attention to developing military spacecraft and it is obvious that without sufficient and multifunctional orbital groups it is practically impossible to ensure our national security. Therefore it is extremely important to create the conditions that will allow us to launch all types of military spacecraft exclusively from Russian territory, from the Plesetsk Cosmodrome. In addition to this we are further developing the aerospace defense system according to the document we approved on 5 April 2006.

In addition to developing our strategic forces for nuclear deterrence, strengthening our general purpose forces is important for developing our Armed Forces. First and foremost this will be done by creating self-sufficient military units that benefit from high-precision intelligence equipment and, like nuclear forces, are capable of accomplishing any tasks to ensure the country’s military security.

For resolving tasks associated with localized conflicts similar to the ones we have faced for several years in the northern Caucasus, such groups can be generated from combat-ready units and other units of the Russian Armed Forces.

However, in order to successfully fight in global, regional and several local conflicts we must significantly increase the number of combat-ready units. By 2011 there must be 700 such units. It is obvious that this is a very difficult and multifaceted task since we must, first of all, staff these units with well-trained contract personnel and, secondly, equip them with the most modern kinds of military technology and weapons.

I shall discuss each of these aspects in more detail.

Already today we are implementing a federal target programme that provides that between 2004 and 2007 the Armed Forces will be increasingly staffed by contract servicemen. 42 military units containing more 60 thousand soldiers and sergeants are already being staffed on a contractual basis. I shall remind you that we must create 74 such units within this federal target programme.

At the same time we are faced with a number of significant problems: insufficient financial resources needed to complete building our installations, insufficient material and social security for contract servicemen, a low morale and insufficient psychological preparation among conscripts. There is enough evidence to assume that in 2008 these problems will become even more acute. Therefore to avoid this and to create the necessary numbers of personnel and combat-ready units staffed by contract servicemen, we must take a number of measures.

First – we must provide timely and fully-financed measures that take into account inflation and rising prices.

Second – we must stick to our building schedule so that we can provide housing for all military units staffed by contract servicemen. When taking into account inflation since 2004, an additional 6,3 billion rubles must be allocated for these purposes.

Third – we must solve the problem of accommodation for the families of contract servicemen. As we have emphasized since the beginning, today the number of contract servicemen amounts to 15 percent of the total number of soldiers and sergeants.

Fourth – we must construct cultural centres, shops, various consumer services, as well as equipment for physical education and sports in isolated military establishments. I emphasize that I am only referring to isolated military centres that are located far away from population centres and, as a matter of fact, are towns in and of themselves.

Fifth – we must take measures to improve the financial incentives available to servicemen.

I emphasize that it is necessary to undertake all these measures in an efficient way.

In addition to implementing a federal target programme to create professional service by 2008, and without spending additional budgetary resources, by 2008 all crews on nuclear submarines must be employed on a contractual basis.

After this we plan to start filling all posts for young commanders, that is the sergeants and master sergeants of the Armed Forces, and the heads of combat-ready above-water craft crews, on a contractual basis. I think that everything is clear with regards to personnel changes.

With respect to weapons and military technology, as of 1 May 2006, only 41 of the 367 main combat-ready units do not yet have all the necessary requirements. It is possible that this does not seem like a huge number to some people. But we must not forget that this is part of being combat-ready. Naturally, such a situation does not suit us. Therefore I can report that the Defense Ministry is doing everything possible to reverse the negative tendencies in this area. While previously the lion’s share of financial resources for state defense requirements were allocated to research and development, we now have the opportunity to start purchasing series of weapons and military equipment. We are now able to deliver not just separate items to the Armed Forces, but already whole sets of weapons or weapons systems.

According the state weapons programme we plan to deploy about 200 combat-ready units by 2015. Along with this we are planning to buy more than three thousand weapons and special military equipment and will ensure that another five thousand of these items undergo major renovations. At the same time it is extremely important that each ruble from the budget be put to good use. For that reason, the Defense Ministry is now undertaking measures to create a unified system for purchasing and delivering weapons, military technology and other equipment. This system will then constitute the basis for creating the corresponding civilian department or agency that can act in the interests of all of the state’s military agencies and not just those of the Defense Ministry.

It is also obvious that implementing large-scale plans to equip the army and navy in large part depends on the conditions within the national defense industry and on modernizing its manufacturing, technological and scientific bases. The primary conditions required for achieving this goal already exist. State defense requirements are not only receiving steady financing, but the amount of budgetary resources allocated has increased by at least 20 percent every year over the past few years. As such over the last five years the number of facilities used to produce military equipment have increased by almost 40 percent. Within the defense industry we have created an additional 75 thousand jobs. In addition, we have established 25 integrated structures and a number of state enterprises in the most important areas for creating weapons and military technology. And the share of Russian weapons exports on the world market has reached 15 percent.

We will continue to implement the measures that have been planned by the government to further reform and develop the defense sector according to the new federal target programme to develop the defense industry between 2007 and 2010 and even until 2015. Developing this programme was mentioned in the opening address and it is inadmissible that this programme be delayed any further.

In sum I would like to say that we have all the necessary conditions in place to ensure that the planned measures to modernize the army and the navy will be implemented in full and within the expected time frame.

I will now address the issue of improving planning within the Armed Forces and optimizing the state’s military command.

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The military sector is also carrying out an experiment whereby the leaders of peripheral military districts in charge of strategic defense forces will become the leaders various regional military units. This new system should confirm the expediency of the various operative and administrative divisions. Once the experiment produces positive results then the Armed Forces’ plan stipulates that between 2008 and until 2010 we will form permanent regional commanders for the East, the South and the West.

Together with the Central Administrative Board for Special Programmes we have analyzed and evaluated the importance of special installations to accomplish military tasks. We have prepared the corresponding proposals to optimize the number of military centres managed by the Armed Forces.

We are also improving the system of telecommunications that lies at the basis of our military command. In order to ensure its balanced development we are planning to develop and start flight-testing the new Meridian spacecraft no later than the fourth quarter of 2006. In addition, the State Weapons Programme for 2015 provides that we will expand the orbital grouping of the integrated system of satellite communications and retransmit from several spacecraft.

Dear colleagues, I will now pass to an aspect which has a defining role in determining the effectiveness of the state’s Armed Forces. I am referring to the human factor. I would like to point out that, unfortunately, the social status of servicemen, citizens that complete military service, and their family members, is still insufficiently low. Therefore it is necessary that we take measures to improve the quality of life for these Russian citizens.

In the first instance this concerns making changes and adding to legislation that either cancels or reduces guarantees and privileges that benefit servicemen. It is necessary that they receive due compensation in the form of monetary support.

Secondly, this concerns quickly resolving the housing problem. We have worked a substantial amount on this issue over the last few years. Suffice to say that over the last few years the number of servicemen without housing has diminished, but the problem is far from being completely resolved.

Thirdly, we must increase servicemen’s income and index it to inflation in the corresponding legislation. Along with this I would like to draw your attention to the fact that we plan to increase servicemen’s income four times over the next three years, an increase of 67 percent.

However, in order to execute your order, Vladimir Vladimirovich, and to attain the goals we have set out for 2009, namely increasing servicemen’s real income one and a half times by 2009, then we need another 10 percent increase. The Defense Ministry and the power agencies have already made a corresponding proposal which is now before the government.

Lastly, there is still one more important topic. In order to restore the appeal of military service, we must do more than simply create comfortable conditions for our servicemen. We must act so that our fellow citizens respect the citizen in military apparel so that protecting the Fatherland once again receives the prestige and respect that it deserves.

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We are trying to do everything we can to exempt servicemen from tasks that do not correspond to their positions, to stabilize the officer personnel, and to increase order and discipline in the Armed Forces.

In particular, military departments are suggesting a five-year increase in the amount of time that officers should stay at their posts and the length of time that they hold a given rank will therefore be adjusted. In other words we will increase the amount of time they hold a given rank by at least a year. This will increase the number of experienced officers in the Armed Forces and also increase the status of military ranks. In turn, this will encourage military service.

We have also prepared proposals to improve the morale and material incentives for officers that work directly with personnel. For example, we are proposing to increase the status of various commanders and their assistants, so that they become masters and captains respectively, but with the obligation that they hold a post in which they have held a commanding position and been in charge of other personnel for a minimum of two to three years.

We are resolving the problems with respect to reforming the military police and transferring their functions to the Justice Ministry. In practice, this is where violations of human rights often occur and officers and servicemen are robbed of their professional skills. In addition to this in order to improve the health of personnel in the army and the navy and increase the quality of personnel, the Defense Ministry has prepared a number of draft projects which posit decreasing the time of obligatory military service, eliminating some delays that exist in this field, attracting more university graduates to professional military service and to officer positions, providing compensation for the money that students spend in the event that they are prematurely dismissed from military service, and abolishing certain institutes.

As you know the State Duma has already adopted a number of these draft projects and in three days these issues will be examined at the Federation Council session.

That is all that I wanted to say.

Vladimir Putin: Thank you very much.

Dear colleagues! As I have already said in my opening address, with much effort over the last five years we have accomplished concrete tasks and restored the basic conditions to ensure our state’s and our citizens’ survival. As a result we were largely able to create the fundamental, necessary conditions so that now we can do more than simply look to tomorrow; we can also improve upon the activities undertaken by all administrative institutions and employ the increasing financial, administrative and societal resources to ensure Russia’s long-term development. Along with this we are able to considerably lengthen the planning horizon for each Russian family and citizen.

Our meeting today is devoted to resolving these problems. The decisions that we make today will determine the main priorities for Russia’s development that were laid out in the 2006 Annual Address. The Security Council decisions will define the way in which these provisions will be implemented.

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