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President Vladimir Putin: Good afternoon dear colleagues, dear Council members!

Today in Zelenograd, – and I think that many of you have already been here – I have been here before and got to know the work of Mikron company yet again today. Modern, innovative manufacturing takes place here. I do not hide the fact that this was pleasant to see. I have often seen similar such endeavours abroad and today was convinced that finally Russia has also started to do things that are at the forefront of the world market, are highly capital intensive, demand a complex organisation of the workplace, and require highly qualified personnel. And all this is present here, all this is expanding effectively, all of this works.

Our visiting session is devoted to precisely the issues we were able to observe and become familiar with here today. In practice, I am referring to integrating the opportunities available in education, science and business in order to provide the national economy with the technical equipment it requires.

Let me remind you that this year’s Address [to the Federal Assembly] developed problems related to innovative development in detail, as well as those related to the long overdue reequipment of Russian industry. The situation was and remains acute and this is despite the fact that much has already been done.

Unfortunately, the level of innovative activity that Russian companies engage in leaves much to be desired. On average companies spend less than one percent of production costs on research and development.

Significant budgetary resources will continue to be allocated to research, development and science as a whole, whereas in the majority of states the situation is the direct opposite. In these states the private sector plays the so-called first violin in financing research.

Domestic companies’ expenditures for innovation are also revealing. In Russia, first and foremost, companies are acquiring cars and equipment – this makes up 60 percent of expenditures – rather than technology. And they are making these acquisitions based on the so-called present sufficiency principle, one that applies in the short-term. As a rule they purchase obsolete equipment, technology from older generations. Less than two percent of financial resources are spent on new technology, licenses and patents. This has no relation to Zelenograd and what I just saw here. Here, thank God, the opposite is true. Here, either there is virtually no state participation or else there are very few state orders and everything is provided for by the company’s own resources. But I am presently referring to the general picture that we see in our economy.

In connection with this I would like to point out an important moment. Today the economic situation in Russia is substantially different from what it was several years ago. We now have strong competitive companies and financial groups that operate at the global level. Russia is one of the world’s leaders with respect to the volume of investments.

We are studying a whole number of major infrastructure and investment projects. We are implementing programmes designed to reequip companies with technological resources. And these programmes are, first and foremost, in electrical energy, the oil and gas sector, in transport, and in the military industrial complex

I believe the situation requires that we create all possible political, economic and administrative conditions to allow our enormous innovative and investment potential to eventually be converted into the technological modernisation of our domestic industry.

Which organisational and legal measures should be adopted to facilitate the massive increase of innovation? And what is still hindering us from achieving these truly breakthrough changes?

I think it would be wrong to accuse our business community of conservatism and short-sightedness, and the same applies to complaining about the faults of a domestic science.

The so-called innovative mentality is still not present enough in the entrepreneurial environment – we definitely need to acknowledge this. But, on the other side, sometimes even companies with the very biggest aspirations to engage in innovative business practices have nowhere to go with their money. There are no established centres for providing scientific information, and there is also no comprehensive system for organising applied research or transfer of technology.

Along with this the tax system does not stimulate production with high-added cost. Tax incentives for research and development practically do not exist. It is true that there are proposals in this respect, that something is before the Duma, and new mechanisms in the high-technology zones with a privileged tax regime are taking root. Meanwhile, this has not yet developed to its full capacity.

It is obvious that we are dealing with a systematic problem, with a gap in a uniform innovative cycle – from preparing personnel that can engage in research activities to introducing new technologies into the production process. Science, education and industry are, to a large degree, developing separately in Russia. And this separateness results in less competitive potential in each of these spheres.

In Russia representatives from the country’s leading universities spoke a great deal about the need to have several major universities get a special status. There are different opinions within the government on this topic. some are for and some against. In the meantime, these decisions are being made in several developed countries. But one of the criteria is that a given university participates in research activites and is part of a so-called cluster. In other words, the old brand name, simply being a well-known institution, is not enough.

I would like to point out that creating the adequate legal, economic and tax mechanisms to assist the development of innovative infrastructure in every possible way is necessary to motivate business to engage in innovation.

It is well known that the world’s developed countries carry out research in university centres and in so-called design laboratories that have been specially created to accomplish tasks related to technological breakthrough. And in this instance it is not only business and the state that work together – science and education cooperate as well.

I believe that we must seriously revise our system of financing and organising research. For example, the share of Russian universities participating in the total amount of research presently being carried out in Russia does not exceed four percent.

We require large-scale changes in the way we organise our expertise and allocate grants; we need to realistically evaluate our current personnel’s potential.

And we all know why this happened. Why? Yuri Sergeevich [Osipov] and his colleagues at the Russian Academy know. The state concentrated resources in academy and in academic institutes that worked mainly in the defense sector, and the defense industry didn’t need serial production – they didn’t produce a lot, not in big quantities. The collegues that showed me around the [Mikron] company told me this just now. I say to them: ‘defense industry will consume everything’ – ‘No, defense will only take a bit of this and a bit of that’. We need serial production. And for this we need our economy to show demand for this product. We need to penetrate markets and develop the domestic market.

We need effective mechanisms so that the private and public sectors can both finance new laboratories and research centres that are engaged in defining the key directions for technological development.

Experts believe that tax incentives for participants in innovative business activities are necessary. And probably we should not limit ourselves to only talking about separate privileges for research and development. We need the tax policy as a whole to include various policies that stimulate innovative activities.

I am referring to a system for collecting indirect taxes. Just now I talked to the Finance Minister about this issue and these problems are being examined, but these measures must be applied more effectively.

We need to continue reforming the unified social tax. These issues must be developed in detail and brought to completion in the near future.

I shall emphasise that here we require absolutely transparent models and I exclude any so-called grey schemes that amount to tax evasion under the cover of innovative activity.

And further on. Venture funds have still not been sufficiently developed. And here we need to define the criteria that will regulate the government’s participation in high-risk and innovative projects. However, in the long-term, venture funds should mainly be formed by private investments.

I would ask representatives of the business community to talk in more detail about just what is hindering the establishment of modern financial and economic structures that would promote an innovative environment.

And, finally, there is still one more problem that we have already spoken about many times, and that is the quality and content of education. A large gulf between the institutes of higher education, companies, and scientific organisations persists. It even became problematic to engage in normal industrial production.

Along with this the business community only gives weak signals to the educational environment and is not taking initiative to update the professional educational standards in an innovative way.

I shall emphasize that the curricula and methods of instruction, classroom techniques as well as the material base of educational institutions must fully correspond to the demands of an innovative economy and its development prospects. And this represents a huge field for teamwork between the state, business, academy and educational community.

Dear colleagues!

Today we must exchange opinions on certain problems. And I expect that following our discussion we will make serious and concrete decisions.

Thank you for your attention.