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Russian President Vladimir Putin: Good afternoon, Alexei Borisovich! You have met with our colleagues from Central Asia. What have you agreed upon?

chairman of Gazprom'S Menegement Commitee Alexei Miller: There was a meeting of the heads of gas companies from Turkmenistan, Uzbekistan and Kazakhstan. Our colleagues raised the question of increasing the price of Central Asian gas to European levels and of the sale of gas from 1 January 2009 in accordance with the pricing formula that is pegged to European prices.

Vladimir Putin: In accordance with the pricing formula that is pegged to European prices, or a European formula for calculating the price?

Alexei Miller: It is pegged to the price of gas in Europe and would be determined on the same principles as pricing in Europe.

Vladimir Putin: What does that mean?

Alexei Miller: It means that the price of gas bought by Gazprom will increase significantly. This puts the company in the difficult situation because Gazprom buys gas for itself as well as for sale in foreign markets.

Thus we sympathise with those in this situation, because we know how profoundly affected consumers have been by the price of hydrocarbons. In particular, with regard to the prices of Russian gas in Europe, in their projections for 2008 Gazprom estimated the price would be 310 dollars per thousand cubic meters. Now the price in Europe has already surpassed 370 dollars. And we believe that the average price for gas in 2008 could be 378 dollars, and may even reach the 400 dollar mark.

Vladimir Putin: Is this linked to the low dollar?

Alexei Miller: It is, but the reasons for changes in gas prices go well beyond the drop in the value of the dollar. On the other hand, this has not affected the growing demand for gas in Europe. In 2007, Gazprom supplied EU countries with 151 billion cubic meters of gas; in 2008, we plan to deliver 157 billion. We have seen sustained growth in demand.

And, of course, the North Stream and South Stream gas pipeline projects are particularly relevant here. The capacity of the two branches of North Stream is 55 billion cubic meters of gas, for South Stream, 30 billion. Our core consumers are supporting these projects.

Germany, our number one buyer in Europe, has actively supported the North Stream project at the government level. Italy has actively supported the South Stream project, and it is our second largest market. In the medium term, Gazprom will deliver additional volumes of gas to Europe via these pipelines.

Vladimir Putin: You talked about cooperation with our colleagues in Asia. How is work going with our colleagues on our western border? I mean our major customers from the CIS countries. How does the position of our colleagues from Turkmenistan, Uzbekistan and Kazakhstan affect their position?

Alexei Miller: With regard to our traditional partners in Western Europe, the supply of gas is based on long-term contracts. Many of these contracts go beyond 2030. We have predictable, intelligible arrangements with our traditional European consumers.

With respect to the supply in the former Soviet republics, we are only now moving to market principles for work and pricing. In the Baltic countries, we have already moved to European principles of pricing. In Belarus, Moldova, and Armenia and other republics of the former USSR, particularly Ukraine, we are in the process of establishing market relations.

Ukraine is one of the largest importers of gas and has been traditionally a consumer of Central Asian gas. And we believe that the issue of prices for consumers of Central Asian gas is raised in good time. In the projections and budgeting for next year consumers must take into account the actual price on the world and European gas markets.

Vladimir Putin: I have two questions. First: is the position of our Central Asian partners final? Second: When do you intend to start negotiations with customers from the CIS countries?

Alexei Miller: The position of our Central Asian partners is final and not subject to revision. This was made clear at the time of our negotiations.

With our consumers in the CIS countries, we will begin negotiations immediately, because the transition to market pricing will require some rather serious dialogue.

Vladimir Putin: Let's talk about plans to supply gas to domestic consumers in Russia and for the gasification of the Russian regions.

Alexei Miller: The volume of commercial gas that Gazprom supplies to the domestic market in Russia is a little more than 300 billion cubic meters. The rapid economic development of the country and the inflow of foreign capital into the real sector of the economy (especially during last year) have affected growth in energy needs. It is clear that economic growth means increased demand for energy.

As requested by the government, Gazprom has established contracts with Russian consumers. Mid-term contracts reflect output from 1 January 2011 of the supply of gas to Russian consumers according to European principles of pricing. But it is understood that the price of gas in Russia in any case will be 40 per cent lower than European prices, because the major cost component of gas supplies is transportation.

Vladimir Putin: Deliveries for export…

Alexei Miller: Deliveries for export will always be more expensive, and Russian consumers will always be in a more comfortable environment: gas will always be a competitive advantage for Russia.

By contracting for five years, we expected that the increase in gas prices for industrial consumers would play a significant role in energy conservation. But studies show that this factor will come into play only after 2012–2013.

Now the inflow of capital into the real economy is such that the demand for energy is outstripping even those projections that we made just one year ago. As a result, for the next five years Gazprom will adjust the long-term balance of gas since the growth of demand in the domestic market is higher than in the foreign market. Therefore, priority will now be given to the domestic market. There is a growing demand for gas in the cement industry, the production of construction materials, agricultural chemistry and gas chemistry, which means our priorities will be more in the domestic market in Russia.

Vladimir Putin: Gasification…

Alexei Miller: Growth in the gas supply in Russia in 2008 will also increase as compared to 2007. In 2008, we plan to set aside 23 billion rubles for this.

Vladimir Putin: How much was it in 2007?

Alexei Miller: 21 billion. In the last two and a half years we have invested 43 billion rubles in increasing the gas supply. We will maintain the momentum of gasification in the Russian regions, taking into account the substantial geographical unevenness of gas supply in the domestic market.

Now we are paying attention to those regions where gas has not given the proper impetus to the development of the economy and social sphere, in particular, the regions of the Far East and Eastern Siberia. Given the social and industrial developments and the APEC summit in 2012 in Vladivostok, our priorities for gasification will be focused in those regions.

We haven't forgotten the European teritotry. Here we want to highlight the North-West region, where gasification will be linked with the development of Shtokman gas and condensate field. Another priority is the Krasnodar Region in light of the Olympics in 2014 in Sochi.