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President of Russia Dmitry Medvedev: Colleagues!

Today, we will address the clarification of parameters for this year’s federal budget and priority budget expenditures which, of course, are most important for us right now.

You may recall that the main approaches to resolving this issue were determined at the meeting that took place on February 9 of this year. At that meeting, we agreed that several ministries and departments, along with the Ministry of Finance, will develop them in more detail, and the Cabinet will determine its overall position on this issue. That is what we will talk about again today.

What is currently most important for us? That which we have repeatedly discussed: the fulfilment of social obligations taken on by the government, even under the circumstance of lower budget revenues. In this regard, we must determine the types of the expenditures that will allow us to more effectively implement measures for supporting the financial system and real production. Meetings to discuss this topic have been held multiple times with the participation of the President, and on a Cabinet level; we are once again discussing this issue in order to have a consolidated position. And, of course, overall, such measures must create conditions for the stable development of our country in the medium term.

In a number of areas, the existing expenditures should not be decreased, and should perhaps even be augmented. We must determine, in a clear and reasoned way, where the budget expenditures will have the maximum effect in lessening existing problems, and we must make some kind of deposits, stocks for the future, meaning ones that will promote, in particular, maximum growth of internal demand for Russian-produced goods.

On February 20, at a special extended session of the State Council Presidium in Irkutsk, it was determined that we shall create a package of anti-crisis measures that must be not only implemented by the Cabinet but complemented as well.

What, in my view, is particularly important today? We must activate work in the residential construction sphere, stimulate the acquisition of Russian-made equipment, and reorganise companies in the military-industrial complex, while at the same time fulfilling all obligations in financing government orders. We must also create new stimuli for small and medium businesses. By the way, speaking of financing residential construction and infrastructure projects: despite the difficulty of this topic, I would like for the Cabinet to think about it and pay attention to it. I have just returned from a state visit, and for many European governments, this is their number one priority. They all spoke about the necessity of investing in housing and infrastructure projects, including for the purpose of maintaining jobs. We must also think about resource provision, and the organizational mechanisms for how we will proceed.

In this regard, it seems right to me that we should work with a cleaner scheme in the future, one which is clear not only to us but to the entire population of Russia. I suggest preparing some relevant proposals, and discussing them with the deputies of our Parliament, the State Duma. Ultimately, I envision this being a consolidated document which includes decisions made by the State Duma that approve a certain operational sequence and the implementation of those decisions in the form of amendments to the Law on the Federal Budget. This is the kind of plan of action, supported by a consolidated position on the part of all deputies, that I feel is very important today.

We must not be shy about our actions; on the contrary, we must work very hard to explain them. Our citizens must understand the activities of our Cabinet. I feel that this is very important.

Now, we will talk about our main activities in regard to social obligations. Some time ago, I was informed that in many regions, employment programs were not being carried out; that is, regional programs for employment co-financing were not formalised, I even specifically named several regions. I would like to find out whether the situation there has been rectified. If not, then we must take appropriate actions. This is the first issue.

Second. I would like for [Deputy Prime Minister] Alexander Dmitrievich Zhukov to also brief me on the state of affairs in the indexation of welfare benefits and pensions. I would also like to remind you that in one of my first decrees, I made a special commitment to provide apartments to veterans of the Great Patriotic War. This brought up a range of technical problems, including the volume of the housing to be provided. Not long ago, we agreed at one of our out-of-town meetings – with the “Victory” Organising Committee – that we will make the necessary changes. I would like to know what has been done on this issue.

Another very complicated and important topic is medication. Please tell me how things stand on this issue, and generally brief me on the situation regarding the financing of social obligations.

And then I would like for [Minister of Finance] Alexey Leonidovich Kudrin to talk about today’s overall situation in the financial and economic sphere.

Alexander Dmitrievich, please go ahead.

Deputy Prime Minister Alexander Zhukov: Dear Dmitry Anatolyevich!

Indeed, financing social obligations is a clear priority in light of the amendments that have been prepared for the federal budget.

But in this respect I want to say that perhaps the most important thing is the indexation of social benefits, where apparently we have to do more than anticipated. This is connected to the fact that in the draft budget inflation was projected at 8.5 percent, and now it is likely to be higher. We will talk about this more later. We now forecast inflation at around 13 percent. And social benefits will be indexed to take this into account, because the poorest and least protected citizens should not suffer due to higher inflation than we predicted.

(Further on Alexander Zhukov talked about indexing certain types of social benefits, increasing monthly payments to certain categories of people, providing housing for veterans of the Great Patriotic War and increasing pensions to compensate for inflation.)

As you rightly said at the outset, Government Cabinet policy is focused on the labour market. As the number of people registered as unemployed increases, the Cabinet has allocated an additional 43,7 billion roubles [about 1,2 billion dollars] in the form of subsidies for regional budgets that will allow regions to implement additional measures to defuse tensions in the labour market. These funds will be used to finance events to provide workers with professional training, create temporary jobs in public works, help organise the relocation of those who have lost their jobs, and provide support for small businesses. All the regions of the Russian Federation have already developed their own programmes. A governmental interdepartmental group has already approved a total of 73 regional programmes. I think that in a week we will finish this work with all the regions.

Dmitry Medvedev: You can tell them that it is their responsibility to bring this work to completion. I myself have mentioned this specifically. It is good that the signal has been received. But the bad news is that until the President himself says something, a number of our esteemed colleagues do not bother to get the ball rolling. For that reason I would like you to say that this was the last warning.

Alexander Zhukov: Dmitry Anatolyevich, another important point is that all regions should promptly adopt amendments to their budgets, because the money we are allocating from the federal budget requires co-financing.

Dmitry Medvedev: I understand Alexander Dmitrievich. What problems are there? What is preventing them from quickly implementing these measures?

Alexander Zhukov: Nothing is preventing them.

Dmitry Medvedev: I think so too. They simply need to meet and take all necessary decisions, rather than hang out somewhere abroad enjoying a collective holiday. Let them meet and comply with their obligations as provided for by regional legislation.

Alexander Zhukov: In addition, to conclude on the theme of employment, the Cabinet has prepared a draft ordinance to increase funding by almost 34 billion roubles [about 1 billion dollars]. But this is connected with providing grants to the regions in the event of a higher number of registered unemployed than we have anticipated.

Therefore, the budgetary amendments that I mentioned show that in practice everything necessary has been set up so that the social obligations of the state will be fulfilled. In addition we are envisioning a reserve (amendment to the budget) in excess of 100 billion roubles [about 2,8 billion dollars.] This reserve will be used, first of all, in case real inflation is higher than we currently anticipate. It will also be used if obligatory medical insurance foundations in the regions receive smaller incomes than anticipated, in connection with the reduction of certain types of taxes, or if we require additional money to purchase drugs for preferential categories of citizens (because changes in the exchange rate have made all imports, including medicine, more expensive). But this reserve will enable all programmes to go ahead.

Dmitry Medvedev: We will have another talk about spending these reserve funds, including on medicine. Thank you.

Alexei Leonidovich, please go ahead.

Deputy Prime Minister and Finance Minister Alexei Kudrin: Dear Dmitry Anatolyevich!

The economic departments in the Cabinet have analysed all the major factors influencing the development of Russia's economy this year. We also evaluated the impact of the global financial crisis and recent data on the growth (or even decline) of the economies of major countries that have previously been engines of growth. Accordingly, we estimate that this year Russia's GDP will decline by 2.2 percent. We estimate inflation at 13 or 14 percent. Accordingly, this will reduce growth in industry and investments. Here we are within the framework of objective trends. However, anti-crisis measures should mitigate and counteract some of these negative trends.

The Cabinet has examined the proposals of ministries and departments at various meetings with the regions of the Russian Federation, measures that need to first and foremost be taken to counteract the crisis, as well as zones of risk; I will name just a few of them. In the near future much of our financial support should be designed to support social spending, especially in the pension system: more than 370 billion roubles [about 10.3 billion dollars] is required to top-up the loss of income due decreases in wages or in the growth rate of wages. Therefore we will not be able to provide the expected incomes for the pension system. The budget is ready to compensate for these declining incomes.

Second. According to our estimates, the subjects of the Russian Federation will receive about a trillion roubles [approximately 27.7 billion dollars] less income than they did last year. We need to support the regions from the federal budget and we plan to allocate about 300 billion roubles [about 8,3 billion dollars] to do so. This is necessary to ensure the viability and the normal operation of the entire fiscal system, including education, health care and social benefits in the regions of the Russian Federation.

We need to first and foremost help the leading sectors of the economy, primarily agriculture, the defence industry, small businesses, exporters and aviation so that their activities are not interrupted and that there is no disruption in providing air transportation. Support for rail transport is also linked to the fact that incomes from rail haulage have significantly decreased. We are now planning more than 350 billion roubles [about 9.7 billion dollars] for this purpose. The details have been worked out and this is currently being implemented by ministries and departments.

We also foresee that difficulties in the real sector will result in a number of credit defaults that will affect banks. But banks need to maintain their solvency, stability and comply with all their functions regarding payments, calculations and savings. And to ensure that the banking system remains stable in these difficult months we suggest spending about 300 billion [about 8.3 billion dollars] for its capitalization from the federal budget and a further 255 billion [about 7 billion dollars] on subordinated loans. These loans will be equivalent to the capital of banks and therefore ensure the sustainability of the entire banking system.

Today the G20 is paying attention to these issues, as is the meeting of G8 finance ministers. The latest statement of the Chairman of the U.S. Federal Reserve reads: if we can stabilise the financial system then the crisis will be over sooner. We need to take this into account in our work: we also consider this to be the case and to be absolutely necessary; this has to be done.

In addition we foresee a number of expenses connected with the indexation of social benefits, employment creation and cooperation with the subjects of the Russian Federation in these areas. In total we can say that these measures will amount to about 1.5 trillion roubles [about 41.6 billion dollars.] We must therefore take them into consideration in the budget. Of course we understand all of this. We considered these implications during meetings with the Prime Minister.

In addition to considering how much the federal government can afford to spend, we must bear in mind that our expenses and the use of the Reserve Fund for these purposes may have an impact on macroeconomic trends and some other trends regarding inflation and the exchange rate. Therefore our joint assessment made together with the Central Bank is that, in light of the actions and operations of the National Prosperity Fund to support the banking system, we should limit the budget deficit to 8 percent of GDP at this time; this will limit the effects for other macroeconomic indicators and risks, and not result in additional macroeconomic risks.

In light of this we have had to reallocate funds from the federal budget from less important areas, and forego many new construction projects and new sites that we wanted to start developing this year, and put them towards anti-crisis measures which will be more effective and more necessary in current circumstances.

In light of consultations with other ministries we expect to submit certain parameters by 16 March to the Cabinet of the Russian Federation, to consider them at a meeting of the Cabinet on 19 March, and then send them on to the State Duma [the lower house of Parliament] by the end of March. At the same time we need to make changes to the Budget Code, because the current Code imposes restrictions on the budget deficit that we are allowed to run. It basically assumes that the Reserve Fund must be used to compensate for the reduction in oil and gas revenues. But now in effect the Reserve Fund has to assume the burden imposed by other reductions in income caused by the impact of the global financial crisis, the burden associated with reductions in the funds available for the pension system and other non-budgetary state funds, and, indeed, support for the regions of the Russian Federation. That is, we are required to draw on the Reserve Fund in all the areas I have mentioned. Therefore, we need to change the rules of the Budget Code, which limit the use of the Reserve Fund, and to remove the restrictions imposed on the budget deficit for four years, as we have previously agreed and asked you to examine. After this we can go back to the rigid standards we set for the budget deficit for our country, as mandated earlier in the Budget Code.

We will put forward the proposals for the Budget Code to the State Duma by next week, where I hope they will be taken up by the end of March. Thus by the end of March we will have the opportunity to submit to the Duma the draft federal budget on the basis of new indicators that take into account the possibility of increasing the budget deficit.

Dmitry Medvedev: Thank you.

And there are three more things to conclude (the open part of our meeting, of course). You were talking about the stabilisation of the financial system, of the world's financial system. Unfortunately we know that this does not depend on us alone, and that is to put it mildly. First and foremost of course this depends on consolidated action by major financial players, both nations and major financial institutions. Russia has put together its proposals and sent them off. These proposals have been prepared by the Cabinet and the Executive Office. Now they are in the hands of all the countries that will be meeting in London on 2 April. I hope that we can work with colleagues at the cabinet level and with other heads of state to continue these deliberations because resolving the problem that we have been discussing, namely stabilising the global financial situation, depends on what we achieve in London.

Alexei Leonidovich talked about spending — the partial increase in a number of sectors and reallocation. All this must be done. Once again, I would like to focus on financing residential construction, support for building infrastructure and other topics related to public works. The whole world is working on these issues and we don't have to suppose that we can avoid addressing them. Naturally we need to think about how to work within the realm of possibilities currently available, but we do need to think about how we can resolve them.

And finally there are the amendments to the Law on the Federal Budget, the ones that the Minister of Finance talked about, and to the Budget Code. I believe that we can put these into a single document that would reflect the Cabinet's plans to combat the crisis. To give this document additional legitimacy, it could then be submitted to the State Duma, together with those laws. In doing so, we will arrive at a broad consensus on the issues of crisis management. I think that is quite important too. I would request the Cabinet to address this.