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President of Russia Dmitry Medvedev: Sergei Borisovich, let’s begin with the transport situation, the air transport situation. Unfortunately, this situation is very difficult, and this has been the case for some time now. The Government has taken a number of decisions and put in place a number of measures, but the situation remains critical in a number of cases. What steps does the Government plan to take now, and what decisions can we expect in this area?

Deputy Prime Minister Sergei Ivanov: Yes, Dmitry Anatolyevich, if I may, I will start with the case of Interavia. This is a small private company that has run into serious difficulties.

[Mr Ivanov went on to inform the President about delayed flights at Interavia, which flies in the Far East regions, and the measures being taken to address the situation].

Overall, the situation at Interavia, like the crisis at Air Union in August, where we had to step in and settle all the problems, is symptomatic of the difficult situation in the air transport industry at the moment.

We have seen solid growth in passenger traffic this year – up 16 percent, but aircraft fuel costs are very high, and so are costs for airport and air traffic control services, and this puts all the companies, including the big ones like Aeroflot and Rossia state aviation company in a difficult situation. They are practically operating at a loss. Since problems began on the inter-bank market with credits, air transport companies are able to buy fuel only on full up-front payment conditions.

The Transport and Finance Ministries have drafted a series of proposals to address these problems. I know the ministers responsible for the economy have already reported to you. The aim is to restore confidence and use state funds to make credits available for buying fuel and carrying out day-to-day activities, and also giving the air transport companies a six-month deferral on customs duties and VAT payments on foreign aircraft and spare parts for them, without the need to meet the collateral and payment demands currently demanded by creditors. The code has provisions for these kinds of measures. Everything is legal and possible. This will enable air transport companies to upgrade their fleets and make more efficient use of their resources.

I will not go into all the details, but the Government has already drafted these measures and a number of others. I ask for your support for these measures because they will help relieve the pressure the air transport companies face at the moment.

Dmitry Medvedev: I just spoke with the ministers responsible for the economy, and I am continuing this subject with you now. We do indeed need to a take a number of urgent measures, probably the measures you have named too, and we need to do this as quickly as we can in order to cut through this tangle of problems, otherwise it will never end.

As far as aircraft fuel prices go, the situation is simply awful. We recall that only a few months ago oil was at $140 a barrel, and now the price is two times lower, but this has had no impact on aircraft fuel prices.

Sergei Ivanov: No impact in our country.

Dmitry Medvedev: Yes, no impact in our country.

Sergei Ivanov: But it has had an impact elsewhere in the world.

Dmitry Medvedev: Yes, prices have changed all around the world. As far as I know, our companies trade on month-long contracts. But even if this is the case, it would still have been possible to adjust prices. What profit margin are they heading at if no change has taken place at all in this situation?

I therefore instruct the Government to get to the bottom of this situation, get the anti-monopoly regulators to see exactly what is happening here, what kind of collusion is going on, find out where the problems lie, and take decisive anti-monopoly regulatory action. This could involve setting the maximum fines the anti-monopoly regulation laws allow, and in the event that criminal activity comes to light, even starting criminal investigations. I will issue the relevant instructions to the law enforcement agencies. We can no longer tolerate this situation.

Sergei Ivanov: Thank you.

Dmitry Medvedev: Now let’s discuss another matter, a matter related to state defence procurement. What is the situation in this area with procurement orders this year, what problems do you see, and what steps do we need to take to ensure that everything goes according to plan?

Sergei Ivanov: Dmitry Anatolyevich, this year, for the first time, the Military Industrial Commission (MIC) has been in charge of planning the state defence procurement requirements for the next three years. Previously, it was the Economic Development Ministry that carried out this work, but now the MIC has taken over this responsibility. We have carried out two reviews of defence procurement spending requirements this year. First, by the beginning of August, we received all the additional budget requests from the Defence Ministry and other security agencies. These additional requests were linked to inflation, rising costs of the finished products, and also implementation of a number of Presidential and Government instructions issued following the approval of the State Arms Programme. As a result, state defence procurement expenditure has been increased by 60 billion roubles in 2009, 30 billion roubles in 2010, and 70 billion roubles in 2011.

We came back to the state defence procurement spending requirements again after the events in South Ossetia and began reviewing expenditure needs once more, this time taking additional budget requests from the security agencies for a total of 344 billion roubles. This breaks down roughly as follows: Another 60 billion roubles will be added next year to the money already approved for the Defence Ministry, and that is aside from the 20 billion roubles allocated for the development of two new military bases in South Ossetia and Abkhazia. Thus, the state defence procurement expenditure for 2009 will come to 1.3 trillion roubles, including capital investment and construction of housing for military servicemen. This is the aggregated total sum for 2009. I hope the State Duma will approve this sum tomorrow in the second reading. That is to say, I hope the state defence procurement programme will get its final approval.

Extra spending is being allocated mainly for the purchase of modern arms, above all aviation. Of course, other types of arms are being purchased too, but the emphasis is on aviation. We also took into account the situation in the defence industry, made sure that it is able to produce these goods in a short period of time. It is not enough just to place the orders. The goods have to be produced rapidly as well.

Looking at the state of the defence industry at the moment, I would say it is showing steady and stable growth. At the start of this year, for example, defence industry production almost doubled compared to 2000, and this in all different areas, except for ship-building. It is good to see that production is up not only of goods for the Armed Forces and the other security agencies, but also civilian use and dual-purpose goods. The defence industry enterprises posted an increase of 30 percent over these last years in production of goods for transport machine-building – wagons, cisterns, road-building equipment — and also for the fuel and energy sector, sophisticated high-technology equipment, including goods that can be used in civilian industrial sectors.

But problems with obtaining credits are beginning to affect the defence industry too. We have set up a working group in response to this situation. I have discussed the issues with Alexei Leonidovich [Kudrin, Minister of Finance] and with Elvira Sakhipzadovna [Nabiullina, Minister for Economic Development], and we have prepared concrete proposals aimed at ensuring credits are available for the defence industry. The problems arising are similar to those faced by the transport sector. I think we need to give priority support to the defence industry for a number of reasons. We cannot allow a payments crisis to arise in the sector, all the more so as we do have the means to prevent this.

Dmitry Medvedev: I just discussed this matter, and the Finance Minister said that he is keeping everything under his personal control. I want you to keep working on this as closely and attentively as possible and keep monitoring the developments in the sector. The fact that defence procurement expenditure has increased is entirely in accordance with the instructions I have issued, and we need to keep to these figures. They will be approved as part of budget expenditure. But as you rightly said, just making sure we have the funds is not enough. We need to convert this into a concrete portfolio of orders placed with our defence industry enterprises.

We need to work on all the different areas. You named some key points. We need to upgrade our Navy too, reequip them. I was recently at naval training exercises. This is one of the segments of our defence industry that receives the least funding, and there are problems with production in the sector, but we also need to invest money there, despite the current financial difficulties in the world. I hope therefore that this increase in expenditure will revive production at many enterprises in the defence industry. Keep this under your control and report to me regularly.

Thank you.