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President of Russia Dmitry Medvedev: Mr Kudrin, I would like you to tell me about your general approach in putting together the 2010–2012 budgets.

Please tell me about how this work is progressing, where you are having difficulties related to the financial crisis and other economic problems, and your general outlook.

Alexei Kudrin: We are currently finalising the key parameters of the budget for the next three years, 2010 through 2012. This week, we will be having a meeting of the Budgetary Commission and a Government session to address these issues.

At the Budgetary Commission meeting, the ministers will have a thorough discussion regarding all the details of the budget’s key parameters. The goal at that point is to determine the amount of national spending we can allow, and the amount of deficit we can permit in 2010, 2011, and 2012, based on the financial markets’ opportunities and our reserves, in order to provide stable funding for all our social commitments and state guarantees, to maintain our defence capacity, security, and development in education, health, culture, and the social sector.

During our most recent meetings (including the meeting held last Friday, where we discussed several issues, particularly in regard to the pension system and all the new expenditures it would entail), we got the parameters that forecast a budget deficit of: 7.5 percent of GDP in 2010, 4.3 percent of GDP in 2011, and 3 percent of GDP in 2012.

Thus, we are remaining within the parameters of the Presidential Budget Message on gradually balancing the budget and arriving at a deficit that can be covered by regular loans even if the economic crisis is not over yet, but will nevertheless allow us to fulfil our obligations and independently balance our liabilities.

At the same time, we are taking into account the fact that 2009 is creating certain difficulties. We have assessed the drop in GDP this year to be 8.5 percent, which is greater than we had planned on in February, when we were planning and adjusting the budget, even taking into account the budget expenditure optimisation. Furthermore, in the forecast we used higher oil prices – USD 54 per barrel for this year, USD 55 per barrel next year, and somewhat higher in subsequent years.

This year’s budget parameters, which I just spoke about, had the following results. Taking into account the drop in GDP, revenues unrelated to oil and gas will fall by 641 billion, according to our estimates. Oil and gas revenues, taking into account an increase in prices and our forecast, are estimated to grow by 488 billion; this means that in some areas, we are seeing declines, while in others, we are seeing growth.

At the moment, our new estimates predict that we will have an overall budget deficit, although we are hoping that perhaps the second half of the year will turn out better than we have predicted. Thus, the budget differs in that it makes a conservative assessment of budgetary development, in order to allow stable fulfilment of all the obligations taken on by the government.

In the years ahead, we will continue fulfilling all social commitments, in spite of the difficulties posed by the crisis and in spite of the fact that revenues will be down by about 30 percent in 2009, compared to last year. In nominal terms, in 2010, things will remain at about the same level as in 2009.

Naturally, the fact that we have cut down certain taxes also has a certain effect. We have reduced income tax, we have increased bonus depreciation to 30 percent, and we have passed some of our tax income on to our federal constituent entities.

This year, we are using additional sources of revenue, for example, the centralisation of customs revenue, and return to the budget of revenues, and resources from a number of corporations (later, we will return them to those corporations). In 2010, we will not have these same special supplements, so revenues will not increase in comparison to 2009, and will most likely remain at this year’s level.

In addition, we will need to do a certain amount of work to optimise expenditures, and thus, we are looking at non-essential programmes and goals that can be postponed. As far as investment programmes are concerned, for example, we are working on the principle that all the projects planned to be completed in 2010 should be completed within these deadlines – this is not an area where we are trying to save money. On the contrary, in some cases, we are even channelling increased funding toward these goals when needed, due to inflation or other causes, and we are therefore carrying out programmes that will produce their final results in 2010. Meanwhile, we are cutting the carryover projects’ programmes by 30 to 50 percent – we are not eliminating these programmes, but simply financing them at a slower rate. Thus, I can say that our defence order will not be lower than in 2009.

Many programmes – the national projects, for example – are mostly maintaining the same level of financing as earlier; some are even receiving additional funding, in cases where we have introduced corresponding measures.

Agricultural support will also remain the same as before. Financing of road development will be slightly lower, and the financing of all transportation-related facilities will decrease somewhat in comparison to 2009, while financing for road construction will remain the same as this year.

Thus, in all these key areas, we have been able to determine our priorities. This will now be the subject of a detailed discussion within the ministries – we will be discussing every objective, every element in every programme, and by September, we will put together discrepancy reports with the ministries. In other words, we will have a second phase of consideration, which will allow us to really bring out all the key activities within the framework of our designated priorities, to be used in 2010, 2011, and 2012.

We are proposing that three new federal target programmes be passed. One of them addresses a priority outlined by your Commission for Modernisation [and Technological Development] of Russia’s Economy: the safe and effective development of sophisticated nuclear technology for civilian use, and the introduction of new resource-saving technologies in the energy sector.

The second is a programme to develop digital broadcasting. Provisions in the budget estimates for this new programme have already been made; it will cost over 10 billion rubles a year. And the third programme is linked to the priority you outlined to finance the development of Ingushetia. We have analysed this issue, and in the first stages, the programme will involve modest funding, but these funds will nevertheless have a palpable effect on Ingushetia’s development (one and a half billion in the first year, and slightly more thereafter), and its key social and infrastructure facilities. Nonetheless, the key programmes will remain.

Naturally, we are giving particular attention to the development of public health, and a large part of the investment programme is devoted first and foremost to public health, constructing new facilities, including high-tech facilities, and equipping them. Programmes addressing vascular diseases, tuberculosis, and pharmacological support are also being given particular attention, as are programmes for developing innovative universities.

Thus, we hope that the priorities are clearly outlined, and it is now our goal to work all of these issues out in detail by mid-September, and present a final draft bill to the State Duma by October 1.

Dmitry Medvedev: I would like for the Cabinet to continue its work as you’ve described it, keeping in mind the current financial and economic situation. As you rightly mentioned, the budget must be conservative.

This is one of the government’s sacred duties; we must create a realistic budget, rather than build castles in the air. Even if we have higher revenues than expected, we will certainly find places to spend that money – we will not face any problems in distributing additional revenues.

As far as our priorities are concerned, these are the priorities that I outlined in the Budget Message, in many instructions, and during meetings that I held with the Cabinet. I think that we have all the possibilities and resources to proceed with these priorities.

What are the priorities? First of all, they include social support for our citizens, resolving social problems, implementing social programmes, and most importantly, honouring the social commitments that the government has taken on and which we must finance fully.

Second, our priorities include related issues in modernising the pension system and fulfilling our pension-related obligations. It is true that we met last Friday; everything that we agreed on at the meeting must be carried out.

Third, the economic development. Here, clearly, we must conform to the current financial situation and the state of affairs in the global economy, but at the same time, we must move forward with the priorities we outlined earlier: Russia’s technical modernisation, an innovative economy, and the development of various clusters in this innovative economy while concentrating our efforts in the areas where we already have solid reserves and in areas that we consider to be absolutely necessary and promising in Russia’s development for years to come. I am referring, among other things, to nuclear energy, which you mentioned, and the development of nuclear technology as high technologies in general, since this is a field where we have certain advantages over other nations. This is just one example, but it is a very important one. Thus, the technological modernisation of the national economy and the socio-economic complex is another important direction.

And clearly, we must maintain our national security at an adequate level. We will therefore continue fulfilling the government defence order and financing programmes for modernising the Russian Federation’s Armed Forces, including a social component, which consists of providing new housing and increasing monetary compensation at the rates that we have agreed on for permanent combat readiness units and other equated units, as well as many other aspects of the Armed Forces’ modernisation. And this must be reflected in the proposed federal budget for next year.

I would like you to continue this work and report back to me regularly. We will meet again to discuss this matter after you enter the next stage in budget coordination.