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State Council meeting on improving investment appeal of Russian regions

December 27, 2017, The Kremlin, Moscow

Vladimir Putin is chairing a State Council meeting on improving investment appeal of the Russian regions in the Kremlin.

Head of the State Council Working Group and Novgorod Region Governor Andrei Nikitin will deliver the keynote speech.

The meeting participants will discuss concrete proposals for improving the investment climate. The results of implementing targeted models for simplifying business procedures will be reviewed separately.

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Transcript of State Council meeting on the Investment Appeal of the Russian Regions as a Prerequisite for Economic Growth in the Russian Federation

President of Russia Vladimir Putin: Good afternoon, colleagues,

We are holding this year’s final State Council meeting. Of course, I wish you all the very best for the festive season, and would like to thank you all for your work in the outgoing year, and wish you every success in the new year.

As is customary, we sum up the results at the close of the year. Today, we will discuss what we managed to accomplish and what remains to be done in the key area such as improving the investment appeal of the Russian regions, creating a comfortable environment for opening and running businesses, and launching new production sites. This means creating new jobs, increasing real wages and personal incomes, which is undoubtedly our top priority.

I would like to say that enhancing investment and business activity is an economic task designed to create conditions for economic growth and for strengthening the regions’ taxable revenue base. But it is also a political task, because taxes provide resources and increase reserves for the development of our healthcare, education and the social sphere in general, as well as for implementing improvement, urban development and environmental projects.

It should be said that investment trends largely depend on the regional management teams. Over the past three years, investment has decreased in the country by 7.9 percent due to the crisis. At the same time, 21 regions have reported an increase of investment in fixed assets. Investment in the best 10 regions has grown by nearly 40 percent in real terms. These are the Amur, Arkhangelsk, Vologda, Kaliningrad, Leningrad, Murmansk and Tula regions, as well as the republics of Yakutia and Kabardino-Balkaria and the Yamal-Nenets Autonomous Area.

It takes a systemic approach to improve the business climate. I consider it to be exceptionally important that we applied this approach in the past few years. The efforts taken by our companies, the federal and regional authorities and the Agency for Strategic Initiatives (ASI) have been brought together within the framework of a completely new mechanism.

I am referring to the National Entrepreneurial Initiative, which has allowed us to simplify the federal legal framework by eliminating over 50 excessive administrative procedures which were not essential for doing business but were a considerable burden on it. Companies spent over a year on completing all these procedures instead of doing business.

According to ASI, the National Entrepreneurial Initiative has helped us eliminate 50 excessive procedures that took a total of 435 days to complete. Specifically, the time required to register property has decreased from 43 to 13 days between 2012 and 2017 and the time needed to register a company from 30 to 10 days. The process of getting an electricity connection, which was a major headache for the national economy, has decreased from 281 to 83 days. The time associated with the preparation of papers and the process of moving export goods across the border has been cut from 139 to 97 hours between 2015 and 2017.

Of course, it is necessary to continue improving the legislation. It should support business initiatives and streamline entrepreneurs’ day-to-day operations.

Let me emphasise that it is important not only to control and monitor compliance with legislative provisions but also to find the most successful practices of improving the business climate. Its efficiency should be assessed by business itself. At any rate, we should proceed from what is happening in real life. This is where we get a real picture.

This is the approach that underlies the National Investment Climate Rating. Its key task is to promote development and facilitate the dissemination of the best experience on boosting the investment appeal.

We have a group of regions that set high standards in the investment area. Let me repeat, I have mentioned those that have been the most successful but there are more of them as well. This is Tatarstan, Chuvashia and the Tula, Kaluga, Tyumen and Ulyanovsk regions and the Krasnodar Territory. It is important to point out that the Far Eastern regions, such as the Khabarovsk Territory and the Amur Region have substantially strengthened their positions this year.

Let me add that this rating is yet another step in the direction of increasing the transparency of the government administration as well as its responsibility to the society and citizens. It has already become a good impetus for the regions to achieve some progress. They must work on a daily basis to increase their investment appeal and managerial competitiveness.

I would like to ask the Agency for Strategic Initiatives to continue this work in cooperation with the Government and business associations, to develop and improve the National Investment Climate Rating.

Last January we approved 12 target models on the basis of the most successful regional investment experience. These are instructions on making business easier with clear-cut instructions on how to register land allocation, receive a construction permit, which is still so difficult in many respects, and get connected to such things as technology networks.

We agreed to introduce target models before the end of this year. Let us discuss today what has been done in this respect. I ask the governors to say what has already been done and what difficulties they are facing in practice.

Colleagues, it is obvious that besides the improvement of the legal framework and regulations, investment attractiveness depends on other factors too, and the key one is providing business with personnel.

I would like to emphasise again that it is necessary to develop vocational education, first of all skilled workers, engineers and specialists together with the business community and business associations.

We need to think about how to organise and modernise the vocational education system using the best Russian and world standards. Let us talk about this too. Another important issue is the efficient interaction between federal, regional and municipal structures.

Businesses regularly complain about the actions of the oversight and security agencies at the local level. And those entrepreneurs who work in accordance with the law suffer, while those whose activity is only half-legal and who operate in the grey area benefit from them.

Once again, there must be no detachment in improving the business climate. All structures – federal, regional and municipal – have the common task of attracting investors, creating conditions for starting and doing business, developing the regions and improving people’s quality of life.

I suggest that today we discuss this issue, as well as the coordination of the activity of the federal agencies with their local colleagues.

Next, the favourable environment for business includes modern roads, networks, logistics – I am talking about eliminating infrastructure obstacles for the development of the Russian economy.

Approximately six months ago, the Government suggested launching a so-called “infrastructure mortgage” mechanism which will make it possible to attract additional financial resources to the construction sector as well as for efforts to improve the quality of the roads. I ask the Economic Development Minister to report today on the progress of this work.

Let me stress in this context that we shall have to tackle comprehensive large-scale tasks involved in developing the regions, including the infrastructure. It is these goals that are outlined in the updated Basics of the State Policy in the Area of Regional Development until 2025.

In the coming year, the Government should adopt a strategy for this country’s long-term spatial development, which will define the competitive advantages and growth points for each constituent entity of the Russian Federation, as well as their economic specialisation and the role in international cooperative ties.

Based on this, it is necessary to adjust the relevant state and municipal programmes and natural monopolies’ plans to locate transport, energy and social facilities. I have just examined yet another construction-related document sent by the Government.

A concrete case in point concerns enterprises in the shipbuilding industry and port installations. We don’t need any duplication or wasting of funds. We should focus on achieving concrete results and determine the mechanisms for guaranteed funding of priority infrastructure projects that are of importance for developing the regions and for business operations.

In this way, we will be able to set clear, predictable long-term guidelines for implementing private investment initiatives as well as business projects and give them proper state support.

Financial stability is yet another factor in the regions’ investment appeal. Investors and the business community trust those regions that are able to live up to their obligations, conduct responsible and balanced budget policies, and avoid excessive borrowing.

I understand perfectly well what the state of regional finances was in previous years and the reasons for this state. As you know, we have launched a programme for rescheduling loans extended by the government to improve the financial standing of the regions and give them additional funding they can use to handle their current tasks, as well as those they plan for the future.

Colleagues, I would like to specifically stress this point in order to bring your attention to it, as it is very important, so I would like to remind you of it yet again: regions that have joined this programme have undertaken to reduce their commercial debt load and their budget deficit. I ask you to take this seriously and give attention to this.

The funds you get must lead to financial rehabilitation in the regions. You should not take out new loans to squander them, spending money as you think to be reasonable and starting to run up debt again. I would like everyone to know that I have asked relevant ministries and agencies to regularly report to me on efforts to achieve financial rehabilitation in the regions across the Russian Federation.

I already spoke about this in public and can repeat this to you with a heavy heart: there are regions which are in no hurry to refinance their loans, although they have the opportunity to do so, and continue borrowing from private banks. It is strange. I will look into [the situation] one more time.

They have the opportunity to repay their loans by fresh borrowing at a lower interest rate through government funding, however, they still obtain loans from private banks at a high interest rate. Whom do you allow to make money on this? Please, think about this, the situation has to be resolved as soon as possible.

I would like to bring the attention of both the regions and the federal bodies to the need to fulfil all obligations undertaken under the rescheduling agreements in full. We will consider this to be an important indicator of how efficient and effective the performance of regional authorities and heads of departments is, while today, we will analyse progress achieved in the government loan rescheduling.

Let us start. I will give the floor to the head of the State Council working group, Mr Nikitin.

Please go ahead.

Novgorod Region Governor Andrei Nikitin: Mr President, colleagues. When the Agency for Strategic Initiatives launched the National Entrepreneurial Initiative in 2012, we pursued primarily business interests. We were drafting amendments to federal legislation and monitored law-enforcement practice together with entrepreneurs.

Naturally, we relied on the experience of the Kaluga Region, the Republic of Tatarstan and other regions of the Russian Federation that have achieved considerable success in creating a comfortable business environment in a short span of time. Our colleagues used a practical example to show that for all the significance of the current legal framework, competent work of regional teams is of major importance.

Today I can assess the launched mechanisms as the head of the region. The national rankings allow us to see better the best practices and approaches, and strongly motivate us to be the best. In turn, target models are in fact a KPI for executive government bodies of the Novgorod Region with understandable, concrete targets, tasks, and of course, deadlines.

I would like to note that we have worked for less than a year, but already rank in ninth place among the Russian regions in introducing target models. We see the results produced by adopted decisions. The development of business is creating jobs with decent incomes and opportunities for our citizens to start their own business.

Colleagues, to go forward, we should resolve the systemic problems that are seriously obstructing normal conditions for doing business. These barriers are obvious at regional and local levels. As the head of the State Council working group, I would like to discuss several key areas.

I would like to start with one of the most sensitive issues for entrepreneurs. I am referring to the increase of administrative burden on business. The working group has made specific proposals and my colleagues will speak about them. I would like to make a number of important points.

We have a unified registry of inspections, but for the time being it does not contain all information. I think it should include all supervisory and other measures that are conducted as regards entrepreneurs on the territory of each region of the Russian Federation. Inspections should be accompanied by video recordings that should be kept for no less than one year and granted to the bodies of the Prosecutor’s Office for the exercise of their supervisory authority.

The next subject is reliably ensuring the right of property on specific plots of land. Without this we will not be able to attract investment and develop our cities and villages.

Today we do not have normal territorial planning and land use. Master plans of cities and villages are formalistic and not always fulfilled. I will quote a specific example. We have launched a project on creating a 3D model of a region with the help of drones. More than 860 plots of land with a vague status have been found within Veliky Novgorod alone. There are industrial buildings and housing on this land. The cadastral value of these land plots is 585 million rubles, which are actually illegal. So, what do we suggest in this respect?

First, to update the territorial planning documents on the basis of uniform methods and a regulatory framework.

Second, to digitise services on urban planning and put them on the relevant regional information systems. Thus, all information will be accessible to citizens, entrepreneurs and investors. We believe decisions on introducing such documents on territorial and urban planning should be made at the regional level and also carried out as a separate project under the Digital Economy programme. There are best practices in this area as well in the Moscow and Tyumen regions.

Now about the deadlines, procedures and quality of heat, water and gas supply services. We work on target models, we regularly conduct business surveys that help us understand how effective our steps are. But here is what is important. Often getting a utilities connection and obtaining energy resources is provided by private organisations, which for a number of reasons have a monopoly in certain territories and do not seek to optimise the technological connection processes or introduce modern services.

It is impossible to submit an electronic application, and to be blunt, certain persons simply demand an additional fee to speed up the resolution of some matters. We believe that companies which provide public services to citizens and entrepreneurs and are monopolies in any sphere, regardless of the form of ownership, should work according to uniform rules and standards. This primarily refers to providing services and reducing deadlines, including in the one-stop-shop form.

Colleagues, I would like to address another very important issue for the development of entrepreneurship. Some of our fellow entrepreneurs believe that it is more profitable to work without registration. Illegal entrepreneurs do not bear any responsibility for poor-quality services, do not pay taxes or contributions for employees to mandatory funds, force people to work illegally, without any guarantees, can fire employees at any time and pay wages in envelopes, which means that this revenue will not be taken into account when forming pension rights.

Municipalities, in turn, lose income, which they could spend on the development of territories. In the Pestovo Municipal District of the Novgorod Region alone, 6,000 people out of the 12,000-strong working population worked at unregistered enterprises. Thanks to the support of the Prosecutor's Office, we managed to officially employ 500 of them in the last few months, and these people began to receive official salaries. I would like to note that the total amount of revenue from personal income taxes the local budget lost may amount to about 90 million rubles (this is one-sixth of the total revenue of the municipal district).

Another example is the provision of tourist services by persons who do not officially have the status of entrepreneurs or legal entities. So, one of the most popular booking resources contains more than 200 reviews on a private hotel. During an inspection, the owner said that his relatives came to his place, and he does not make any profit or engage in entrepreneurial activity.

At the same time, major investors are openly telling us: we are not prepared to work in the absence of fair competition, because we will be losing to illegal businesses in terms of the economy. I emphasise, proper conditions are being created for small companies and sole proprietors at the federal and regional levels. I would like to thank the Corporation for the Development of Small and Medium-Sized Businesses for their Business Navigator for small and medium-sized entrepreneurship, lending programmes, guarantees, and access to procurement by monopolies.

The regions are taking steps to reduce tax rates for those who use the simplified taxation system. There are ways to quickly register a business. I believe we cannot allow the shadow sector to destroy the competitive environment, or to put honest businesspeople at a disadvantage. So, we propose taking another look at liability for illegal entrepreneurship.

Colleagues, on a separate note, I would like to spend a moment discussing the mechanisms for supporting investment projects in the regions. Today, the regions have been given broad authority regarding tax benefits. However, no one can tell whether a particular preference is good for business. In the end, the investor does not feel any support, and the budget loses money. We suggest developing a methodology for assessing the effectiveness of tax incentives and introducing accountability for project outcomes.

Also, a programme for compensating expenses of the regions on creating regional industrial parks started in 2015. The funds available under it cannot exceed the amount of federal taxes effectively paid by tax residents. Clearly, the VAT payments are the largest ones, and the companies get a refund when exporting products meaning that the VAT is not taken into account when calculating compensation amounts.

It turns out that, on the one hand, we are striving to increase exports of domestic products and, on the other hand, we are depriving regions of motivation to work with the companies oriented towards foreign markets. In this regard, we believe it is necessary to adjust the mechanism for compensating the costs involved in creating industrial parks.

Colleagues, today, you can hear almost every large company cite a lack of young skilled personnel. At the same time the prestige of blue-collar jobs is growing and our youth are willing to receive a quality education that will allow them to find an interesting, in-demand job and receive a decent income.

We must meet the demand from domestic business, and of course, from young people. To do this, we must help our colleges, including technical colleges, be up to the highest global standards, to massively renovate their facilities and install new equipment and also have teachers upgrade their skills. We suggest implementing the state programme for developing the system of basic and intermediate vocational education that will be co-financed by both the regions and businesses.

Mr President, colleagues,

Six years ago you tasked us with creating conditions for doing business in Russia on par with the world’s leading countries. We have made a significant step forward. But in the contemporary world, to be the best and competitive, we need to constantly improve and move faster than other countries. We need a mechanism that will allow us to promptly respond to businesses’ growing demands regarding the quality of the business environment.

I am talking about timely changes in the laws and regulatory acts, as well as exchanging best practices. In this connection, we suggest that a centre for monitoring and lifting regulatory restrictions be established under the Ministry of Economic Development and a coordinating body at the governmental level.

Thank you for your attention. This is the end of my report.

Vladimir Putin: Thank you very much.

Please, Mr Golubev, go ahead.

Rostov Region Governor Vasily Golubev: Mr President, colleagues,

The working group has presented a comprehensive and detailed report. Mr Nikitin spoke about the main provisions, so I’d like to comment on several proposals.

First, it is evident that one of the factors influencing the investment appeal of the regions is increasing their budgetary self-reliance. Reaching this goal is possible only as a result of pursuing a responsible and well-balanced budget policy, planning real revenue without any “soap bubbles,” economical and effective spending within the limits of one’s authority, and strictly observing financial discipline all while meeting the social commitments to the people.

Another challenge for investment appeal is the region’s debt burden. As of December 1, the public debt of Russia’s territorial entities totalled 2 trillion 141 billion rubles.

Mr President, at the State Council Presidium meeting in Ulyanovsk, you made a landmark decision to restructure budgetary loans, which is very important to our regions. This will allow us to ease-off regional debt burdens.

In addition, based on your instructions to the Government Commission for Regional Development, the Ministry of Finance made decisions to adopt budgetary rules that will prevent unbalanced budgets. However, the problem of high cost of commercial borrowings remains. In the regional budgets, the debt load this year was about 140 billion rubles and the loans themselves exceed one trillion rubles.

If the federal authorities had not supported regional financing, we would be talking about insolvency in some regions today. For this reason, observing financial discipline should be a top priority in all budgetary relations. In other words, the obligations the regions assume when signing contracts with the Ministry of Finance, should be fulfilled, just as the federal authorities’ obligations to regions.

The issue of reducing interest rates for the Russian Federation’s constituent entities to ensure financial stability remains very relevant. The Bank of Russia has adopted certain regulatory measures; there have been recommendations to lend funds to the constituent entities at no more than a key plus one percent rate.

In this regard, we are suggesting considering a further reduction of interest rates on commercial loans for the regional budgets. At the same time, the regions need to provide a balanced budget and prudent debt policies, consolidation of internal state financial controls that focus on preventive measures, as well as budget transparency.

Allow me to express the collective opinion of all the constituent entities: we need to find a milder version of the model of interaction between commercial banks and Russia’s regions.

Mr President! We are asking you to instruct the Russian government to work with the Bank of Russia to develop new measures to reduce the interest rate burden on the budgets of the regions.

For example, we are proposing a special lending schedule for the Bank of Russia, which, if approved by the Russian Ministry of Finance, would provide credit support to the regional budgets at a reduced interest rate.

The second suggestion. It is no secret that the activity of law enforcement agencies greatly influences the investment climate. Once there are signs at the regional level of something being done in an unprofessional way – and in middle management this happens quite often, or even worse (as you said recently), that there are unscrupulous law enforcement officials involved – any functioning investment climate management system collapses. It is obvious that under the present circumstances the issue of establishing a confident environment for conducting business activities and developing entrepreneurship must become a priority for the authorities in the regions.

Under the presidential executive order, coordination meetings have been created in the regions, which include the heads of the law enforcement and oversight bodies. In this regard, I propose informing the Government about the role and the influence these bodies have on the investment climate in each region based on their performance during the year.

There is one more proposal. The time has come for business representatives to come together and have permanent and systematic platforms for interaction between themselves, the Government and business, and of course, vertically from the municipal level all the way up to the federal government.

This will allow us to prepare and implement validated and effective economic solutions, which is important today, and this approach will lead us to a place where businesses will also be accountable to society. I am referring to the negative things that happen in economic activities. I believe our society and our people should be aware of this.

There are proposals that the Chamber of Commerce and Industry of the Russian Federation should assume this role. This organisation has offices all the way from the district level to the federal centre, and also has administrative staff and expertise. This approach is common in many countries. Some of our regions also have positive experience in this area, and the role of chambers of commerce and industry is notable in developing economic policies, including investment policies.

There are instances where regional chambers of commerce and industry are entitled to legislative initiative, and this is working effectively today. I am convinced that implementing these measures will really create the proper environment for improving the investment climate.

Mr President, please have the above proposals included in the list of instructions to be drawn up following today's State Council meeting.

Vladimir Putin: Thank you.

Mr Vorobyov, please go ahead.

Moscow Region Governor Andrei Vorobyov: Mr President, colleagues,

Mr President, I would like to begin with words of gratitude for creating the ASI platform in its own time, because the rankings that are compiled and published at the St Petersburg Forum are an important reference point for us, and each territory wants, of course, to improve its investment potential. It is good that we have an opportunity to regularly share experience and use best practices in our regions.

To further improve the investment climate, I would like to ask you to pass down instructions in three areas.

First, these are special economic zones. In May 2016 an inspection revealed violations and inefficiency in special economic zones. Since then the Government of the Russian Federation and the regional authorities have carried out a lot of work and I think there is every reason to remove this moratorium.

This would allow the regions to establish new special economic zones to attract new investors and of course, grant a package of regional and federal benefits. This is the first request or proposal that I would like to submit.

Second, I would like to talk about e-services. The problem is that to build a plant or factory, investors have to apply for 22 approvals – nine regional and 13 federal permits. My request, Mr President, is to forward an instruction on mandatory e-document exchange with the federal departments. This would drastically reduce the paperwork and the number of applications that are required from entrepreneurs and investors.

We have already amassed positive experience both with the Special Guard Service and Rosaviatsiya (Federal Air Transport Agency). We signed agreements with Rospotrebnadzor (Federal Service for the Oversight of Consumer Protection and Welfare) and Rosavtodor (Federal Road Agency) the other day and they have greatly improved the investment climate. They make it possible to approve documents and build new enterprises with much less delay.

There are some issues in approving documents in the Ministry of Culture and the Federal Agency on the Use of Mineral Resources. The problem is that you have to get approvals no matter where you want to build a plant, even on an old site. You have to get approvals from the Ministry of Culture and the Federal Agency on the Use of Mineral Resources. This is required by law. I would like to suggest amending it so that both this ministry and the agency are required to list the areas that are of special value to them. We have already done this as regards territories near airfields where the owners themselves publish what territories are under restrictions.

And the third issue that you mentioned in your speech is a reduction in the utility connection times. Indeed, all regions made a breakthrough both in gas and electricity because there is a law on standardised fees. I have already talked with the Prime Minister on this issue; he understands where we are with this.

We need a federal law on standardised fees for heat, water discharge and water supply. This would also enable us to drastically reduce the infrastructure connection times and facilitate the commissioning of new enterprises.

So, Mr President, these are my three proposals that I wanted to draw your attention to.

Vladimir Putin: Thank you very much.

Mr Oreshkin.

Minister of Economic Development Maxim Oreshkin: Thank you very much. Mr President, colleagues,

Today, indeed, it was noted that we made great progress in the Doing Business rankings, and the national ranking system encourages the regions to compete among themselves and to improve procedures. However, the analysis shows that there is not always a clear relationship, for example, between the rankings and investment dynamics.

The fact is that the benchmark models and the investment standards offered to the regions are necessary, but of course, insufficient conditions for ensuring favourable investment climate sometimes exist.

I would like to spend a moment to discuss a number of issues.

First, today we talked about the importance of regional financial sustainability. I am not going to delve into matters that Mr Siluanov will take up in his remarks, but I will make just one point taking advantage of the fact that so many governors are present here today. This week we have completed the first stage of the work to identify the so-called redundant, and occasionally even absurd, requirements that the federal authorities set for the regional authorities. I will give you a couple of examples.

We have, for example, an order by the Ministry of Communications that requires everyone to switch to a certain type of franking machines for mail correspondence beginning February 1, 2018. The regions will pay three billion rubles to comply with that next year. Or take, for example, an order by the Ministry of Labour, which identifies a list of equipment that needs to be installed at the organisations that provide social services. The list includes the number of mirrors and the number of clocks on the walls, and how many checker and chess sets should be available on the tables.

We made the first list of such requirements, and submitted it to the Government this week. We suggest either changing or cancelling them. Our ultimate goal is to create an institutional mechanism which will prevent these kinds of requirements from ever surfacing. Recently, we discussed this with the State Duma and the Federation Council, and we are already working to this end.

The second point I would like to make is the stability of the tax system which is an important part of the investment climate. I will give you an example as well.

With regard to the story about returning the right to grant tax incentives on movable property to the regions, beginning next year, if a region does not decide on an incentive, the rate will be set at 1.1 percent. Here, we can see that different regions proceed differently. What, for example, are the regions, for which the stability of tax terms is of primary importance, to do? I will give you an example of the Ivanovo or Nizhny Novgorod regions. They maintained this incentive in key industries, but not all of them. They chose the ones where the tax really represents a tax on modernisation, and ensured keeping this incentive. It is important, when taking decisions, to always think ahead and to understand what ramifications can follow any short-term gains in revenue.

The third thing that has already been mentioned today is control and oversight. Here, it is important to not just limit this activity head on, but rather make it smart. The pressure on businesses should decrease following reorientation of the control agencies to high-risk sites, which systematically commit gross violations of the law. With that, low-risk facilities, on the contrary, should be completely exempted from planned inspections.

Here, too, importantly, a significant portion of these controls should, in the near future, become remote, and the opportunities that the digital economy opens before us will make it possible to automate control to an even greater extent.

The law on control and oversight which describes the new system was put together this year and submitted by the Government to the State Duma. I hope we will work it through in detail next year, as it needs more work, and then adopt a draft law to this effect.

Infrastructure is the fourth important area that you, Mr President, mentioned. Clearly, when the quality of roads is low and energy or railway infrastructure is not available, this can put an end to any investment project, be it large or small. Again, I will give you an example.

The town of Novomoskovsk in the Tula Region has a good industrial park, with properly developed sites for the construction of plants. However, trucking the output from this area is a challenge. The bridge which connects this area with the mainland has one lane closed for safety reasons, as it is in poor condition. No proper transport infrastructure, so everything else is just not working. Indeed, creating an infrastructure that is adequate for economic needs is a prerequisite for improving investment activity.

We have accomplished certain things, though. We drew up a detailed plan for implementing the new programme. This plan, as well as a number of amendments to draft laws, have already been submitted to the Government. In the first quarter, we will need to do a lot of work to put these changes into practice. We are working actively on pilot projects with the regions such as the Tula Region – everything I mentioned about it – the Novgorod Region, the Perm Region, and a number of other regions, because they are moving forward fast.

The fifth point is competition. It is possible to have ideal infrastructure and perfect procedures but investment will decrease if competition rules are violated.

Mr Nikitin talked about illegal businesses but there are also other problems such as the creation of unitary enterprises in the market, and other forms of regional protectionism. There are also problems with regulations that put competing enterprises in the same industry into different conditions and many other things.

Mr President, you recently signed an executive order on competition and it reflects all these important points. Now our task is to match reality to this executive order. I also think it is important to establish an institutional mechanism that will monitor whether the actions of the authorities correspond to the provisions of the signed executive order.

The sixth point is the human factor, of course. Mr Nikitin spoke about personnel. Indeed, the economy of the 21st century is based on human capital. Therefore, an environment that ensures high living standards and allows people to develop and realise their potential is an absolutely indispensable part of the general investment climate. For instance, the goal of increasing the global competitiveness of Russian cities is highly important in this respect.

Returning to the start of my speech – administrative procedures – I must admit that we need to win global competition rather than simply compete. We must make breakthroughs in some areas, and digital technology allows us to achieve this.

Mr Nikitin talked about the 3D-model of the region that revealed, as a result of cooperation with Rosreestr (Federal Service for State Registration, Cadastre and Cartography), unregistered plots of land, which could increase tax revenue in the region.

Another project that Rosreestr is beginning to carry out jointly with Moscow is on a higher level. It is not just a 3D-model of the region. It is basically the issue of full 3D cadastre registration for buildings, which will substantially facilitate real estate transactions in the capital.

This is one of the examples where new technology makes it possible to raise procedures to an entirely new level. Understandably, it is not always possible to implement these ideas under current law for the simple reason that some areas have not yet been covered. This is why experts are working hard in cooperation with business to change the laws and regulations for the Digital Economy programme.

The part of the programme that we reviewed at the commission meeting with the Prime Minister already contains 53 drafts that should be amended in the next eighteen months. We are ready to listen to the ideas of our regions. If there is a new specific, tech-savvy solution that cannot be carried out because of legal restrictions, we will be happy to include it in this plan.

In closing, indeed, we are now faced with a critical mass of initiatives and goals to increase our investment appeal in the broad sense of the word. Mr Nikitin suggested creating a single centre for monitoring and eliminating normative and regulatory restrictions on business. I support this idea, we will be happy to take on such a function.

Vladimir Putin: Thank you.

Mr Siluanov, please go ahead.

Minister of Finance Anton Siluanov: Mr President, colleagues,

Clearly, the country's investment climate is formed in the regions. It includes infrastructure, tax regulations, promptness of opening and running a business, connecting to the grid, and so on.

Much depends on a regional leader’s pro-active stance. There is a big difference between the regions where the governor and his team are looking for investors in Russia and around the world, and are working to create a proper investment climate in their respective regions, and the regions, which spend most of their time trying to get more financial aid from the federal centre. So, motivation tools are being introduced at the federal level to encourage the regions to develop pro-investment regulations in their respective territories.

What do I mean by that? This includes grants that the federal centre is making available to the regions in recognition of their success in achieving benchmarks, including increases in investment, creating new jobs, and increasing the gross regional product. It also includes profit tax refund that is credited to the federal budget as regards profit tax gains for the regions which showed growth for this indicator during the financial year under report, that is, in effect, ensured investment activity.

This also includes accounting, as part of calculating financial assistance, for the so-called tax expenses or incentives provided by the regions, and the incentives which, according to our criteria, fall under the effective incentive indicators. They will be taken into account when deciding on not reducing the amount of financial aid provided by the federal centre.

Additional tax incentives to encourage investment will be introduced in 2018. This includes an investment tax break, the corresponding law has been adopted. Now, the regions can make a decision on granting a tax incentive as it applies to new investment. In other words, new investment will, in fact, be deducted from the taxable profit tax base. This also includes the so-called special investment contract in a new format: for major investors with over one billion rubles in capital, special conditions will be created protecting them against changes in tax legislation, providing preferential terms for stable infrastructure solutions, and preferential taxation terms. This also includes subsidies for the regions to develop industrial parks using the revenue that comes to the federal budget from these industrial parks (the regions will get a refund to compensate for these expenses). We have a number of other tools as well. All we need to do is use them. Unfortunately, we can see that not all regions take this into account in their activities.

And, of course, the budget policy. Mr President, you have already spoken about this that indeed the drafting of patently unrealistic budgets, and the failure to comply with commitments on agreements and infrastructure projects and also accounts payable that are revealed with new governors are creating mistrust and a lack of motivation to invest in a region that pursues such an irresponsible financial policy.

In the last few years the Ministry has been trying to put regional finances in order. We have signed agreements on budget parameters and on debt as a condition of granting financial aid and loans, and agreed on responsible financial policy loan restructuring.

 I would like to report that today 74 of 78 regions that can sign loan restructuring agreements, have already addressed us and we will sign these agreements before the end of this year. Four regions have not yet addressed the Finance Ministry because the sums they owe are insignificant. Probably, such debt will not be restructured, but again, this is not critical for the budgets of these regions.

I would like to draw the attention of the regions to the need to observe the commitments under these agreements. There are precedents when agreements on loans and financial aid were signed. In three or four cases they were not fulfilled. This is a systematic failure to comply with your commitments. How can this happen? Naturally, under these conditions it is impossible to talk about investment appeal. In these cases we resort to treasury support. In effect, the Treasury itself determines its priorities – whom to fund in the first, second or third place. Obviously, investors will not be attracted to such regions.

To sum up, there are investment tools, and they simply need to be used. The Government will toughen the responsibility of the regional governors for creating a business environment. Naturally, a realistic and well-balanced budget and sustainable financial policy facilitate trust and success and create the investment appeal of the region. It is necessary to take this into account by all means.

Vladimir Putin: Thank you.

Please, colleagues, do you have any comments or suggestions?

Please, Mr Zyuganov.

Chairman of the Central Committee of the Communist Party of the Russian Federation Gennady Zyuganov: Colleagues, three important speeches have been made that I believe, will influence both domestic and foreign policy, including the investment climate [in our country].

President Vladimir Putin has addressed the country with his, I will call it, message Russia Focused on the Future, in which he set forth guidelines on how to lead the country to make it competitive, intelligent, successful and secure.

Speaking at a Chinese Communist Party meeting, Xi Jinping presented a programme for the next 30 years. They plan to eradicate poverty by 2021, when they will mark the 100th anniversary of the Communist Party, and become the world’s leading country within the next five years. [Donald] Trump presented his national security strategy, referring to Russia and China for the first time in the history of the United States as the US’s two main adversaries or, maybe, even enemies.

Never before have UN foreign policy statements like this been made, because [Henry] Kissinger, one of the most intelligent strategists, invariably said: we can never allow Russia and China to cement their common interests. Apparently, global policy in the next few years will be confined to a triangle of American globalism, Russian revival and China’s breakthrough into the future. Much will depend on how fast [each of them] moves.

Mr President, in your Address last year, you set an absolutely correct and realistic objective for the country to reach global economic growth rates. This year, the growth rate for Russia will be 3.5 percent, in China it will be 7.5 percent and the US economy will see global growth. We must do everything to deliver on your instructions because [our] competitiveness, in this case, security, is at stake.

Any country which cares about its future should begin with a law on the distribution of productive forces and population. Given our vast territory, this law acquires a special meaning, and we need it to identify areas of investment activity. If you use a compass and draw a circle with a radius of 1,000 kilometres around Vladivostok on a map, you should know that in our country only 3.5 million people live in this area while 350 million people live in the neighbouring territories.

The recent efforts of the President and the government on developing the Far East – the cosmodrome, a scientific centre, laying our [gas] pipeline – are a good start. However, if we do not triple are efforts in this area, the situation will aggravate for us. This is why we should think together about how to proceed with that line, all the more so given that the current relations with China allow us to implement a number of programmes.

Our Governor Levchenko’s visit to China with Ms Matviyenko has already achieved the realisation of four large investment programmes. And such regions as the Irkutsk Region, the Krasnoyarsk Territory, the Novosibirsk Region could be an engine for the development not only of the Siberian but also the Far Eastern regions. Yet the key territories whose development is essential for us are Crimea and Kaliningrad which are largely strategic territories, and we will have to work together on that.

Mr President, five years ago you undertook, in my view, an exceptionally crucial attempt to plan future work by issuing 11 decrees. They determined development parameters, deadlines and personal responsibility. As we are review the results now, we see that the matters related to security and defence that you oversaw, yielded excellent results, including Syria, equipment renewal, and creating new technologies.

Regarding a number of areas of investment nature, new equipment and productivity, we have not reached the goals that were set. I think one of the reasons for this is the lack of tough and due accountability and personal responsibility. Many issues could have been resolved.

When the most influential people speak at our Duma – you spoke there, so did His Holiness Patriarch Kirill, Nobel Prize winner Zhores Alferov – there emerged a formula which, in my opinion, is the groundwork for exiting the crisis, for the revival of the country. They are the values of the Holy Rus, Russia’s millennium-long statehood and Soviet justice. Where we had those as guidelines, in my view, we had the best results.

For example, 132 delegations came to us for the centenary of the Great October Revolution, and you supported sending these invitations to the delegations. I would like to stress and inform everyone – including the governors, and to thank you as you were very considerate about the issue – all 132 delegations (there were 500 MPs and 60 general secretaries), without exception, supported our foreign policy, the policy of fighting terrorism, the policy of security, the policy of strengthening peace on the planet, all the delegations supported us on Crimea and Sevastopol, and all of them without exception took support for Donbass seriously. We recently sent the 68th [humanitarian] convoy related to the New Year holidays.

The Syrian example shows the result that can be achieved when the state machinery, parties, movements, ministers, service personnel and citizens work towards one and the same goal. Everyone believed that it was impossible to accomplish this task, but it was accomplished in the shortest possible time and extremely effectively. However, we must not rest on our laurels. I saw that you met with your CIS colleagues yesterday. The situation will shift to Afghanistan and Central Asia, and we must therefore display maximum vigilance.

Last time when we contacted you on the Artek issue, you supported all State Duma party factions. It took us three years to turn Artek into the best place on Earth. Brilliant programmes have been introduced. We must thank Crimean leaders who have built 60 new facilities. In 1986, Artek received 38,000 children, an all-time high during the Soviet period, and 40,000 will stay there in 2017. This is an impressive result.

We must consider the supply of milk to children today. We have discussed this issue before. We hope you will support this measure. This would be an effective form of assistance for all families. The agricultural sector has posted a good harvest, but the processing industry is lagging behind. Unfortunately, this excellent harvest has not reduced the price of one loaf of bread even by one kopeck at local shops.

I would like to highlight several threats that all of us will have to deal with, and we will need to provide substantial extra investment. I have assessed the share of foreign capital in the energy sector. Our big country has a cold climate, and this share exceeds 90 percent. The share of foreign capital in the railway engineering sector is about 75 percent, and its share in vodka and tobacco is 53 percent. Most importantly, we cannot give away our sources because they will ensure the country’s overall stability.

I would like to thank you for addressing the poverty issue in full measure. In your last three speeches, including at your meeting with deputies, you set this out clearly.

Incidentally, throughout 2017 the State Duma became more actively involved in resolving the most complicated matters, including the housing renovation or housing equity holders.

I am confident that if we pool our efforts we will obtain the desired result. All of us must be wary of the liberal revanchism. I never thought that all these characters who staged protests in front of the Bolshoi Theatre and in other squares in the 1990s would ever resurface again. All of us must remember that the liberal surge in February 1917 led to the breakdown of the state.

Hitler came to power with the help of liberals and unleashed the war. The very same liberals helped Mussolini, Franco and Pinochet come to power. Therefore, all of us must be vigilant because the Americans are shoring up these people every day, and we can feel it, especially in the media.

And the last point concerning our priorities and investment. Poverty. We must first address the children of the war. There are still 12 million of them; 140 billion rubles is nothing, we can afford it, but I feel ashamed looking them in the eye. Several big anniversaries are approaching, including the victories in the Moscow, Stalingrad, Orel and Kursk battles, and Victory Day.

As regards the defence industry, investment has been quite extensive. Even the smallest cuts are not acceptable. I have reviewed the funding plan. You recently met with the new president of the Russian Academy of Sciences. Please support their initiative. Four billion for the academy and scientists but 80 billion for the Federal Agency for Scientific Organisations which has no idea about scientific inquiry? It allocates the funding to those in favour rather than those who need it and can solve problems. This is not right. There is a respective petition.

As concerns rural areas and construction, these are the two driving forces that always drag us out of a crisis if the money is invested properly. I am appealing to you because of the situation with traditionally ethnic Russian areas. Back in 1990, our population was 81 percent Russian. Now, unfortunately, Russian ethnicity is 75 percent and the death rate in traditionally Russian regions is higher than in others. Therefore, it is important to think about measures to support the state-forming ethnicity which is the core of our security and which is an internationalist nation uniting 190 peoples and languages preserving each and every culture, faith and tradition.

Finally, I wish you a Happy New Year. Thank you to the State Council for the support of this anniversary event. The iconic Red Army’s 100th anniversary is coming up, along with the 100th anniversary of the Lenin Komsomol, the 200th birthday of Ivan Turgenev who comes from the same region as me. Andrei Klychkov is working effectively on the Orel Region’s development, with your support. So, I hope we can deal with the current difficulties and challenges together.

Vladimir Putin: Thank you very much.

Mr Zhirinovsky, please.

Chairman of the Liberal Democratic Party of Russia Vladimir Zhirinovsky: I do not want to argue, but the world will not turn to China’s path. No matter how we criticise Europe, its liberalism, freedom in economy, media and culture. Some of these liberties go too far. However, young people will still look up to Europe rather than Asia.

We need to merge our constituent regions to improve investment climate. Consider the case of the Voronezh Region. Under the Tsar it had the population of 8 million. It is 2.4 million now. Why is that? There is a decline even though the region is one of the largest. We need to bring together 30 such large entities under the term namestnichestvo, a Russian word. Most of the terms we use are foreign: region, rayon (district), governor. It is a reason why we are not always treated with respect when we speak Russian. Out of every 10 words seven come from other languages. It makes people think that we are not such a developed nation.

That is not our fault, but our ancestors’. Still, today’s officials borrow foreign terms, and it plays a role. Today’s Council focuses on the investment climate. Where are Russian words in that? We are used to the word ‘climate’, but what about ‘investment’? Why can’t we say it is an issue of ‘putting money into the national economy’? Anyone listening to us right now would understand it, even children.

Transport is the main issue. It is our only advantage. Transport, transport economy — that doesn’t sound good. Transport engineer is not a model job. People want to become actors, or whatever, but not transport engineers, even though the economy stagnates without transport.

Look at the Ural-North motorway. The idea to build it was put forward in 1912, but we will actually finish the project in 2023. It will have taken us 118 years to build a road! How can that even be? Why? Small regions, none of them have sufficient funds. If we had one large region, a territory — whatever we would call it — the road would have been long built. As it is, we just hear the small regions ask for more funds, because they lack them. And the project isn’t going anywhere.

We grew a lot of grain but we do not have enough elevators. If all is well with production, the transport issues will not allow us to deliver the product. If transport is all right, then there are issues with processing and storing. All retail chains are owned by foreigners, and they don’t want our products, but prioritise imports. We need the right professional orientation here.

The cryptocurrency concept emerged. Have students enrolled at a cryptocurrency department September 1? Is there a department or maybe a seminar? In four years, these specialists in cryptocurrency or other currencies will start working for the economy. This will be a trend. Not a single university has opened even one department, and no experts are available. Those who graduate from economic universities in the summer of 2018 should be trained accordingly. We need career guidance and a revision of professions to really improve the investment climate.

Regarding the repatriation of capital, we are doing everything as we should, but we are unable to guarantee banking secrecy. Is it possible to guarantee 100 percent privacy in at least one bank? The Central Bank should open a subsidiary for foreign currency assets. This would guarantee banking secrecy, and no one would know the names of those transferring money or the amounts. In fact, no one would even have the right to ask such questions. In Switzerland, people are jailed for asking how much money their neighbours have. They are not supposed to inquire about other people’s assets. And this information is available all over Russia, including on the internet… Everyone has to file declarations and show how much money he or she has at various banks and accounts.

Look, we need classified declarations. It’s no good telling the whole world where wealthy people live in this country because it will boost economic crime. Therefore, we need 100 percent banking secrecy that can be guaranteed forever by decisions signed and approved by the President, the Government and the parliament. And investigators should deal with criminals alone, if any.

And of course, foreign investors. And the problem here is that they should not push out local producers. They are having a hard time, and I understand that inexpensive foreign money is issued quickly for longer terms. Nevertheless, we must not allow this to hamper our investors.

We have done everything right with regard to the land issue and cadastre values. But why do cadastre values exceed market prices by four times? The cadastre price of my friend’s land plot is 80 million, and its market price is not more than 15 million. How will he sell his land? People want to buy it for 15 million, but the official cadastre price is 80 million, as determined by the authorities. But who has determined the price? You can understand a 10, 20, or even 30 percent price gap, but a four to five-fold increase is a bit over the top! Who did this? People will stop buying and selling anything; they will be afraid to pay exorbitant taxes.

As I see it, we have some positive information. The Smolensk Region is showing a favourable investment climate. As far as I know, this is an objective estimate. The region is creating jobs, and it boasts a good information website, the best, in my opinion.

There is progress with regard to the Far East, but I propose that we introduce a tax-free economy on Sakhalin Island. We can try it, and if it proves successful, we can extend it to the entire Far East and then Siberia. Step by step. Remember, Sakhalin is like a ‘Utopia’ island. We could build Communism within the limits of one island, which we would not be able to do on the scale of our big country. The same goes for new trends in the capitalist economy. The island is small. Its population is under 1 million if I am not mistaken. It is isolated. We could try a tax-exempt economy there. But all of the revenue must be invested in Sakhalin. I can assure you the outcome will be good. The island will attract more people. Many want to become millionaires fast but legally. Once it is a success, we can extend this plan. Perhaps in 30 or 40 years, it will reach Kaliningrad.

The same applies to other aspects. I was very bothered by the fact that the regions with large debt to private banks were offered cheaper loans but refused to refinance. This is the first indication of a corrupt scheme. “Why are you keeping your region in debt chains? Here, pay it off, the new loan will be cheaper. You will pay off your debts faster.” “No, I don’t want to.” It means the banker has direct links with the decision-makers. The authorities in the regions that refuse to refinance must be replaced as soon as possible and investigated by the Federal Security Service and prosecutors.

And last, fraud. Here is an example: a new Bryansk to Moscow flight. A promotion campaign offered the cheapest tickets for the destination. Local competitors such as the railway bought all the tickets. The planes were sold out but flew empty. Who benefits from this? Of course, passengers want to reach Moscow in 45 minutes. But no, they must ride a train for four hours. Somebody must investigate this.

Here is my advice. I am not saying that we should encourage ‘fingering’ or informants. But I think every ticket salesperson should inform their management and the deputy governor in charge of transport about “an organisation that buys all the tickets.” Why on earth did you buy 200 tickets? Is your whole company taking a business trip to Moscow? It is just so easy to expose. Staff must inform their management and the management must inform the city officials about such ‘surprises.’

Another example. A plane flies from Nizhny Novgorod to Nice. A private charter – no problem. Business people – no problem. But it is the city mayor’s office and officials that are on the plane. Why are you flying to your holiday destination on somebody else’s plane and on somebody else’s money? These things get reported to us. If airport officials informed the governor about a group of public officers who did not buy their own tickets (meaning, the plane was paid for), it will be easier for us to expose these kinds of violations.

We are not forcing anyone to inform on others. This is about the recovery of our economy, discipline and preventing embezzlement and fraud. It requires improving law enforcement. Security comes before economy. If economy came before security I think there would be people who would take advantage and line their own pockets and the money would drain abroad.

I am finished now.

Vladimir Putin: Thank you.

Mr Mironov, please.

Chairman of A Just Russia party Sergei Mironov: Mr President, colleagues,

Today we are discussing a very important practical issue. Some very useful and practical proposals have been made by the head of the working group and two governors, and the heads of relevant ministries have spoken very clearly and in a business-like way about this crucial issue – the regions’ investment attractiveness.

I would like to devote my short speech to four other concrete aspects of investment attractiveness that are of vital importance for many regions.

Speaking about the investment attractiveness of agricultural regions, I believe that our agricultural achievements allow us to do the following.

First, we should revive our selection system. It is unacceptable that we lack our own breeding animals and stock seeds. More specifically, 98 percent of hatching eggs are imported. The situation with agricultural sciences is improving, though very slowly. Selection and agricultural genetics are not just a business but a vital condition of the national food security.

Second, our regions, the Russian regions, are capable of producing large amounts of organic foods. As of now, only 5 percent on the global organic foods market come from Russia. A law on organic foods is being discussed in the Government. It is a very good law, which we really need, but its implementation requires serious investment.

I believe that the economic and social effect of this investment will be enormous. We have created a system of agrarian education, which we did not have before. It comprises 54 universities. I believe that the farms attached to these institutions must be able to receive state support, which is provided to the agricultural sector in general. Where there are people, there will be investment.

Third. A huge area, specifically, 57.7 million hectares are accounted for by Rosreestr (Federal Service for State Registration, Cadastre and Cartography) as belonging to agricultural producers you can’t find. That is, its ownership is documented but the owners are nowhere to be found. Another 30 million hectares are not assigned to anyone at all. Imagine the area of Spain that belongs to ‘dead souls’ or Italy that is hanging in the air because nobody knows whose land it is.

Therefore, I believe it is necessary to enact into law the deadline after which such unclaimed farmland must be transferred into municipal property. We must also specify who has the priority for a discount price or gratuitous ownership to such land.

The second issue concerns the development of the northern territories. An area’s investment appeal largely depends on its links with industries and production in other regions. Let us take the northern territories. Despite understanding the importance of production chains, the Arctic projects hardly ever involve the mainland production capacities – particularly, the southern Siberian regions.

Each territory seems to be isolated. Last year, a directory of Siberian companies’ products and services for the Arctic projects was released. However, the majority of contractors and subcontractors are still foreign, often not for a good reason and despite our counter-sanctions. The development of the northern territories can produce a multiplier effect similar to that of the defence industry.

Another matter concerning the North is the remuneration policy. Due to a mess in the system of benefits and social protection for northern workers, which has continued since the mid-1990s, only 12 out of the 36 articles of the North law are actually in force. Russia’s North has lost its former appeal as a source for earning good wages. As many as 1.6 million people have already fled the North. My belief is the North cannot and must not be developed by people working on a rotational basis. If the local population’s income falls the people will leave and investors will not go there.

And the fourth subject is geological prospecting. Indeed, geological prospecting ranks among promising regional investment projects. The Accounts Chamber estimates that geologists have studied just 23 percent of Russia’s territory to date. One is worried about the absence of the required number of implemented prospecting projects, the insufficient volume of geological and earlier-than-planned geological and physical and geological survey works.

We have managed to make headway in providing information support for geological prospecting operations as well as to pass legislation simplifying access to geological information for all market players.

A state information system listing geological information about natural resources has been created. This is a highly important step for the establishment of a geological information market that exists in many countries.

However, regional geological policies are lacking, although the law on natural resources delegates specific powers to Russian regions.

I believe it is high time to seriously amend legislation on managing mineral deposits. First of all, we need to pass legislation that would regulate the powers of the executive branch for stockpiling strategic reserves of mineral resources.

Moreover, geological prospecting companies must be able to more easily access promising sectors from the unallocated fund. The pricing system for geological prospecting operations also needs to be upgraded.

Thank you.

Vladimir Putin: Thank you.

Mr Neverov, you have the floor.

Deputy Speaker of the State Duma and Head of the United Russia Party Duma faction Sergei Neverov: Thank you, Mr President. Colleagues, all previous speakers have dwelled upon the subject of today’s meeting in sufficiently great detail. I’ll make it very brief.

Many Russian regions continue to receive federal-budget subsidies. Of course, this factor influences overall economic growth rates because the country’s well-being depends on the success of every region. Doubtless, there are leading regions that lead the way in terms of their popularity with investors.

Mr President, you have just noted this, and substantial attention is now being devoted to the regions of the Russian Far East that have a tremendous potential. But every region is unique, and I am confident that each of our 85 regions has a potential that needs to be unlocked and displayed.

The creation of an investor-friendly environment that would guarantee safe investment is an important aspect. And all of us realise that a favourable investment climate is a combination of the most diverse factors, and we have also discussed this issue today. This includes a stable tax system, legislation and regulations. And the business community must sense stability.

I want to say that the business community must sense stability, including political stability. And I would like to address my colleagues, leaders of parliamentary parties, to ask them to select regional leaders in a more responsible way because their current regional agenda sometimes negatively influences the investment climate.

This includes spreading rumours that any specific regional governor will resign soon. Various media outlets publish these stories all the time, and the situation is being constantly incited. And, of course, investors are not attracted by these loud and frenzied statements which sometimes aim to boost media ratings.

I am confident that we need to prioritise the region’s interests and its future, rather than time-serving political ambitions. The region’s prospective long-term investors are deterred by the lack of confidence in the positions of incumbent regional leaders and by the apprehensions of those who invested under the current leadership.

I am not talking about only one agenda. Each of us has a right to express his or her opinion on various methods for building a rich and prosperous Russia. But we must do our best to avoid actions capable of destabilising society and, as I have already said, making it possible to implement one’s own personal time-serving political interests. In this context, substantial responsibility rests with representatives of political and parliamentary parties.

I would like to say that current national challenges must unite us, despite our political views because national interests are more important than party interests.

Happy New Year, everyone!

Vladimir Putin: Thank you. Mr Titov, you have the floor.

Presidential Commissioner for Entrepreneurs’ Rights Boris Titov: Thank you very much, Mr President.

In his report, Mr Nikitin spoke about the shadow economy, or, as we say now, the “garage” economy and called for increasing liability, in particular, for illegal business activities according to Article 171 of the Criminal Code. The problem is huge indeed. According to our institute’s estimates, trade in the shadow sector is worth 33.6 trillion rubles, or 39 percent of the GDP, which speaks volumes about our economy.

Of course, we should demand full compliance with the law, but we must realise that in most cases legalisation is fraught with many risks for small businesses. First of all, it is fraught with losses, because it is unprofitable to work while paying all the taxes, and, of course, administrative and even criminal pressure.

The Stolypin Institute for the Economy of Growth has drafted a programme, because it should be a comprehensive programme, which, on one hand, creates incentives for entering the legal sphere, and on the other, increases liability if it is not done. The general direction is clear, and we should only strengthen separate measures.

For example, we should set the simplest, most comfortable and profitable terms for the smallest, micro business, or as we say, individual entrepreneurs with no right to employ. We have been talking about it for a long time, but I would like to repeat that it would be a serious step in legalising businesses.

Also, of course, the main problem for the small shadow businesses is to gain access to money, resources and loans. For them, for the shadow businesses, money is very expensive. So, if we can give them some proposals on [creating] a special fund similar to the Industrial Development Fund, with rates at five percent for five years, this might very much interest them in entering the legal sphere.

Industrial infrastructure, which Mr Oreshkin talked about, is very important, but, unfortunately, we have already created enough of it, and it is very expensive for many people. I mean we should create more business-friendly and cheaper infrastructure for “garage” businesses, to make them come out.

And the main thing I would like to say: we should give them time. With all these conditions, which we, of course, should set clearly and correctly, we will give them a chance to become legal and free themselves from the liability they might face in connection with their past. This concerns several articles. In particular, Article 171, illegal business activities, but also several articles of the Administrative Offences Code.

If we give them time, if they come out and work legally, they will not be responsible for the past. But if they commit another violation or do something wrong again, that is when they must bear full responsibility according to the criminal and administrative legislation.

One more thing I wanted to say. Mr President, we are talking about the fact that the poverty rate in our country is very high. 20 million, you said. But in fact, this shadow economy hides among these 20 million. We have 15 million people who do not pay taxes at all; we see no income. So, statistically, people who are not really poor are often included in this figure. Thank you.

Vladimir Region Governor Svetlana Orlova: Mr President, may I?

Vladimir Putin: Yes, go ahead.

Svetlana Orlova: Mr President, colleagues,

The matter that the State Council is discussing today (I believe, everyone would agree) is of great importance. Mr President, I would like to say that both the Russian Government and Dmitry Kozak’s Commission conducted a very meticulous piece of work. We held many meetings, had our disagreements, but now have reached common ground, which must be mandatory for all of us. Regarding the replacement of business loans. Each region had its own results of addressing this subject, some regions have debts, some do not. In any case, there are certain things that stimulate an investment climate today.

For example, I would ask for those 20 billion rubles allocated for socioeconomic development of the regions – this year there were not 20, but 40 regions, Mr President. The regions were given an incentive, and the Ministry of Finance, the Ministry of Economic Development, and Mr Kozak as well, developed such a scrupulous approach. And then there was not enough for northern regions, but our colleagues reached an agreement and revised everything. Our budget was cut a little, but this served as a very good incentive. We allocated most of the funds, Mr President, to address social needs.

Regarding the attraction of investments. Let me give you an example. Six months ago, we presented the Leningrad Region and Karachayevo-Circassia before the Council of Europe. The presentation of our regions, our territories was done brilliantly; all of us already have planning offices, thanks to the Agency for Strategic Initiatives, Industrial Development Fund, SME Corporation, and the export centre, too. Mr President, today our export centre is conducting a great deal of work to promote our products. Two years ago we used to export to 90 countries, but today our rather small Vladimir Region is exporting to 110 countries. Many other regions are also developing, as you already mentioned.

What should we also mention? Well, Mr President, on December 21, we commissioned a new factory. So, I am reporting: it is producing the first NGV-fuelled buses in Russia; everything is automated. We are now to close a special investment contract, the Ministry of Industry and Trade is supporting us, we have leasing funds. I know that Tatarstan is making progress in addressing this matter, too. We have 3.6 billion, Mr Zhirinovsky, I’m responding to your question, these are the funds of a Russian investor, and we have a lot of Russian investors in the region already.

But if we switch to buses manufactured in our own country, to Russian fire engines, tourist vehicles, vehicles for medical staff, what kind of money are we going to save? That is right: budget money. And we have to admit, Mr President, despite the complicated situation with guaranteeing suppliers, with provision of gas, water and heat supply, the Energy Ministry and the prosecutor’s office helped us, and you too, Mr President, and we solved a number of issues.

In general, Mr President, I would like to say that our investments have not decreased. The ASI ranks us in 15th place in terms of investment, even though we have no oil or gas. Over the past five years, we transferred 12 billion rubles to the budget. It is thanks to you and to all our colleagues that we have put the issue of financial stability and investment at the top of the agenda.

I wish everyone the best of luck, love, harmony and health.

Vladimir Putin: Thank you.

Ms Golikova, will you speak about love as well?

Accounts Chamber Chairperson Tatyana Golikova: Yes, I will speak about love of finance.

Mr President, colleagues,

I would like to speak about a matter that has not been touched upon today, although it is very important for balancing regional budgets, on the one hand, and for the investment climate, an issue on our agenda today, on the other hand.

As of now, the distribution of financial assistance is not based on the regions’ budgets but on the consolidated budgets of constituent entities, which means that we also take into account the municipalities that comprise constituent entities.

The debt restructuring measures we are taking now concern the public-sector debts of constituent entities but not the debts of municipalities, whose finances fall within the exclusive competence of the regions.

Unlike the regions’ public debts as of December 1, which is the most recent data, where the share of commercial loans has decreased to 27.4 percent – we hope that this share will continue to decrease – the municipalities’ debts are quite another matter. Although they are smaller overall, only 343 billion rubles, the share of commercial loans is much larger, 63 percent.

Regrettably, some regions have no commercial debts, but the municipalities they incorporate do have them, and these debts are quite large.

Vladimir Putin: Are you referring to the debts of municipal organisations and various regional publicly-funded institutions?

Tatyana Golikova: Yes, I am. Regrettably, the authorities either did not get around to this problem, or it does not fall within the federal competence but concerns a different level of public authority as per the Constitution. And it is probably more difficult to deal with this problem at this level than if it fell within the federal competence.

In this connection, I would like to bring your attention to yet another matter, which we are not discussing, however, it is glaringly obvious and it has to do with efforts to balance the regions’ overall consolidated budgets.

Since the delineation of authority reform, we have delegated 113 areas of responsibility, which fell within the terms of reference of the Russian Federation, to the regions. For this purpose, 1.5 trillion rubles were allocated from the federal budget in 2012–2016. This is quite a sum. What I want to say is that given financial constraints, some regions in the Russian Federation have devolved the delegated responsibility down to municipal entities.

Today, work is being carried out at the federal level to oversee, so to say, how regions are exercising the delegated authority, however, nothing is being done to analyse this work. As of January 1, 2017, since the annual figures for 2017 are unavailable as yet, 7,429 local government bodies as well as other organisations exercised authority delegated to them by their regions.

I would like to remind you that we have mainly delegated authority related to, among other things, social security and the provision of social services. Regarding what you just said, that they also started running up credit debts, the reason for this is the same, that is, an unbalanced budget policy but this time at the municipal level. It seems to me that it is crucially important to establish a liaison between the federal government, regional authorities and municipal entities, although we are aware of all the difficulties associated with this, as we now have 85 regions and nearly 22,000 municipal entities. Of course, it is extremely difficult to administer this work, nonetheless these matters may move to the forefront as the regions settle their debts to the federal government and additional funds are made available to them. This should be given special attention. Thank you.

Vladimir Putin: Thank you.

Mr Kondratyev, please, go ahead and then we better wind this gathering up.

Krasnodar Territory Governor Veniamin Kondratyev: Thank you.

Mr President,

Indeed, the investment climate depends on the local governments in the Russian Federation constituent entities, self-government bodies. But, Mr President, here we need your support. In what sense? Mr Nikitin already said that certainly the natural state monopolies such as enterprises, or power or utility providers also have a serious impact on the investment climate. Sometimes, the connection time as well as the limits make a real difference to us.

Another, significant aspect – the local federal ministries and agencies. They also contribute to the investment climate. I have a request to make: could you include the work of the federal natural monopolies and the regional power and utility providers, and local ministries and agencies in the rating compiled by the ASI. This is of primary importance to us. Then we will at least be working on a parity basis. Otherwise, we are trying and doing our best, but there is a problem, which is not always obvious, but it is sometimes of crucial importance. And here, not only me, we ask for your support.

Vladimir Putin: Thank you. That was a good and useful proposal.

Mr Medvedev, over to you.

Prime Minister Dmitry Medvedev: Thank you, Mr President.

I’ve got three bits of feedback to what we heard here. Mr President talked about the need to work on a strategy of long-term multi-dimensional development through to 2025. It is nearly ready and will be considered soon at a Government Cabinet meeting and made public.

As for the problem of numerous decisions that have to be coordinated through the Russian Ministry of Natural Resources and the Ministry of Culture, we are aware of this. I have given instructions and we must study this matter and maybe abolish the need for coordination on non-essential things because it does undermine the investment climate development efforts.

And finally, somebody mentioned the property tax here. We could consider the future of this tax in the context of improving the tax legislation, which is in our plans following the President’s instructions.

Vladimir Putin: Thank you very much.

I will make a few comments as well and then say a few words at close of the meeting too.

First of all, I agree with what Mr Kondratyev said. Indeed, much depends on the efficiency of the work concerning the natural monopolies in the territories, where their enterprises are located plus how efficiently the local federal agency bodies work. To a certain degree, this is a restriction in the regional teams' activities. This is absolutely true. And I would like to ask you to consider this while developing a general assessment of what is really happening in the regions.

This is as true as what Ms Golikova has just pointed out. We don't take into account the debt of the regional budget-funded institutions while it poses a growing problem for the municipal entities. I would like everyone, heads of the corresponding departments and, of course, our colleagues in the Russian regions, to pay attention to this as well.

As regards natural gas vehicle (NGV) fuel, this is certainly a very important direction. Gazprom has started to switch its transport to NGV fuel, and this immediately resulted in the company drivers' massively leaving their jobs as they no longer can get their hands on this fuel by syphoning it off. And what about the army? What is occurring in the Defence Ministry as a whole and other agencies? I think any comment here is superfluous.

Secondly, NGV fuel is certainly more eco-friendly. We have great competitive advantages in this regard as we have an abundance of this type of fuel. And selling oil and oil products on foreign markets is even more profitable then selling natural gas.

NGV fuel can be used domestically to a great economic effect and this will create absolute competitive advantages for the national economy as a whole. This is why further efforts should be taken to support the development in this field both at the government and regional levels. I would like to point out that this is very important.

Now step by step. About the “grey” economy. Boris Titov said that we have, according to their data, about 39 percent of the GRP. You know, there’s nothing strange about that. In some European countries, it is 40 percent. I heard it from their leaders. That’s what they said. I mean the situation is not unique for Russia, but bad. We must do better than them, and for this we must get rid of this “grey” zone.

I agree that to get rid of it we must not use repressive measures only, making it work its way into the “white” zone; we must create conditions. This depends on the Government, but also on what is going on in the Russian regions.

In fact, this is what we are trying to do. Let’s say, in resolving the matter of capital amnesty, we create conditions for people to incur no expenses when deciding to transfer their business or capital to Russia, and we have additional proposals in this area.

And inside the country too, the decisions, let’s say, which were taken concerning individual entrepreneurs, are also based on the same principles: to introduce a grace period and to save people from possible damage or persecution, God forbid. This is how it works. But, of course, we should expand this practice.

Now about the Central Bank’s recommendations or instructions to commercial banks on easy-term lending to the Russian regions. I do not know how it is possible, but this is what I would like to point out. We have already talked with the Central Bank’s Governor.

What is happening here? Commercial banks give any loans to the regions at rather high interest rates, but it is not clear why the rates are high, and not clear why they extend these loans so freely, even if the region is going through a difficult financial situation. But it is unclear only at first sight, while in reality, everything is clear and can be easily explained: because the state gives guarantees. They are practically giving away loans with a state guarantee.

And here, of course, we should take measures to stimulate accounting when extending loans to the regions with guarantees provided by the state, on one hand; and on the other hand, we should examine some limitations we could introduce in this regard, because a commercial bank will not give money to its customers for no reason whatsoever. It always analyses the financial and economic situation of the company. This is not somehow taken into account when we finance the regions.

I have already asked the Central Bank and the Finance Ministry to think about it and I am now asking them to make proposals.

And now, I would like to say a few words about what, I think, the Moscow Region Governor’s said – the creation of priority development areas all over the country. We have already established these areas. Theoretically speaking, this idea is good in itself. These areas are good, and they have won a reputation for themselves. In reality, we can see that they are developing successfully.

But we did this to improve the investment climate in the regions which we need to develop, in the first place. First of all, this concerns the Russian Far East. If we spread these privileges to the entire Russian territory and economy, then what advantages would be retained by high-priority areas on which we are focusing? These areas would simply disappear. In that case, we would have to stipulate some other privileges for them.

Mr Zhirinovsky has suggested exempting Sakhalin from all taxes. I would simply like to tell everyone that the Sakhalin Region ranks among the best regions in terms of its economic results and financial performance. In effect, the region is faring much better than most Russian regions. Local authorities collect substantial tax proceeds, and regional companies develop rather intensively. As you know, this includes energy companies. If exempted from taxes, the region might turn into a tax haven.

But chances are that the entire Russian economy would immediately reregister in that tax zone. However, these ideas have some common sense, and all we should do is focus on their implementation.

Various federal departments voice excessive demands to regional agencies. We need to eliminate this practice, including the number of wall clocks and mirrors that these agencies should have. It is good that they are not telling officials about the colour of their pants and other underwear they should choose. This is already funny. And, of course (Mr Medvedev has noted this), we need to pay attention to this, and this excessive regimentation of all aspects is pointless and harmful.

We have talked about the growing network of unitary enterprises today. Some of our colleagues have said this. I fully agree with them that it is a dangerous trend both at the federal and the local levels. The growth of these enterprises will create a situation where they will take over the powers of the authorities. Instead of doing their duty for the people by developing the economy, the authorities transfer budgetary funds to these enterprises and eventually lose control of their administration.

In addition, these enterprises receive certain benefits, which destroys competition and increases costs. We all know the perils of delivering a deadly blow at competition. It means no investment in other companies. Indeed, why invest when new unitary enterprises will be created to take over the market? Why invest in creating new production facilities or encourage production? Completely useless. This is what we need to eliminate. I want you to take this into account. We have already discussed this matter with the Government. I urge the regional heads to monitor this situation.

As for labour efficiency, I’m glad Mr Zyuganov has raised this issue. Of course, it is a vital component of economic development. Of course, it can be said, or rather, we must admit that we have not reached our targets here.

During a recent meeting with the Economic Development Minister, we pointed out that labour efficiency decreases as GDP declines, because it falls in those sectors where it was expected to grow predominantly. Now that the Russian economy is recuperating and has entered a period of growth, and these trends are growing stronger, we need to seriously consider a way to enhance labour efficiency, which is a key issue of economic development.

By the way, I would like to say it again, although we have said this more than once: the growth of wages and real incomes must be based above all on the growth of labour efficiency.

Wed talked about agriculture and the harvest today. The harvest is very good. We should congratulate our farmers on this. It is their achievement and their result.

What should we point out in this connection? The harvest is record high, but what are the grain prices? I can understand the decisions on grain intervention and the like. But we also have other instruments for supporting our farmers, and now is the time to put them to use. Or we should use grain interventions but at the same time support agricultural producers, so that the results of their hard work will not create new economic problems.

As for why young people do not choose engineering professions at universities. They already do. There has been a significant increase in the number of applicants to engineering or technical universities. This is very good news.

Surely, a special focus must be placed on working with staff for the training of quality specialists in the labour and technical professions. This is important. We must support this network in the regions and bring it closer to industrial centres and new industrial enterprises.

We have discussed this many times, what needs to be done to achieve that and what we need to focus on. I will not elaborate on this now. I just want to stress the importance of this in our work.

As regards enlarging the regions. True, from an economic viewpoint, this is often expedient. First, we have the Constitution and the necessary laws. We cannot and will not impose this without asking. Second, we have had an enlargement of regions in our history. In Soviet times, you know, Lenin's idea on how the Soviet Union should be created got through.

In fact, large and strong super regions were created in the Russia of those times. It does not matter what its name was back then, it was the Soviet Union, the fact is that large regions were created. Moreover, they were granted the right of exit, which was fixed in the 1924 Constitution. And later, all this moved from one constitution to another. The result is well-known: the breakup of the Soviet Union.

True, there were many other reasons, but this bomb also took its toll. Therefore, we must, together with the Federal Assembly deputies, consider both the pluses and the risks and make optimal decisions, but we must be very careful in addressing such matters.

Now a few words about the north. I will not go into details. Indeed, the work is the north has become largely unattractive. This is true. In Soviet times some incentives were created, but this was done in the framework of the planned economy when everything belonged to the state. Now it is not possible to create the same conditions with the old methods in the new economic reality. Building new cities beyond the polar circle…

As you know, the ecology system is changing and the climate is changing. What shall we do with the many towns and villages that we built on permafrost? Many cities are built on piles. They are driven into a permafrost that is melting. This is the first point.

Second, is it worth building new housing, new cities and permanent structures in the Extreme North and moving people there? Maybe, in some cases this makes sense. Maybe.

As you know, we have now started organising the Northern Sea Route, this transport corridor. We are doing this in a comprehensive way, ensuring security and protecting nature, bearing in mind that we are increasing economic activity in these hard-to-access northern regions that are very sensitive to any interference in nature. But I assure you that sometimes this rotating scheme is much more efficient than an investment of billions and maybe hundreds of billions of rubles in major construction work.

Here is a good example of regional development – the well-known Yamal LNG project. People are working on a rotating basis and earning good money. They are working in good conditions – these conditions are really very good. Maybe they could be better and they will improve them further but they are quite decent. Gazprom has many examples like this. Other companies have them too, so we should look at this on a case-by-case basis.

And finally, I must agree with one of the last speakers and would like to ask you to support what has been said. To make investment conditions reliable and attractive we need a stable tax policy, different administrative and legal procedures and political stability. Without these there will be no investment.

Who will invest in a region or a country if nobody knows what will happen there tomorrow? So, we do need changes and some progress. But all this should take place in a calm atmosphere via evolution whereby each step forward will be predictable.

Thank you very much. Happy New Year to you!

December 27, 2017, The Kremlin, Moscow