Russia Calling! Investment Forum

Vladimir Putin took part in the 7^th Russia Calling! InvestmentForum organised by VTB Capital.

The theme of the plenarysession was “Building Long-term Cooperation and Developing Opportunities for Economic Growth.” The discussion focused on ways of adapting the Russianeconomy to the changing macroeconomic conditions that open up new opportunitiesfor strengthening the Eurasian Economic Union and creating strategicintegrational projects within the framework of the Silk Route Economic Belt, as well as other issues of importance for the Russian and global economies.

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President of RussiaVladimir Putin: I would like to begin by thanking you for the invitation and for organising sucha representative forum. I believe it is both interesting and useful –definitely interesting and useful for this country. I hope those participantswho came from abroad will also find it beneficial.

Actually, all those who spoke here have already said everything – and wehave a very representative board here on stage: the best economists, the bestfinanciers, the best bankers in the world – so I doubt that I will be able to add anything of substance. The entire idea of having me here actually boilsdown to saying that I support them and that we will conduct the policy theyspoke of.

The policy that was declared, in detail and in numbers, I believe, isnot something frozen. Our economic policy reacts to developments both in the globaleconomy and in this country, and some adjustments are made, of course. However,the fundamental principles mentioned by my colleagues will remain.

We will do everything to ensure macroeconomic stability and respond to what is going on, as I said, in international finance and economy, on the worldmarkets. If there is anything you would like to ask or clarify – go ahead,please, I will try to provide you with answers.

VTB Bank Chairman and CEO Andrei Kostin: Thank you very much, Mr President. I amcertain there will be many questions.

The live discussion that takes placeat our forums, when you answer questions from the public, is truly worth a lotand, in fact, it is the reason many people come here. If you allow me, as the host I would like to ask the first question.

This year we have been hearing thatfor the first time in 27 years money is being withdrawn from developing marketsin general. There has always been an influx, while now we will have a pureoutflow: money is being withdrawn from China, Brazil and Turkey. Incidentally, the drain from Russia this yearis half of what we had last year, which is seen as a rather positive tendency.

Given this background, how much doesRussia need foreign investment? Generally, are we expecting an inflow, do weneed foreign investors, or will we replace them with some resources of our own?

My second question is if we do needthem and if Russia is indeed calling, as our forum’s name says, then where isit calling? What are advantages can Russia and the Russian economy offer thatallow us to say to investors: you can invest here, and here you will get someextra ‘chocolates’ or ‘carrots’ – something that would attract investors to this country, to this economy rather than let them look in other countries?What do you think is the greatest attraction of the Russian economy?

Vladimir Putin:There is no need to discuss the reasons for the capital drain from developingmarkets with the people gathered here. This could have been brought about by a change in the US Federal Reserve System policy or many other factors, like a drop in prices on traditional export goods in the developing countries. At the same time, I would like to draw your attention to the fact that in this countrywe have been experiencing a capital drain since the second quarter of 2010,while in the third quarter of this year we have seen an inflow, and absoluteinflow of capital. I believe our colleagues have mentioned this here. If thisis the case, it means the market is responding quickly to the developments in this country and in its economy.

So what is going on? Clearly, wehave come across a crisis. I have already named the causes, and there areactually more of them, but these are the main ones. Nevertheless, some expertsmaintain, and I tend to agree with them that we have generally reached the peakof the crisis and overall our economy is gradually adapting to these neweconomic circumstances, not all of it, but generally, it has adapted.

These are the first signs of stabilisation. Despite the fact, say, that many sectors of the economy arestill going through a slump, except for agriculture, the situation neverthelessis becoming more stable. The processing industry is gaining confidence. In conditions when the economy is adapting to lower raw materials prices,including hydrocarbons, opportunities open up for other branches of the economy: for machine building, agriculture, processing and so on.

This is the first factor that canattract potential investors not only to the oil and gas sector of the Russianeconomy, but to the other ones as well. In additional to that, as we alwayssay, and this is true – here in Russia, we have a sufficiently well educatedpopulation and well trained personnel. This, of course, requires a lot morework in a professional sense, but we have a good pool of skilled personnel.

Finally, I would like to say somekind words about the Government of the Russian Federation and the Central Bank.Despite all the difficulties facing the Russian economy, our management team in the economy has demonstrated a high degree of responsibility, consistency and the ability to achieve results. I think this is also a good reason to believethat Russia is a good place for cooperation and investment.

As for Russian investment, there isa certain decrease in investment into basic capital; however, overall we areretaining a rather high level of investment, including investment from the federal budget. While last year it reached 1.5 trillion rubles, this year the amount will be greater, but without violating as much as possible the mainmacroeconomic parameters. Both the Finance Ministry and the Central Bank aretrying to conduct a more flexible policy.

You have probably heard here aboutthe relevant Central Bank programmes directed at so-called project financing to reduce interest rates for the end loan consumer. You have probably also heardabout the various funds that we are creating. As you may know, or may not know,there are some positive trends in cutting red tape in the economy and raisingRussia’s ratings in these areas. These are all good signs demonstrating thatRussia is a comfortable and very promising place for cooperation.

Andrei Kostin:Thank you.

Would Mr Schulte like to add anything?

Chairman of the Executive Board of Fraport AG Stefan Schulte: As we are all here at this plenum I think we all believe in the future of Russia and we know that recovery will come as soon as possible.

If I take the aviation industry,yes, it is going through difficult times. You know all together the situationof Transaero. If we take St Petersburg, we know that Aeroflot is more focusingat the moment on Moscow. That is all fine. We would like to explore even morethe potential of St Petersburg and invest even more, because we want to invest,and investment means jobs, and it means further potential for the GDP. I thinka good proposal would be to open the sky somehow for more charter traffic for St Petersburg because St Petersburg is a great city with a lot of potential for tourists and if we could have some chance to discuss those issues it would bereally great because we know there is a big appetite from a lot of Europeancountries to go to St Petersburg to see this great city and to create more connectivity,and not just for tourism there but also to bring in business.

Vladimir Putin:I can only support everything our colleague has said, especially as he isspeaking of my hometown of St Petersburg. The potential is great, and clearly,it has not yet been fully realised. We will do everything together with you to make this possible.

The airport did turn out very well,even wonderfully. If you remember, I even took part in the first steps of itsconstruction: I laid a capsule there. It is a pleasure for me that the projecthas been completed with such brilliance. I am certain that it will be used to capacity and will operate efficiently.

Andrei Kostin:Thank you very much.

Colleagues, your questions arewelcome. You can address them to any of the participants, though I believe mostof them will be addressed to Mr Putin.

Question: The last 12 months have been very difficult for the Russian economy. Would you say the most difficult phase of reconfiguring the economy for lower oil prices and for less access to external financing has fully been completed? And if so, could weexpect renewed growth next year, in 2016? And if not, when do you think the process will be completed and in that what do you see as the hardest tasks for the ministries of the Russian Government?

Vladimir Putin:We have already spoken about this. Next week I believe the 2016 budget is to besubmitted to Parliament. Predictions are made on the basis of economicdevelopment forecasts formulated by the Economic Development Ministry and the Finance Ministry. Last year, as you may know, we had a certain slump, and itwill continue this year. However, we believe that we will recover from this in the next few years.

I already said in my opening remarksthat we have if not passed the peak, then reached it – I will be very careful withthe wording here. Some colleagues believe we have passed the peak of the crisisand all our plans for the next few years have been made on the premise that wewill not only overcome this, not only recover from this recession in certain sectorsor the economy, but will also restore our overall positive dynamics. I have nodoubt that this is the way it will be, and all our forecasts, which are veryin-depth and professional, show this as well.

We will be doing this by using veryrealistic and very modest forecasts for prices of hydrocarbons, of energyresources – oil, gas – proceeding from $50 a barrel. This will allow us to concentrate greater resources on the main task facing us, which is now actuallyeven easier to resolve than in conditions of high prices on traditional exportcommodities. The task is to achieve structural changes in our economy, and thisis what all our actions will be based on.

Question: A question from Siemens. We haveheard a lot about the crisis and about political difficulties. How do you seethe prospects for the development of relations between Germany and Russia,prospects for German companies? We have just heard about the decision to buildNord Stream-2. What are the chances of taking part in a national project for high-speed transportation, for instance? How do you see the development of the economy for foreign, German companies?

Vladimir Putin: Germany as a country is one of ourmajor trade and economic partners. This concerns not only trade turnover, butalso the depth of penetration by German businesses into the Russian economy.German business comes to Russia, as we know, not only in areas of ‘fast’ money – German businesses come to machine engineering, to power generation on the territory of the Russian Federation, to agriculture, pharmaceuticals, to the key industries that we are giving special attention to and intend to do so in the future as well. This is the first thing I would like to note.

The second thing I would like to highlight is the balanced and I wouldsay wise approach of German businesses to developing relations with Russia.German companies do not swing from one extreme to another depending on the political situation, but act very pragmatically, proceeding from their owninterests and those of their partners. We value this highly.

As for specific projects, they were formulated quite some time ago, at least the ones you mentioned. Nord Stream-2 within the framework of the greaterNord Stream project was formulated several years ago, back in 2010, and wasthen implemented in stages, beginning with Nord Stream-1.

While we were implementing North Stream-1, our partners, the company’sshareholders were working on their ideas to expand the project. Therefore, thereis nothing new about this. It is directed at meeting the demand for energy resourcesprimarily in Northern Europe, considering the drop in production in GreatBritain and Norway and the simultaneously growing demand for energy resourcesin this part of Europe. It is absolutely not aimed at taking away anyone’stransit opportunities. I would like you to leave behind all these politicalspeculations.

As for Ukrainian transit and shipments to Southern Europe, we haveseparate plans, including those involving our German, Turkish and Frenchpartners – there are many possible participants in future projects. Nord Stream-2has nothing to do with those transits and is not in anybody’s way.

Regarding high-speed transportation routes – we would be happy to seeyou on such projects, on infrastructural projects. Your company took a veryactive and significant part in Russia’s transport machine engineering and itsdevelopment, and continues to do so. This is a mutually beneficial project and naturallywe would be happy to carry on with this cooperation.

We know that our Chinese partners are also developing their transportmachine engineering using German technologies. However, when implementing suchlarge scale projects as high-speed railways, in this case from Moscow to Kazanand further, we have to proceed from economic parameters, from cost, primarilythe cost of loans. This is a question to your Government rather than to ours. If access to European financing is limitedfor participants in such projects, it does not leave us much choice. In that case,our Chinese partners’ proposal to take part in the financing may be decisive.This is one thing.

The other is the price, of course. If we agree on all of these things,we will be happy to see your company join the ranks of those who areimplementing projects of this kind.

George Sebulela: MrPresident, thank you very much for giving me the opportunity to ask thisquestion. My name is George Sebulela, I am from South Africa, Chairman of BlackBusiness Council and I serve on the South African Presidential Advisory Group.I want to also note the role that Russia has played in the transformation of South Africa during the political times, particularly for the ANC, which wasreally appreciated.

My question is around the BRICS countries. One is: Is China-Russia a strategicpartnership, a strong and a stable one? We have seen a lot of the Chinesetravelling to Africa for various opportunities, becoming much more active. And secondly, what do you see as the priorities in terms of economic cooperationwith China, similarly with Africa?

Vladimir Putin: We areaware of the activity of Chinese business in Africa. There is nothing unusual here:Africa is a very rich continent, rich in mineral resources of different kinds.It is natural that such a rapidly developing economy as China needs a stablesupply of mineral resources to its rapidly developing market. Therefore, I believe this is the reason behind China’s activity in Africa generally and in the South African Republic in particular.

As for relations between Russia,China, the South African Republic, Brazil and India, they are acquiring a special nature and becoming more fundamental, because all of these countries,we are all working within the framework of trade that is growing in volume and the growing authority of the BRICS international organisation.

You speak about the prospects for the development of relations between Russia and China. China as a nation is ourbiggest trade and economic partner. I may get the numbers wrong, but itexceeded $83 billion last year — $83.5 billion, I think.

We have very big promising projectsnot only in energy, which is natural, considering the large volume of mineralresources in the east of the Russian Federation and the need to develop entireterritories in China that are adjacent to Russia. There is nothing surprisingin that we are supplying ever-growing volumes of oil and gas and starting the implementation of these major projects.

However, our cooperation is notlimited to that. As you may know, we are doing a lot of construction in Chinain the sphere of nuclear power generation. This is an absolutely different typeof energy, involving high technologies. We have built the Tianwan Nuclear PowerPlant and we have an entire programme for future joint work in this area.

We have good prospects in infrastructure and transport. We are planning large projects in aviation, and there are other areas of mutual interest.

In this connection we find it very interesting to consider involving ourpartners in BRICS in joint work in all these areas; it seems very promising,specifically in nuclear energy. We are discussing one such project with the South African Republic.

However, this is not the only one – we have many different cooperationscenarios within the framework of the financial institutions we have created:the bank, the currency reserve pool – both are formed of $100 billioncontributions. These are large resources that can, should and will be used for mutual development.

Question: Mr President, thank you for yourtime. I’m Steve Lantis, Portfolio Manager at Delaware Investments in the UnitedStates.

Russia adopted a fully floating ruble in a somewhat more dramaticfashion than many of us would have envisioned a year ago. But it has been clearthat the steps you undertook have ensured that the economy is on a more stablepath than we have seen in crises of 1998 and 2008. And as a member of the internationalinvestment community we applaud the fact that you undertook these steps withoutany restrictions on the free movement of capital. But I wanted to ask you at this time are there any circumstances that you can envision where the politicalleadership in Russia would make a change in that direction and put restrictionson the free movement of capital? Thank you.

Vladimir Putin: You recalled the crisis of 2008–2009. You have also mentioned the CentralBank’s decision to introduce a floating national currency, the ruble. We didnot do it in 2008–2009. Then we believed the economy was not ready for suchsteps, such tough measures. Then we really did use up huge reserves to maintainthe ruble exchange rate and retained economic stability. However, we did not makethe decision to limit the movement of capital, nor have we made it now, and weare not planning anything of the kind in the future.

I believe that the fact that we have demonstrated to all our partnersand investors who have invested into the Russian economy that we would not dothat is also a reason why we had a direct flow of investment in the thirdquarter of this year for the first time since the second quarter of 2010. I would like to repeat that we are not planning any limitations on the movementof capital.

As for the introduction of the floating ruble rate, this also has itsdrawbacks for some participants in economic activity: there are some drawbacksfor Russian citizens, of course, for individuals, as this has influenced pricesand, consequently, inflation. In other words, this has some negativeconsequences for the economy and our citizens. However, overall for the countryand its economy, and therefore for the citizens of the Russian Federation in the final count, this step turned out to be the right one and a timely one.

Andrei Kostin: Thank you, Mr President.

I remember the meeting you held in 2008 quite well, and this issue was addressed. At the time, I myself suggestedlimited measures, and you said: this will not happen, that is not why we madeall our reforms and changes, to now go back. And since then, I do not recall a single instance when this topic was discussed seriously. I think that here, youare very consistent. But all investors ask: this is one of the main concernsthat they have.

Vladimir Putin: You know, there are many possible limitations, from full prohibition to partial prohibition related to reserve requirements, certain volumes of transfers and so on. None of this will work.

Question: Mr President, this spring, after a two-year pause, the second pillar of the pension system started working againas before, with funds being transferred to NPFs. However, in September, therewas already talk again about a new freeze. To the outside observer, this riskslooking like uncertain decision-making, and that in turn raises question marksabout the visibility on other elements of long-term economic policy. In addition, freezing payments would have direct effects on the long-term savingsof the economy. In your view, what can be done to ensure that key long-termpolicy decisions are taken in a consistent manner, and that they agree with the long-term strategy that has already been announced? Thank you.

Vladimir Putin: In the economy, as in many other areas in the life of the state and citizens, this is always a compromise between what is possible and what isdesired. First of all, we need to balance the pension system, whose income isnot currently as high as we would like. And the extension of this freeze in the pension saving system has to do with this situation and the need to balance the pension system and guarantee that all Russian pensioners will get stablepayments and stable income.

You said that something is changing.In this case, nothing has changed, because last year, we also froze thesetransfers. But I would like to note that we are not cancelling this programme or these plans drastically, and we assume thatultimately, the defined contribution pension system will develop in Russia in the future.

In this respect, I would like to note that I and many of my colleagues would like for these pension payments –much as in the United States and many other nations – to not only be used by ourcolleagues in the Finance Ministry, who take this money from the market and convert it into securities, but for it to truly be channelled into the economy.We need to resolve this issue.

If there are significantaccumulations, then essentially, enormous reserves are created, but we needthis money to be guaranteed for future pensioners, protected absolutely whileworking effectively in the economy. We will need to dealwith all these elements and, in addition to everything else, we will need to ensure the safekeeping of these funds. All this, together – the first, second, third, fourth and fifth issue – when we achieve all of this, and I think that it will be done, then the pension system will continueto develop.

I repeat again, we are assumingthat, A, it will be preserved, and B, we will invest funds into in the futureto develop it.

Question:The set 5% inflation target seems to have been pushed back once again. And I think that’s somewhat understandable given the events of the past 12 months.But I think it’s worth bearing in mind what other countries have suffered as they’ve deviated from these targets and the difficulties they’ve had regainingcontrol of such metrics. Could I ask you, relative to other priorities, such as restoring economic growth, job creation, reserve building, etc., how importantis achieving the inflation target?

Vladimir Putin: Naturally, all these macroeconomic parameters, as I already said manytimes – as, I’m sure, have all of my colleagues here – there is already a kindof stamp, we will strive to abide by these macroeconomic parameters. But one of them should not contradict another. Just now, Mr Kostin stated that even here,on stage, when our colleagues spoke, they had disagreements amongst themselves.But you could also say that there are disputes constantly when we gather for various meetings.

 Today, we have another meeting withthe Government members, and I’m almost certain these questions will come upagain. What is more important? To maintain a macroeconomic parameter likeinflation, as the Finance Minister states, through the Central Bank, or to reduce federal budget expenditures with the hope that more money will flow intothe economy? This is the question, but it does not have a clear answer –whether this will happen or not. But in general, it’s hard not to agree with.

 On the other hand, the EconomicDevelopment Ministry always demands more resources for specific projects, for supporting the real sectors of the Russian economy, and says that it’s okay ifthe inflation parameters are a little bit higher. We were planning for 3% nextyear? No, 6%; that means, the subsequent years will be 4–5%. It’s clear thatfor developed economies, 2–4% inflation is optimal. Of course, we will strivefor this. It’s hard for me to say now how quickly we will achieve thisparameter. By 2017–2018?

Central Bank Chairperson Elvira Nabiullina: By 2017.

Vladimir Putin: By 2017 we expect somewhere around 5–6% – what is your estimate?

Elvira Nabiullina: Four percent.

Vladimir Putin: We’re even hearing four. God bless the Central Bank. (Laughter.)

But you see what the problem is?It’s that the Central Bank can regulate the volume of money supply and influencethe national currency exchange rate. But if we analyse the situation, I wasjust looking at some fact sheets before coming here on how much the CentralBank has issued and the volume of money supply in our economy, as well as the inflation we had – this year, if I remember correctly, the Central Bank addedthe least money supply to the economy, while inflation was higher. This is onlyone of the parameters. So we need to give more attention to other factors, the most important of which, a fundamental one, is diversifying the economy, reducingdependence on energy resources and our so-called traditional exports, reducingbureaucracy in our economy, creating reliable conditions for investors and ensuring normal functioning of the judicial system and administrativestructures. We are working on all of this. But these are issues that takelonger than a year to resolve – and longer than two, or even five years – butwe know that we need to do this, and we will follow this path.

Question: Over the weekend, US President Obamacalled into question your leadership over Syria. He said that you are proppingup an ally rather than going after ISIS. He also said you are running down the economy here. Can I ask you, how do you respond to President Obama’s commentsand what would you say to international investors who are dissuaded fromputting money into the Russian economy because of such remarks? Thank you.

Vladimir Putin: You know, as we say in Russia, everything has been thrown into one pile.What does the situation with ISIS in Syria have to do with investments in Russia? Although, of course, everything in the world is interconnected. Thereis no direct connection, but ultimately, of course, everything isinterconnected.

First of all, I do not want to debatewith anyone right now, but I will note that we are not striving for some sortof leadership in Syria. There can only be one leader in Syria: the Syrian people.We strive to make our input in the fight against terrorism, which is dangerousfor the United States, Russia, European nations and the entire world, withoutany exceptions.

I will point out that all ouractions, as I have said before, are in strict compliance with the UN Charterand international law – unlike our colleagues from the so-called internationalcoalition led by the United States, which is acting without UN Security Councilresolutions and without invitation by the Syrian authorities. Over this time(operations by international forces headed by the United States – or if we putit simply, the actions by the US – have been underway by over a year), theyhave engaged 11 nations in bombing, with over 500 strikes on Syrian territory,spending half a billion dollars, and that’s only officially, to train FreeSyrian Army fighters to fight against ISIS. We know the result: there is none,there’s no result.

Now, it has been reported that the Free Syrian Army is being supplied with ammunition via aircraft. Where is thisFree Syrian Army? If they simply discharge or dump the ammunition and weaponrysomewhere from the air, how can we know that it won’t all get into the hands of ISIS, as this happened during training of the Free Syrian Army personnel and armingit – what are the guarantees? After all, this was just done, this justhappened, and just now, the United States admitted that the action failed. And now, they are simply throwing ammunition somewhere. To whom? This is not a rhetorical question.

Now, we often hear that our pilotsare bombing the wrong targets, not ISIS. First of all, we briefed US leadershipin advance, although the United States has never done this. We were the firstto do this out of respect and a desire to establish a working relationship. Nowthey tell us, “No, first, we are not ready to cooperate with you, and second,you are bombing the wrong targets.” We said at the military level, appealed and asked, “Give us the targets that you are 100% certain to be terrorists.” The replied, “No, we are not ready to do that.” So then, we thought about it and asked another question: “Then tell us, where shouldn’t we be bombing?” Noresponse there either. So then, what should we be doing? This is no joke, I didnot make this up, this is what happened. Just recently, we said to the Americans, “Tell us the facilities we should strike.” There was no response. Howcan we work jointly then? Do you have an answer? I don’t have one either, yet.

I think that some of our partnersare simply confused and do not have a clear understanding of what is reallyhappening on the ground, nor what goals they want to achieve. But we willinsistently work to ensure that the efforts in the fight against internationalterrorism are joint efforts, and the result is clear, expected, and aimed at fighting international terror, to eliminate this threat for all of us.

As for investments, as I alreadysaid, I do not feel the two are related, but when I was just telling you abouthow these events occurred; I had said from the very beginning that nobody everwarned against such actions. Whereas we did. This speaks to the fact that wewant to work together, and whoever wants to work with us in the spheres of security, counter-terrorism and economics is welcome.

Andrei Kostin:Shall we get back to pensions?

Question: VadimSobolevsky from Finisterre Capital in London. Sorry, just to continue the Syrian theme just for one more second. Can you give a few words on how you seethe relations between Russia and Turkey going forward? There seems to be sometension on the Turkish side about the recent developments. Is there a dialoguewith Turkey? Where do you see this going forward?

Vladimir Putin:Turkey is one of our priority partners and good friends. We have had very goodrelations with Turkey for many years now; this is one of our major trade and economic partners. Take our construction market, where Turkish companies havespent about 12 billion, I believe, over the past years. We supply large volumesof energy resources to Turkey. We have large joint projects in energy and agriculture. Turkey has significantly increased exports of its agricultural productsto our market, which actually meets the interests of the Turkish economy and Turkish people.

We need to understand how we candevelop relations on the anti-terrorism track. Here Turkey has many concerns in connection with the Kurds and with fighting terrorism. We see these concernsand are ready to take them into consideration in the course of our joint work.Even now, we have contacts between our military agencies. I hope they wouldlead to better coordination between us. We have to arrange this work on a political level, just as with the United States.

Question:Thank you, Mr President. My name is Richard Lamb and I work at Lloyds of Londonin the UK. The Bank of Russia has started implementing the plan to create a national ratings agency. The requirements of such an agency are clear – to protect the national financing system against the risk of losing the servicescurrently provided by the international rating agencies. However, do you notthink that the appearance of such an agency, supported by the Government and the prominent business groups, could damage the chances of competing Russianrating agencies and correspondingly limit the competition in this importantsector? Thank you.

Vladimir Putin:Can limit what? The agency’s competition? How? It does not exist yet. When itis created, there will be more competition for structures of this kind. I believe there is nothing wrong here. This will only be good for this sphere of activity in the world at large and here in particular.

I am sure you remember how nervousour European partners were a few years ago when they though that international(actually American) rating agencies were knowingly assessing the Europeaneconomy and individual companies in a way that would reduce the competitivenessof the European economy with regards to their American competitors. Such fearswere voiced not only by experts, but also regularly expressed at governmentlevel.

Therefore, I believe the implementation of the project to create a national rating agency will not aggravatethe situation in this sphere, but, on the contrary, improve it. The main thingis to ensure that this rating agency is highly professional and independent in every sense. With this in view, we expect that all the participants in thisproject will hold no more than 5 percent of the equity; we intend to attract a maximum number of participants specifically from private companies, rather thancompanies with public ownership.

Naturally, all the work on such a structure should be free of lobbying of any kind based on any national principleor other motive. I expect the governing bodies of this agency to be made up of world-class experts. In this sense, their nationality does not matter.

Question: PresidentPutin, what effect do economic sanctions have on the global economy? In connection with this, how substantial is the threat of the global financialsystem fragmenting? Can we talk about the end of globalisation, at least in the form that we have known it in the last 25 years? Thank you.

Vladimir Putin: The United States once created a General Agreement on Tariffs and Trade(GATT), then transformed it into the World Trade Organisation (WTO). And theyattracted the majority of participants in international communications or international economic activity – they sucked them in like a vacuum cleaner.Clearly, the ideas formulated by the WTO are good and promising for export-oriented economies, thanks to a common currency (today, the dollar isthe only real reserve currency); and the next step to take with the help of the WTO – removing national borders – was the right decision. Certain bonuses werealso provided to nations belonging to this organisation, whose idea was to remove national borders and essentially provide the national regime to participantsin economic activity in specific countries and offer them the most favourednation treatment.

We view issues pertaining to limiting and destroying this system through sanctions primarily as a tool of dishonest competition. I feel this could be bad for everyone. I am not eventalking about the losses incurred, for example, by our European partners,equalling tens of billions of dollars from our countersanctions, but this issimply a manifestation of the negative consequences of this approach to management on the international arena.

We in Russia thought the economicrules set forth within the framework of the WTO are inviolable and unrelated – and shouldn’t be related – in any way to politics. It turned out this is not the case. It turned out that these economic instruments are used to achievecompetitive economic advantages and to achieve political goals. I believe thisis highly damaging to everyone. We need to agree somehow, somewhere, that wewill avoid this practice entirely in the future.

Question: Goodafternoon. Thanks, Mr President, for your time; it’s certainly much appreciated.Recently, the governors of Sakhalin and Komi Republic were arrested and currently face some very serious charges. Could you comment on those events please?

Vladimir Putin: I think it is premature to talk about it. In Russia, as in any othercivilised nation, an individual is considered innocent until a guilty verdictis reached by the court. The law enforcement agencies have good reason to believe that some serious violations of the law, crimes, were committed. Butmaking any comments before the initial investigation is complete and before a court makes a verdict is wrong and, in my opinion, counterproductive; it can bebad for the course of the investigation itself and for objective conclusions by the corresponding judicial agency.

As for the fight against corruption,we are setting this as one of our most important objectives. You know that wehave adopted a whole set of decisions of a restrictive nature, restrictive for people engaged in administrative work at all levels, from federal to regional.We will work to improve this monitoring system, we will work to improve the work of the law enforcement and judicial systems and, of course, we willcontribute to international efforts in this area. Soon, in November, a corresponding forum will be held in St Petersburg under the auspices of the UNwhere Russia, as the host nation, will be a very active participant.

Question: Mr President, the first part of my question is very short. What share of your time do you spend on economic and infrastructure issues, and what share do you spend on settling internationalconflicts, deploying the army and humanitarian issues?

Vladimir Putin: I spend at least 80% of my time on the first, if not more.

Question: Thank you. The second part of my question is more specific. In order for foreign investors to come to Russia,they need to see an example of Russian investments. It was already mentionedthat only 3 percent of the Russian pension fund is being invested in shares;frankly speaking, foreign investors are not very comfortable investing in shares. If we are talking about the real economy, it was mentioned at the lastsession that Russian roads are so dangerous that 27,000 people die in road accidentsevery year. This is twice as much as in Europe. In other words, Russianinvestors once again do not feel entirely comfortable coming here from a purelyphysical standpoint.

Vladimir Putin: You think foreign investors are drivingaround between Voronezh and Orel?

Comment: It would be wonderful if they were.

Vladimir Putin: I doubt it. Foreign investors inviteus all to fly in planes.

As for the roads, it’s true, this is a well-known problem in Russia. Ourterritory is enormous, incomparable to any other state in the world, with manyunderdeveloped territories, and traditionally, the road network there wassimply absent.

Moreover, our road-building standards are even stricter than in manyEuropean nations, and the climate is quite different, to put it lightly. Thereare objective and subjective difficulties, but one of the methods for developing the economy overall is certainly expanding infrastructure and the public road system, railroads, airports, ports and machine engineering – bothin aviation and transport overall.

Question: Here is the last part of my question. What economic investment issue would you, personally, most like to see resolved?

Vladimir Putin: You named one of them: developinginfrastructure, which has always been considered a priority, particularly in times of economic hardship, providing good returns for the economy in the medium- and long-term. We agree with this.

Andrei Kostin: We have been having a discussionconcerning roads since this morning, because one of the speakers, Mr SergeiGalitsky, the owner of an enormous number of retail outlets, said that to increase demand, we do not need cheap money or anything else. We need for morepeople to be born and fewer to die, and then demand will grow, because the population will grow. I think this is an echo of this topic, which we alreadydiscussed. I believe it would be fair to say that investment in people willalso allow us to increase demand within the country.

Colleagues, Mr President can answer a few more questions.

Vladimir Putin: Three last questions, and then I will let you be.

Please, go ahead.

Question: I have a question on competition –in other words, on the Government’s policy on de-monopolisation. Incidentally,I asked a question about this same issue at the first VTB Capital forum in 2009.The President – then the Prime Minister – responded positively to my question on whether the domestic gas market would be de-monopolised. And indeed, that is what happened. Thus, additional shareholder value was added at companies like Novatek, TNK-BP, which is part of Rosneft, and so on.

So today’s question concerns the merger of two agencies: the FederalAntimonopoly Service and the Federal Tariff Service. How are investors to understand this decision? Does this open the path toward furtherde-monopolising the most important sectors, such as rail transport and electricity? Incidentally, perhaps representatives of international business in Russia will also want to share their impressions of the competitiveenvironment.

Vladimir Putin: As far as de-monopolisation of railtransport and electricity, we will move in that direction. Moreover, I personally feel that as far as rail transport is concerned, these questions arelong overdue. Russian Railways’ position on this matter is that they cannot or should not let go of certain elements of this business. In my view, this is notconvincing, given that they will control traffic control in any case. So I believe continued liberalisation is necessary, it should be developed and implemented.

In theory, the same is true of de-monopolising electricity. Of course,here, we need to monitor the market very carefully – I am referring primarilyto rates.

With regard to combining the two agencies, there is nothing unusualabout this. Resolving the issue this way was driven by the fact that there wasa desire to eliminate certain overlapping work by the two departments, to makeit more effective and aimed at resolving the challenges that you just askedabout – continued, more effective work to de-monopolise the economy overall.

As for our aspirations in this area, you know that in addition to intensifying the work of these departments, particularly the FederalAnti-Monopoly Service, we also made a corresponding decision at the legislativelevel to significantly toughen penalties for monopolistic collusion, going as far as criminal penalties, which we never had before in our legal system. Wedid this in part based on the analysis of work by similar agencies in other countries,including the United States and the United Kingdom.

From the point of view of Russian practice, there is nothing unusual here;after all, the Federal Anti-Monopoly Service and the Federal Tariff Servicewere formed, I believe, in 2004 on the basis of the Anti-Monopoly Ministry. Butafter they spent some time working separately, practice showed that ultimately,it is probably better to combine their efforts for higher-quality and moreeffective work.

Question: Good afternoon, Mr President, my name is Bridgette Radebe, I’m from South Africa. I actually met you the lasttime you came for the BRICS business summit, we took pictures with ourPresident. I’m the President of the South African Mining DevelopmentAssociation, which is a mining chain in South Africa. And I’m also the co-chairof the Russia-South Africa business forum in BRICS.

My observation within the BRICS context is that we have two verydominant countries in Russia and in China. And the amount of effort that Russiacontributed towards the political liberation of the African countries duringthe colonialist time was very dominant and very fundamental. I feel when we seethat the economic dominance is not enshrined and there would potentially be a risk of replacing foreign direct investments from Europe with that of China.

The Chinese are very, very active in the African economy, and would liketo see more prominent Russian participation in terms of the oil and gas and minerals. We have created a BRICS bank for infrastructure. It would be veryunique to create also a resources bank and maybe go beyond that and look into a BRICS stock exchange. And when you look at a stock exchange and maybe model itor cut into the flow through shares, flow through shares that might translateinto tax incentives for those producers in the oil, gas and minerals that areinvesting in that BRICS stock exchange.

I’m just talking about the paradigm shift beyond what we started, by creating the BRICS infrastructure bank, and we would then like to pursuefurther interactions beyond that.

You are aware that you have not been sanctioned in BRICS. Africa is an economy of nearly a billion consumers, and we are well endowed with mineralsand there are lots of opportunities. So let’s see what we can create beyondwhat we’ve started in terms of BRICS and would welcome everybody else to participate.

And please be aware of the dominance the Chinese are playing in the African economy. There are Chinese in every country, wherever you go. And wewant the Russians to be a little bit – also active, taking into account thatyou played a very dominant role in our political liberation, and those economicbenefits must match the role that you played. Thank you.

Vladimir Putin: Thank you very much. I think thereis no need to fear any investments. Investments, if they are developed and accepted by a particular sovereign nation, should work in the interests of the nation where the money is being invested.

And the role of experts from one state or another is only to create rulesfor these investments that will benefit both investors and the receivingnation. But indeed, your speech is not actually a question but a suggestion on creating a common stock exchange and several other infrastructure-relatedthings.

Of course, all this can be done taking into account that the Infrastructure Investment Bank and the Currency Reserve Pool are starting to work, as I already said and as you just mentioned. We need to develop this at an expert level, so I thank you for your speech and for your suggestion. Wewill certainly think about it.

Andrei Kostin: One last question from Mr Ravi Ruia – this is a major Rosneft partner, and one of the biggest industrialists in India. This is a major industrial group that includes oil, metals, ports and everything else.

Ravi, please go ahead.

Ravi Ruia: Thank you, Mr Kostin.

Your Excellency, I’m Ravi Ruia from the SR Group in India. We areinvolved in the oil refining and exploration business, the steel business, the infrastructure business and the power generation business. In the recent past,we have been working very closely with Rosneft. We have now signed a long-term10-year agreement to buy crude oil from them into India. This will be the firsttime after several years that India will actually be getting crude from Russia.We have been working closely with VTB Bank, who have supported us in the recentpast. In fact, I can tell you that with Rosneft and VTB, today have become verywell-known in India because of these transactions.

We are now looking at further investments both ways – both into India by Rosneft and VTB, as well as two-way, from our side, into the Russian economy.

Your Excellency, Russia has always supported India in the time whenIndia needed help, and I think, as you well know, India has always been verygrateful for that. And even today, all the political leadership in Indiacontinues to maintain the Russia-India – will continue Russia in every possibleway.

From our side, the question I have is, other than the political side,how do you really see Russian economic cooperation with India, particularly in the private sector? Because in the recent past, the real investment or realcooperation has been between Russian government entities and Indian governmententities. But increasingly, we see a role for Indian private entities and Russian private entities, as well as Russian state-owned enterprises.

We would like to see, what is really the commitment and how interestedis Russia in developing this relationship with India in different sectors.

 Vladimir Putin: You know, we would very much likefor this enormous, simply colossal political potential of our cooperation thathas been built over decades, the huge potential of our mutual trust, I would evensay, the great love of our peoples toward one another, to be realised in concrete actions, through concrete economic projects. And the potential of oureconomic development has clearly not been fully tapped. India is an enormousnation with a large population of over one billion people and naturally, with a rapid, effective emerging market economy.

And yes, until now, we have supported our economic relations, but ifthey are exceptional, it is largely thanks to the efforts of our twogovernments. But our goal is for our efforts at the governmental level to actas a trigger to activate work at the level of private companies.

India has a large number of private companies. Right now, many of themare already working in Russia, especially in the pharmaceutical industry, butin others as well. We have many good, large projects, but naturally, we wouldlike to attract private companies to engage in joint work: in Russia, in India,and jointly in third nations. Let’s work together to use all the instruments wehave, the interstate commission and the Business Community forum, to find suchopportunities and bring them to reality.

Jacob Grapengiesser: My name is Jacob Grapengiesser, fromEast Capital. I have a couple of questions about Ukraine. First of all, do youthink the current ceasefire in Ukraine is stable? Second, will the Minsk Agreements befulfilled? And third, is there any chance Europe will lift the sanctionsagainst Russia?

Vladimir Putin: Concerning the last question, you’llhave to ask Europe, or those who issue the relevant orders in a slightlydifferent place.

As far as Ukraine is concerned, I already said this and want to say itagain: there is no alternative to the Minsk Agreements. But it’s beenconstantly stated thatRussia shouldfulfil them – it’s becoming downright awkward. You see, it’s just not serious, it’snot funny, it’s simply awkward.

The most important element that must become thefoundation of the peace settlement in southeast Ukraine is the political process. And what is a political process? It has three to fivecomponents.

First, and this is stated in the Minsk Agreements, is amending the Constitutionon a permanent basis in agreement with Donetsk and Lugansk. There have been noamendments so far, and whatever has been done at the preliminary stage has notbeen agreed upon with either Lugansk or Donetsk. At the same time, we are toldabout Ukrainian domestic policy limitations. However, there are limitationseverywhere, but there is also an obligation to fulfil the Minsk Agreements.This does not depend on us; it depends on the United States, Europe and Kiev.Incidentally, this should be done on a permanent basis.

A law on the special status of these territories has been submittedwithin the transitional provisions. And we are told: this is on a permanentbasis. But everyone forgot that this law itself was adopted for only three years – a year has already passed. It is not our role to give this law a permanentstatus.

Furthermore, they need to adopt a law on amnesty. It’s stated so rightin the Minsk Agreements. But we, here in Moscow, cannot adopt a Ukrainian lawon amnesty. And how can political dialogue be conducted with people who areunder threat of criminal prosecution? Are we supposed to do this? Why are weconstantly told that we need to fulfil the Minsk Agreements? Why substitutethese concepts and these problems and transfer the responsibility for theirresolutions to us? Why is this being done, if we truly want to achieve the fulfilment of the Minsk Agreements and solve the problem on that basis? And that is the only way it can be solved.

Finally, the law on the special status for governing these territories.It says right in the Minsk Agreements: within 30 days after signing, a Rada resolutionmust be adopted and implemented. Have they done this? Formally, they have. Theyadopted the Rada decision, but they added Article 10 to the law, withoutverifying it with Donbass, and the Rada once again postponed the adoption of this law from Article 2 through 9. In other words, they essentially createdthis ploy. They adopted it, used it formally, but in reality they cancelled itagain. Is this our doing? We understand that there are internal politicallimitations but the Minsk Agreements must nevertheless be fulfilled.

The law on elections. The Minsk Agreements say that the law on localelections must be agreed upon with Donbass. The Rada adopted a law on localelections without any consultations with Donbass, in spite of the fact thatDonbass has sent its drafts three times. They were ignored. They adopted a lawand stated clearly in that law: local elections will not be held in theseterritories. Then what did the people living there do? They said, “Okay, thenwe will hold our own elections.” That’s what happened. Kiev began asking themto delay the elections – all right, they agreed to delay the elections, theywanted to meet them halfway. But now, the efforts to adopt this law must bealigned. It will be a difficult process to find compromises, but it cannot bedone otherwise. There are no problems there from our side. In spite of all the domestic policy limitations, this must be done, first and foremost, by ourcolleagues in Kiev. It needs to be done.

Finally, the economic rehabilitation of territories. There is a full embargoagainst those territories. They tell us, “Ensure that they allow Ukrainianhumanitarian assistance to access those areas.” While Donbass replies to us,“They should lift the embargo, and then no humanitarian assistance will benecessary.” That’s the problem. There are many problems, but the overwhelmingmajority does not lie in our domain.

Do our colleagues in Europe and the United States see this? I think theydo. I also have reason to believe that they see it clearly. But they areuncomfortable saying that the current authorities in Kiev are incapable of resolving it. It’s much easier to blame it on us and tell us to intensifysomething or other, to triple or increase it six-fold. What should we increasesix-fold? We need our partners to fulfil their obligations; the same is true of those who can influence them. We believe that by working together, we willultimately achieve a positive resolution.

Question: I am from Verno CapitalFoundation. My question is about small and medium-sized businesses. Mr Kostin wonderedat the previous session whether small and medium-sized businesses should begiven loans. They are risky and this could create…

Andrei Kostin: I will repeat exactly what I said.Please do not misquote me.

Question: I am sorry, I may havemisunderstood you.

However, the point of my question is whether small and medium-sizedbusinesses will develop in Russia. If we take statistics, currently the contribution of small and medium-sized businesses to the GDP amounts to about20 percent, I believe. If we take developed countries, in England the figure is50 percent, in some countries up to 80 percent. When export markets collapsedue to certain external factors, the sector that supports the national economyremains. It would be interesting to know what would happen to it.

Thank you.

Vladimir Putin: The answer is obvious, I believe.I think you know the answer. Of course, we are aware of everything you said.The thing is that it has always been underdeveloped here, was not developed at all, the Soviet Union and then the new Russia never had such a sector. We arestarting from scratch. Obviously, we need to create new administrative conditions,beginning with the registration of companies and appropriate legal entities,including access to the infrastructure, primarily power supply, to variouspremises, to investment, the fiscal burden of every kind, including payments to social finds and taxes proper should be reduced.

However, I am sure you know the support system developed by the statevery well. We are studying your proposals in close contact with representativesof small and medium-sized businesses in various areas. I will not speak now of special support instruments via Vnesheconombank, of the funds allocateddirectly from the budget and distributed among small and medium-sizedbusinesses through the regions of the Russian Federation.

This is probably not enough. However, this direct support is not the most important thing. The most important thing is to create proper conditions.We understand this very well too. And we will continue to do everythingpossible in the present economic situation. Have no doubt about that.

Andrei Kostin: May I make some corrections? I said lending money only makes sense if there is a demand for their product, isthey have an opportunity to operate. However, there is no point in simplylending money if there is no demand. If nobody needs their product – why shouldthey be making it?

Vladimir Putin: I believe what our colleague meantwas that, despite the lower interest rate, and the average used to be 20percent, while now it is slightly over 14 percent, this is the average figure,while, naturally, there are both higher and lower rates – for good, traditionalborrowers…This is exactly why both the Central Bank and the Government aredeveloping a system of special measures to support small and medium-sizedbusinesses both through the regions and by directly funding existing projects.We need to increase access to project financing, to make sure that the threshold is not too high for investment, so that small and medium-sizedbusinesses can get closer to such sources.

I will repeat that we will continue working closely and persistentlywith your colleagues, with small and medium-sized business associations.

Vladimir Korobkin: Good afternoon, Mr President,colleagues.

 

There was a difference of opinions among the participants in the previous session regarding the feasibility of stimulating investment into the oil and gas sector. I would like to hear your opinion, Mr President,specifically within the context of project financing. There has been mention of Government Resolution 1044. As far as we understand, it does not cover projectsin our sector. Do you consider it feasible to adopt a similar resolution to stimulate project financing in the oil industry?

 

Thank you.

 

Vladimir Putin: You know, this is quite natural,and this should be no secret to you: as soon as prices go down, the consumptionof energy resources goes down, and investment into this sector goes down as well. This has always been the case everywhere, and we have the same thing.

 

A company should envision future market developments and if the prospects are limited, investment is also limited. However, this eventuallyleads to a situation where promising fields are not commissioned on time, a deficit occurs and the price of energy resources goes up.

 

I am certain that this will happen this time in the world economy as well. However, this does not mean that we should not support promising nationalprojects and the oil industry. Despite the views of some of our financialauthorities, we are thinking about it. They would like to ‘bite’ a piece offyou, I am sure you already had some arguments here.

 

However, it is not true that we would like to limit investment into thissector of the economy. Mr Siluanov [Finance Minister] has explained: the Finance Ministry wants to collect the surplus revenue generated by fluctuationsin the national currency exchange rate. However, you may have noticed, and experts, market players know this, that initially we spoke of 600 billionrubles. The Finance Ministry eventually agreed that if we do consider this, the figure should be much lower, and we reached a very modest figure of about 200billion through the use of various instruments: taxes, duty, etc.

 

However, I would like to assure you that we are fully aware of the importance of the oil and gas sector for Russia, for the Russian economy. In our attempts to diversify it, to achieve structural change, we will not do itby supressing the sector that is working efficiently.

 

Thank you all very much. I wish you success.