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Excerpts from Transcript of Meeting with Members of the Russian Union of Industrialists and Entrepreneurs

DMITRY MEDVEDEV: Good afternoon,

I will say a few words to get the discussion going though do not expect anything particularly original. I am more interested in hearing what you have to say, all the more so as more than a year has passed since we last met in this format at the Kremlin. We had earlier meetings too, and informal contacts since, but it was a year ago that we last got together here or anywhere else in the Kremlin. The spectre of the crisis had already raised its head around the world by then and in our country too. Much has happened since then, as you know well. The world has changed and our economy, your companies included, the country’s biggest companies, have faced very serious challenges. All of you present have withstood these trials. This is a fact, although there have been losses along the way too.

The state authorities have implemented a whole package of anti-crisis measures. I instructed the Government to draft an anti-crisis programme, which I think has been effective overall. There have been difficulties encountered, of course, as we expected, all the more so as other countries too have faced various problems carrying out their anti-crisis programmes. Some of the companies represented here received direct state support (this has to do with the issue of the state’s ultimate influence on the economy).

As you know, I am working on the Address [to the Federal Assembly] at the moment. In a new move, this work has taken on a much more public dimension, based on the article [Go, Russia!] published in September, and the ensuing discussion. Today, I want above all to hear your thoughts on modernising our economy, because we realise that action is needed. The crisis revealed our economy’s weak points and obviously, if we do not make the needed changes, a new crisis would simply spell the end of many of the companies present here today.

The financial support we gave our economy and companies was unprecedented in our country. Overall, as I said, it has served its purpose and is now starting to produce results. Preliminary results for the third quarter show that, despite the fact that our economy slumped farther than anyone here expected, we are now starting to climb out of the recession. Our economy is following the same pattern as the global economy. This is in itself a good sign, because if we had distinguished ourselves by putting on a worse performance than others it would have been a worrying signal indeed.

We will continue to provide support in one form or another. A difficult year lies ahead. We have for the first time deliberately drafted a budget with a deficit, and we are going to have to trim some state spending on investment and other federal programmes. But we will carry out all of our main obligations, all of our social commitments.

Increasing the effectiveness of state spending and the way budget funds are used is another important issue at the moment. The situation is really quite dire in this area. It is our common task to diversify our economy and move away from the raw materials-based model, despite the fact that many of the companies here today are involved precisely in this area. But we all realise that if we want to ensure our future we need to develop higher value-added production, no matter what the economic sector in question.

I will not spell out the benefits of innovation. You are all capable and aware people who understand this matter well. But we have seen only very slow progress in this area. I set up a special presidential commission [for modernisation and technological development of Russia’s economy], and the Address [to the Federal Assembly] will be largely devoted to these issues. We need to examine what additional incentives we can create, legislative incentives, and also organisational and ideological incentives, if you wish. All the more so as the state, being the owner of our natural resources, has the right to expect that industrial production will introduce and make use of the most advanced technology that meets the highest standards of production efficiency, environmental safety, and labour productivity. I hope that you all keep this in mind.

The heads of most Russian companies underestimate the benefits of using new advanced technology. The emphasis in most cases usually goes on increasing sales rather than cutting costs, raising product quality and labour productivity. This is a clear fact.

But whatever the case, we have reached a turning point in our country’s and economy’s development. The regulations governing access for imported goods and services to our market are already quite liberal. There should be no doubt as to our plans to join the WTO, despite the delay due to the establishment of the Customs Union, and this means that we will have to compete against the strongest international companies, who have a very high level of technology and are already present on our market. This further highlights the need to shift our entire economy to an innovative development model.

We understand that often, especially when the situation was more or less calm, you invested in foreign business, in leading foreign industrial, financial, trade and media companies, even sports clubs, and this is not a bad thing overall. But of course we (and by ‘we’ I mean the country, Russian society) have a right to expect to see you being similarly active on the domestic market. Capital formed in our country should in considerable measure be invested here at home.

I hope you all realise just how important modernisation is. None of you here were so acutely aware of this importance before the crisis began. There was a point when everyone was dizzy with delight at how prices for our various export goods - gas, oil, metals - were rising. Our cars seemed to be developing too and selling on the market. The crisis put a stop to all of this. Our task now, therefore, when the whole world is working on an exit strategy, is to reflect on the exit strategy for our own economy. You have a big part to play in this. You are all experienced people. Not only did you start your businesses in the 1990s, but developed them too.

Now you have gone through the crucible of the crisis, and this is a valuable lesson, even if it has been difficult and today too, we do not face an easy situation.

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I want to talk about transforming state corporations working in competitive sectors of the economy into joint stock companies. I think that we will need to follow that route. Certainly, the state corporations that operate in other non-competitive areas will remain. Alternatively, the state corporations that were created temporarily for the purposes of funding projects only, should be dismantled once their goals are accomplished. Still, the state-owned corporations that are clearly needed must remain but change their legal status. In the grand scheme of things, we do not need such entities as state corporations. At a certain point, we allowed the creation of state corporations to get out of control. This does not mean that we need to shut them all down tomorrow - no, they will continue their work. However, there will ultimately be only two options for them and they will either become joint stock companies or go into liquidation.

Regarding the privatisation of government assets: the Cabinet recently spoke about this issue and is preparing a programme of action. I feel that we really do need to come to the final point here. The privatisation has been going on in our country for a long time - nearly two decades now. All of you participated in those processes in one way or another. We need to take stock of the situation and reach some kind of optimal level of state participation - one that, in light of the crisis, may serve as a road map for the next ten or fifteen years - because it is impossible to set particular limits for government involvement in the economy.

The crisis has shown us that our aspirations to move away from government involvement have become untenable. At the same time, we must be cognizant of the limits that should not be surpassed in this particular situation. Perhaps in 15 to 20 years, things may change. That is how other economies function as well. The process of nationalisation and privatisation occurs in the development of nearly all nations. Thus, we need a clear programme on how to go about it and, perhaps, some kind of enumeration following two decades of work. This should include a legal assessment of the process. I know that this issue is quite complicated; it has been analysed many times and various suggestions have been made. But I think that some of those suggestions should now be implemented. What will our exit strategies look like when the time comes to stop providing government support to the financial sector? Indeed, this is the subject of our meeting today - it is the reason why I am here to listen, as are the other Cabinet and Presidential Executive Office officials present. You are making suggestions and we are listening to them and trying to assess them.

As someone with a legal background, I want to support you. It is true that basic laws should be amended with great care. I myself once said, when speaking to the Cabinet and the State Duma, “Act more quickly, so that we do not run out of time and so that we can avoid any major complications for particular sectors of the economy.” In some cases, we were able to do the right thing; in other cases, we may have made some opportunistic changes. Right now, we need to evaluate them and decide which anti-crisis measures have withstood the test of time and which ones should be eliminated, having served their situational purpose. Clearly, we must also evaluate all the innovations that appeared in our legislation, including innovations in anti-monopoly legislation.

A word about measures to support projects in infrastructure. Our budget for the upcoming year is complicated and frugal. One thing that I can say is that the PRC’s experience is very interesting and appealing, but I still do not think that it should serve as a model for our development - we have differences in our economic volumes, our decision making processes, and issues of accountability in various areas, including accountability on the part of bureaucrats and businesses. The measures taken there are based on a somewhat different mindset.

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I want to talk about the anti-monopoly legislation to somehow formalize our understanding, at least to a certain degree. It is true that we had a difficult time with this bill. I personally gave instructions to have it passed by the State Duma, because at some stage, the number of people actively opposing it surpassed all reasonable limits. Thus, I had to give direct instructions. However, this does not mean that the bill we passed is absolutely optimal.

You know, anti-monopoly legislation all throughout the world is strict, and we know this. It not only includes administrative, civil and property-related sanctions, but criminal sanctions as well. In some of the most-developed industrial nations, the criminal sanctions are quite severe. In this regard, it would seem that we are moving down the conventional path. But there is one thing I cannot agree with. Currently, our judicial and legal system is not ideal in terms of how it functions and in terms of many individuals being capable to influence court rulings - let’s define the problem in such a manner. This means that ultimately, criminal sanctions can turn into a weapon that may be manipulated by your competitors and, in certain cases, dishonest bureaucrats wishing to receive bribes or achieve personal, selfish goals. We cannot allow such misuse of this law, but it would also be detrimental to discard it, because it would mean that we would never get past the primitive competitive arena we are in now.

That is why I generally support the idea of taking a second look at the wordings of the bill. I am instructing the Cabinet and the Presidential Executive Office to look into whether the language is sufficiently well-written - whether, on the one hand, it can be applied to a variety of real-life situations, and on the other hand, is specific enough in their current form. In particular, it should be assessed with regard to potential for corruption. The same is true of the law on insider trading.

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A word on telecommunications. The day before yesterday, I was discussing this subject with senior officials in the Cabinet and the Presidential Executive Office, using the same terms and expressions, referring to frequency resources that the government currently possesses, including resources belonging to the Defence Ministry. This situation also needs to change. Indeed, we are once again beginning to lag behind: currently, Moscow, the capital of our nation, does not have 3G connections, which is a very bad sign. Other cities have it, but Moscow does not. The 4G technology is just ahead, and is being actively developed. If we are slow in developing digital communication, we will continue to fall behind. But at the same time, I would like to draw your attention to the fact that all the technologies you are mentioning originate from abroad. These technologies are not produced here. Thus, we not only need to find the money to implement them here, but we must also work to create our own technologies, including in the field of telecommunications. I gave [Minister of Telecommunications and Mass Communications] Shchegolev and [Defence Minister] Serdyukov corresponding instructions, to finally make the ultimate decisions about the frequencies use.

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Another topic I must draw your attention to is that of our judicial system. You said that the courts are replete with intermediaries, and you find this surprising. First of all, it must be asked: who pays these intermediaries? I suspect that they receive their money from businesses, rather than anyone else.

This is not a new phenomenon. It is another matter that during this crisis, the quantity of such intermediaries has simply increased. Indeed, we have discussed this matter several times (I recall that we spoke about it in this very hall several years ago, when Vladimir Putin was President). This is our common challenge: if we do not work on it together, then these individuals will continue to offer their services. They should be put in jail, because these problems in our judicial system represent the highest form of corruption. Once you hear about such facts, it is the duty of all businesspeople approached with offers of judicial mediation to file a statement to the law enforcement agencies, the Prosecutor General’s Office, the police, and the FSB, as such mediation is pure corruption, and if we do not start fighting it, then you will continue to have to pay bribes, because it will be the only way to get things done.

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The sector with the greatest significance to our economy is the banking sector, and not only because it provides the infrastructure that allots money and carries out social goals, otherwise we could have made some very harsh decisions regarding the fate of our banking sector. The position I stand behind, which I plan to implement, is that we must not exit this crisis with only three government owned banks, which would essentially fulfil nearly the same functions performed by corporate banks in the late 1980s.

We have our own particular, underdeveloped banking system, which includes a large number of banks that should ideally merge and grow, but right now, we need to make decisions in view of the current financial situation. It is true that we have a lot of banks, but the United States of America have even more as compared to the population number. Thus, we need to create our own strong, independent banking system, which cannot be limited to the state banks, even with the highly important functions that they have been fulfilling in the past year.

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