OREANDA-NEWS. February 19, 2010. Transcript of the beginning of the meeting: Vladimir Putin: Mr Trotsenko, since you joined the United Ship-Building Corporation things have been livelier, which is heartening. This is good. I hope this will continue to be the case.

You and I were in the Far East recently. It is true that necessary and urgent measures were taken to support the existing enterprises there. And there are plans to build new capacities in the Far East. I would like you to tell me about the progress of that work. This is number one.

Number two, what is the status in the effort to consolidate ship-building assets, including the North West, and the Southern Shipbuilding Centre? You have over 100, to be exact, 118 ships and vessels on your order books. It is substantial. I have a question regarding these orders: how are the financing plans to support shipbuilding, including equipment lease programmes, among other things, being implemented? What is actually happening in practice? And, finally, laws and regulations. Legislation to support shipbuilding and navigation is being prepared. How is that work going, and what should be included in the law to promote the development of shipbuilding in the country? Can you fill me in on all this, please?

Roman Trotsenko: I don't think any sector has come in for so much attention on the part of the government in 2009 as shipbuilding. The five conferences that you presided over have yielded results. We see that the industry reported a 62% growth in 2009. There are several reasons for this growth, for example, several large vessels and drilling platforms were completed as scheduled. Nevertheless, this figure does give an idea of the potential for this sector to drive growth in the engineering industry in the future.

Now for the questions you have asked. Consolidation of USC continues.

Vladimir Putin: You mean consolidation of assets?

Roman Trotsenko: Yes, we have completed the purchase of all the shares of the Baltic plant Yantar. This is a very important acquisition for USC because it makes us a key manufacturer of surface ships, which will help create new jobs.

Vladimir Putin: In Kaliningrad?

Roman Trotsenko: In the Kaliningrad Region. We are thinking in terms of a thousand new jobs. Orders are being placed. In the future that enterprise in the west of the country will become one of the biggest shipbuilding enterprises in Russia. The plant is well-designed, has the potential to expand in square meters, and it has one of the youngest work forces. Also, the customs and tax regulations applicable in the Kaliningrad Region make shipbuilding there a promising and profitable business. We are completing the consolidation of the Southern Shipbuilding Centre...

Vladimir Putin: Sorry to interrupt you. We don't want it to be just a "screw-driver" assembly plant.

Roman Trotsenko: Absolutely right. Ship manufacturing is actually high-added-value production at present. Our shipbuilding enterprises create about 60% of the cost of a contract. So, it is far from being a "screw-driver" assembly line, we produce high-tech products, some of which are in demand for military-technical cooperation. Production in Kaliningrad is of a very high standard.

As for the Southern Shipbuilding Centre, consolidation of assets is well underway there. We believe that by expanding in that direction USC will gain the opportunity to build drilling vessels and drilling platforms for Caspian extraction projects to enable Russia to be more active in the Caspian. Also, we could provide our neighbours, Turkmenistan and Kazakhstan, with drilling rigs.

The leasing programme has been launched. This year leasing credit was approved for the first time. The most active bank in this respect is VEB which has issued about 4 billion roubles to finance shipbuilding contracts through its subsidiary VEB-Leasing.

This has proven to be a most effective measure. The process is very simple and easy to monitor. The state allocates money to USC which, through its state-owned agent bank, finances shipbuilding contracts on condition that the ships are built in Russia and have 60% Russian content and that the vessels fly the Russian flag. This programme is effective and we have asked for your permission to extend it through next year. We expect that if the quotas for the fishing fleet are confirmed, fishing companies will also show an interest in building a new fleet.

Vladimir Putin: By next year you mean 2011? This is timely because we are starting work on the 2011 budget. What amounts were spent this year to support leasing?

Roman Trotsenko: In 2010 it is 2.7 billion roubles. We believe the task is not so much to increase the volume but to extend it over a longer term, and then it would be 3 billion roubles over ten years. We could then start putting together a package of orders.

On the plus side, we see that banks are adding their own assets to provide additional funding for the leasing programme. The formula today is as follows: one rouble is contributed by the ship owner, one rouble by USC under easy-term leasing arrangements and one rouble is made available by the bank. We have programmes with Sberbank and VTB. But so far VEB has been the most active.

Vladimir Putin: You raised that issue in a timely manner.

Roman Trotsenko: In addition, we have a programme to compensate up to two-thirds of the interest rate for shipbuilding loans. You have noticed that less than the allocated sum has been used. This is because leasing has really kicked in this year. The money will be used next year. We would like this interest rate and this level of support to continue.

Pursuant to your instructions we are completing the draft law On Measures to Support Shipbuilding and Navigation in the Russian Federation. This is a major interagency effort involving the Ministry of Industry and Trade, the Ministry of Transport and USC. Under the law, specialized shipbuilding zones will be created which will have special tax and customs rules to provide a business environment not worse than that of our competition in China and Korea. We have to compete with the shipbuilders from these countries in the free market. But this measure will not detract from tax revenues because these contracts have yet to materialize. We are talking in terms of large ships similar to the icebreaker tanker which you launched on December. We lost about USD 100 million in tax liabilities on that tanker alone. So, of course it is hard to be competitive. We must use shipbuilding zones as a vehicle for developing the industry. This was the road that Japan took in the 1970s, Korea in the 1980s, and more recently China.

Vladimir Putin: Korea started in the 1960s. The early laws in support of large-tonnage shipbuilding were passed back in the 1960s.

Roman Trotsenko: That is why we count on your support in this area. We think this law will give a big boost to shipbuilding. Shipbuilding proper in Russia employs just 250,000 workers, but the production of components and materials for shipbuilding employs about 700,000. So we are talking about a million people who depend on the industry for their livelihoods.

Vladimir Putin: When do you think will the draft law be ready?

Roman Trotsenko: It is in the process of inter-agencies coordination and it is not an easy process. The Finance Ministry has some questions. We are planning to finish in late February. The law will be ready for submission to the State Duma by March, as you have ordered.

Vladimir Putin: OK.

Roman Trotsenko: Two shipyards are under construction in the Far East as joint ventures.

Vladimir Putin: One with Singapore and the other with Korea.

Roman Trotsenko: Yes. We see that construction is going according to plan. Our Korean colleagues are perhaps a bit more active. We expect to get the project documentation by May, by the beginning of the building season. The site is already being prepared, heavy machinery is in action. We expect to complete the project 24 months from today, assuming no slip-ups.

Vladimir Putin: You and I have visited one site, it is a working enterprise.

Roman Trotsenko: Yes. The site was chosen by our Korean partners. Construction is going briskly, according to schedule, no changes.

The second site is Chazhma Harbour. It has 33 plants on the ground and it is a much more difficult site. The plant was virtually shut down, there is talk about re-launching production which will have a positive impact on the labour market in the region. We know that the nearby community of Dunai has lost 13,000 people out of 20,000.

I have to say that postponing the Shtokman field development by three years was bound to influence the business plans for the joint venture with Korea. This naturally results in a delay in the building of gas tankers.

We ask you to make a decision to optimize offshore development on condition that offshore fields are given to Russian companies which will order Russian ships and equipment.

Vladimir Putin: We will do it, but this work must be coordinated with sales volume, and the willingness of the market to absorb these volumes.

Roman Trotsenko: As you have correctly stated, we have 118 ships and vessels in the works. The volume of USC's foreign trade alone is USD 7.5 billion. December saw the signing of major contracts with Vietnam and Kuwait worth over USD 2.5 billion, which loads the capacity at the Admiralty Shipyards and the Khabarovsk Shipbuilding Plant.

Now on your directives regarding Vladivostok. Large plots of land are being vacated in the centre of Vladivostok where old industries were removed. The designing of a Naval Museum in Vladivostok is being completed. We think construction might start in the summer, and it will give the city a new look.

Vladimir Putin: When will we finish it?

Roman Trotsenko: We will probably not be able to complete it before the APEC summit, but then life does not end with the APEC summit. We plan to finish the whole complex in the city centre by 2013.

Vladimir Putin: You mean the museum part?

Roman Trotsenko: Yes. The project is managed by a Russian architectural office under Sergei Choban. They are talented young Russian architects. We think Vladivostok will become a unique, beautiful and modern city, a good place to live and work in.

Vladimir Putin: In any case, the city will have another landmark.

Roman Trotsenko: Yes, next to the bridge because the area abuts the bridge across the Golden Horn Bay, so we will have a Russian view of the Pacific.

Now, regarding the projects that were under your special review last year. First of all, Project 518, the Nerpa submarine. It is in the final stages of testing in the Pacific. We think we will meet the deadline for handing it over to the navy. No change of schedule there.