OREANDA-NEWS. October 13, 2010.   “Businesses need to carry on and constantly improve their standards of operation and social responsibility. Only then will the government be able to continue its policy of removing bureaucratic barriers, including in taxation.”

Vladimir Putin  At a meeting of the General Council of Delovaya Rossiyaa

 In his introductory remarks, Vladimir Putin said the government would continue to reduce administrative barriers as long as the business community avoids the grey market and gives up tax evasion schemes. At the same time, Mr Putin called on the business community to submit its proposals on improving the system created by the government on incentives and preferential conditions.

"We will be grateful to get any proposals that make it possible to improve the system," Mr Putin said. He also proposed discussing the possibility of providing additional incentives to regions that improve the investment climate. The prime minister believes that the national business climate should be comprehensively assessed as one single issue, and that it is necessary to ensure that work continues normally along the entire chain - from federal legislation down to law enforcement at the level of specific regions and municipalities.

Opening remarks by Prime Minister Vladimir Putin:

Good afternoon, ladies and gentlemen,

I am happy to welcome you all to a meeting of the General Council of Delovaya Rossiya.

This organisation brings together firms and companies that play an important, and often crucial role in various sectors of Russia's economy such as mechanical engineering, power generation, computer technology, communications, agriculture, advanced processing of timber, tourism, sports and others.

A company's success in these areas of business directly depends on its ability to have flexible policies on the market, on its willingness to introduce innovations, offer new services and remain competitive. We believe that this kind of business activity is essential for the qualitative growth of the national economy.

The government views Delovaya Rossiya as a reliable and constructive partner, inclined towards dialogue and ready to identify and solve specific problems.

Let me remind you of one issue we used to discuss at every meeting two or three years ago. We began each meeting with it and closed with it as well. I am referring to administrative barriers, excessive administrative pressure on businesses and endless inspections by supervision services.

We jointly drafted a law protecting the rights of legal entities and then passed it; we have asked law enforcement agencies and prosecutors to make sure that the inspections we are talking about are legitimate and substantiated. The problem of intrusive and often pointless inspections has been largely removed from the agenda, or at least I believe it has been minimised.

Now we have new goals. What we need to do is comprehensively improve the business environment in Russia - to ensure that work continues normally along the entire chain from the federal legislation to the enforcement of laws and regulations at the regional or municipal level.

That is why we decided to give more authority to Delovaya Rossiya as well as to the association of small businesses, Opora Rossii. These two non-governmental organisations will be authorised to monitor the business climate in Russia, to expose violations of entrepreneurs' rights and draft proposals on dealing with these violations.

As you know, First Deputy Prime Minister Igor Shuvalov has been tasked with reviewing the proposals submitted to the government and drafting corresponding government decisions.

I hope that we will see real results from this plan very soon.

I would like to draw your attention to the following today: We have already removed a number of excessive administrative barriers and are consistently clearing our legislation of outdated requirements that impede development.

We are doing this in construction, education and healthcare as well as in the supervision of veterinary, phytosanitary and epidemiological procedures. We are working to improve the operation of the tax and customs services. Special institutions have been established to support entrepreneurship. I am referring to SME support programmes, special economic zones, technology parks, venture funds and the microlending system.

We have recently started supporting the export of high-tech products. For example, a decision has been made to set up an agency for export credit insurance at Vnesheconombank (VEB). The agency's services should be available to all exporters, including medium-sized companies making their first forays into international markets, and not only large traditional exporters.

We are also working to remove infrastructural limitations on economic growth. In the past few months alone, as you know, we have introduced an instalment plan to pay for the connection of low and medium capacity facilities (below 750 kWt) to power grids. Beginning in 2011, utility companies will not be allowed to add charges for the development of the existing grid to the basic connection fee. A consumer will have to pay only for the so-called last mile access. I hope this requirement will significantly reduce businesses' operating costs.

We have also expanded the information disclosure requirements for power generation, to spare utility companies the temptation to tamper with the waiting list.

All applications are to be posted online now. We are making similar efforts to ensure non-discrimination in access to household gas and other utilities. The plan is to draw up a standard agreement form for connection and to develop a method of calculating fees and charges. These policies, I hope, should reduce the chances of biased decisions being made.

The government's system of incentives and preferential conditions is still far from ideal. We will appreciate any proposals to improve it. It is obvious that regions are playing an increasingly important role in the process of improving business climate because many issues connected with start-up businesses, such as the distribution of land, access roads and utilities have to be handled locally by regional and municipal administrations.

It is also easier to see on the ground the advantages that each region has and the amount of investment they can draw. Therefore, regional and local governments need assistance to establish effective interaction with investors.

As you know, I highly value the work of those regional leaders who are personally involved in attracting investment. I am naturally referring to the cases in which regional leaders consider all businesses equally.

I have often heard the proposal to introduce additional federal incentives for regions that are effectively improving their investment climate. We could discuss this idea.

Next, we have decided to hold online auctions for the acquisition of goods and services for state needs; we will hear several reports on the issue today.

The electronic bidding system gives small and medium-sized businesses a real chance to get state orders worth billions of roubles a year. For your information, in the first half of 2010, over 20,000 contracts worth 67 billion roubles were arranged on the electronic platforms.

On the other hand, these new opportunities will only benefit those businesses which can offer competitive products. This is an important reason to consider additional investment to improve the quality of their products or to cut their prices.

In conclusion, I would like to repeat that improving the business climate is a two-way street. A great deal depends on the government indeed, but not everything. The government certainly sets the tone and sets the rules of the game, but the business community itself is also responsible for creating a favourable atmosphere for its own operation.

I am referring to such responsibilities as abiding by the laws, making good on their commitments, and consciously deciding to abandon shadowy schemes and the grey market.

This decision has to be made for the right reasons - not out of fear of punishment, but because it is unethical to deceive consumers and employees and to evade taxes.

Businesses need to carry on and constantly improve their standards of operation and social responsibility. Only then will the government be able to continue its policy of removing bureaucratic barriers, including in taxation.
If we see examples of the contrary - say if employers pay salaries under the table - we will find it very difficult to preserve this system and the experience we have gained while jointly putting it together. This scenario does not support the government's or the business community's interests. It does not support Russia's sovereign interests.

I suggest we continue today's discussion in a working format, so that we can discuss, constructively and in detail, the problems of the business climate in Russia and other concerns of Russia's business community.

Let's get down to work. Mr Titov, please.

Boris Titov: Thank you, Mr Prime Minister. Our first meeting took place in 2001. Around a similar time of year nine years ago, on October 17, you met with Business Russia (‘Delovaya Rossiya') for the first time. A great deal has changed since then. The socio-economic situation and the quality of life in the country have significantly improved. The economy is getting stronger. The macroeconomic financial situation has stabilised. Business Russia itself has also seen a lot of changes. In the past, our main aim was to bring together companies operating in the non-commodities, manufacturing industry. Over the years, Business Russia has become stronger and has expanded its national network. What's even more important, we have become one of the leading business associations in Russia and have met - at least partially -our original objective of bringing together processing companies.
The stronger we become, the more ambitious we become, including in the manufacturing industry. Its share in the economy is still meager, 13.7%, and during the economic crisis it fell by almost 2%. Manufacturing companies are generally less profitable than mining ones. According to official statistics, profitability in the mining industry stands at 31.7%, while the country's average is only 11% and only 8.8% in the food industry, not to mention the construction sector. We all know how the financial crisis affected construction - its profitability stands at only 3.7%.

At first glance, it seems like companies just need to make the effort to modernise their facilities in order to increase profitability. But unfortunately, this cannot be done so easily, mainly because interest rates on loans are still pretty high. Profitability at medium-sized businesses, which account for the majority of companies in the sector, is 11-12%. As far as long-term loans, such as ones issued for particular projects, my company has recently posted a 16.8% profitability. But the thing is that my company produces wine in the Krasnodar Territory and local authorities subsidise 50% of the interest payments on the loan. This assistance is really valuable. But on the whole interest rates are still very high.

Vladimir Putin: Which wine do you produce, red or white?

Boris Titov: Champagne Abrau-Durso.

Vladimir Putin: Did you bring any for us?

Boris Titov: To tell you the truth, yes, I did. But I'd like to hold on to it until the end of this meeting to maintain a professional atmosphere.

Vladimir Putin: Okay.

Boris Titov: Of course the oil industry and mining industries are very important; they constitute the cornerstone of the economy. But we believe that diversification is the only way to make the economy sufficiently stable and independent from the traditional markets on which the Russian economy still relies. We need true modernisation, which implies not only the creation of an innovative economic system but also an extensive technological upgrade. It is very important to adapt international technology to conditions in Russia.
Even experts at the American Academy of Sciences, who prepared a report for us on the prospects of the innovations system in Russia, wrote that Russia must not lose the industrial base created here earlier in the process of creating an innovative economy. And they claimed that a modern economy is impossible without a well-developed industry, which operates as a partner to and customer of innovative businesses. This is why technological advancement is so important.

In addition, it is important to develop the processing sector and diversify the economy to address, however strange that might sound, current social challenges still existing in our society. We need to shift the burden from the state and create new jobs in the private sector. This will resolve many issues and increase tax revenues, and we'll be able to...

We have estimated, although it was actually very difficult to calculate, that a 20% increase in labour productivity in the existing economy would allow us to resolve all the problems in the budget and the Pension Fund.

Many people say that this sector has no growth potential. I often hear that our manufacturing sector is not a core economic area and it is hard to develop. In fact, we believe that our growth potential is huge. There is evidence to support this. For example, we recall that in 1998 costs went down dramatically as a result of the crisis and investments into our sector rapidly grew (oil prices then were not too high, or to put it more precisely, they were rather low). And we made up for the 1998 recession because as early as 1999 and 2000 we showed very high rates, the highest ones, 10%. And the growth of the GDP should primarily be attributed to the manufacturing industry.

We will probably never be leaders in the production of consumer goods, but we think that we have great prospects in terms of more advanced processing of raw materials: in mineral fertilizers, chemistry and wood processing. We also have enormous development potential in the food industry and in agriculture, and even in mechanical engineering, because the form chosen for attracting foreign loans and production development to Russia was to my mind very appropriate. Many have criticized that we are bringing processing to a higher level because we are proceeding from a complete knock down. And most important is that the system of localization is working properly. It also allows for our enterprises to develop around major industries, such as the auto industry. This is why mechanical engineering is a very important and promising industry for our development too.

Another significant sector is residential construction. We consider it the main driving force of our economy. If we create really good conditions for growth here... This industry produces an effect of exponential growth in other areas. We have made some calculations: residential construction is second only to tourism. It is able to drive all connected industries and the economy as a whole. However, as you rightly said, we need to improve the investment and business climate in our country.

We, Business Russia, every year, or almost every year during this period prepared a report: this is our sixth one already. This year it was focused specifically on the development of the business climate in this country. The business climate at the national or federal level is important here, indeed. We also say, of course, that a better tax system is necessary. We are proposing, as we call it, tax maneuvering: to increase some taxes but to cut others, which are mainly in production, and raise them at the consumption level.

Of course, many questions have been raised here regarding the rates and tariffs of natural monopolies. Nevertheless, today we have given priority to the business climate in the regions, as you precisely put it. The reason for this is that direct contacts between investors and authorities, just at the regional level in most cases, are creating the climate, which will either be conducive to economic development or won't be favourable enough.

Our report highlights those areas: there are many issues. Today we would like to further discuss many of them. If it is possible, I would like to give you our report. It contains our proposals and draft resolutions that could be adopted as a follow-up to today's meeting. We would like to give priority to one of today's decisions, we would like you to instruct the government to review the report and to provide comments if possible because we would really appreciate feedback. We have such a feedback in general, but I mean with respect to this particular report. I would like to give it to you.

Vladimir Putin: Of course. Thank you very much. We will certainly read it. However, Mr Titov, I think you are in the know, as far as I understand you are in permanent contact with our colleagues from the economic section. I am sure that most of the provisions formulated here are very well known already. But all the same, we will review this once again as a whole. Thank you very much.