Russian President on ‘Project Russia’

Following is the address delivered by Russian President Dmitry Medvedev at the St. Petersburg International Economic Forum:

Good afternoon, ladies and gentlemen, I want to welcome you all to the St. Petersburg Economic Forum. In particular, I want to thank my colleagues and the leaders of other countries who have come to our beautiful city.

For obvious reasons, I am going to talk mostly about Russia today, about the positive changes Russia has already made, the kind of economy our people need, my vision of what our country will look like in a few years’ time, and what we need to do to achieve this.

I will talk about the project for developing Russia, a project that will come to fruition only if the whole of Russian society joins forces in its implementation. Projects only achieve results when society as a whole feels a need for and is involved in their implementation.

This project will go ahead no matter who holds office in this country over the coming years. I guarantee this personally as President of this country, as do the colleagues with whom I am working on this modernisation programme.

Rundown on achievements

Let me start with a rundown of what Russia has achieved in the two decades of its new statehood, and over the recent period.

This year marks 20 years since the new Russia was formed. The country has undergone tremendous development since the collapse of the Soviet Union and its planned economy. The private sector was practically non-existent back then, but now accounts for more than 60% of the economy.

The sovereign debt back then exceeded the country’s GDP, but now comes to around 10 per cent of GDP. The hyperinflation that surged to record levels at that time has been reined in considerably, with prices undergoing only a moderate increase now.

Russian families’ real consumption levels have doubled. Russia has carried out reforms on a scale few can match over these last 20 years. We have gone from prices fixed by the State to market pricing, and from strict currency controls to one of the most liberal currency regulation models in the world. We have gone from being a country closed to foreign capital to having more $ 300 billion in accumulated foreign investment.

We have built a tax system from scratch. I remind you that Russia has one of the lowest corporate and income tax rates in the world. Starting this year, we have introduced capital gains tax exemptions in order to encourage long-term investment.

I can list many accomplishments. It is always a pleasure to look at the results achieved. The most important thing, I think, is that we have made consistent and systemic efforts insofar as possible over this time to keep moving forward.

Moving forward

We realise that there are many problems and obstacles on the way. We know that we can overcome our dependence on exports of raw materials and achieve a higher quality of life only if we vanquish corruption, develop effective public administration and build a quality financial system.

Modernisation is the only way to address the many issues before us, and this is why we have set the course of modernising our national economy, outlined our technology development priorities for the coming years, and set the goal of turning Moscow into one of the world’s major financial centres.

Of course this is not an easy process, and we knew from the start that we would encounter difficulties on the way, but we could not simply wait for the right time to come along, and decided to seize the initiative and take action. In any case, our modernisation policy is already starting to bear fruit.

They are small fruits, but they are there. Over these last few months alone, projects worth hundreds of millions of dollars have got underway in our priority areas. Almost all of the big pharmaceuticals and energy companies have come to Russia as strategic investors. The number of families with broadband internet access has doubled over the last three years. Russian internet companies have carried out successful IPOs, and their total capitalization now comes to tens of billions of dollars.

Russia has maintained and even consolidated the lead it gained with the launch of the first satellite and Yuri Gagarin’s space flight 50 years ago. Russia today launches more spacecraft every year than any other country. We are completing work on the national GLONASS navigation system, which other countries are also starting to use too now.

Finally, Russia is building nuclear power plants using technology that meets the very latest, post-Fukushima, standards, that is, the highest safety standards possible. This is one of the technology priorities we have set in which our economic modernisation efforts should be reflected.  

Our plans go beyond building the innovation centre in Skolkovo and replacing outdated technology with advanced technology in the different priority sectors. This message needs to be clear. These projects are just the spark, the catalyst that will trigger change on a broader scale and accelerate the pace of transformation. These pilot projects are there to set examples of how we need to work today.

We have begun introducing advanced technology and procedures throughout the country. These efforts range from universal introduction of the best technology and instruments to promoting research and innovation, new technical regulation standards, customs clearance procedures, immigration rules, and much more, including a higher quality of management at the regional level.

There have been personnel changes too, so as to speed up the pace of change. I have brought in many new, and I hope ambitious, leaders to head the different Russian regions over these last years. This has had a positive effect on the business climate.

To give just one example, that of Moscow, the new team appointed not so long ago has already halved the number of procedures needed to obtain a construction permit, which was one of the big problems hampering our capital’s development. I stress the point that these are just the first results our modernisation policy has achieved, and I know that achieving our goals is a complicated task that will take time, but I have absolutely no doubt that we can succeed.   

Minimising external risks

Colleagues, let me say a few words now about how we plan to minimise external risks. The global financial crisis created big financial imbalances in a number of countries, including in Europe and the USA. New ‘bubbles’ can form in almost any market, as we have seen clearly, and with the global financial system the way it is, when they break, the whole world feels the effects.

The need to reduce budget deficits could slow down economic growth, and thus also lower demand for Russian goods. Investors will look for means to diversify their investments, and whether they choose our country or not depend a lot on us.

Russia needs to offer new opportunities, from growing consumer demand to dozens of infrastructure projects, and we need to demonstrate the new possibilities created by the common economic space we are building with our neighbours. Let me stress that this is something that will make us one of the world’s biggest and most attractive markets.

The excessive volatility of raw materials markets is also one of the factors hampering the global economy’s smooth development today, as we know all too clearly from our own experience. We cannot always count on high oil prices and expect them to keep going up.

Yes, the boom in Asia that our Economic Development Minister spoke about just before, the conflicts in the Middle East and North Africa, and the consequences of the disaster in Japan have all pushed up raw materials prices. But counting on prices staying favourable is not consistent with our long-term goals.

To state the obvious, we need to live within our means and save at least part of the windfall profits we make from high oil prices. Making excessive use of these windfall profits now, with global inflation on the rise, is a very risky policy that makes it impossible to bring down interest rates and give a real boost to investment activity. (I see the Finance Minister busy nodding).

There can be no doubt either as to Russia’s continued integration into the global economy. We have no choice here. Businesspeople like to say that markets are like parachutes; they work only when open. Without an open economy we would fall very badly and do ourselves a lot of damage. We are therefore lowing the barriers for foreign investment and hope to complete soon Russia’s accession to the WTO, and then to the OECD too.

As far as the WTO goes, I think we can realistically complete the process by the end of the year, if, of course, political games do not start up again. We are long since ready to join the WTO, readier than many other countries, big and small. You all know this. But we are being asked to make an awful lot of concessions, and this is an unacceptable situation. Russia is not ready to agree to frankly disadvantageous conditions.

If our partners are not ready to let Russia join international organisations on fair terms, this would be a sad turn of events indeed and something we must try to avoid. Whatever the case, particular political and economic interests must not get in the way of our successful development.

Russia will do its utmost to put its positions in the international organisations to good use. We are a member of the G8 and take on responsibility for resolving global security problems and helping the world’s poorer countries in their development.

At the same time, as one of the BRICS group members, Russia is a fast-growing economy with an interest in building a more stable global financial system, promoting the use of modern management technology, and democratising the international economic system. More active use of the ruble, yuan, and other developing currencies on the global markets would clearly make the global currency system more flexible and give investors more comfortable conditions.

Furthermore, Russia’s membership in both groups gives it the possibility of serving as a bridge to help harmonise the different positions and contribute to more effective work within what is currently the world’s most influential economic forum – the G20. Russia’s initiatives have already been widely discussed at various influential international forums, and we are pleased to see this.

Our initiatives include proposals on nuclear security, and safety in offshore oil production. We have also drafted proposals on new rules for regulating trade in intellectual property, necessitated by the internet’s development. The main idea is to give authors and artists a new role in choosing the means through which they will protect the works they create.

These are just a few examples of the joint work we are involved in. I think that the world’s main economies need to reach new agreements today on the general principles for developing economic policy, and modernise the multilateral conventions. Russia will play the part of one of the key moderators in this work.  

I want to say a few words separately on the positive role that our big neighbour – the People’s Republic of China – is playing in global stability and security. The strategic partnership between Russia and China makes the world at once a more stable and also a faster-growing place.

Development strategy and goals

Colleagues, I come now to our development strategy and its goals, which have been discussed on plenty of occasions. I want to concentrate on our actions, which are more important. One of the great innovators of our times, Steve Jobs, once said that the important decisions are not the ones we take, but the ones we decide not to take.

I want to state loud and clear here that we are not building State capitalism. Yes, there was a point in our development when we increased the State’s share in the economy, but this was an unavoidable step and in many ways necessary in order to stabilise the situation after the chaos of the 1990s, and re-establish basic order.

That avenue has exhausted its potential now, however, and has only relative effectiveness in any case, for it is an economic model that depends very much on the situation at the given moment and often leads to hasty action aimed at addressing the sole objective of maintaining what already exists, with little regard to whether these inherited assets have any actual effectiveness or not.

The State still owns numerous economic assets, from enterprises to land, but other assets too feel the effects of excessive State regulation in the areas under State control, above all in the natural monopolies. But any vagueness in the law is a risk for the entrepreneur, not for the State. The principle that the State is always right leads to corruption, or to preference always going to one’s own companies, regardless of their ownership form.

This creates an environment not of functioning market institutions, but of manual management. Such a system’s effectiveness is not just very limited, but is also very selective. The quality of economy management and bureaucracy in such a system is reminiscent of the well-known joke about how computer systems develop: “Yes, we’ve removed the old bugs, but added new ones.”

The result is State-controlled companies dominating many sectors, low levels of entrepreneurial and investment activity in these sectors, and ultimately, the threat that Russia’s economy will become less competitive in general, and no amount of soothing words from experts in putting together five-year plans can stave off this danger. This economic model jeopardises the country’s future. It is not my choice.

My choice

My choice is different. Private business and private investment should dominate in the Russian economy. The State must protect the choice and assets of those who consciously decide to risk their money and reputation. We need to give them the right to make mistakes, and opportunities for drive and development. Moreover, we need to use our State companies to guarantee a modern and stable infrastructure for the economy’s development in general.

Contd.on page 18

Russian President on ‘Project Russia’

Contd.from page 13

The State also needs to establish social protection and public services of the kind that would encourage Russian families to have more children, lead a healthier lifestyle, pursue ongoing education, and engage in long and productive labour.

We still have much work to do in this area too in order to resolve the problems inherited from the old system, which included special distribution mechanisms and minimal risk for the select few, as well as various guaranteed bonuses, while leaving everyone else in a state of equal poverty and lack of rights.

In other words, my choice is a policy that gives millions of people maximum opportunities for economic activeness, and protects them with laws backed by the full weight of State power. My choice is a Russia that, over the next decade, will build an economy offering a high standard of life and an economy that makes life comfortable and interesting and produces what will make Russia one of the world’s leaders.

In my view, this is above all our people, healthy people, clean energy, smart networks, electronic services, convenient transport, affordable housing, high quality education, and a good environment for everyone, above all for our children, our people with disabilities, and our senior citizens.

Today, we do not have to try to catch up with anyone, but can step to a new technological level and move towards an economy built on the most advanced technology, based on big companies that are competitive on the global markets, and on a broad section of small and medium-sized businesses, including innovative business.

If we can become global trendsetters in these crucial areas, and maintain and develop our immense human and intellectual capital, I am sure that Russia will be among the leaders in global economic growth.

My choice is to thoroughly overhaul not just outdated parts of our economy, but all of our public institutions. Isolated adjustments here and there are not enough; we need systemic decisions. We should not delay doing away with numerous bad habits. It would be the wrong course of action to set our sights on calm and moderate growth only. This would be a mistake. Much touted stability, after all, can mask stagnation, and so we need to act swiftly and decisively to change whatever is in the way of rapid development.

Modern and worthy policy

All of these things form the foundation of the strategy that I have outlined over my three years in office, and which has become known as the Russian modernisation programme. I am certain that this is the most modern and worthy policy for Russia.

It is within our power to dramatically change the situation over the next few years. For this to happen, we need to concentrate our main action on the following tasks: real improvement of the investment and business climate in order to create highly productive jobs in all parts of the country; real progress in fighting corruption; establishment of a modern police force and other law enforcement agencies; efforts to make the judicial system more effective; and modernisation of the State management system itself, introduction of modern new project and planning approaches, and decentralisation of powers.  

I gave a number of instructions in Magnitogorsk at the end of March aimed at improving our market institutions’ performance, reducing costs to business, and attracting investment into the Russian economy. It is important in politics to make sure that decisions are actually carried out, and the Magnitogorsk initiatives are being carried out now.

We decided, for example, after lengthy discussion, to lower the maximum rate for compulsory insurance fund payments from 34 to 30 per cent starting next year, and bring them down to 20 per cent for small business in the production and social sectors. Of course, this is not such a radical reduction, but it will nonetheless make a real difference for a huge number of small and medium-sized businesses. I think that this decision is fair and balanced in the transition period.  

We have also drafted decisions that reduce controls on strategic foreign investment and give minority shareholders access to information on public companies’ activities. We have introduced the post of insurance ombudsman in the federal districts, and the mobile presidential reception office has also started work.

We have drafted a federal law setting out a special procedure for examining reports containing accusations of corruption. The replacement of senior officials with independent directors in key State-owned companies is almost complete now. This process will be completed in all of the companies controlled by the State by autumn this year.

We have established the Russian Direct Investment Fund managing company, and the federal budget has earmarked around $2 billion for its initial capital. Talks have been held with key potential partners, who show a lot of interest, and concrete projects are due to be examined over the coming months.

Discussion of the Magnitogorsk initiatives showed there is great demand for objective and speedy decisions. This is only natural. Modernisation cannot be achieved through one-off measures, even big decisions, but only through constant and uninterrupted change and, of course, the political will needed to keep this process moving predictably ahead, one step at a time, but steadily moving forward.

State assets

I think that in this context the following new steps are needed.

First, the State does not need so many assets. The Government has drafted proposals on a timetable for privatising big companies. These plans must be carried out of course. But they need to go further. I think we need to give up not just controlling stakes but, in a number of cases, also blocking stakes in many big companies that are currently still State-owned today.

Of course, we need to take a more cautious approach with regard to infrastructure monopolies and companies that are essential for our country’s military security. The Government has until 1 August to adjust the privatisation timetable accordingly, so as to carry out this task. I am sure that we can organise a transparent and modern privatisation process that will attract effective private investors and help to bring considerable funds into the Russian budget.

Federal system

Second, our federal system needs to be an engine for our vast and diverse country’s development and give us a competitive advantage. It is not possible in the modern world to run a country from one single place, all the more so when we’re talking about a country like Russia.

In fact, we have already gone through the kind of system when everything operates only on the Kremlin’s signal, and I know from my own experience that this kind of system is not viable and is always been adjusted to suit the particular individual. We therefore need to change it.

I will soon set up a special high-level working group to draft proposals on decentralising powers between the different levels of power, above all in favour of the municipal authorities. This will include proposed adjustments to the tax system and principles for relations between the budgets at the different levels too. I am certain that these decisions will be more in keeping with the Russian economy’s future demands and organisation.

Judicial system

Third, we need to take further steps to improve the work of our judicial system. Much has been written about the problems in this area. We are well aware of these problems and we can resolve them on our own, without help from outside. I am sure that the judges themselves will do this.

I receive proposals from people suggesting that we establish a separate court, essentially a separate legal system, for foreign investors. I do not think this is the right decision. Everyone needs an unbiased, fair and effective court system. Our citizens need it, and so does every organisation and individual. This is the goal to work towards.

We will encourage judges to specialise in the arbitration court, separate the arbitration court and mediation, and improve judges’ training. I think we need to bring new people into the judges’ corps, people with experience and specialised in different areas of law. We will take the necessary decisions soon so as to give this process the impetus it needs.

I am also giving the instruction to draft amendments to the procedures for selecting judges and for their disciplinary liability. At the moment, these functions come under the qualification commissions at the different levels. I think a more balanced approach would be to divide these functions between the qualification commissions and the regional disciplinary commissions. This is a specific matter, but it is important too.

Corruption

Fourth, we hear constantly that corruption is strangling Russia. We need to reply in kind and put a relentless stranglehold on those guilty of corruption. The whole of Russian society without exception shares this view.

Corruption is difficult to detect, however, and the current criminal prosecution procedures in these cases are very slow and complex. We should maintain these procedures in place if only to ensure reliable guarantees in the case of unfounded accusations, of which there are a fair few, regrettably.

But at the same time, the State bodies need to clean themselves of corrupt employees faster and more decisively, and to do this we should broaden the grounds for firing people suspected of corruption from the civil service.

Grounds for firing people in such cases could include evidence revealed by investigations, but which is not presented in a way that can be used to launch criminal prosecution. Such dismissals would essentially amount to dismissal on the grounds of loss of confidence. Of course, we would need to keep legal procedures in place giving people the right to appeal against such dismissals.

I think we could also look at making civil servants and State officials bear full material liability to the State Treasury, which in the past always compensated the losses caused to private individuals by civil servants’ unlawful action or inaction.

We need to squeeze out everyone who holds the law, order, and their honest colleagues in contempt, and sadly, there are many such people, including in the law enforcement system. In particular, I am referring to investigators who turn unfounded criminal charges and investigations into a corporate raiding tool and essentially a business.

We need to use the institution of mandatory checks by the prosecutor’s office of all criminal cases that were opened and then closed without being sent before the courts. If prosecutors find evidence of abuse, they can make the investigators liable, including criminal liability. I will send these amendments to our legislation to the parliament very soon.

Financial centre

Fifth, we need not just fine plans but also real progress in establishing the financial centre in Moscow. Many important amendments to legislation have already been made this year. The Moscow City Government is also working fast to put together the package of main measures that will change the city’s life. We will also take decisions on a number of issues, such as abolishing many of the restrictions on placement and circulation of Russian securities abroad, very soon.

Visa-free travel

Finally, we seek to introduce visa-free travel with the European Union and other countries, but much here depends on our partners. We are ready to demonstrate our good will on this matter by taking concrete steps.

We are therefore offering the chance for all investors and entrepreneurs with substantial business in Russia to obtain long-term visas, and this includes people taking part in the Skolkovo innovation centre projects and the Moscow international financial centre.

Expanding Moscow’s borders

And finally, in order to improve greater Moscow’s development, boost the financial centre’s development, and quite simply make life easier for many people, we will also examine the question of expanding Moscow’s borders. This would involve creating a capital federal district that goes beyond the current Moscow city limits, and consequently expands beyond these limits a substantial share of federal lever administrative functions and State organisations.

Friends, colleagues, I have named a number of measures, and I am sure they will be carried out. The list does not end here. It can be expanded and improved. I am sure that we will reach all of the strategic goals we have set. I have no doubt of this because I know that we all aspire to development, a better quality of life, and victory over injustice and corruption. These aspirations unite our society, and we will work together to reach them.

Reaching these goals that unite us will require changes to the Government’s organisation, and changes to the State bodies at various levels. We need to make them more open and offer broader opportunities for private business, give modernisation our maximum support at the local level, and support too public initiatives and groups of people who are not indifferent and want to improve life in their towns, villages, and regions.

The great Russian historian Nikolai Karamzin said that, “If we cherish our own welfare, we will love our homeland too, and if we love ourselves, we fill pride in our people, which is the cornerstone of patriotism.” I think these words reflect very well the national development tasks before Russia today.

I have no illusions. I know that we cannot totally transform the Russian economy in just a few years, but we have only a relatively short time to get beyond the point of no return to the models that would only lead our country backwards. We will carry out everything that we have planned, step-by step, but steadily and consistently. Corruption, closure to investment, excessive State presence in the economy, and over-centralisation are the taxes on our future that we must abolish, and abolish them we will. Our citizens will do the rest themselves, do it for themselves, and thus for our country, for Russia. They will build their own success, and thus our entire country’s success.

Thank you for your attention. I wish you success at the forum.

FT Quotes

•    I have named a number of measures, and I am sure they will be carried out. The list does not end here. It can be expanded and improved. I am sure that we will reach all of the strategic goals we have set. I have no doubt of this because I know that we all aspire to development, a better quality of life, and victory over injustice and corruption. These aspirations unite our society, and we will work together to reach them

•    I have no illusions. I know that we cannot totally transform the Russian economy in just a few years, but we have only a relatively short time to get beyond the point of no return to the models that would only lead our country backwards. We will carry out everything that we have planned, step-by step, but steadily and consistently. Corruption, closure to investment, excessive State presence in the economy, and over-centralisation are the taxes on our future that we must abolish, and abolish them we will. Our citizens will do the rest themselves, do it for themselves, and thus for our country, for Russia. They will build their own success, and thus our entire country’s success