Ground Report

Beginning of meeting with Government members

PRESIDENT OF RUSSIA VLADIMIR PUTIN: Good afternoon,

The Government seems to be having a hard time coping with the flu and is taking some losses. Everybody, please don’t come to work sick, I say this seriously.

Before we turn to the main issues on our agenda today, I want to ask [Economic Development Minister] Mr Ulyukayev to say a few words about the situation with project financing.

Last year, we started discussing possibilities for carrying out a number of promising projects of interest to the economy at lowered interest rates that the economic actors would find acceptable. I know that a lot of work has been done on this issue.

Mr Ulyukayev, the floor is yours.

ECONOMIC DEVELOPMENT MINISTER ALEXEI ULYUKAYEV

“>: Thank you.

Mr President, colleagues, I can inform you that the institution of project financing is up and running now in Russia and has become an economic reality. We spent nearly the whole of last year fine-tuning the legal base and doing the needed analysis.

Let me remind you of what prompted us to turn to its development. The fact is that banks are extremely reluctant to extend loans for investment projects under normal circumstances because aside from the uncertainties over monetary flows (and we are talking here of projects with a timeframe of up to a decade), there is also the lack of collateral, at least during a project’s initial years.

Furthermore, if a bank does extend a loan, it cannot pledge it to the Central Bank under the refinancing terms as defined by the current legislation. That placed these projects in what amounted to essentially prohibitive conditions.

What have we achieved? We have managed to divide the risks between the four main players: the project’s initiator and final borrower, who has to finance at least 20 percent of the project cost from their own funds; the lending bank; the budget, which under simplified procedures provides budget guarantees covering 25 percent of the project’s value; and the Central Bank, which finances the project at special terms.

What do these special terms entail? Today, we are talking about an interest rate of 9 percent (much lower than the current key interest rate and the rate on other Central Bank instruments). The creditor has to lend to the final borrower at a rate of no higher than 11.5 percent. This is the case for medium-term projects worth between $1 billion and $20 billion in priority production sectors.

The commission that was set up has selected the banks that will take part. Ten banks will be involved, our country’s biggest banks: Sberbank, Gazprombank, VTB, Alfa Bank, Bank of Moscow and others. These banks act as project initiators.

We have already examined the first group of projects and have selected three projects, two in the agriculture sector and one in telecommunications. These three projects have a total value of around 37 billion rubles, of which 29 billion rubles comes from the credit resources the banks provide under our guarantee and through Central Bank funding.

We now plan to examine projects already in an advanced stage of preparation and worth a total of around 80 billion rubles. We are talking about around 30 projects here, in agriculture, industry, energy and construction. We expect to examine these projects over February-March this year.

Overall, going by the information the banks have given us, their portfolio of this type of projects now comes to around 500 billion rubles. Of course, we are not able to take on all of these projects. We want to make sure that the projects are prepared very thoroughly so as to minimise the risks.

I remind you that we decided to increase budget guarantees by up to 60 billion rubles. This is one of the items in the Government’s anti-crisis plan too. This decision will enable us to examine and finance projects worth up to 240 billion rubles, so long as the Central Bank provides the needed refinancing limit. So, the work is going ahead and quite actively too.

VLADIMIR PUTIN: How transparent are the procedures for selecting these projects?

ALEXEI ULYUKAYEV: We make use of several mechanisms here. First, the quality guarantee comes from the bank itself, which, going through its own procedures, takes a decision through the credit committee, based on the basic parameters that are under the Central Bank’s supervision.

Second, we have an agent – Vnesheconombank, which provides an evaluation report of all the documentation involved.

Third, we have set up an inter-ministerial commission with the Ministries of Finance, Industry and Trade, Agriculture, and Energy. This commission examines the projects and the relevant federal executive bodies present their conclusions on each project.

Following the meeting with the regional governors last week, we agreed on the need to get the regions involved in this work too so that the governors can give if not formal conclusions then at least have the chance to express their views on these projects, because we are talking about projects that will be carried out in the regions after all.

Overall, I think this system gives us the necessary transparency.

VLADIMIR PUTIN: Thank you.

Yes, we need to see how the pilot projects in this area go and build up these efforts, taking into account of course the impact on the macroeconomic indicators and constantly analysing developments on the market.

ALEXEI ULYUKAYEV: We have agreed with the Central Bank to do just this. The Central Bank, with its knowledge and understanding of the inflation outlook and the potential risks involved, sets the limits within which we work.

VLADIMIR PUTIN: Very well. Thank you.

Mr Kozak, we have another major project. It is regional and, at the same time, national. An infrastructure project – a bridge across the Kerch Strait. How is the work progressing?

DEPUTY PRIME MINISTER DMITRY KOZAK

Deputy Prime Minister of the Russian Federation

“>: On January 30, the Government signed a resolution identifying the executors of this work and general contractors for constructing the bridge. And the general terms and conditions of the construction contract were approved.

This resolution was the result of very lengthy, complicated competitive negotiations, whose goal was to select a reliable construction company that has the necessary equipment, the essential experience and capacity to fulfil this highly complex project under difficult geological and hydrological conditions.

As a result of the competitive negotiations and through the optimisation of technological solutions, as well as competition between various construction companies, we were able to lower the cost of the bridge construction by 19 billion rubles. In accordance with the Federal Targeted Programme, the cost of this bridge is nearly 247 billion rubles.

Today, as per the Government resolution, the price limit under the contract that we are now signing is 228.3 billion rubles. According to the contract, this price cannot be changed either during the design or construction phases.

Strict financial responsibility measures are stipulated if the contractor fails to comply with the contract’s terms and conditions, including its key conditions – price limit and construction term. Under contract, the deadline for opening traffic across the bridge is December 2018.

VLADIMIR PUTIN: Some potential contractors backed out of the tender?

DMITRY KOZAK: We encountered such things during the negotiations. Some contractors backed out of the tender on construction due to the strict conditions and the requirement to provide guarantees.

Currently, the road and railroad infrastructure from the Taman Peninsula to the bridge is being built at an accelerated rate. They should be finished very soon in order to organise the delivery of building materials and cargo.

There will be 11 infrastructure facilities built on the Taman and Kerch peninsulas (six public clients).

A construction headquarters has been created to coordinate this work. In March, the development of the general area planning documentation (in order to optimise withdrawal and purchase of land, and budget land purchase expenditure) and a general construction organisation scheme for all these facilities should be completed. The total needs for the main construction materials, equipment, logistics and sources of their delivery should also be determined.

And the overall construction plan should also identify the locations for materials and equipment storage. People will be working primarily on rotation, living in builders’ camps, etc. All this work is close to completion.

VLADIMIR PUTIN: How many traffic lanes will ultimately be built?

DMITRY KOZAK: Four lanes: two in each direction, as well as two railroad lines, going in each direction.

VLADIMIR PUTIN: Very well. Thank you.

Yesterday, Mr Dvorkovich and I discussed certain issues pertaining to the work of Russian Railways, including the issue of suburban commuter rail. What is currently happening there?

DEPUTY PRIME MINISTER ARKADY DVORKOVICH

“>: Mr President, colleagues,

We have a difficult situation with commuter trains in our country. We know that in several regions, commuter routes have been cancelled on dozens of destinations. We have a list of those routes. We have the funds necessary to restore them. I have already held three meetings with regional heads.

As a result, I can report on why this happened: it’s due to the new principles of contractual relations between Russian Railways, the federal budget and the regions. In a normal situation, the regions would have been able to pay all the costs charged by Russian Railways.

They currently receive extra funds from property tax, which Russian Railways didn’t pay before to the regional budget, but pays now at an interim rate. After two years, it will reach the standard rate of 2%. This is a large amount going to the regional budgets. They should fully cover the cost of commuter trains.

Because of the crisis, the regions lost income tax revenues from Russian Railways, and this source of income was no longer available to the regions.

The government is proposing the following set of measures.

The first is already included in the anti-crisis plan: lowering value added taxes for commuter rail to 10%. This draft law will be submitted in February; it should be quickly adopted by the State Duma and will allow us to save money on commuter travel.

The second is reintroducing preferential rates charged for infrastructure use, going from 25% to 1%. In order to compensate for this step, we will need additional funding from the federal budget – according to initial estimates, about six to eight million rubles. We will ask for this money to be allocated from the anti-crisis fund, and I hope the Government will support us.

The third is allocating extra funding by the regions themselves, but in a lesser volume than we had initially planned. We already have corresponding agreements with each of the regions facing these problems. Each one committed to allocate that money at Government meetings we held.

We assume that the overwhelming majority of routes should be restored and maintained. They can only be discontinued in areas where there are real alternatives such as good roads, good bus service and it takes a relatively short time to travel by bus.

Overall, we intend to resolve this problem within about a month.

VLADIMIR PUTIN: You just proposed a set of measures; but couldn’t this have been done earlier?

What was the Government thinking about when it introduced corresponding norms, when it supported changes in the relations between the regions and Russian Railways? After all, we have earmarked the corresponding funding, 25 billion in previous years, and had a schedule of work created. This means that you either had to make sure that the schedule is complied with or you should have provided for extra funding.

Don’t we have a Transport Ministry? I thought you were responsible for supervising this sector. What is happening? We understand how serious this is. This isn’t just some bus route that got cancelled. Commuter trains in the regions stopped operating. Are you crazy, or what?

Listen, this is not a serious approach to the matter. After all, this affects thousands of people and it affects companies: people either go to work or they don’t. Couldn’t this have been done earlier? And now, you’re saying that we need two more months to solve this problem.

Commuter rail service should be restored immediately with corresponding guarantees for Russian Railways and the regions in resolving these problems. If they can do some of this on their own, we should regulate it so that it gets done, but it should be done immediately, without waiting for any formal resolution or putting this issue up for discussion in the Parliament, or even asking for a Government resolution. There should be certain procedures in place here. Commuter rail service must be quickly restored.

ARKADY DVORKOVICH: Mr President, we will do it. 25 billion rubles will be provided this year, there will be no delays. Within the next 24 hours I will submit a financial solution that will allow us to immediately restore commuter rail service, just you requested.

VLADIMIR PUTIN: Wait – the service should be restored immediately with a proposal on how to resolve the financial problems. And these problems should then be resolved calmly and methodically. It was all clear, after all, and we discussed problems with the regions’ revenues over the course of last year. The Finance Ministry has all of this: what kind of incomes they have, what are their expenditures, where the money is going – all of this.

This is one of the most important factors behind the regions’ normal operation – commuter train service. It is absolutely clear that the decisions were made in advance and that the regions should have been ready for this, and an enormous responsibility lies with them as well. But this work needs to be coordinated.

All right, let’s bring this discussion to an end. And I repeat, I am asking you to do this immediately.

ARKADY DVORKOVICH: Ok.”

Source: Kremlin, Office of the President

See related video: Russian Railways https://www.youtube.com/watch?v=P8X8zgwXOoQ

Protecting the rail lines in Russia are the Railway forces! This is an elite unit in Russia responsible for conducting anti terrorist operations and protecting infrastructure.

See video: https://www.youtube.com/watch?v=1g0NgWen23E