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Annual Address to the Federal Assembly of the Russian Federation
April 3, 2001
Moscow, the Kremlin

President Vladimir PUTIN:

Esteemed State Duma deputies,

Esteemed members of the Federation Council,

Esteemed citizens of Russia,

In presenting the Annual Address for 2001, I would first like to say a few words about the past year.

Our strategic task over the last year was to strengthen the state in the form of its institutions and all the levels of power. It was clear that without resolving this key issue we would not achieve success either in the economy or in the social sphere.

We set ourselves the objective of building an effectively functioning executive vertical power structure, ensuring legal discipline and creating an effectively functioning judicial system. We must continue to work towards this objective because it is this that will create the mechanism we need for implementing state decisions and for effectively protecting the rights of our citizens.

If we are to have a genuinely strong state we need a solid federation. We can now say today that the period of erosion of the state is over. A stop has been put to the disintegration of the state that I spoke of in last year's address. Last year, we made a great effort together to achieve this. We drafted and adopted a federal legislation package and carried out reform of the Federation Council. The work of the presidential plenipotentiaries in the federal districts is now starting to bring results. The State Council has been created and has begun active work and Russia now finally has state symbols approved by law.

All of this took place as the economic situation remained favourable. The Russian economy experienced growth rates unseen in almost 30 years in 2000. Growth continues in some industrial sectors today. Investment activity is on the rise, more taxes are being collected and people are finally being paid their wages and pensions on time for the first time in years.

But this is all still not enough and these results cannot leave us satisfied. Our people continue to have very low living standards, Russian businesspeople are still cautious about investing money in their own country, and civil servants, unfortunately, continue putting pressure on business and holding back business initiative and activity.

We still have serious economic and social risks to deal with. This can be seen from the Russian towns left without heating and light during the winter, the numerous breakdowns and accidents in the worn out housing and utilities sector infrastructure and the serious technological disasters that have plagued us over this last year.

A cause for concern over recent months is the worsening of a number of key economic indicators coinciding with unstable development in the world economy.

For now, we are in a situation of only relative economic stability. Whether we can maintain this situation and create favourable conditions for our development and increased prosperity for our people depends on us alone. We have a unique chance and it is up to us to use it or to lose it. If we fail to make use of this opportunity we will still end up having to take the necessary decisions, but no longer in such favourable conditions for our country.

The situation requires once more analysing the situation in the country and the objectives that were set earlier, including those announced here in this hall last summer.

A year ago it was clear that in order to ensure the success of the strategic transformations we wished to undertake, we would have to bring order to relations between the federal and regional authorities, and that not having clearly delimited powers and effective mechanisms for cooperation between the different levels of power would result in greater economic and social losses. We need a consolidated and effective state power system in order to act on urgent social and economic problems and security issues. I will name just a few of these priorities.

The first task is to clearly define the specific powers of the federal centre and the country's regions. This requires having federal laws, and I emphasise this point, federal laws that divide the powers and responsibilities between the federal and regional authorities. We need to minimise the potential for conflict in this area today by clearly defining the respective powers of the federal and regional authorities, otherwise this situation could give rise to new disputes and will be used by those who oppose this policy of strengthening the federation.

The second task is to bring order to the system of regional branches of the federal executive authorities. At the moment they are financially and organisationally weak, duplicate the work of the regional authorities and sometimes are not even up to performing control and supervision functions. The government is to define new procedures for the establishment and work of the regional branches of federal ministries and agencies over the coming months.

Finally, the third task, also technical in nature, is to bring order to inter-budgetary relations. Clear distribution of resources and tax revenue is essential for the different levels of power to be able to assume their responsibilities and effectively fulfil their mutual commitments.

We carried out a redistribution of tax revenue between the centre and the regions last year. This aroused plenty of debate but it did go some way towards giving regions more equal opportunities and gave them increased possibilities for economic development. New procedures for allocation of budget transfers are already working in practice but still have to be cemented in law, and this will require a review of the current regional support funds' activities. We are in urgent need of a transparent mechanism for allocation of budget subsidies and transfer payments to the regions.

The municipal budgets are a crucial part of the country's budget system. It is at this level, above all at local government level, that the different state management agencies carry out their functions. It is here that battles take place between regional and local authorities, between mayors and regional governors, usually over budget funds. As a result, budget money at all levels is not always used effectively and for its assigned purpose. This is at the root of much of the economic and political instability in the country's regions.

Finally, the country's heavily subsidised regions are also in need of particular attention. The government is to complete work on the relevant documents and present draft legislation regarding procedures, if necessary, for putting these regions under special financial management.

I would like to say a few words separately about the situation in Chechnya. Today I call above all on all the country's political forces - all represented here in this hall - to show a sense of responsibility regarding the issue of resolving the problems in this republic. So far, we have managed to avoid speculating on blood and tragedy and using it to earn political dividends and score points.

Only recently we were being told that our army is in a state of disintegration and that we should not hope for any shadow of military success. And in the political sphere too, we were told, nothing positive awaited because not a single Chechen would support the federal centre's attempts to fight terrorists and restore constitutional order. Life itself has shown that these arguments are not founded. Having fulfilled its main missions, the army is withdrawing. This is a serious result and it is has been achieved at a high price. I think therefore, breaking with the tradition of the annual addresses, that it would be a fitting moment to remember our servicemen, the Dagestani home guard, the Chechen policemen and everyone who stopped the collapse of the state at the cost of their lives. The national TV channels are broadcasting this address live to the whole country today. I ask you, not only those here in this hall, but also all those watching us and listening to us today, to stand and honour the memory of our heroes with a minute of silence.

I also want to say that, while we are making progress in Chechnya, we should guard against letting euphoria at our successes overtake us. We must not allow unfounded optimism and unrealistic expectations to take hold in society. Yes, our missions in the North Caucasus are changing today. Along with the essential task of liquidating the final hotbeds of terrorism, the emphasis should now shift to creating and strengthening the power system in Chechnya. We must take serious and responsible steps to ensure citizens' rights, organise social rehabilitation for the people and resolve the economic problems in Chechnya. This demands from us professionalism and courage, both in preventing terrorist attacks and in overcoming the consequences of the crimes we have not managed to prevent. I must say, too, that there is still a great threat that new crimes will be committed.

No less courage, determination and patience is required of us in the social and economic sphere. Achieving change will require time, at least as much time as it took to put Chechnya in this extreme situation in which it finds itself now, and we need to be aware of this.

Dear colleagues,

One of last year's most important decisions was the creation of the federal districts. The work of the presidential plenipotentiaries has brought federal power closer to the regions. The presidential plenipotentiaries have worked actively to help bring regional legislation into line with federal legislation. They, together with the Prosecutor General's Office and its branches in the regions, play a key part in this process. More than 3,500 laws passed in the regions contradicted the Russian Constitution and federal laws. Today, four fifths of these laws are now in harmony with federal laws.

But we should remember that this kind of rush job, no matter how justified it may be, is not a normal way to work. Ensuring that federal laws are observed, therefore, should be work carried out in a planned fashion and in close contact with the justice authorities, the prosecutors and the courts.

I would also like to remind those who pass the laws and those who enforce them that we need to not only ensure that the regions do not infringe on what comes under federal authority, but also that the federal authorities do not make unjustified attempts to intervene in what is exclusively under the regions' jurisdiction. This is an important point and in this I fully agree with the regional leaders.

A key issue for any state authorities is how much the country's people trust the state. The extent to which people trust the state depends directly on how well the state protects them from the arbitrary actions of racketeers, bandits and bribe takers. But the legislative and executive branches, the courts and the law enforcement agencies all still have shortcomings in their work here and this leads to violations of people's rights and interests and undermines state authority in general. This, therefore, is a political problem.

We are in urgent need today of court reform. The country's judicial system is lagging behind life and in practice is of little help in carrying out economic transformations. For businesspeople and for many others, the courts are not speedy, just, or fair. This is not always the case, but unfortunately, it is often this way.

Arbitration practice also often runs up against a contradictory and unclear legislative base. The setting of rules and regulations by the state ministries and agencies is one of the biggest brakes on developing business. Officials are used to acting according to instructions that, once new laws have come into force, contradict these laws and yet remain unchanged for years. This problem has been noted hundreds of times but practically nothing changes. The government and the ministries and agencies must take radical measures to improve the setting of rules and regulations by ministries and agencies, including abolishing ministry and agency rules and regulations in cases where direct federal laws have already been passed. Today we have a regulation and legislative base - and I will speak later about how this is linked to the work of the civil service - that is superfluous on the one hand and incomplete on the other. We have too many laws, many of which duplicate each other, but in numerous cases these laws do not resolve the issues they are supposed to as they were passed under pressure from narrow group or ministerial interests.

What's more, it has been said many times that all laws should be backed up both organisationally and financially. What we see in practice, however, is a very different picture. The Federal Assembly continues, unfortunately, to pass laws that, to be enforced, would require reviewing the federal budget and the Pension Fund budget, also approved by them. I think that even if motivated by the best intentions, these kinds of decisions are politically irresponsible.

We have long been in need of systematised legislation that enables us to take into account new economic realities and also preserve the traditional areas of law that have been dangerously eroded over recent years. The huge number of declarative laws already passed and their contradictory nature creates opportunities for arbitrariness that is unacceptable in an area such as the law. We have practically reached the dangerous point when judges or other law enforcers can choose the particular law they think most suitable. Along with a shadow economy then, this creates a kind of "shadow justice". Practice shows that when people lose hope of seeing justice done in the courts, they look for other, far from legal, solutions and ways around their problems and sometimes come to the conclusion that taking the illegal road has a greater chance of success than does turning to the courts. This undermines confidence in the state.

The situation with procedural legislation is no better, neither for civil nor criminal procedural legislation. There are a huge number of complaints about unjustified violence and arbitrary action when opening criminal cases, carrying out investigations and during court proceedings. Investigations can drag on for years. We have more than a million people sitting in our prisons and pre-trial detention centres. Just think about this figure. A large number of these people are cut off from society, having been sentenced under articles of the Criminal Code that provide for other forms of punishment and not just imprisonment. This is all the more serious as the state is not able to provide these people with normal prison conditions nor to ensure they get the social rehabilitation they need afterwards. The result is families destroyed and a worsening public health situation and moral climate in society. This problem has stopped being just a legal problem and now affects the whole of society.

This kind of law enforcement clearly also creates huge opportunities for abuses of citizens' rights and freedoms and forms a breeding ground for corruption amongst civil servants. The root of this problem lies in ineffective law enforcement instruments and in the structure of our legislation itself. In this respect, we must resolve several tasks in the near future. This includes issues concerning the status of judges and the procedures for their appointment. I think that the qualification colleges should include among their members not just judges but also other authoritative representatives of the legal community. Also, we must ensure that the constitutional principles of equality of the parties and controversy are respected during criminal and civil trials.

The legislation on enforcement of court decisions also needs to be considerably improved because at the moment it is far from all court decisions that are actually enforced.

It is high time that we brought order to municipal legislation. This legislation is closest of all to people's daily lives but it is poor quality, overburdened and often illogical. I think that local government practitioners and specialists and public councils in towns and cities that have a wealth of theoretical and practical experience should be involved in this work. We have enough people who could make a contribution here.

Finally, it is essential for the state that we improve the work of the law enforcement agencies and the prosecutor's office.

Dear State Duma deputies and members of the Federation Council,

In last year's address I spoke of the danger of a growing lag in the economy. This danger remains with us today. Yes, the results for 2000 show impressive economic growth, a certain increase in labour productivity and reduction in production costs. But high growth rates over just one year are not enough, and what's more, the growth rate slowed down at the end of last year. Conditions for ensuring a sustainable high growth rate have unfortunately still not been created.

The country still has an unfavourable business climate and capital outflow of more than $20 billion a year. Total capitalisation of the Russian stock market comes to around $50 billion, while the biggest companies in our closest neighbour, Finland, have a total value five times higher. Compare the examples - Russia's biggest companies, its blue chips, are worth several times less than their counterparts abroad.

It is clear that if we do not start taking action today, including by carrying out structural reforms, we could end up going into a lengthy period of economic stagnation tomorrow. Our economy is still based primarily on natural resources rather than on manufacturing. Our economic system has changed little in essence. Where does most of our money come from? From oil, gas, metals and other raw materials. The additional revenue we receive from exports is either eaten up, feeds the capital outflow or, at best, gets reinvested in the same raw materials sector. The fuel and energy sector accounted for more than 60 percent of all industrial investment last year. This happened partly because no effective use was found for export revenue in other sectors of the Russian economy.

Inflow of capital is hindered by high risks linked to contracts not being fulfilled and an undeveloped financial market infrastructure. Incentives are limited, there is no trust, and as a result, our economy is not modernising, it is staying stuck where it is and is even coming to rely even more on raw materials exports, and thus is even more dependent on cyclical factors.

Another tried and tested way of making money well-known in Russia through the centuries, that of making money out of state assets, be they state property or budget funds, remains popular today. In other words, a greater profit is made from distributing and redistributing wealth than is made through creating this wealth. This is what explains the protracted battles over reforming the monopolies.

It is no coincidence that we see enthusiasm, both in the government and in the Federation Council, only when budget money is being divided up, and this enthusiasm wanes when it comes to taking the decisions on collecting this budget revenue. A sort of consensus has formed: many are happy with the status quo, this state of inaction, in which some ensure they get financial benefits while others collect the political dividends. Many confuse this status quo with stability, but no one needs this kind of stability, for it is nothing more than maintaining a flawed tradition based on frittering away national resources and it is a road to economic and social stagnation. We can avoid this situation if we ensure that attempts to carry out structural reforms go beyond merely drawing up concepts and programmes, and the government must finally prove that this practice will no longer exist.

I am convinced that the cause of this state of affairs lies not only in resistance to reforms from the civil servants, though examples of this abound. I think the cause lies also in the way the legislative and executive authorities themselves work. This system of work is currently organised in such a way that it hampers and often simply halts reforms. The system looks after its own rights to receive a sort of payment for status, in other words, bribes and compensation. This form of existence of the state authorities constitutes a threat for society and for the state itself.

We must begin preparing administrative reform, above all of the government, the ministries and agencies and their branches in the regions, and we need to review not so much their structure and staff as the functions for which they are responsible. Previous repeated attempts to streamline the management apparatus and merge or separate agencies have made the government and its agencies neither more compact nor more effective. It is enough to say that the number of people working in the state agencies and apparatuses has risen from 882,000 in 1993 to more than a million today.

This year, the government has prepared a package of legislation on de-bureaucratisation and minimisation of state intervention in business. We need to work on further reducing the number of activities requiring licenses, because even though it has already been shortened, this list is still far too long.

We must make energetic efforts to bring order also to other sectors that suffer from excessive state intervention. I emphasise that we are talking here of excessive intervention. I have in mind above all at the moment compulsory certification of goods and various permits, registrations, accreditations and other norms and rules not provided for by legislation but introduced with determination by all kinds of instructions. We should have no illusions: only transparent relations between business and the state, relations that are fixed in direct legislation, will give the Russian economy the development impulse it needs.

Dear colleagues,

Last year we began reform of the budget. We passed a deficit-free budget, but the procedure by which the budget went through, or rather, was pushed through the State Duma, was more reminiscent of a round of haggling between the government and the deputies. This kind of haggling is inevitable with budget approval procedures as they are today. I call on you to examine together ways for moving away from this now familiar practice. I think it is time we looked at forming a budget that would consist of two parts.

The first part should ensure that all the state's commitments are fulfilled. The parliament should have the right to either accept or reject the government's proposals concerning this part, but not to change its parameters.

The second part of the budget should be based on revenue sources linked to the favourable foreign economic situation. It can build up a reserve that can be used to ensure stable development during less favourable years and also for financing large-scale strategic objectives. There can and should be discussion and debate on amendments concerning this part. I think that this kind of budget based on two parts will enable us to avoid eating up these additional revenues.

Going further. One of the points in my election campaign programme was far-reaching tax reform. We have taken the first steps in this direction and now need to move further.

Running a little ahead here, I would like to remind you of my attitude concerning the results of privatisation. I am against a new carve-up of assets. Although I do not doubt the aims and objectives that were behind these transformations in the 1990s, I think that we should listen to the questions raised regarding the way they were carried out. These questions are coming not only from supporters of a planned economy but also from liberals. Carving up assets again, however, could prove even more harmful and dangerous for the economy and social sphere, so, going on the situation we have today, what we need to do now is ensure these resources are used effectively and contribute as they should to state revenue, and the only way to do this is through tax instruments.

Our strategic priority today is to ensure fair and rational taxation of natural resources (Russia's main source of wealth) and real estate, and also to lower taxes on non-rent income and completely phase out turnover taxes. The government will very soon complete its examination of these problems and, as the Prime Minister has just informed me, the relevant draft laws will be introduced to the parliament within three, maximum four weeks.

We must also continue customs reform. Measures have already been taken to simplify and reduce import duties but this is still not enough. We need to make radical change to the system of customs administration. The main task in this area this year is to adopt the new draft Customs Code as a direct law. Of course, this code should be in line with the standards set by the World Trade Organisation. Joining the WTO remains a priority for Russia. We need to reach basic agreements with the WTO member states by the end of this year. The parliament's task is to bring Russian legislation into line with the World Trade Organisation's norms and provisions.

Russia's integration into the world economy requires us to take a civilised approach to settling the debt problem. We have to learn lessons for the future from today's situation and only borrow when we know exactly how to spend the money effectively and how to pay it back without creating a debt burden for our children and grandchildren. The government, therefore, must be very careful in making any decisions on new borrowing.

In this respect, I want to say a few words about the government's decision not to sign an agreement with the International Monetary Fund. The government has reached a general agreement on budget, monetary and structural policy, but has taken on the responsibility of carrying out this programme without signing a formal agreement with the IMF. I think the government is able to control its own actions and should prove that it is able to do this without supervision from the international financial organisations, but within the framework of the programme that was prepared.

Now coming to the business climate in the country. Unfortunately, ownership rights are still not well protected. The level of corporate governance is still low. Battles over ownership rights continue even after court decisions have been taken, and these decisions themselves are often not based on laws so much as on pressure from the parties involved.

We must protect the rights of honest buyers of real estate and securities or any other property. Of course, this includes not just the property of large corporations - we have to protect the property rights of all, big and small property owners, Russian and foreign investors. I think the government and the Federal Assembly should draft the relevant legislation in this area this year.

Moreover, we need to speed up the adoption of a new law on privatisation, a law that will set clear and transparent rules for the sale and acquisition of state assets and that will put an end to the political speculation on the subject of "selling Russia". Unfortunately, this kind of talk continues today with occasional calls to take back assets, confiscate property and so on. We already lived through a time when the state owned everything, and we all know well how this ended.

I am convinced that the state's effectiveness is not measured by how many assets it owns but rather by how effective are the political, legal and administrative mechanisms it uses to uphold public interests in the country. It was precisely this that I was talking about when I spoke about tax reform.

This same principle applies to the military-industrial complex, a sector of major importance for our country. Private entrepreneurs already supply half of our defence requirements, including through joint-stock companies with state participation. I think we should expand the private sector's involvement in defence research and production. This should be done, of course, only in clear respect of the set requirements and through a public procurement system.

Now a few words about the land question. This is an issue that has dragged on a very long time. A solution could be to abandon attempts to cover all aspects of state regulation of land relations in the Land Code. The main thing today is not to hinder development of a land market in areas where it is already established and to make the Land Code reflect the most modern ideas about ways and methods of regulating land relations and recognise that non-agricultural land should now be able to be bought and sold without restriction. Regulating the purchase and sale of agricultural land will obviously require passing a special federal law and it should be perhaps up to the regions to decide for themselves the timetable for introducing a market for agricultural land.

An accessible and developed transport and energy infrastructure that is transparent in its functioning is extremely important for the country. We have already begun reforms in the electricity sector, gas supplies, railways and communications. It is clear for everyone that we can no longer tolerate the lack of financial transparency in these sectors, rising costs and ineffective management. The practice of large-scale cross subsidies also cannot continue. But as we begin real transformations in these infrastructure monopolies, we must take great care to calculate the economic and social consequences and also to respect owners' and investors' rights. This is of great importance because it is precisely these monopolies that form the foundation of our economy, today at least.

Another question of importance is capital export. I am sure that if we create an acceptable business climate in the country, capital will stop fleeing abroad. You can't keep capital under lock and key - it has to have the legal freedom to go wherever it sees the biggest advantage and greatest effectiveness. Strategically, capital can only be kept in place by giving it the right conditions and ensuring free enterprise, within the framework of the law, of course. So I don't think it makes sense to cling to currency restrictions that do not work anyway, and I already gave you the figures. It is time to review the very principles of currency regulation and bring them closer into line with world practice. I think that the current restrictions on capital and real estate operations discriminate against Russian citizens compared with the citizens of other countries, restrict their freedom and undermine the competitiveness of Russian business.

We should keep strictly to the principle of most-favoured treatment of our own citizens in all our actions. Russian citizens should not be banned from doing what foreign citizens have the right to do here.

Esteemed Assembly,

Our country's development is not measured only by economic successes but also, and not in the least, by its level of spiritual and physical health, although, of course, all of these things are interlinked. The nation's health today is directly linked not only to the state of the public health system but also to people's way of life, to the environment and the development of medical science. In the modern world, health protection is a state-level issue. The government approves every year a programme of state-guaranteed free medical treatment, but this programme is not backed up the necessary state funds in the absolute majority of the country's regions. The deficit of funds for this programme comes to 30-40 percent of the requirements and this gap is filled, and let us be direct and honest about this, by patients themselves, who end up having to pay for their medicines and treatment.

Restructuring in the medical system is going ahead slowly. The increase in paid services is leading to a hidden commercialisation of state and municipal hospitals and treatment centres. Meanwhile, the medical insurance system, which is supposed to compensate patients for their healthcare costs, is working ineffectively. What we now have, essentially, is a hidden but almost legalised system of paying healthcare based on the network of budget-funded medical centres, and within this system we often see arbitrariness and no real social justice at all.

Our objective this year is to create the legislative base for a transition to a healthcare system based on medical insurance. This must be done within the framework of the common medical-social insurance system and the funds for its implementation must be guaranteed. We must use this as a foundation for overcoming the chronic shortage of financial resources and ensure that the population has access to a full range of state-guaranteed basic healthcare services. We must make these services genuinely accessible and increase the quality of free healthcare for the population, and regarding paying healthcare, we must develop a clear legal and economic base for its work.

Just as important a priority for the state is to ensure that our people have a decent old age. Population decline is continuing in our country, the share of old people will increase over time and so will the burden on the working-age population. We know the forecasts in this area. But unfortunately, the state does not have great possibilities for ensuring that current and future pensioners get a decent old age. The funds available today are enough only for paying minimal pensions.

Yes, we did manage to improve a little the lives of elderly people last year. Pensions were paid on time and increased by around 28 percent in real terms. This was the biggest increase over the last few years. This year we must take another step forward and bring the average pension up to the subsistence level. These are still just modest goals. We cannot guarantee decent lives for our pensioners under the current system, and so we need to move quickly to introduce a new, more effective pension system. People are ready for this change. Surveys show that more than 60 percent of Russians think we need to radically change the way the country's pension system works.

We have set up a National Council for Pension Reform to discuss the basic mechanisms for moving over to a new system. This council should become an effective policy-forming instrument in this sector that is of such importance for society, and it will be the body that works out the new principles for pension legislation.

No one working today knows exactly what kind of pension they will receive. No one knows because pensions are not calculated on the basis of what each individual has contributed, but depend upon future generations of workers, and we cannot predict how effectively they will work and contribute to the pension system. We need to move over to a comprehensible individual pension savings system. People should be sure that each rouble they earn will have an impact on the size of the pension they receive later. This will serve as an additional incentive and will help bring wages into the open.

Successful pension reform is directly linked to labour relations. Many people today have only limited opportunities to legally earn their wages and are forced to resort to all sorts of cunning schemes, bypassing labour and administrative legislation that just does not work in practice.

The archaic Labour Code adopted in 1971 is still in force today. The gap is growing all the time between modern market-based civil legislation and the old labour legislation, and this is preventing labour relations to be above board, and is also keeping trade unions from having any say.

The deputies, the government and the trade unions have very different views on the Labour Code. What we need are labour laws that protect workers' rights and interests not on paper but in practice. We need laws that ensure labour resource mobility and that open the way for structural changes in companies. I very much hope that the parliament will speed up work on and approval of the Labour Code based on the government proposal.

In the social services provision sector what we especially need are effectiveness, transparency and clarity. Each citizen should know clearly what they are entitled to receive free from the federal authorities and what they should pay for themselves. The authorities at every level of power should have their responsibilities clearly set out. In accordance with this principle, we should move away from public sector financing based on estimated financing requirements to a system of financing based on set public procurement, and just as importantly, we should create the conditions for competition at all levels - between state and private organisations for the opportunity to provide social services.

Education is one sector where we should expand opportunities for economic mechanisms to work. More than a quarter of our country's population is involved in education at any one time. On the one hand this is a lot, but on the other hand it is not enough at all. The rate at which the modern economy, science and information technologies are developing mean that education should become an ongoing part of life.

I think we should change our very approach to education. In the era of globalisation and new technologies, education is more than just part of the social sphere, it represents an investment in the country's future and should involve companies, public organisations and citizens, everyone without exception who has an interest in quality education for our children.

Education cannot depend solely on budget distribution of resources. Extra-budgetary funding of educational institutions, fees, in other words, to call it what it really is, have in many cases become the norm. but this market is not transparent and it is not legal. School directors adopt it at their own risk. An education system that remains officially free while being fee-paying in practice corrupts both pupils and teachers. We must clearly set out the limits for free education, ensure fair and guaranteed access to this education and also create an adequate legal foundation for fee-paying education.

Our task this year is to develop state education standards that should become the foundation for later introducing norms for per-capita financing of education services. At the same time, we should create an independent attestation and education quality control system in the interests of improving the quality of education. No less important is the task of improving access to education for people from low-income families through targeted allowances.

We often hear that science in our country is in a miserable state. I would like to say a few words about this. We hear that the main reason for this bad state of affairs is the meagre funding the state provides. This is partly true, but only partly. Contrary to widespread belief, Russian science is not only very much alive but is developing, though not as fast as we would like.

Extra-budgetary financing sources have come to play a big part in financing science, increasing as a share of total financing from 5 percent to 50 percent over the last decade. Russian science has begun to work for the market and to develop intensive cooperation with Russian and foreign business. Many developments by Russian scientists are fully competitive on world markets.

The state, of course, can and should support fundamental science. But the state should act as a client for research and development only within the limits of its economic possibilities. Today then, we need to clearly define state priorities for financing scientific work and also change financing mechanisms, including by borrowing the experience of Russian scientific funds that have been financing particular research, and not entire research institutions, on a tender basis for quite a while now.

We should also remedy the incomplete and extremely contradictory nature of the legislative base for science. Legislation for managing this sector is very unwieldy, complex and confused. The Russian Academy of Sciences' charter and legal basis for its work are archaic. The system of intellectual property protection and use is inadequate. These problems must all be resolved.

Dear colleagues,

In working towards our economic and social objectives we must take into account not only the domestic political situation but also the strength of our international positions. Foreign policy is an indicator and a major component of domestic affairs. We should have no illusions here. Not only our authority on the international stage but also the political and economic situation in Russia itself depend on how competently and effectively we use our diplomatic possibilities.

I have said before that Russia should build its foreign policy on the basis of clearly defined national priorities, pragmatism and economic effectiveness.

Our country is becoming more and more integrated into the world economy today and this is why we must act in the foreign policy sphere to protect our country's economic interests and the interests of Russian business and Russian citizens. It is our duty to ensure and to serve, if you will, the interests of the Russian economy, and this means that we must fight discrimination against our producers, preserve and ensure optimum use of Russian assets abroad, speed up the work on Russia's accession to the WTO on conditions that are acceptable to us and generally work to make Russia competitive in all senses of the word.

Having a good reputation is important not only in the economy but also in politics, and this is why we must fulfil all our long-term commitments and agreements and uphold the principles upon which our ties with other countries are based - a balance of interests, mutually beneficial cooperation and respect and trust. This approach is far more productive than rigid ideological dogma. Those who share this approach can always be sure that they will find an interested and predictable partner in Russia.

But it is a matter of principle for us that our international partners also respect and consider our national interests. This applies completely also to discussion of questions regarding strategic stability, disarmament, NATO expansion and forming the foundations of the world order in the twenty-first century.

Our efforts to activate work within the CIS are dictated not only by our historic closeness but also by obvious practical considerations. Russia is the nucleus of integration processes in the CIS, and as Russia's economy experiences an upturn, this opens up new opportunities. We will continue the hard work on building a union state with Belarus and we will continue to encourage further integration in the CIS as a whole. The signature of the treaty setting up the Eurasian Economic Community is just a first significant step and we are ready to go further in this direction.

We must breathe new life into our relations with European and other international structures, while at the same time maintaining and developing all that is positive that has built up over the previous years. Dynamic processes are now at work in Europe and the role of large European organisations and regional forums is changing. In this respect, our efforts to build up a partnership with the European Union will become even more important. Integration with Europe is one of the key areas of our foreign policy.

We are consistent also in our relations with NATO. These relations are regulated by the Founding Act on mutual relations, cooperation and security that was signed in 1997. We think that this organisation often ignores the opinion of the international community and the provisions of international legal documents in its decision-making process, and this is the biggest problem. The future of our relations with NATO therefore depends on how closely the basic principles and norms of international law will be respected in questions of use of force and threat of the use of force. Our position is clear: the only organisation with the right to authorise the use of force in international relations is the United Nations Security Council.

Another problem that it is my duty to mention here at this tribune is the defence of the rights and interests of Russians abroad, our compatriots in other countries. The hundreds of thousands of Russians living and working outside this country must be sure that Russia will not abandon them should they find themselves in a difficult situation, that we will protect their personal rights, protect their families from possible violations of the law and from unlawful pressure and help uphold their human dignity. No one should be allowed to apply a selective version of human rights and freedoms based on people's passports, and our diplomats should be not only active in such cases, but should show professional firmness and take effective action.

I wish to emphasise particularly that all the state authorities should view foreign policy today as a very sensitive and important affair. We should keep in mind that the prosperity of our country and our citizens, the situation of our compatriots abroad and, last but not least, our success in domestic affairs, depends on how intelligently, sensitively and effectively we pursue our foreign policy.

Esteemed members of the Federation Council and State Duma deputies,

The last decade has been a stormy, even revolutionary time for Russia. Last year and the beginning of this year seem rather calm compared to the past years. For many people, now used to constant crises, the lack of political upheavals have given rise to predictions of structural and personnel changes.

I want to be quite clear in saying that we do not and should not fear change. But any change, whether political or administrative, should be justified by the circumstances. Of course, public expectations and fears do not arise out of nowhere. They are based on the well-known logic that after revolution comes counter-revolution, and this is followed by a search for those guilty of revolutionary excesses and their punishment, all the more so as Russian history abounds in such examples. But it is time to say firmly that this period is over and there will be neither revolution nor counter-revolution. State stability built on a solid economic foundation is a blessing for Russia and for its people. It is high time now to start living according to normal human logic and realise that we have long and hard work ahead of us. Our main problems are too far-reaching and require not a policy of jumps forward here and there but qualified, daily work. Stability, however, is not bureaucratic stagnation. We need bold and carefully prepared decisions, competent and well-qualified specialists, both in the business community and in the civil service.

In conclusion, I would like to say once more that after a stormy decade of reform we are now entering a period where our long-term success depends on our will, our qualifications and our determination. We have exhausted the potential of transition period measures, but in order to ensure that today's political stability becomes tomorrow's economic prosperity, we must put in a lot more effort and this will take more than one year. The authorities must ensure that there can be no backing away from democratic freedoms and that the economic course we have chosen cannot be reversed. The authorities must work in order to guarantee this policy of improving the lives of all groups of our population and take a consistent and law-based approach to improving the country's business climate.

In addressing today the Federal Assembly, the government and the regional and local authorities, I ask you to remember that we will not achieve tangible results of we do not remove people's fears and cautious attitude towards the state. The cause of many of our problems lies in this ingrained lack of trust in a state that has deceived citizens on many occasions in the past, and in this inherited suspicion people feel towards the state given the lack of authentic civil equality and business partnership.

I deliberately kept your attention on problems today, on shortcomings, because I think that an objective analysis of our own shortcomings is a lot more useful than soothing speeches, though I could have chosen to develop this theme. Last year showed clearly that we can work together and that we now need to learn to work together effectively. I ask all who work for the state to treat this as their main and most important mission, I repeat, their most important mission.

Thank you for your attention.

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