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Annual Address to the Federal Assembly
April 26, 2007
Marble Hall, the Kremlin, Moscow


Yesterday we paid farewell to First President of Russia Boris Nikolayevich Yeltsin. I ask you to honour his memory with a minute of silence.

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Deputies and members of the Federation Council,

As you know, this tradition of making an annual address to the Federal Assembly - in effect a direct address to the people of Russia - was established by the 1993 Constitution, the Constitution adopted on the initiative of President Yeltsin.

He believed it was crucially important to maintain a direct and open dialogue with the people. He believed in the need for public debate on state policy priorities and problems. He considered this to be a valuable instrument for bringing society together, a valuable instrument for building genuine democracy.

Our country at that time was deeply divided by complex social conflicts, confrontation between parties and ideologies. Separatism represented a real threat to Russia's security and territorial integrity. And as if this were not enough, resources for resolving the country's most urgent and vital problems were in drastically short supply.

But it was precisely during this difficult period that the foundations for future change were laid.

We have worked together for many years to overcome the serious consequences of the transition period, to overcome the negative effects of far-reaching but not always straightforward transformation.

In untangling the complex knots of social, economic and political problems, we have at the same time built a new life. As a result, the situation in the country is gradually, slowly, step by step, changing for the better. Not only has Russia now made a full turn-around after years of industrial decline, it has become one of the world's ten-biggest economies. People's real incomes have more than doubled since 2000. The income gap between our citizens is still unacceptably wide, but the measures taken over recent years have reduced the extent of poverty in Russia by almost half.

We realise that we are still only at the beginning of the difficult road to our country's full and genuine recovery. The more firmly our society pulls together, the quicker and more confidently we will complete this journey.

The spiritual unity of the people and the moral values that unite us are just as important a factor for development as political and economic stability. It is my conviction that a society can set and achieve ambitious national goals only if it has a common system of moral guidelines. We will be able to achieve our goals only if we maintain respect for our native language, for our unique cultural values, for the memory of our forebears and for each page of our country's history.

This national treasure is the foundation for strengthening our country's unity and sovereignty. It is the foundation for our everyday life and the basis on which we can build our economic and political relations.

One of this year's most important events is the election to the State Duma. What principle importance and unifying significance does this election have for our society?

Above all, the results of this election will objectively reflect the level of support among the Russian public for the policies we have been following. Essentially, this election will decide whether the current policies will continue or not, for the implementation of our strategic plans depends directly on the composition of the parliament after December 2.

These strategic plans include the formation of an effectively functioning civil society and development of an effective state able to ensure security and a decent life for our people. They also include the development of free and socially responsible enterprise, the fight against corruption and terrorism, modernisation of the armed forces and law enforcement agencies, and finally, a much more influential role for Russia in world affairs.

This year will be the first time that the State Duma elections will take place according to the proportional system. In other words, only political parties will take part in the election. The parties' lists of candidates will be divided into regional groups so that voters will know exactly who is competing to represent their interests in parliament.

This amounts to a revolutionary change and it was a conscious choice that we made in order to achieve real democratisation of the electoral system.

It needs to be said frankly that the old system of single-seat electoral districts did not stop influential regional organisations from pushing through their 'own' candidates, making use of the administrative resource at their disposal. We have still not overcome this problem, but the new system does considerably reduce the possibilities for using such methods.

Practice shows that the proportional system gives the opposition greater opportunities to expand its representation in the legislative assemblies. This is easily proven through examples, or through statistics, to be more precise.

In the three years that this system has been used at regional level, the number of party factions in local parliaments has increased almost four-fold. Today they account for almost two thirds of all members of the regional parliaments.

Moreover, the abolition of the minimum voter-turnout requirement (the subject of much debate, you will recall) has not led to a decrease in political activeness, and indeed, voter turnout has been even higher than in previous election campaigns.

I am certain that the new election rules will not only strengthen the role of political parties in forming a democratic system of power, but will also encourage greater competition between the different parties. This in turn will strengthen and improve the quality of Russia's political system.

Based on the outcome of the elections, the political parties will be entitled to state financing. Russia's taxpayers have the right to rest assured that their money will not be spent on empty populist promises or on undermining the foundations of our state system.

To be frank, our policy of stable and gradual development is not to everyone's taste. Some, making skilful use of pseudo-democratic rhetoric, would like to return us to the recent past, some in order to once again plunder the nation's resources with impunity and rob the people and the state, and others in order to deprive our country of its economic and political independence.

There has been an increasing influx of money from abroad being used to intervene directly in our internal affairs. Looking back at the more distant past, we recall the talk about the civilising role of colonial powers during the colonial era. Today, 'civilisation' has been replaced by democratisation, but the aim is the same - to ensure unilateral gains and one's own advantage, and to pursue one's own interests.

Some are not above using the dirtiest techniques, attempting to ignite inter-ethnic and inter-religious hatred in our multiethnic and democratic country. In this respect, I ask you to speed up the adoption of amendments to the law introducing stricter liability for extremist actions.

Greater powers for regional and local authorities constitute one of the main criteria for measuring a society's degree of political culture and development. Decentralisation of state power in Russia is now at a higher point today than at any other time in our country's history.

In the last year alone, important powers in the areas of urban development, forestry management, land and water relations, wildlife protection, and employment, have been transferred to the regional authorities. Starting next year, the regional authorities will begin exercising powers with regard to the protection and management of historical and cultural monuments of federal significance.

Much has also been said about the need to strengthen the links between the upper house of the parliament and the country's regions. I know that the Federation Council's current members take their responsibilities very seriously indeed and consistently uphold the regions' interests in their practical work.

At the same time, many of those gathered here today propose passing a law that would allow a region to be represented only by someone who has lived there for at least ten years.

I agree with this proposal but only on condition that this change will be introduced gradually, in accordance with the current procedures for rotation of the members of the Federation Council. We do not need any new revolutions.

Last year was the first year during which the new law on local self-government was in force. This law considerably expands the powers and possibilities of the local authorities. Overall, I consider it necessary to continue the work to consolidate the economic foundation for local self-government, above all through ensuring the formation of a sufficient revenue base.

All of this, of course, does not mean the federal authorities will no longer take responsibility for the quality of life in the regions. But it is important that the power system become more flexible and closer to the people, and that more and more decisions are taken locally. At the same time, all of us without exception, at every level of power, are responsible before the public.

I draw your attention to the fact that the federal budget will allocate the regional authorities 153 billion roubles this year so that they can exercise the powers transferred to them. Next year, the money allocated for this purpose will increase to 200 billion roubles. Overall, the regions' budgets have increased six-fold over the last seven years. We will look later at the priorities for how this money is spent, but the possibilities are considerably greater today than they were before.

But along with the transfer of powers and financial resources to the regions, we must also develop an objective system for evaluating the effectiveness of the regional and municipal authorities' work.

The rapid expansion of our national information and media space is also having a beneficial effect on the development of democratic institutions and procedures. The last four years have seen a 40-percent increase in the number of registered print media, and an almost 2.5-fold increase in the number of electronic media outlets. But the leader for growth is without question the Internet. The number of Russians regularly using the Internet has increased more then four-fold over this period and now exceeds 25 million people.

It is impossible to imagine the democratic political process without the participation of non-governmental organisations, without taking into account their views and opinions.

This exchange of views, this dialogue with the NGOs, is developing consistently today, including through the Public Council's constructive assistance. The professional influence and the openness of the Council's members have given NGOs greater influence on lawmaking work, on the activities of the Government and the Federal Assembly, and also on the administrative practices of the state ministries and agencies.

The Public Council has become involved in combating xenophobia and cases of bullying and abuse in the armed forces. It is making an important contribution to strengthening legality and protecting human rights.

State support for public organisations is also on the increase. Last year, state support totalled 500 million roubles, while this year it will be 2.5 times higher.

The number of active NGOs in the country is growing, and so is their membership, the number of volunteers carrying out all kinds of socially important work. Around 8 million people in Russia are now active in NGOs.

These are all real indicators that an active civil society is developing in our country.


The protracted economic crisis the country has gone through has had severe consequences for our country's intelligentsia, for the situation in the arts and literature, for our people's culture and creativity. To be honest, these difficulties have all but led to the disappearance of many of our spiritual and moral traditions.

And yet, the absence of cultural beacons of our own, and blindly copying foreign models, will inevitably lead to us losing our national identity. As Dmitry Likhachev wrote, "State sovereignty is also defined by cultural criteria".

Having a unique cultural and spiritual identity has never stopped anyone from building a country open to the world. Russia has made a tremendous contribution to the formation of European and world culture. Our country has historically developed as a union of many peoples and cultures and the idea of a common community, a community in which people of different nationalities and religions live together, has been at the foundation of the Russian people's spiritual outlook for many centuries now.

This year, Russian Language Year, is a good time for us to remember once again that Russian is the language of a historical fraternity of peoples, a true language of international communication.

The Russian language not only preserves an entire layer of truly global achievements but is also the living space for the many millions of people in the Russian-speaking world, a community that goes far beyond Russia itself. As the common heritage of many peoples, the Russian language will never become the language of hatred or enmity, xenophobia or isolationism.

In my view, we need to support the initiative put forward by Russian linguists to create a National Russian Language Foundation, the main aim of which will be to develop the Russian language at home, support Russian language study programmes abroad and generally promote Russian language and literature around the world.

Looking after the Russian language and expanding the influence of Russian culture are crucial social and political issues. Genuine art has a serious educational mission, helps to forge patriotic spirit, promotes moral and family values, respect for work and respect for one's elders.

We have already introduced a system of grants for a number of musical, theatrical and other creative groups. This has helped to stabilise the material situation in the arts community. We will take this positive experience into account in our future work.

I believe that not only the state but also the business community can do much to contribute to the revival of Russian cinema and theatre, publishing and literature. And of course, it is also vitally important today to help develop the national cultures of our country's different peoples, including through support for folklore groups.

Turning to another very important matter, our country developed at one time a library system that was unique in the world, but we are forced to recognise that many years of financing shortages have led to its decline.

We now need to rebuild this library system on a new and modern basis. I have already made a decision to establish a Presidential Library, which will become an information link binding the entire national library system together. This part of the library development project will be completed by the end of next year.

I propose that this library be given the name of Boris Nikolayevich Yeltsin, Russia's First President.

The next stage is to use regional libraries as a base for developing regional branches of the Presidential Library. They will be linked together into an information network using common methodological and software programmes.

I ask the regional and municipal authorities to ensure this work to develop local information and library networks and strengthen the material and financial base for libraries, including school libraries. Libraries should be not just the storage centres for books, but genuine information, cultural and leisure centres.

Carrying out these tasks I have named will require the adoption of a relevant programme and the allocation of funds. I think that support for this project from the Russian Academy of Sciences would also be helpful and timely.

Cooperation with the world's major library centres is another possibility. Our specialists have already held a series of consultations with colleagues from leading libraries in other countries. In the future, this work could eventually lead to the creation of a global library based on digital technology, which would serve as the base for an ambitious international humanitarian project to preserve the cultures and histories of the world's peoples. I discussed this subject just recently with U.S. President George W. Bush, and we agreed that a project of this kind deserves political support at the highest level.


No matter what the tasks we are resolving, be they in the cultural, economic or social spheres, we must look for the most effective solutions and methods.

We began implementing the priority national projects 18 months ago. The primary aim of these projects is to invest in people and improve their quality of life.

We realised right from the beginning that work on these projects required a particularly carefully tailored management system. At the same time, financing for the national projects was to come to no more than 5-10 percent of total budget spending on the corresponding sectors.

The first year of the projects' implementation has shown that we have succeeded in focusing budget spending on the final result. A whole number of programmes, especially in housing construction and education, are being carried out as joint projects between the federal, regional and local authorities, often with the business community becoming involved as well.

Another distinguishing feature of the national projects is their innovative nature. State support is going to development projects linked to the use and introduction of the most advanced technology. This includes, for example, computerisation of the country's schools and ensuring the provision of Internet access - a programme that should be implemented already this year. This also includes providing healthcare establishments with state-of-the-art equipment, and providing financial support to universities using new teaching methods and concepts.

The projects are starting to yield their first results. The Healthcare national project, for example, has brought results in the form of victories, small victories, yes, but victories nonetheless, represented by the lives of thousands of our fellow citizens. The reduction in the death rate and rise in the birth rate that we achieved in 2006 and that has continued in the first months of this year are clear evidence that we are working in the right direction.

In this respect, I would like to support the initiative to declare 2008 the Year of the Family in Russia. I hope that this decision will consolidate the efforts of the state and the business community to help strengthen and support the institution of the family and basic family values.

The national project in agriculture has not only proven its effectiveness but has also demonstrated the enormous potential of Russia's agriculture sector. It has helped to develop initiative and enterprise in rural areas. The result is that we have succeeded in checking a number of negative trends for the first time in many years. Moreover, it is clear to all now that agriculture is a promising and potentially technologically advanced sector of our economy.

We recently passed a law on agriculture in accordance with which a five-year development programme for the sector is to be drafted (I know how the deputies fought for this law). I ask the Government not to delay its adoption.

To give another example, implementation of the national project, Affordable and Comfortable Housing for Russia's Citizens, has considerably invigorated the construction sector in every area, from low-rise housing to complex development of entire districts and even towns.

We have come to the point now when the need to adopt a long-term strategy for mass-scale housing construction for all groups of the population is high on the agenda. We also need to look at a whole range of related issues such as urban development policy, the use of energy-saving and resource-saving technology and a development strategy for the construction industry as a whole.

Although the construction industry is growing at record rates (it posted annual growth of more than 15 percent last year), it still cannot keep up with the country's fast-growing needs.

The need for a long-term strategy for the industry is also underscored by the fact that even the ambitious targets set by the national project, such as bringing 80 million square metres of new housing on to the market every year by 2010, are already not enough to meet the needs of our country today.

What was once considered an achievement by Soviet standards will no longer be enough to meet demand even in the medium term. We will need to bring at the very least up to 100 million - 130 million square metres of new housing on to the market each year. Ideally, we would need to build at least one square metre of housing per capita every year.

While expanding the construction of new housing, we must also not forget about the importance of maintaining existing housing in a decent state. This was a subject we discussed in detail at the State Council Presidium meeting in Kazan.

The new Housing Code makes owners fully responsible for the maintenance of their property, but the chronic financing shortages for maintaining housing stock over previous decades makes this too great a burden for the overwhelming majority of new property owners, people who have become property owners after privatising their apartments and who simply do not have the means to carry out this work.

Judge for yourselves: of the 3 billion square metres of housing stock in the country, more than half is in need of repair. Some buildings have not only not had any repair work done over the last 15 years, but have not seen repairs in the last 40-50 years. This explains why we are seeing an increase in the amount of dilapidated housing, which now accounts for a total of 93 million square metres, more than 11 million square metres of which - 11.2 million square metres to be precise - is in a state unfit for habitation. The scale of the problem is disastrous, without any exaggeration. There is no other word for it.

The red tape involved in organising condominiums, the excessive tax burden they have to bear, and also the excessive burden of repair work are all acting as a brake on putting in place effective mechanisms to reform the housing and municipal services sector.

If we wish to move ahead we therefore must find additional sources of financing, at the very least for repairs, and for resolving an issue we cannot delay - that of moving people out of housing that is no longer fit for habitation.

It would be amoral for the state to ignore these problems. A country with such big reserves built up through oil and gas revenues cannot accept to see millions of its citizens living in slums.

The Government has planned to allocate only 1 billion roubles on moving people out of old and dilapidated housing in 2007. I remember that when we began working on this issue back in 2004, I think it was, only 300 million roubles were allocated, and then the figure rose to 1 billion, and this year it is again 1 billion. The local authorities are spending little more on this, although this is their direct responsibility. Now I would like to come back to what I mentioned earlier, namely that there has been a six-fold increase in the [regional] budgets.

I believe that sufficient financing for repairs should be allocated, but as a one-off procedure, in order to launch the mechanism for creating effective property owners' cooperatives.

As for moving people out of dilapidated housing, this should become a long-term programme that would break the negative trends in this sector and help millions of our citizens resolve their housing problems.

We need to look the truth in the eyes and recognise that many of our fellow citizens, who have found themselves in very difficult circumstances, are unable to resolve this issue without support from the state. You are aware, of course, that this situation is the root of many of the serious problems we face, problems such as drunkenness, the high death rate, and crime, including juvenile delinquency. Let us also not forget the problem of abandoned children.

Of course, the question arises, where will the money come from?

First, we have the money. Spending decisions are always just a matter of the choice of priorities at federal and regional level.

Second, I have a concrete proposal, namely, to allocate considerable additional revenue to these tasks, including revenue obtained through improved tax collection, from the privatisation of state assets and also, perhaps, from the sale of assets belonging to YUKOS in payment of its debts to the state.

It is my view that we should establish a special fund with at least 250 billion roubles in order to effectively reform the housing and municipal services sector. We need to allocate at least 100 billion roubles to programmes to move people out of dilapidated housing. Note that this is twenty times higher than the funding allocated in previous years.

At least 150 billion roubles should be spent on repairs to the housing stock. Previously, the federal budget allocated no money for this purpose at all.

Not only government officials but also representatives of the parliament and public organisations should be involved in the management of this Fund. Given the seriousness of the problem and the large amount of resources allocated, the Fund should draw up a programme for a 4-5-year period. This programme should focus on encouraging reform of the housing and municipal services sector and on providing assistance to specific individuals.

I hope that the members of the national and regional parliaments will exercise reliable control over the spending of these funds, and I ask you to do so, and I also hope that the media and the public will ensure control. I stress too that nobody is relieving the regional and local authorities of their responsibilities in this area.


In 2002, we decided to establish the Stabilisation Fund. It was necessary in order to guarantee the execution of budget spending commitments and to reduce inflationary pressure created by high oil prices on the world markets.

Time has shown that this policy was correct and justified. We have consistently brought down the inflation rate and this has had a positive impact on the growth of real incomes and has contributed to our economy's sustainable development.

But the nature of the economic tasks at hand today call for adjustments to the Stabilisation Fund's functions and structure, while continuing to pursue a conservative financial policy. In this respect, in my Budget Address, I proposed a new procedure for using the financial resources obtained through oil and gas revenues. The specific parameters of this new procedure are fixed in the Budget Code.

I remind you that all oil and gas revenues will be divided into three components.

First is the Reserve Fund, the purpose of which is to minimise the risks to our economy of a sharp drop in energy prices on the world markets, and also to maintain macroeconomic stability and fight inflation, which, as I said, has a direct impact on the growth of people's real incomes.

Second, part of the oil and gas revenues will go into the federal budget, primarily in order to carry out large-scale social programmes.

Third, the remaining oil and gas revenue will be placed in the Fund for Future Generations.

I think that the money in this Fund should be spent on raising the quality of life of our citizens and developing our economy. This Fund should help bring greater prosperity for our people both now and in the future. In this respect, it would be more correct to call it the National Prosperity Fund.

I would like to look now in more detail at how we propose spending the Fund's resources.

Historically, our culture has been based on respect for the people who have raised us and set us on our road in life. A society that does not show respect for its old people has no future. But during the difficult reform years, many pensioners - the vast majority, to be honest - ended up below the poverty line, above all due to the collapse of a pension system that was not adapted to market conditions.

We have no right to repeat the mistakes of the past and we must undertake every possible effort to guarantee a decent life for our pensioners in the future.

At the same time, we are hearing more and more often that we will not be able to resolve the problem of providing future pensions unless we raise the retirement age. Advocates of this idea base their conclusions on calculations that show a potential deficit in the pension system over 2012-2030 due to the need to index the basic pension at rates exceeding inflation, and also as a result of the problematic demographic situation.

It is my conviction that if we act in time to take all the necessary measures, there will not be any crisis in the pension system.

I also believe that there is no objective need to raise the retirement age in our country in the foreseeable future, not only because this would not in itself resolve pension provision issues for once and for good, but above all because we still have considerable possibilities we can make use of to ensure that the Pension Fund is better provided for and that would cover any deficit that could arise.

This takes us back to the issue of tax collection and to bringing wages out into the open, and I ask the Government to take the appropriate measures in this respect.

We also need to create a system of incentives so that people who have reached retirement age can, if they wish, voluntarily continue to work. Allowing people to voluntarily continue to work should, in the future, lead to a considerable increase in pension payments.

I think that pensions should increase on average by at least 65 percent over 2007-2009.

I also propose that we settle the issue of the so-called 'Far North' pensions, so that pensioners - both those who have already resettled from the Far North regions and regions with a similar status, and those who will do so in the future - can keep the greater part of the pensions they previously received. A decision on this matter should be made this year and I ask the Government to do this.

As well as indexing pensions, we must also provide incentives for voluntary retirement savings programmes - a very important aspect of pension schemes. In this respect, I propose that some of the money from the National Prosperity Fund be spent on co-financing voluntary retirement savings programmes.

What we must do, in essence, is to develop our citizens' 'pension capital'.

I propose the following scheme: for every 1,000 roubles a person makes in voluntary contributions, the state should add another 1,000 roubles to his personal pension account in the Pension Fund. Of course, so as to ensure that these contributions do not lose their value over time, they should be reliably and profitably invested. I ask the Government to define the maximum amount of this kind of co-financing in order to ensure a fair distribution of funds among the different social groups.

In the future, available funds from the National Prosperity Fund could be used to cover an eventual deficit in the pension system if it were to come about.

The Fund's financial resources should be increased to levels that would make it possible to meet the set objectives through the revenue obtained by their effective investment. I will not name any specific figures now - the Government will get nervous if I name them, but it knows what kind of amounts we are talking about. I ask you to ensure that this does not remain just empty words.

Together, these measures I have mentioned should ensure that our citizens' retirement provisions increase and should also guarantee the pension system's reliable functioning in the long-term perspective.


Russia's rich educational, scientific and creative heritage gives our country clear advantages for creating a competitive economy based on knowledge and intellect, an economy driven not by the rate at which natural resources are exploited, but above all by the ability to come up with new ideas and inventions and introduce them more rapidly than others into everyday life.

We have prepared the conditions for implementing precisely this strategy. We have passed the necessary laws and established the necessary structures. Now, using the base we have laid, we must begin setting concrete objectives.

In this respect, I want to come back to the question of making use of the National Prosperity Fund. Part of the Fund's money should be spent on capitalising development institutions, above all the Development Bank, the Investment Fund, the Russian Venture Company and others. For this purpose I propose that 300 billion roubles be allocated this year with further allocations for this work in the years to come.

Regarding the projects financed by the development institutions, I think they should be devoted to resolving the biggest tasks our economy faces.

First is to remove infrastructure bottlenecks that hinder growth.

Second is to make use of natural resources more effective.

Third is to modernise and develop high-technology industrial production.

I also note one point of principle importance, and that is that budget funds should not become the main source of funding but should above all serve as a catalyst for private investment.

The state's aim in putting budget funds into the economy should be only to provide a shoulder to lean on in areas where the risks for private investors are still too high. The state's main role should be to help business create a new and genuinely modern production base and encourage the emergence of an increasing number of national public companies.

I also want to mention the importance of small business as an economic sector. We have spoken on many occasions of the need to develop small business, and I ask you to pass at the earliest possible date a law on the support and development of small business.

I can say with all certainty that where small business is developing well, there is less poverty and the death rate is lower. The statistics confirm this. As small business continues to develop, the structure of our society will change and the middle class will grow. The parasite mentality will fade away and a spirit of initiative will develop as our citizens come to take ever greater responsibility for the results of their labour.

Concerning state funds, we should keep in mind that federal, regional and local investment already accounts for around 20 percent of all investment in the country. We must ensure that this investment is used as effectively as possible. The taxpayers have a right to demand that this money bring the expected results.

We also need to bring order to the system for concluding state contracts. We need to move over entirely to a system of contracts in which the cost of state procurement orders does not change throughout the contract's execution. In the vast majority of cases, the allocation of state procurement orders should be conducted through a system of auctions.

Now I would like to speak in more detail about the specific projects we propose. These are ambitious and large-scale projects.

One of our clear priorities over the coming years is electricity production. Russia has already run up against a shortage of capacity for future growth.

We plan to carry out the biggest structural reform project this sector has seen in decades. In essence, our project amounts to a second electrification of the country. We need to increase electricity production by two thirds by 2020. The state and private companies will invest around 12 trillion roubles in this work.

We will build new electricity stations and modernise existing stations, and we will also expand the network infrastructure. We also need to change considerably the structure of our electricity production by increasing the share of nuclear, coal-based and hydroelectricity production.

Over the entire Soviet period, 30 nuclear power plant units were built, but we plan to build 26 such units over the next 12 years, and to do so using the most advanced technology available.

I propose establishing a special corporation to carry out this project, a corporation that would bring together nuclear energy and industrial companies. This corporation will work on the domestic and foreign markets and will also take part in ensuring the state's defence interests. This will require a special law to be adopted. This is the nuclear energy industry I am talking about here.

Russia also has immense hydroelectricity production potential, but it is making less than 20 percent use of this huge potential, while other developed countries are making 70-80 percent use of their hydroelectricity production resources. We must begin building major new hydroelectric stations, above all in Siberia and the Far East.

We also possess enormous coal reserves, and we should therefore focus also on increasing the share of new generation coal-based production in our electricity production structure.

I hope that the Government's active work and initiative from the business community will enable us to successfully implement these electricity production development plans.

Yet another element in the infrastructure for future growth is an effective transport system.

Poor and at times completely inexistent roads severely hamper development. Annual economic losses due to the poor state of our roads are estimated at more than 3 percent of GDP. Just think that we spend 2.7 percent of our GDP on defence each year. The mobility of Russia's population is almost 2.5 times lower than in other developed countries

You will agree, I am sure, that we can no longer accept to see the decrepit bridge crossings, construction of which began during the Soviet years, or calmly read the tragic figures for the number of road accidents, including fatal accidents, on busy highways such as the Moscow-Don road, for example, used by millions of people, especially in the summer. All of this is absolutely unacceptable.

Federal spending on roads has practically doubled since 2005, but given the urgency of the problems I have mentioned and the need to develop the road networks within cities too, I propose that an additional 100 billion roubles be allocated.

Overall, I believe that we need to approve a programme for developing the road network through to 2015. The construction of high-quality federal highways and the reconstruction of the roads that form the international north-south and centre-Urals transport corridors in the European part of Russia are definite priorities. Also a priority is work to develop the infrastructure needed to help the Far East and Siberia realise their economic potential.

I believe that simply increasing funding is not enough, of course. We need to put in place a legal base that would provide for new and modern methods of financing and the construction and operation of roads.

The members of the State Duma and the Government have already put forward the relevant legislative initiatives. We need to act now to implement them as soon as possible.

Developing the country's rail, air and water transport links is just as important a task.

We need to adopt a long-term programme for developing our railways, in terms of both domestic and international traffic.

The number of airports in Russia has dropped three-fold over the last 15 years. We need to take urgent measures to improve the situation in this area and to begin implementation of a programme to establish aviation transit hubs.

I believe that only the most important airports should remain federal property, while the rest should be transferred to the country's regions. I ask the Government to examine the adoption of a special programme for developing the airport network.

We need to raise private investment too, through the privatisation of airport terminals and the concession of airport infrastructure, including runways.

I have been talking about the need to develop our sea ports for several years now. But the situation has barely improved at all. Our freight traffic continues to go through foreign ports and this is quite simply unacceptable.

The Government, as if on purpose, is not taking any measures. And yet we have been discussing this matter for several years now! I think that this situation results from either an inability to properly set the priorities I have spoken of on several occasions now, or an inability to properly organise the practical work. Both cases are equally bad.

Now we must take urgent steps. First of all, we need to draft and adopt investment programmes for developing Russia's ports. This year, we will settle the issue of allocating land resources for the development of port infrastructure. Finally, we also need to pass the corresponding law and make the decisions regarding the establishment of a number of free port zones offering tax incentives.

The development of river transport can play a big part in bringing down costs in the economy. We need to carry out projects to increase the throughput capacity of our internal waterways, including through modernising the Volga-Don and Volga-Baltic canals.

I propose that the Government also examine the establishment of an international consortium to build a second section of the Volga-Don canal. This new transport artery would have a significant impact on improving shipping links between the Caspian and the Black Seas.

Not only would this give the Caspian Sea countries a route to the Black Sea and the Mediterranean, thus providing them with access to the world's oceans, it would also radically change their geopolitical situation by enabling them to become sea powers.

I have already held preliminary talks on this issue with my colleagues from the countries bordering the Caspian.

For Russia, this would be another large-scale and economically advantageous infrastructure project.

Another question future generations will have the right to ask us regards the use of our country's natural resources. Are we really gaining maximum benefit from our natural resources? This question applies not only to oil, gas, and mineral resources, but also to our forestry and water resources.

Many of you probably do not know that Russia was the world's biggest oil producer in 2006, but that we lag behind considerably when it comes to oil refining.

The Government needs to draw up a system of measures to encourage the development of refining capacity within the country.

Yet another problem is that Russian oil fields burn more than 20 billion cubic metres of accompanying gas every year, and that is the minimum estimate. And yet, elsewhere in the world, there is a whole system of measures that has already proven its effectiveness. We must act urgently to establish the relevant accounting system, increase fines for environmental damage, and also toughen licence demands for natural resource users.

Turning to the next issue, the Government has already made a decision to gradually raise export duties on round wood. We do not seek to damage the interests of our foreign partners, but we must work on developing our own wood processing industry. This includes further justified steps to bring down import duties on technical equipment, speeding up the provision of forest tracts and using co-financing programmes to create the necessary infrastructure.

We have been discussing the problems of another sector, the fisheries sector, increasingly frequently of late. No visible progress has been made yet in this sector, and yet the priority decisions are obvious and very clear.

Most countries have traditionally kept their fisheries closed to foreigners. We should stop allocating quotas to foreign companies and give preference to Russian companies that develop their own processing activities.

I also ask the Government to draw up a system of measures for ensuring effective customs control and prevention of poaching and smuggling.

I would like to look now at the sectors that will play an important part in developing an innovation-based economy.

Russia has historically been a leader in aircraft manufacturing, both military and civilian. Over the last decade, however, we have seen our civilian aircraft manufacturing industry decline.

We have adopted a programme to develop this sector and have established the United Aircraft Manufacturing Corporation.

This new aircraft manufacturing corporation should become an engine for modernising the entire sector. Ultimately, Russia will develop a modern aircraft manufacturing sector producing the main different types of civilian aircraft.

This year, we need to choose an international partner for mutually beneficial cooperation, while continuing to implement the projects already begun.

Russia is also a major sea power. We have a fairly well developed sea traffic market , but we have practically stopped building civilian vessels.

Over the last decade, our ship owners have placed orders for more than 90 percent of their new vessels with foreign shipyards. If we do not take action now, the shipbuilding sector in our country will go into decline and this will ultimately have a negative impact also on our country's security, on military shipbuilding.

In order to rectify this situation, we have decided to establish the United Shipbuilding Corporation, which will work in all segments of the market, from designing and building ships to carrying out maintenance and repair work. The corporation's mission is to win itself a decent niche on the global shipbuilding market. This is a goal within our reach.

I expect us to decide very soon on state support measures for the shipbuilding sector in Russia.

We cannot modernise our economy without also developing science in our country.

Last year, a federal law was passed which will see scientific work in state academies take place based on a five-year programme for fundamental research. This programme will be approved by the Government based on proposals made by the Russian Academy of Sciences and other state institutions.

A total of 48 billion roubles will be allocated to this fundamental research programme in 2008 and another 8 billion roubles will be allocated to funds supporting fundamental research. I ask that provisions be made to increase these allocations in the future.

Special targeted programmes introducing open tenders for state orders for applied scientific research and development constitute another source of funding. Based on the results of these tenders, contracts will be signed with individual scientific organisations and teams. This will also help to encourage the competitive spirit that is essential in science.

This thus gives us two sources of financing - through the Academy of Sciences and other institutions, and directly to the scientific centres through open tenders. The targeted programmes represent a total of more than 33 billion roubles in funds for 2008, and this is in addition to the financing through the Academy of Sciences. I also propose that we introduce the practice of holding tenders for development programmes for scientific research institutes, similar to the system of tenders for developing innovation in universities we began using last year.

We have the task now of developing our science and technology potential and ensuring it is up to the challenges of global technological development. In this respect, I particularly want to stress the need to establish an effective system of research and development in the area of nanotechnology based on atomic and molecular constructions.

For most people today, nanotechnology is as abstract a concept as was nuclear technology back in the 1930s. But nanotechnology is already a key direction in the development of modern industry and science. In the long term, nanotechnology will provide a foundation for raising living standards, strengthening national security and supporting high economic growth rates.

Scientists predict that goods making use of nanotechnology will become a part of our everyday lives, and that they will help us to conserve non-renewable natural resources.

I recently approved a development strategy for the nanotechnology industry, setting out the main priorities and the legal and organisational mechanisms for creating the infrastructure in this sector. This infrastructure will encompass state scientific centres and universities and also private corporations' laboratories.

The state must make available the necessary resources for the material, technical, personnel and organisational implementation of this work. These funds will be managed by the specially established Russian Nanotechnology Corporation. These funds total at least 130 billion roubles. I ask that you complete the drafting and adoption of the corresponding federal law as soon as possible. I call on you, colleagues, to please do this as swiftly as you can.

In total, taking into account the federal targeted programmes, the federal budget will allocate around 180 billion roubles to this work.

I draw your attention to the fact that this new area of work will receive funding comparable to the funding we give to science in general, almost the same amount!

The main question is that of putting in place the conditions for increasing private investment in nanotechnology development. I hope to see intensive joint work by the Government, the state organisations being formed, and private companies, to carry out specific projects, including in aircraft manufacturing and shipbuilding and in the rocket and space industry, nuclear energy, medical technology and the housing and municipal services sector.

Given the scale and unique nature of the nanotechnology project, I think we could propose that the CIS countries also become involved. This could be yet another forward-looking and mutually beneficial project that brings us closer together. Regarding the nanotechnology corporation, I think that its directors should include representatives of both houses of the Federal Assembly.


We must continue our work to strengthen the country's armed forces. Our military reform and development programmes have already brought about significant changes, and this is in large part thanks to the consolidated position of the main political groups and the coordinated work of the executive and legislative branches of power.

The implementation of the federal targeted programme, Transition to Contract-based Service in a Number of Military Units, has led to two thirds of armed forces units now being manned by contract servicemen. The length of compulsory military service will be reduced to 12 months starting in January 2008. We will carry out this task.

The re-equipment of military units with new and modernised arms and equipment, which will form the basis of the arms programme through to 2020, is going according to plan.

We have begun implementing the State Arms Programme for 2007-2015. The bulk of the spending under this programme will go on series procurement of new arms and military equipment. In order to use these funds effectively, contracts will be concluded by a new specially set-up federal agency. The security agencies will all delegate to this new agency their functions for placing procurement orders and paying contracts.

One of the most important indicators of the state of the armed forces is the situation with the social protection system for servicemen and their families. Two 15-percent wage increases are planned for servicemen, one in December this year, and one in September 2008.

These increases will have a direct impact on military pensions too. Increases to military pensions depend on the level of wages of current servicemen.

Yet another matter: last year, more than 40,000 apartments were made available for servicemen and armed forces veterans. By 2010, we should have fully resolved the problem of providing all servicemen and veterans with permanent housing, and by the end of 2012, we should have completed construction of service housing stock. We also need to take additional measures to encourage housing construction for servicemen in the Far East.

I say again that we must work consistently to keep strengthening our armed forces, keeping our objectives in this area commensurate with our economic possibilities and with the nature of potential threats and the changes in the international situation.

This brings me to the following matter.

As you know, the Warsaw Pact countries and NATO signed the Conventional Forces in Europe Treaty in 1990. This treaty would have made sense if the Warsaw Pact had continued to exist.

But today all that this treaty means is that we face restrictions on deploying conventional forces on our own territory. It is difficult to imagine a situation where the United States, for example, would accept restrictions on such a basis on the deployment of troops on its own territory. However, not only did Russia sign and ratify this treaty, but it has also observed its provisions in practice.

We have carried out considerable troop reductions. We no longer have any groups in the northwest of army or corps size. Practically all types of heavy arms have been withdrawn from the European part of the country. We are essentially the only country facing so-called 'flank restrictions' in the south and north. Even when the situation flared up in Chechnya, Russia continued to observe its commitments under this treaty and coordinated its action with its partners.

But what about our partners? They have not even ratified the adapted treaty, citing the Istanbul Agreements providing for the withdrawal of Russian troops from Georgia and Trans-Dniester.

But our country has been working consistently towards resolving these complex tasks. More importantly, the Conventional Forces in Europe Treaty is not in any way legally bound to the Istanbul Agreements.

This makes us fully justified in saying that in this particular case, our partners are not displaying correct behaviour, to say the least, in their attempts to gain unilateral advantages. While making use of an invented pretext for not ratifying the Conventional Forces in Europe Treaty, they are taking advantage of the situation to build up their own system of military bases along our borders. Furthermore, they plan to deploy elements of a missile defence system in the Czech Republic and Poland.

New NATO members such as Slovenia and the Baltic states, despite the preliminary agreements reached with NATO, have not signed the Conventional Forces in Europe Treaty at all. This creates a real threat and an unpredictable situation for Russia.

In this context, I believe that the right course of action is for Russia to declare a moratorium on its observance of this treaty until such time as all NATO members without exception ratify it and start strictly observing its provisions, as Russia has been doing so far on a unilateral basis.

It is time for our partners to also make their contribution to arms reductions, not just in word but in deed. At the moment, they are only increasing arms, but it is time for them to start making cutbacks, if only in Europe.

I propose that we discuss this problem at the Russia-NATO Council. If no progress can be made through negotiations, then I propose that we examine the possibility of suspending our commitments under the Conventional Forces in Europe Treaty (Applause). I was about to say that I call on the Federal Assembly to support this proposal, but I understand from your reaction that you do support it.

I also call your attention to the fact that elements of U.S. strategic weapons systems could be deployed in Europe for the first time. It is clear that the U.S. plans to deploy a missile defence system in Europe is not just an issue for bilateral Russian-American relations.

This issue, in one way or another, affects the interests of all European countries, including those in NATO. In this respect, this subject should be, and I would even say must be, discussed in the Organisation for Security and Cooperation in Europe as part of this organisation's political and military dimension.

It is time for us to give the OSCE real substance and have it address the issues of genuine concern to the peoples of Europe rather than just hunting for fleas in the post-Soviet area.

Incidentally, we support the candidacy of Kazakhstan for the presidency of this organisation and we hope that Kazakhstan's presidency would help to give the organisation the needed positive boost to its work.


Our foreign policy is aimed at joint, pragmatic, and non-ideological work to resolve the important problems we face.

In broader terms, what I am speaking about is a culture of international relations based on international law - without attempts to impose development models or to force the natural pace of the historical process. This makes the democratisation of international life and a new ethic in relations between states and peoples particularly important. It also calls for the expansion of economic and humanitarian cooperation between countries.

This explains the attention we must pay to building up the common humanitarian space within the CIS, making our work with Russians abroad more effective, and making greater use of cooperation between civil society organisations that has proved its worth. Youth, education, cultural and professional exchanges are all an important part of humanitarian cooperation.

As it rebuilds its economic potential and becomes more aware of its possibilities, today's Russia seeks to develop equal relations with all countries avoiding any attitude of arrogance. We will do no more than defend our economic interests and make use of our competitive advantages in the way that all countries around the world do.

We support the development of institutions and mechanisms that give equal consideration to the interests of all partners. This is true for projects in all fields - in the energy sector, in industry, and in the area of international transit. These projects exist and are being implemented. Russia will continue to show initiative in pursuing economic integration in the CIS area and, more broadly, throughout the Eurasian region. We need to bolster the integration processes taking place in the Eurasian Economic Community and in the Shanghai Cooperation Organisation. This, I stress, is precisely a case where economic development is synonymous with security, including the security of our borders.

I would like to reiterate our approach to building the Union State between Russia and Belarus.

Russia is open to all forms and models of integration. We are prepared to go as far in this respect as our Belarusian friends are ready to go. The pace at which we build the Union State depends only on the substance and the real depth of the integration processes underway.

We are not hurrying anyone. We are ready to hold frank discussions with our partners on any of the problems that arise on the way. But we remain unswervingly committed to our policy of comprehensive development of relations with Belarus in vital areas such as the economy, transport, social protection, healthcare and humanitarian cooperation.

Whatever the case, we will act in keeping with the interests of the peoples of both Russia and Belarus.

I note also that we are developing an increasingly constructive partnership with the European Union. We believe that all of these positive elements in our relations should now be cemented and developed in the new basic strategic partnership agreement between Russia and the EU.

Overall, we need to conduct a serious discussion involving the politicians and members of the business and academic communities on ways to facilitate the free movement of capital, goods, services and labour on the European and Asian continents. Russia, with its geopolitical position, can and will play an important part in this respect and will do all it can to encourage these processes.

I propose that we begin this discussion at the International Economic Forum in June 2007 in St Petersburg.

In conclusion, I would like to make a small and almost lyrical digression from the purely businesslike format of this Address. My presidential term comes to an end in the spring of 2008 and the next Address to the Federal Assembly will be delivered by the next head of state.

In this respect, of course, many of you expected that today's Address would concentrate mostly on summing up and evaluating what we have accomplished in our work together since 2000. You expected to hear, no doubt, some philosophical recommendations for the future. But I think that it is not proper for us to evaluate our own work, and not time yet for me to set out my political testament.

Of course, we should always be thinking about the future. Here in Russia we have this old tradition, a favourite pastime, of searching for a national idea. This is something akin to looking for the meaning of life. It is, generally speaking, a useful and interesting pursuit, and also one that is never-ending. Let us not launch into discussions on such matters today.

But I think that many of you will agree with me that in working towards the goals we have set, making use of everything new, modern and innovative in doing so, we must and we also will rest our endeavours upon the moral values that our people have forged over the more than 1,000 years of their history. Only in this case will we be able to set the right course of development for our country, and only in this case will we achieve success.

No matter what times we have lived through, be it revolutionary upheavals or the stagnation years, we have almost always yearned for change. True, each of us has our own idea of what kind of change we need, our own priorities, our own preferences and dislikes, and our own vision of the past, present and future. This is natural and understandable, for we are all different.

But there is also something that unites us all without exception: we all want things to change for the better. But we do not all know how to achieve this. You and I, all of us present here at the Kremlin today, are not only duty-bound to know how to achieve this, but are duty-bound to do everything possible to come up with plans for practical, concrete action. We must do everything we can to convince the majority of our citizens that these plans are effective and to genuinely involve them in this constructive process.

I would like to note in this respect that each of my eight Addresses to the Federal Assembly has not only evaluated the situation in the country and its place in the world, but has also set priorities, including long-term priorities in the social sphere, in the economy, in foreign and domestic policy, and in defence and security. Though perhaps not complete, this constitutes in effect a fairly concrete and substantial conceptual programme for Russia's development. Its implementation requires constructive work from all sections of society and calls for immense effort and huge financial resources.

It is my conviction that our country will take its deserved place in the world, and we will be able to preserve our statehood and our sovereignty, only when our citizens see and feel for themselves and are confident that all of the state's endeavours aim at protecting their vital interests, at improving their lives and bringing them greater prosperity and security. Only when our people are able to feel proud of their country. Each citizen should feel that he is a part of the nation, involved in its fate. And each citizen should be able to improve his own life through lawful means and add to our nation's wealth through his labour. All of us who are involved in administrative, public, and all the more so political work, bear particular responsibility. This applies fully to everyone present here today, to the Russian Government, the federal ministers, the regional governors, the members of both houses of parliament, the judges, to the representatives of all the branches of power. We must make the utmost effort and give all our strength to the very last minute of our lawful constitutional mandates and use effectively the time that destiny has given us to serve Russia.

Thank you.

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