TO PRESERVE CIS IS SURELY OF HIGH PRIORITY FOR US... -GERMAN GREF

- Mister Gref, do you consider the economy of Russia all-sufficient?

Minister of economic development of RF German Gref: The economy of Russia is a progressing economy that actively stimulates development of the international cooperation. From this point of view none of global economies is not and should not be "all-sufficient" or isolated and, as a result, close. All countries involved in the global trade and international capital flows are to some extent interdependent.

At the same time the economy of Russia is all-sufficient because our state does not depend upon foreign credits. We have stable income and rapidly reduce our foreign debts.

- The economic relations between Russia and CIS countries leave much to be desired and formation of new economic organizations on the Commonwealth's space prove this fact. Does the RF government plan to translate conditions so as to revive old relations between industrial entities on the new development stage?

German Gref: Indeed, the 15-year cooperation practice proved the degree of concern of some CIS countries to promote and diversify cooperation forms within the frameworks of the integration process is different. At the moment the Commonwealth has no approaches towards formation of a single economic space as it was fixed in the founding documents. Virtually, the principle of complementarity of economies in the process of making common plans is not used.

At the same time, as RF President Vladimir Putin said in 2006 in his Message to the Federal Assembly of the Russian Federation, "our relations with the neighbour states were and are the important direction of the external policy of the Russian Federation".

The trade-economic cooperation on the post-soviet space is of high priority for Russia and CIS states as well.

It is still impossible to refer CIS States to economically developed countries. Similar problems envisaged by the economies of these states concern the high degree of integration and interdependence of the post-soviet countries. Though now CIS countries-members trend to isolate economic policies when momentary benefits of the country prevail over common strategic interests of CIS, the Commonwealth has real perspectives to preserve close mutually beneficial relations based on the cooperation partnership and common infrastructure.

At the same time, the potential of CIS has not been exhausted yet. Therefore, the existence of the Commonwealth on the given stage is still profitable because expansion of the most prospective integration directions stimulates internal development of states and gives the opportunity to adapt to the globalization conditions. We consider necessary to take actions so as to certainly preserve the CIS as a rational integration organization for almost all states on the post-soviet space.

- Mister Gref, how will EurAsEC develop in future? What economic common grounds were laid as a basis of this organization? How will they be developed in future? What are the results of the meetings in Uralsk? Will Russia offer Azerbaijan to enter this organization?

German Gref: the Customs Union and the Common Economic Space on its base were formed pursuant to the Treaty about Customs Union and Common Economic Space dated February 26, 1999.

EurAsEC took some steps towards formation of the Customs Union.

The extensive market of the EurAsEC countries, the complementary raw base, unified production & technical and consumer standards, unified technical parameters of the transport and communication infrastructure potentially promote the development of integration.

EurAsEC obtained positive results in mutual cooperation in the trade-economic field and liberalization of mutual trade. The organization took important steps to form a unified customs territory, to harmonize and unify national external economic legislations of EurAsEC states as soon as they get ready.

EurAsEC states trade without almost any restrictions and enjoy the free trade regime. The organization carries out work to form a Unified Customs Tariff.

To optimize the process at first the Customs Union will be formed on the basis of three countries - Russia, Belarus and Kazakhstan with gradual involvement of all other EurAsEC countries.

At the moment the tariffs of the three states are unified by 62 %, whereas the trade regimes are on the initial stage of unification. The measures of non-tariff regulation of the external economic activity have not been completely unified yet. The states are unifying the customs legislation. The formation of unified rules of rivalry and financing is underway.

Simultaneously the countries are going to develop cooperation in the real sector of economy, form the energy market, Transport Union and use the transit potential of the Commonwealth states.

By now EurAsEC has started forming some elements of the common economic space: the States Members of the Eurasian Economic Community signed the Cooperation Agreement on the Securities Market and the Agreement on formation of the integrated currency market of the EurAsEC States, approved the list of major indicators of the social-economic development of the states and the rules of coordination of the major macroeconomic figures on development of economies in EurAsEC States, worked out the normative base for elaboration of interstate programmes.

EurAsEC also plans to create conditions for complete liberalization of mutual trade in services, to follow a coordinated policy in this field in relation to third countries, to legalize withdrawals in favour of EurAsEC Countries in the contract-legal relations with the third countries and custom unions.

The organization will carry out work so as to create conditions for free capital flows, to form the common financial market, to coordinate principles and conditions for shifting to common currency in EurAsEC.

- What are the outlooks and the potential for expanding cooperation between Russia and Azerbaijan?

German Gref: The economic ties between Russia and Azerbaijan have old traditions. The spirit of strategic cooperation is inherent to all aspects of the Russian-Azerbaijan relations. The high level of political understanding gives the opportunity of consistent development of the bilateral trade-economic, scientific & technical and humanitarian cooperation.

Russia is among the three largest trade parents of Azerbaijan. In 2005 the bilateral turnover grew by 40% vs. 2004 and exceeded $1 billion.

Within 8 months of 2006 the trade turnover made $969.1 million. The dynamic development of trade between the two countries makes sure to suggest in 2006 the trade turnover will exceed $1.5 billion. The wide export and import nomenclature is a strong point of the trade-economic cooperation between Russia and Azerbaijan. Nearly 80% of Russian export to Azerbaijan accounts for goods of machine-building, food, motor-car and chemical industries and 20% - for raw products (electrical energy, gas, lime, concrete and timber).

The government of Azerbaijan has real opportunities to use growing oil reCEpts for enhancement of industrial goods procurement from Russia in order to develop the potential of the non-oil industries and in the medium-term perspective is ready to activate the economic cooperation with Russia in the field of agriculture, to set up new joint ventures in the field of machine-building, to produce oilfield equipment, textile, pharmaceuticals and other goods. The two countries may create Russian-Azerbaijan leasing companies to render services to farmers.

During the visit paid by the delegation from the Sverdlovsk oblast to Azerbaijan in early 2006 Azerbaijan reached the agreement to purchase 10 electric freight DC locomotives from Ural Railway Engineering Plant JSC. In July 2006 Azerbaijan bought five locomotives from Russian companies Uraltrade and Dortekhcomplekt.

- What fields are attractive for the Russian capital? What concrete projects will Azerbaijan and Russia carry out in such fields as power industry, machine-building, metallurgy and high techs?

German Gref: I would like to lay stress on the evident increased interest of the economic entities of Russia in the production activity on the Azerbaijan market. There are 395 entities and organizations with Russian capital in Azerbaijan - 176 joint ventures, 95 entities with 100% Russian capital and 124 representative offices and branches.

The government of Azerbaijan promotes direct foreign investments and constantly carries out work to liberalize economy and approve laws and normative acts creating favourable conditions for foreign investors. However, attraction of Russian capital in the Azerbaijan economy and use Russian technologies in production is of high importance for Azerbaijan.

OAO LUKOIL has worked in Azerbaijan for 15 years. RUSAL plans to construct a 500-megawatt electrogenerating gas station in Azerbaijan that will produce 5 billion kWh of energy a year within the framework of the smelter construction project.

This investment-industrial project is the largest and most difficult project of the non-oil sector within the last decades in Azerbaijan. The company intends to invest $1 billion in the project.

The energy cooperation between Russia and Azerbaijan is not limited to electrical energy supplies. Russian companies are ready to build up pre-fabricated power units, which capacity range from 2.5 to 25 MW, with the opportunity to finance and implement these projects key-in-the-door.

Under the Memorandum of Energy Cooperation between RAO UES of Russia and Azerenergy JSC signed in May 2004, these two companies are working on the project to unify the energy grids of Russia, Azerbaijan and Iran.

In 2005 Russia became the main transport vehicles supplier to Azerbaijan. RF supplied Azerbaijan with over 19,000 cars, over 5,000 trucks, approximately 300 special-purpose vehicles. Within 6 months of 2006 Russia exported to Azerbaijan 8,156 cars and nearly 2,000 trucks, 46 special-purpose vehicles. This direction of cooperation is prospective and mutually beneficial for both states. In future Russia plans to enhance delivery of cars, trucks, special-purpose vehicles and vehicles for highway engineering to the Azerbaijan market and develop the services network.

Russian companies KAMAZ, GAZ and Vyazensky Machine-Building Plant actively participate in establishing new truck-manufacturing entities. During the visit paid by the delegation from Tatarstan to Azerbaijan in August 2006 the sides agreed to set up KAMAZ JSC assembly plant to produce 1,500 trucks a year.

Russia's Russkie Avtobusi Ltd continues participating in upgrading the bus fleet of Azerbaijan. Within 2 years the company supplies over 200 buses.

Innovative technologies are a new and quite prospective direction of the bilateral cooperation. At the moment the preliminary work in carried out on a number of concrete projects related to this field. I would like to dwell on the project on construction of the Open Russian Training Center, which provides distant educating of Azerbaijan citizens in wide range of specialties.

The issues related to the cooperation in the field of high techs will be discussed during the next session of the Intergovernmental Commission on Economic Cooperation between the Russian Federation and the Republic of Azerbaijan.

- What conditions will be created to expand agricultural goods supply from Azerbaijan, which accounts for 30% of Russian demand now? How will the bilateral cooperation in the field of production and refining of agrarian production develop?

German Gref: Of course Russia is interested to develop cooperation with Azerbaijan in these directions. The legal vacuum is the main constraining factor. I mean a missing Agreement on Attraction and Mutual Protection of Investments in the contract-legal base of the bilateral relations. Today the sides are carrying out active work on the appropriate law draft; the talks are close to completion. I am sure when the agreement is signed the dialogue on these directions will press ahead. We have to wait a little. A fruit should ripen.

The Russian regions are also interested to develop this direction of cooperation. Thus, when visiting Azerbaijan the delegation from the Boronezh oblast concluded the contracts about mutual deliveries of wine-vodka goods and procurement of rathe vegetables for Russian consumers.

- Do you plan to implement concrete transit projects within the North-South corridor to expand the transport cooperation between Azerbaijan and Russia?

German Gref: The increase in goods traffic carried out within the framework of the Agreement on North-South international transport corridor is mainly provided due to the development of the infrastructure on the Russian territory. During the last years Russia put into operation additional facilities in Olya port and the railway line towards the port, which allowed creating a necessary reserve for non-stop goods traffic through the international transport corridor.

OAO Russian Railways, Kurganmashzavod, the Twer Wagon Works, Transmash, the Kryukov Wagon Works and other Russian companies contribute much to provide railway communication.

Iran initiated the Kazvin-Resht-Astara railway line construction project, which was backed by Azerbaijan. Russia was invited to join the project. The final decision about probable investing will be taken as soon as the analysis of the freight base's growth rates is completed.

- How do the principles fixed in the Minute on gradual removal of withdrawals from the free trade regime dated February 6, 2004, the Agreement and the Programme between the Russian Federation and the Republic of Azerbaijan about the long-term economic cooperation until 2010 dated January 25, 2002 work in practice?

German Gref: The removal of tariff withdrawals from the free trade regime fixed in this Minute is executed pursuant to the coordinated schedules: tariffs on white sugar - from January 1, 2005, on alcohol, cigars, cigarettes and cigarillos - from January 1, 2012.

The Agreement and the Programme on Long-Term Economic Cooperation mentioned above stimulate activation of the Russian-Azerbaijan trade-economic relations and expansion of ties between the economic entities and regions of the two countries.

The majority of Russian regions, mainly the entities from Southern, Central and Volga federal districts, successfully cooperate with Azerbaijan. Dagestan, Kalmykia and Tatarstan, the Stavropol and Krasnodar Territories, Moscow and St Petersburg cities, the Moscow, Astrakhan, Volgograd, Samara Regions and others most actively cooperate with your country.

In my opinion the large order on construction of a bulk carrier and five tankers for Caspian Shipping Company executed by Nizhniy Novgorod's Krasnoye Sormovo Shipyard may be viewed as the example of development of the economic ties.

When visiting Azerbaijan the Astrakhan delegation discussed the issues regarding establishment of ferry traffic between ports Olya and Baku using Ro-Ro vessels, application of accelerated freight registration technologies, enhancement of freight flows through port Olya and participation of Azerbaijan investors in the port's development.

When visiting Baku the delegation form the Stavropol Territory viewed the offers to deepen and develop mutually beneficial trade relations, in particular, in such fields as supplies of agricultural goods, foodstuffs and manufactured goods and development of tourism.

The stable trade relations link Azerbaijan and the Kirov Region, which supplies Azerbaijan with petrochemical and timber production.

To make the friendly ties between the Kabardino-Balkarian Republic and Azerbaijan stronger the sides exchanged views about probable cooperation in various directions of the economic and cultural lives of the republics and took interest in location of investments in the Northern Caucasia, in particular, on the territory of Kabardino-Balkaria. The draft agreement on trade-economic, scientific & technical and cultural cooperation is being coordinated by Russia now.

I would like to say our countries constantly work on the expansion of the contract-legal base of the cooperation on the interregional level. Over 30 documents about trade-economic and cultural cooperation were signed between the entities of Azerbaijan and Russia. Delegations paid numerous visits.

- What are the prospects of qualitative and quantitative long-term enhancement of the trade turnover between Azerbaijan and Russia?

German Gref: The experts from our ministry regularly make forecasts about trade-economic cooperation with CIS countries. Usually we view two variants on development of our cooperation with the partners within CIS - favourable and unfavorable. Thus, our analysts think by 2009 the trade turnover between Russia and Azerbaijan will go up by 29-69% up $1370.7-1801.0 million vs. 2005. Export is going to grew to 83%, import - to 12%, thus, ensuring the increase in the positive balance for Russia.

- What problems will be solved due to the start of operation of REBCO trading petroleum exchange and posterior exchange trade in oil products? What consumers can enjoy using these exchanges?

German Gref: Due to such factors as the Russia's annual oil production on the level of 470 million tonnes, 35 billion tonnes of available reserves (the second place in the world) and total annual oil export on the level of 260 million tonnes (2 place in the world) and well as the fact of being the largest oil/oil products supplier for the European market (30% of the market), Russian oil companies are able to exert no influence on the price policy and even do not have the right on transparent pricing rules.

These facts explain the decision about necessity and importance of a new oil marker and, as a result, formation of a new price indicator fairly reflecting the global demand and supply on Russian export oil.

To solve this task we took the first step and offered a new product (Russian Export Blend Crude Oil - REBCO) to the international market. The new brand is to replace the existing stereotype Urals and should have quite a new pricing basis unlike Brent quotations.

NYMEX as the most authoritative global hydrocarbon exchange, which trade turnover exceeds $60 billion, was chosen to be the place for the pilot triggering of the new REBCO brand. The first trades were held on October 20, 2006.

The operation of the Russian exchange in St Petersburg and daily trading in REBCO oil in rubles will be launched before the end of 2007.

Until the end of 2006 the RF government plans to issue a decree and register non-commercial partnership with the control participation of state representatives in the Supervisory Board. This non-profit partnership should be laid as a basis for formation of the Russian petroleum exchange and appropriate procedural and regulatory and legal framework. It will be expedient to involve not only financial institutes and oil companies but also our partners from CIS such as, for instance, Azerbaijan to establish the non-profit partnership. This country is a large producer and exporter of hydrocarbons on the post-soviet space and extracts oil, which characteristics coincide with Russian export oil. Kazakh oil companies like the Russian ones are interested much to form a just market price indicator. Their participation in the project will enable to unite efforts aimed at strengthening the role of the CIS States on the global raw material markets. Russia and Azerbaijan actively cooperate in the fuel-energy complex. As is known, the President of Azerbaijan also showed interest in the project.

Establishment of the exchange for trading in Russian oil will allow enhancing transparency of price formation on export markets through independent assignment of quotes, creating a marker brand of standard quality so as to reduce the rate of differential depending upon the quality of oil, developing the derivatives market to ensure hedging of risks of participants in tenders.

At the same time, formation of the exchange infrastructure on the oil products market will raise transparency of the pricing mechanism in the field of oil products sales, ensure getting long-term price indicators, form the market demand and supply balance and enhance transparency of the existing rules of oil products procurement for state needs. All this will have positive influence on the price situation on the home fuel market.

- The Gazprom's ability to independently develop such difficult deposits as Shtokman, Yamal and Sakhalin-2 raise doubts today, which can be backed by the monopoly's longstanding hesitation, whereas today new gas export routes of Russia require new sources of raw materials. What way out would you suggest to solve the problem? What steps will the government take to avoid gas production stagnation in Russia?

German Gref: It is no secret that the main deposits of Gazprom JSC located in the Nadym-Purtazov region show the decline in production. Large funds are spent to maintain the appropriate gas production level. In 2005 Gazprom's gas output made approximately 0.4 %. The RF Ministry of Economic Development many times drew attention to the fact that within the last years the company's investment strategy provided investing of only 30% of total investments in production, whereas the development of deposits located on Yamal Peninsula requires nearly $70 billion. The major funds are invested in the development of infrastructure projects, mainly export-oriented ones.

To my mind, the problem with gas production stagnation in Russia should be solved using complex measures.

It is necessary to introduce energy-saving technologies on entities (first of all on Gazprom itself that consumes 53 billion cubic metres) and calculation of gas consumed by population and the housing and utility complex.

Furthermore, it is necessary to create conditions so as to ramp up gas recovery of independent producers, whose potential is limited now by both the existing system of contracted access to the unified gas supply system and throughput capacity of this system as well as lack of the home market development strategy of Gazprom (out of 70% of funds invested in development of the transport infrastructure only 30% are spent on expansion of internal infrastructure capacities).