The National Projects

December 2019

Population and GDP (2020E data) The long and winding road Population 146.8 GDP, Nominal, US$ bln $1,781 Plans are worthless. Planning is essential” GDP/Capita, US$ $12,132 Dwight D. Eisenhower GDP/Capita, PPP, US$ $27,147 Source: World Bank, World-o-Meters, MA The National Projects (NP) are at the core of the Russian

government’s efforts to pull the economy out of the current slump, National Projects - Spending* to create sustainable diversified long-term growth and to improve Rub, Bln US$ Bln lifestyle conditions in . It is the key element of President Putin’s Human Capital 5,729 $88 effort to establish his legacy. Health 1,726 $27 Education 785 $12 We are now initiating coverage of the National Projects strategy. We Demographics 3,105 $48 will provide regular detailed updates about the progress in each of Culture 114 $2 the major project sectors, focusing especially on the opportunities Quality of Life 9,887 $152 Safer Roads 4,780 $74 for foreign investors and on the mechanisms for them to take part. Housing 1,066 $16 ▪ What is it? A US$390 billion program of public spending, designed Ecology 4,041 $62 to stimulate investment, build infrastructure and improve health Economic Growth 10,109 $156 and well-being by 2024, i.e. the end of the current presidential Science 636 $10 Small Business Development 482 $7 term. Digital Economy 1,635 $25 ▪ Is this a return to Soviet-style planning? For some of the NPs, Labour productivity 52 $1 Export Support 957 $15 especially those involving infrastructure, it certainly looks like it. Transport Infrastructure 6,348 $98 For others – such as the SME and high-tech projects – there are Total 25,725 $396 clear nods towards the market economy and an apparent Source:Government of the Russian Federation recognition that future growth lies in rebalancing the economy. * converted using the Ruble-Dollar rate of 65.0 ▪ What’s different this time? The lack of any realistic alternative to Base Case Macro Scenario* promoting economic growth and the pressing need to improve 2020E 2021E the well-being of the population is sharpening officials’ minds. Growth, real % YoY 1.8% 2.4% CPI - year-end, % YoY 3.6% 3.8% ▪ Off to a flying start? Not really. There has been much criticism of Central bank key rate, % 6.00% 5.50% delays in starting the program properly. However, an initiative of Retail sales, % YoY 2.0% 2.4% this size and significance takes time and work to launch and much Real disposable inc., % YoY 0.6% 0.9% of the criticism is premature. We will have a better view on Budget, balance % of GDP 1.0% 0.8% Current account, % GDP 3.9% 3.4% progress by the summer of 2020. RUB/US$, year-end 65.0 65.0 ▪ Who’s in charge? President Putin announced that Prime Minister RUB/EUR year-end 74.0 73.0 Urals, US$ p/bbl, average $56 $55 would have overall responsibility. Each project Source: Macro-Advisory Ltd estimates under the National Project’s umbrella has designated officials at Refer to Russia Macro Monthly for more detail all meaningful levels responsible for successful delivery. Deputy * based largely on expectations for NPs PMs have key roles and have been given focused KPIs. Optimistic Case Macro Scenario* ▪ Will the targets be achieved? The National Projects program is 2020E 2021E very ambitious and has started slowly. It is unlikely that all targets Growth, real % YoY 2.3% 3.0% will be met. However, some projects will succeed and if the CPI - year-end, % YoY 3.3% 3.1% President can show ‘significant progress’ by 2024, the NPs will be Central bank key rate, % 5.50% 5.25% considered successful. It is probably more realistic to regard the Retail sales, % YoY 2.6% 3.5% Real disposable inc., % YoY 1.0% 1.4% NPs as an 8-10 year program, rather than a 5-year one. Budget, balance % of GDP 2.5% 3.0% Current account, % GDP 5.0% 4.5% ▪ What are the opportunities for international companies? Despite RUB/US$, year-end 61.0 60.0 calls to keep the NPs totally ‘Russian’, the government realizes RUB/EUR year-end 69.0 68.0 that some of the projects require considerable input from Urals, US$ p/bbl, average $80 $88 Source: Macro-Advisory Ltd estimates international companies to succeed. This is the area we will focus

Refer to Russia Macro Monthly for more detail on in the regular bespoke analysis. * based largely on expectations for NPs

No warranties, promises, and/or representations of any kind, expressed or implied are given as to the nature, standard, accuracy, or likewise of the information provided in this material nor to the suitability or otherwise of the information to your particular circumstances. Macro-Advisory Limited does not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the content contained in this note. © Copyright Macro-Advisory Limited The National Projects

Snapshot

The National Projects comprise a wide program of sub-projects – some 4,000 in all over the lifetime of the program – and the large-scale disbursement of funds means that the landscape is constantly changing. The table below indicates the situation as of early November 2019, restated in US dollars. The projects are ranked in terms of expenditure in 2019, which gives an early picture of leaders and laggards. The final column is a subjective assessment (low-medium-high) of the likely interest that the contents of each projects will offer to multinational companies.

National Projects: Allocations, Spending, Foreign Interest Plan (US$ billion) Allocation (US$ billion) % Spent Foreign Interest 2019-24 2019 2019 Total 390.6 26.8 56% H

Demography 47.0 7.9 83% L Science 9.6 0.6 74% H Healthcare 25.8 2.4 71% H Culture 1.7 0.2 69% M Safe Roads 71.9 2.0 67% H Education 11.8 1.6 66% H SME 7.2 0.9 60% H Housing 16.0 1.6 60% H Labor Productivity 0.8 0.1 50% M Exports 14.4 1.3 45% H Infrastructure 95.6 5.7 43% H Ecology 60.8 0.9 27% H Digital Economy 28.0 1.6 16% H Source: Ministry of Economic Development Why the delay? The above data shows the allocations for the whole period and for 2019, as well as the percentage of 2019’s spending for which government tenders had been published as of the time of going to press. The primary reason for the low implementation for some projects was given by the relevant ministers as a lack of cooperation from other departments. Tender documents had been drafted and submitted to relevant departments, including the Ministry of Finance, for final clearance. This is a standard procedure for all government spending, and the ministers responsible for some projects were complaining that they had not received the necessary sign-offs from other departments. At a meeting to discuss this issue, President Putin was highly critical of this excuse in the televised part, and probably even more so off-camera, threatening the ministers and deputy prime ministers with “personnel decisions” if they were unable to push and lobby other departments to sign off on their documents.

Paralyzed by fear? We have also heard suggestions from some sources that there is some ministerial paralysis because of the high attention paid to the National Projects and their novelty. Because they are new, there are no precedents to fall back on and ministries are nervous about making a decision without a clearer signal about how to proceed. The high profile of these projects mean that mis-steps will be highly visible and potentially career threatening. This means that officials would rather sit on papers rather than take the risk of a decision which might hurt them, preferring to wait for someone else to take the responsibility. Our sense is that Putin’s intervention was designed to remove this option.

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Division of overall allocation Emphasis on infrastructure. The chart below shows the allocations made under the National Projects. There is a clear emphasis on infrastructure projects, with substantial funds allocated to improving road safety and to the improvement of so-called ‘core’ infrastructure – roads, railways and the electricity grid. Not all of this spending is genuinely additions – i.e. over and above what the government planned to spend anyway but the amount allocated do represent a significant increase in planned spending over the next 5-6 years.

National Projects: Allocations Sector-Wise

Source: Russian Government, Macro-Advisory Ltd.

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Summary

Design and Implementation. Each National Project consists of several Federal Projects, which are typically broken down into regional projects, of which some 4,000 have been designated for support. The exact list of projects to be supported has been a topic of fierce debate ever since – and probably before – the announcement of the NP program, with federal and regional ministers and officials all competing for support for their pet projects. This factor alone has hindered the speedy take-off of the NP program. Thus, all levels of Government are involved in the implementation of national projects.

Is this just state planning? It is true that much of Russia’s industry and commerce lies in state hands. Estimates vary but some commentators believe that state companies control up to 70% of the economy. Viewed in this context, the National Projects could be seen simply as a reincarnation of Soviet state planning, designed to benefit state-owned companies. Against that, the presence in the program for SMEs and high technology projects suggest that, at least on paper, the NPs are designed to encourage private sector economic development. It is in these areas where genuine additionality can be found, as opposed to the massive infrastructure investment, much of which would have gone ahead anyway.

Private sector involvements. The NPs are intended to be funded not only from the public purse but also by attracting private sector investment into individual projects. Some programs do not lend themselves easily to the mix – for example, it is anticipated that some 97% of the road-building program will be financed by the Russian state – and the mechanisms for private sector involvement have not been fully worked out. But the intent is certainly there, with Ministers announcing that the NPs will attract at least another US$ 100 billion on top of state funds

Are the NP funds genuinely additional? In some areas this is clearly not the case. For example, in the Demography NP, the majority of funds has been allocated to the support given to mothers for childbirth – but this program is already in force, so the re-routing of such funding can hardly be described as additional. Sources close to the NPs suggest that, overall, an estimated two-thirds of the NP budget would probably have been spent in any event. But that still leaves an additional US$130 billion of funding over six years.

Why are the KPIs important? The NPs set KPIs for senior officials, which is a relatively new development for the Russian system of government. The introduction of personalized KPIs is designed to stimulate the motivation of officials and politicians, who are not accustomed to working under such scrutiny. It is significant in this context that economic KPIs have, in any event, also been introduced for regional governors, who will in future be assessed by the Kremlin, inter alia, on their efforts to improve the economy in their regions. The extent to which they deliver on their NP projects will probably play an important role in their appraisals, given the importance which the government attaches to the program.

Attention to SMEs. The development of small and medium-sized enterprises (SMEs) is given a significant place in the NP program. The SME project involves the development of a business support system, where emphasis is given to a loan interest rate subsidy program. The high cost of borrowing has been one of the key obstacles to business development in Russia, with commercial interest rates averaging 15-18% in recent years. However, Central Bank (CBR) policies – and other factors have been successful in reducing interest rates and a downward trend has been in evidence to date, resulting in a 6.5% base rate in autumn 2019.

Low interest rates are a key factor. The SME NP’s target is to offer small and medium sized businesses borrowing at a rate 1% below base, so, as the program gets into its stride, rates of 6-8% should be available in the market. These loans are delivered through Russian banks, which are compensated for offering the subsidies.

4 The National Projects

Other measures for SMEs. Separate activities are aimed at supporting export-oriented companies, improving the procurement system used by the largest companies to the greater benefit of SMEs, developing rural cooperation programs and supporting farmers. The projects aim to increase the share of SMEs in Russia’s GDP from 22% currently to 32.5% and to increase the number employed in SMEs from 19.2 million workers to 25 million workers (about a third of the economically active population). The national projects call for improvements in the control and supervision of customs administration and in the quality of legal regulation.

Are the national projects enough to kick-start the economy? The potential effect of the national projects should not be exaggerated. The total spending over the lifetime of the program should vary between 2.8% and 4% of GDP. The exact figures can fluctuate during implementation under the principle of "rolling reviews", i.e. the refinement of projects as they are implemented, taking into account the available budget allocations. But the success of the national projects should not be judged by short-term growth figures alone – the projects can provide a major contribution to GDP through the development of transport infrastructure, growth in capital investment, investment in health, science and education. Investments in these areas often have a significant effect on longer-term economic development.

And a delayed start? The National Projects are hugely complex programs, especially as they are overlaid on a raft of other measures designed to promote economic activity and social wellbeing. In the economic space alone, there are such measures as Special Economic Zones, significant agriculture subsidies, clustering initiatives and export-stimulus programs, at both federal and regional levels. Ensuring effective coordination takes time. Moreover, there is evidence that the National Projects were conceived and announced hastily, giving officials little warning or chance to prepare. Another factor, to which we referred earlier, is the hesitancy in some quarters to make firm decisions, in the knowledge that decision makers will be held to account.

Coordination is a key factor. As a result, the start of some of the projects have been subject to delays and setbacks (in our review of each project in this report we estimate how much has been spent so far in 2019). As a general rule, the more ‘coherent’ NPs – i.e. those under the jurisdiction of a single ministry – have got off to a better start – those NPs which call for coordination between ministries are slower to take off. However, it now seems that officials are gradually getting their acts together and the take-up of funding should be much higher in future years.

Uneven roll-out across the regions. Perhaps unsurprisingly, the regions which have made the most progress in the early days of NP implementation are those which score highly on other measures of economic and social progress, so the most advances have been made in (city and region) St. Petersburg, Kaluga and Tatarstan.

Is anyone keeping an eye on all this? In addition to the KPI system, to which we refer repeatedly, an important role is being carried out by the Audit Chamber, under the leadership of the always-skeptical Alexey Kudrin, who is raising his profile to make sure that the NPs are kept on track and properly monitored. Moreover, developments in social networking give opportunities for many interested observers to comment on the NPs’ progress or lack thereof. Of particular note is the fact that several channels on the Telegram network are following the development of the NPs, often with apparent insider insights and commentary.

The role of Deputy PMs is crucial. Although the buck ultimately stops with the President and Prime Minister, the key officials at a senior level are the nine deputy prime ministers. These are mostly seasoned veterans of the Russian political machine and, with one or two exceptions, have reputations as heavy hitters. The sticks and carrots operating at this level are hard for outsiders to discern accurately – none of the Deputy PMs are candidates for the role of President or PM - but, given the importance to President Putin of the NP system it seems clear that success will be rewarded and failure punished.

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Key players in the National Projects. Of this group, the main managers for the National Projects are: , Tatiana Golikova, , , and Olga Golodets. All of these, with the possible exception of Akimov, are veterans of Putin’s team since he first became President. He worked with Mutko and Kozak back when he was in local government in St Petersburg. They are a team that has proved to him that they can deliver what he wants, in the way that he wants it. Akimov is a relative newcomer to government, and is much younger, but presumably has been talent-spotted after an excellent job attracting foreign investment to Kaluga, and an internal management job inside Medvedev’s Cabinet Office.

Tatiana Golikova - Health & Social Affairs. Golikova was the main budget coordinator for Alexei Kudrin when he was Finance Minister. She was then promoted to deal with social policy, mainly to implement reforms to the pension system. She has family links to the medical sector. Golikova’s background as a Minister of Social Policy and as an auditor make her an excellent candidate to ensure that the large extra allocations to medicine are not redistributed to strong lobbying groups like the medicine distribution companies. There may, however, be accusations of favoritism because of her alleged links to Pharmstandard, a large domestic medicine producer.

Vitaly Mutko – Construction. Mutko is a controversial figure in Russia, and many in the media expected he would have been fired from the cabinet after the World Cup. Mutko was responsible for bringing the World Cup to Russia and was in charge of ensuring that the stadia were ready on time, which to his credit has been done. In addition, the World Cup cost the budget a lot less than the (2014) Winter Olympics. This success, plus the fact that his links to Putin go back to the latter’s days in St Petersburg local government, make him a trusted candidate to handle the large budget for housing construction in the new National Projects.

Dmitry Kozak – Transport & Energy. Another colleague from Putin’s days in St Petersburg, Kozak has been a key troubleshooter for Putin throughout his presidency. He was tipped as a successor to Putin before Medvedev became the front runner and was Putin’s main point man on the preparations for the Sochi Olympics. Some commentators are saying that his appointment to the energy and transport brief is because he can be a stronger counterpoint to Igor Sechin at Rosneft than his predecessor Arkady Dvorkovich. However, the reality is that Sechin’s counterpoint is at the Energy Ministry (see below). Kozak’s main focus is likely to be ensuring that high profile transport infrastructure projects get done on time and on budget.

6 The National Projects

Maxim Akimov – Communications & Digital. Akimov is not well known and his appointment is one of the more interesting in the new government. He heads up the Digital Government initiative. He was previously first deputy head of the government’s administrative department dealing with this issue so his promotion suggests that this is a reward for the progress that he has made and recognition that there is a need for the government to modernize both its internal processes and its interactions with citizens.

Olga Golodets – Culture & Sports. Another “safe pair of hands”, Golodets was previously the Deputy Prime Minister covering the social brief inside the government, which has now been passed to Golikova. It is expected there will be less focus on sports under this government so that Golodets may focus more on culture, one of the priorities of Putin’s May 2018 decree.

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Opportunities for international companies

Do foreigners have access to the NPs? Russian and foreign investors, especially those localizing production in Russia, can participate in the National Projects. Although the projects are mostly state-funded, part of the money is expected to come from extra-budgetary sources, including the private sector. There are some political figures who believe that all the money allocated to the National Projects program should be reserved for Russian companies. The government is resisting such pressure though. In part, this is a continuation of the government’s mantra that ‘bad (international) politics should not mean bad business’- and in part an acceptance that insisting on local content for all National Projects will hinder progress in some of them.

Where are the most opportunities? We draw attention to the Ecology NP, where Russian companies simply lack all the technology to ensure that the program can meet its ambitions. Fresh emphasis is being given to measures to improve the living environment in Russia and the Ecology NP is in line with this trend. On the surface, other opportunities should emerge in the Digital Economy NP; however, an express KPI in that NP is the target to reduce foreign software used by public bodies from 30% of the total to 10%.

Infrastructure is a key sector. The infrastructure NP is such vast project that although in relative terms very little work should flow to foreign companies, the absolute amounts to be spent on foreign technology should be significant.

Exports as an investment driver. An important place in the NPs is the development of Russian exports. The NP "International Cooperation and Export" is focused on export development, which is implemented in logistics, industry, construction, agriculture, information technology and others. The liberalization of visa regimes, as well as the promotion of inbound tourism to the Russian Federation will play a special role in the development of exports.

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The National Projects

❖ Culture

2019 allocation: US$210 million. Utilized 69%

Key targets:

▪ 15% increase in the number of visits to museums, theaters, and other cultural places

▪ Five-fold increase in the number of applications to digital cultural resources

Issues: Out of RUB108 billion of allocations planned (all of it federal spending), the most (77%) is earmarked for the federal project, Cultural Environment. In fact, a large portion of the money will go towards construction of concert halls, leisure venues and cultural centers in remote areas of the country, as well as the renovation of existing cultural facilities and halls around Russia.

Federal projects:

Cultural Environment. This project will allocate money for the construction or renovation of multiple cultural venues across the country. For example, 39 cultural development centers in small towns will be built, 526 village halls, 600 mobile “cultural buses” will be built. 660 municipal libraries will be re-equipped, and 1200 cinemas in towns with less than 500,000 inhabitants will get modern equipment.

Creative People. This project focuses on making instruments available to young people with 900 pianos installed in musical arts schools, and 1800 performing arts schools will get modern musical instruments and equipment. In addition 15 teacher training colleges specializing in the arts will be built, aiming to train 200,000 teachers. There will also be youth arts festivals and special grants for youth arts collectives.

Digital Culture. This will aim to put more culture online, by building 500 virtual concert halls, digitizing 22,500 old films, and creating 450 multimedia guides for national and regional museums. 48,000 historic books will be digitized and made available via a National Electronic Library.

Key officials: Deputy Prime Minister for Social Policy Olga Golodets and the Minister of Culture.

Although this national project includes a federal project on Digital Culture, it is also administered by the Ministry of Culture.

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❖ Demographics

2019 allocation: US$7.9 billion. Utilized 83% (in 2019 to end November)

Key targets:

▪ Reduce mortality

▪ Increase the birth rate

▪ Increase the number of people with healthy lifestyles

▪ Promote participation in sport

Federal projects:

(1) Payment to families on the birth of a child

(2) Help women with pre-school children to find employment and to provide crèche facilities for working mothers

(3) Provide support to the elderly

(4) Strengthen public healthcare

(5) Support sports initiatives

Issues: At first glance, the Demographics National Project is one of the best funded in the portfolio of the national projects, with over RUB3 trillion of spending through to 2024. However, most of this spending (87%) will go to the federal project ‘Financial Support of Families at the Birth of a Child’, which will continue the existing program of subsidies to boost the birthrate. This factor alone probably explains the high up-take of funds in 2019. One shortfall of the project is that there is a lack of economic mechanisms to boost demographic indicators. Moreover, the targets set are vaguer than for the other national projects. Key officials: Deputy Prime Minister for Social Services Tatiana Golikova.

Management is divided between the Ministry of Labor, the Ministry of Health and the Ministry of Sports.

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❖ Digital Economy

2019 allocation: US$0.9 billion. Utilized 16%

Key Targets:

▪ Increase from 1.9% to 5.1% the share of digital spending in GDP by 2024 (this should include both public and private money)

▪ Increase the number of households with broadband internet access from 75% to 97% by 2024

▪ Expand the share of social infrastructure (houses, hospitals, cultural and sports centers) with broadband access from 33% to 100% by 2024

▪ Expand the number of Data Processing Centers in the Russian regions from two to eight by 2024

▪ Reduce the share of software bought or leased by government agencies and public companies from foreign companies to 10% and 30%, respectively

Issues: A lack of access to internet and PCs is still a considerable problem hindering the development of e- commerce. RUB3.5 billion is to be allocated to the program through to 2024, of which 43% will come from the private sector. At the same time, the project has a complicated system of management, the main project office being seated not within one Ministry, but distributed between the Ministry of Digital Development, Mass Media & Communications, the Analytical Center of the Government of the Russian Federation and the Digital Economy NGO.

Federal projects

(1) Improve the legal framework of the digital economy (2) Build information infrastructure (3) Train staff for the digital economy (4) Information security (5) Digital technologies and projects (6) Digital government Key Officials: Deputy Prime Minister Maxim Akimov oversees the national program

Day-to-day running is conducted by the Ministry of Digital Development, Mass Media & Communications.

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❖ Ecology

2019 allocation: US$1.64 billion Utilized 27%

Key targets

▪ Close all 191 unauthorized landfills identified within city boundaries prior to January 1st 2018

▪ Raise the number of commissioned production and technical complexes for processing and disposing of hazardous waste to four in 2023 and seven in 2024

▪ The share of solid municipal waste being processing as a share of the total amount of solid municipal waste produced should increase from 1% to 36%

▪ Raise the share of processed municipal waste from 7% to 60%

▪ Reduce air pollution emissions by 20% in the most polluted cities

▪ Introduce tradable pollution permits, targeting the issue of 6,900 such permits by 2024

▪ Improve the quality of drinking water, including residential settlements not equipped with modern centralized water supply

▪ Improve water management on the Volga River and Lake Baikal

▪ Conserve biodiversity through the creation of at least 24 new protected areas (natural parks), raising the total to 241 parks with more than 10 million visitors per year by 2024

▪ Introduce sustainable forest management fully replacing felled forests by 2024

▪ Reduce overall damage from forest fires by three-fold to RUB12 billion by 2024

Issues: The against rubbish landfills in the Moscow region and the adjacent oblasts in 2018-19 showed a shift in social expectations with regard to state management of the environment. Ecology had previously not been high on the agenda anytime during the past 30 years in post-Soviet Russia.

The Ecology National Project has among the largest funding allocations in the portfolio of national projects (over RUB4 trillion of spending) and is potentially one of the more interesting for foreign investors, as the government attempts to attract a record RUB3 trillion of non-budgetary resources. However, the fact that most of the spending (75%) is supposed to come from non-budgetary resources suggests a risk of the project not being fully realized if the government fails to attract adequate funding. The government underlined that imports of equipment required to realize this project should not to fall below 36% (from the current level of 50), suggesting a low level of preparedness among Russian producers to cope with the KPIs.

A separate project “Infrastructure to process class I-II hazardous waste materials” is managed by the Russian Agency for Atomic Energy. The Federal Project Clean Air implies almost RUB0.5 trillion of spending and is run by the Federal Service for Supervision of Natural Resources. Federal Project “Clean Water” is run by the Ministry of Construction and Utilities.

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Federal Programs: (1) Clean country project

(2) Integrated municipal solid waste management system

(3) Recovering River Volga

(4) Preservation of unique water reserves

(5) Preservation of Lake Baikal

(6) Conservation of biological diversity and development of ecological tourism

(7) Preservation of forests (the agency is supposed to consolidate RUB200 billion of spending)

Key officials

Deputy PM Gordyeev

Dmitry Kobylkin, the Minister of Natural Resources & Ecology.

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❖ Education

2019 allocation: US$1,640 billion Utilized 66%

Key targets

▪ Raise Russia into the World top-10 for education

▪ Improve the presence of Russian universities in the top-500

Issues: This part of the National Projects is under the umbrella of the Ministry of Education and the Ministry of Science & Higher Education. However, it is controlled by the Ministry of Education which means there is greater weight on primary and secondary education. Also, one of the federal projects (Social Projects and Activity) is run by the Russian Agency for Youth.

The second KPI reflects political vision: to increase the number of children aged 5-18 following continued education programs, to increase participation in youth NGOs, in order to ‘educate a harmonious and socially responsible person’ grounded in the spiritual and moral values of Russia’s historical and national cultural traditions.

Federal projects

(1) Modern schools (40% of all spending)

(2) Success for every child

(3) Support to families with children

(4) Digital education environment

(5) Teacher of the future

(6) Increasing the quality of professional education (14% of all spending)

(7) New opportunities for everyone

(8) Social projects and activity

(9) Export of education (15% of all spending) and attracting foreign students

(10) Social advancement for everyone.

Key Officials: Deputy PM Tatiana Golikova

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❖ To promote Small & Medium-Sized Enterprises

2019 allocation: US$910 billion Utilized: 60%

Key targets:

▪ To elevate Russia to a top-5 global economy by 2024

▪ To achieve greater balance in the economy

▪ To raise the number of SME employees from 19.2 million to 25 million

▪ To increase SME’s share of GDP from 22% to 32%

▪ To reduce the size of the state in the national economy

▪ To increase the share of SMEs in non-commodity exports from 8.6% to 10% by 2024

Issues: SMEs constitute only 15%-20% of Russian GDP. 65-70% of economic activity is in the state sector and this NP is a reflection of the governments’ intention to rebalance the economy. However, this NP is an unwieldy one to manage, due to the split in responsibly between three ministries and a non-government organisation.

Federal projects (FP):

(1) To improve the overall business environment

(2) To expand access to credit resources, including subsidized credit (50% of budget)

(3) To accelerate SME growth through IT-infrastructure, education and infrastructure investment at the regional level

(4) To create support system for farmers and agriculture cooperatives

(5) to popularize entrepreneurship (through media, news, and other means)

Key officials:

Deputy Prime Minister and Minister of Finance Anton Siluanov

Minister of Economic Development Maxim Oreshkin

(For FP 4) Minister of Agriculture

(For FP 5) The All-Russian Non-Governmental Organization of Small and Medium Business (OPORA Rossii).

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❖ Healthcare

2019 allocation: US$ 2.4billion Utilized 71%

Key targets

▪ Reduce mortality within the working age population from 455 per 100 000 to 350 by 2024.

▪ Reduce mortality from cardiovascular disease, cancer, and child mortality by one-third

▪ Increase enrollment rates in education programs for medium-level healthcare personnel from 240,000 trained staff in 2018 to almost 2 million in 2024.

▪ Provide insurance cover for all citizens with preventive medical examinations at least once a year

▪ Ensure access to primary care, including remote areas, including the use of telemedecine

▪ Reduce waiting times for primary care

▪ Triple the export of health services to US$1 billion by 2024

Issues: This complicated and expensive national project addresses a number of problematic issues. For example, residents from over 200 towns in Russia currently have no access to primary healthcare. The NP emphasizes the fight against cancer , as the Fight Cancer Federal Project accounts for almost 2/3 of all allocations to the Healthcare NP, which indicates the prevalence of this illness in Russia

Federal projects

(1) Develop primary care

(2) Fight cardiovascular disease

(3) Fight cancer

(4) Develop pediatric healthcare, including the construction of new infrastructure

(5) Ensure qualified staff for medical Institutions

(6) Build a network of national medical research centers and implement innovative medical technologies

(7) Create a unified information system of healthcare (10% of all spending)

(8) The export of medical services (i.e. foreign patients coming to Russia for medical treatment.

Key officials

Deputy Prime Minister of Health Tatiana Golikova

The project is run entirely by the Ministry of Health. Most of the funding is public, with only 3% coming from non-budgetary sources.

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❖ Housing and Urban Environment

2019 allocation: US$1.6 billion Utilized 60%

Key targets

▪ Construct 120 million sqm of housing per year

▪ Reduce the mortgage rate to 7.9% by 2024

▪ Increase mortgages from 1.5 million policies]to 2.3 million by 2024

▪ Reduce by 50% the number of cities with ‘unfavorable living conditions’

Issues: This national project envisages over RUB1 trillion of spending through to 2024, over 90% of which will be government funded. The mortgage project primarily includes changes to the legal framework: like the development of credit resources for housing, reducing the financial risk of citizens participating in construction projects using new instruments to attract investment (including stock exchanges, mortgage stock, and project financing using escrow accounts).

Federal projects

(1) Mortgages (subsidize interest rates)

(2) Housing (one quarter of all allocations)

(3) Comfortable urban environment

(4) Decrease the amount of uninhabitable housing stock (half of all allocations)

Key officials:

Deputy Prime Minister for Construction Vitali Mutko

Day-to-day administration is the responsibility of the Ministry of Utilities and Construction.

FP 1 is under the jurisdiction of the Ministry of Finance under the control of the First Deputy Prime Minister.

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❖ Infrastructure: Modernization and Expansion

2019 allocation: US$1.64 billion Utilized 43%

Key Targets

▪ Transportation Infrastructure

▪ Energy Infrastructure Transportation

The project encompasses several plans for improving Russia’s broader transport and logistics networks.

1. Develop two key corridors for cargo transportation: “West – East” and “North – South”

2. Improve economic connectedness of the different territories of the Russian Federation through the expansion and modernization of the country’s rail, road, river, air and sea infrastructure.

The government has also announced several key target metrics:

▪ Transport Infrastructure Index from a base of 100 to 115.5 by 2024

▪ Exports of Transport Services to increase from US$16.9 billion to US$25.0 billion by 2024

▪ Russia’s place in the Logistics Performance Index from 75th to 50th by 2024

▪ Per capita Transport Mobility (000 passenger km per year) from 8.2 to 9.5 by 2024

▪ Share of Centers of Economic Growth Linked by High-Speed Transport to rise from 40% to 100% by 2024

▪ Increasing the Transport Security in the Federal Subjects by 7.7% (relative to 2017) by 2024

Energy

The project covers a series of key objectives.

1. Ensure an increase of at least 6% in electricity use in centralized energy systems, by the end of 2024

2. Reduce excess installed capacity in Russia’s Single Electrical System by 12% by the end of 2024

3. Ensure the commissioning of 4,000 MW in new generation capacity, by the end of 2024

4. Ensure RUB156.9 billion of investment in the construction of thermal power generation facilities by the end of 2024

5. Increase the number of constituent entities in the Russian transport system using intelligent control systems to 70 by the end of 2024

Issues: The government is especially concerned about the state of Russia’s core infrastructure and has allocated the lion’s share of the overall national project funding to projects in this sector. This concern is underlined by the recent report of the World Economic Forum, which scores Russia highly for some measures, such as IT penetration and combating inflation but which is downbeat on the state of the country’s infrastructure. Significantly, the quality of road infrastructure, which is being addressed by one of the biggest spends under the national projects, scores very low on the WEF scale.

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WEF Assessment of Russia's Infrastructure Efficiency 2019 (Maximum 100) Scale Score Rank Increase/Decrease Leader Transport Infrastructure 49 + Singapore Road Connectivity 1 to 100 86 41 + Multiple Quality of Road Infrastructure 1 to 7 3.5 99.0 + Singapore Railroad Density 1 to 7 5.2 69.0 + Multiple Efficiency of Train Services 1 to 7 4.9 17.0 - Japan Airport Connectivity million/week 426396 18.0 = Multiple Efficiency of Air Transport 1 to 7 5.0 52.0 + Singapore Liner Shipping Connectivity 1 to 100 40.4 43.0 + Multiple Efficiency of Seaport Services 1 to 7 4.7 47.0 + Singapore Utility Infrastructure 90.0 50.0 + Iceland Electricity Access % of population 100.0 2.0 = Multiple Electricity Supply Quality % of output 10.0 61.0 + Multiple Exposure to Unsafe Drinking Water % of population 8.0 94.0 + Multiple Reliability of Water Supply 1 to 7 5.3 53.0 + Iceland Source: Macro-Advisory Ltd., adapted from WEF figures Source: Ministry of Economic Development Moscow- route, a focus of attention. On November 4th the first project in the Modernization and Expansion of Core Infrastructure program was approved, the high-speed toll road linking Moscow and Kazan. This is one of the most expensive projects in the whole national project universe. The construction of new roads is expected to cost RUB730 billion, RUB120 billion of which has been allocated for the Tolyatti bypass project and RUB610 billion to connect the Central Ring Road and the village of Shali in Tatarstan. The government has estimated that 40% of expenditure will come from private-sector investors, who will face a payback period of 45 years. The Moscow-Kazan route has long been a focus for debate and prior to the approval of this initiative, Ministry of Transport, Ministry of Finance and Ministry of Economic Development all had their own proposals. Federal Projects

Transportation infrastructure:

▪ Europe-Western China Transport Corridor

▪ Seaports of Russia

▪ Northern Sea route

▪ Rail transportation

▪ Transport and logistics centers

▪ Communications

▪ Development of regional airports

▪ High-speed rail

▪ Inland waterways

Energy infrastructure:

▪ Guaranteeing the availability of affordable electricity

▪ Guaranteeing the transportation of oil, oil products, gas and gas condensates

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Key officials

Transportation:

▪ Curator – Maxim Akimov (Deputy Prime Minister)

▪ Manager – Alexander Novak (Minister of Energy)

▪ Administrator – Innokentiy Alafinov (First Deputy Minister of Transport)

Energy segment

▪ Curator – Dmitry Kozak (Deputy Prime Minister)

▪ Manager – (Minister of Transport)

▪ Administrator – Pavel Sorokin (Deputy Minister of Energy)

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❖ International Cooperation and Export

2019 allocation: US$1.3 billion Utilized 45%

Key targets

▪ Increase non-commodity exports from US$160 billion currently to US$250 billion by 2024

▪ Increase exports of services from US$70 billion per annum currently to US$100 billion by 2024

▪ Raise the share of exports of manufactured and agricultural products to 20% of GDP by 2024

▪ Double mutual investments within the Eurasian Economic Union to almost US$80 billion.

Issues: The international cooperation and export national project overlaps a number of sectors, which complicates management. It is jointly administered by the Ministry of Industry and Trade and the Russian Export Centre (REC).

The REC is a state organization supporting non-commodity exports, which provides Russian exporters with a wide range of financial and non-financial support measures. The organization is part of the VEB.RF Group, which unites key Russian development corporations. The Russian Export Credit and Investment Insurance Agency (EXAR) and ROSEXIMBANK are also integrated into the REC Group.

The funding allocation amounts to almost RUB1 trillion, all of which will come from the federal budget. Most of the spending (almost 88%) should go to support industrial and agricultural exports.

Federal projects

(1) Industrial exports

(2) Agricultural exports

(3) International trade logistics

(4) Exports of services

(5) Measures to develop international cooperation and exports

Key Officials: the division of overall responsibility reflects the complexity of this NP.

Each federal project is coordinated by a separate Deputy Prime Minister. The logistics project is run by Maxim Akimov, Deputy Prime Minister for the Digital Economy, which reflects the importance of the project.

Industrial exports are supervised by Dmitry Kozak (except military spending).

Agricultural exports are supervised by the Ministry of Agriculture and respective Deputy Prime Minister Alexey Gordeev.

Exports of Services is the responsibility of the Minister of Economic development Oreshkin, while System Measures are supervised by the Russian Export Center.

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❖ Labour Productivity and Employment Support

2019 allocation: US$106 million Utilized 50%

Key targets

▪ Annual growth of productivity in medium and large non-commodity enterprises to reach 5% by 2024

▪ Participation of all 85 regions in the tax preference program by 2024 (compared to 29 in 2019)

▪ Raise the number of enterprises participating in the program from 1,000 currently to 10,000 by 2024

▪

Issues: Productivity is defined as growth in value-added or in revenue depending on the sector (jointly by the Russian Fiscal Service and the Ministry of Economy). This is the smallest of the national projects: roughly RUB52 billion until 2024, 10% of which is non-budgetary money. The aim is to target support to enterprises that are chosen to boost their productivity by over 50%.

Some of the targets are very ambitious -for example targeting productivity growth of 5% against the background of forecast economic growth of 1.5 – 2% is challenging. Moreover, spreading the tax preference scheme to all 85 regions of Russia is especially ambitious as, in 2019, there is just one region in the program.

Federal projects:

(1) Measures to boost productivity

(2) Targeted support to enterprises

(3) Employment support and boost labor market efficiency

Key officials:

First Deputy Prime Minister Siluanov. Day-to-day administration is with the Ministry of Economy.

Minister for Economic Development Maxim Oreshkin (for Federal projects 1 and 3)

Day-to-day running of this project under the management of the Federal Center for Improved Productivity (the Ministry of Labor).

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❖ Safe and High-Quality Roads

2019 allocation: US$2.0 billion Utilized 67%

Key targets

▪ Raise the share of regional roads meeting quality standards from 44% to only 50% in six years. For urban roads, this share should rise from 46% to 85% by 2024.

▪ Reduce the share of over-congested roads from 10.1% currently to 9.1% within six years.

▪ Reduce road fatalities by 66%.

▪ Expand the number of roads designated as using new and best technologies from 10% to 80%.

Issues: The peculiarity of this National Project is that most of the spending (86%) is supposed to come from regional budgets. The figure is especially important given the unbalanced budget structure of the Russian economy with only 12 out of 85 regions considered to be donors, while others receive subsidies from the federal government. Given the size of the country, it is particularly important for economic development to increase the economic inter-connectivity of the regions, their mutual transport accessibility, which is focused on increasing labour mobility, as well as the speed of cargo flows.

Road deaths in Russia still total 25,000-30,000 per year – compared with, for example, fewer than 3,000 in the UK, which still has more automobiles in operation than Russia does. This is a source of great concern for the government.

Federal projects

The four federal projects are:

(1) To expand the road network (almost 93% of the budget for this project)

(2) Measures to develop roads

(3) To improve road safety

(4) Limited road access to the Ministry of Defence

Key Officials

Deputy PM for Transport Dmitry Kozak.

Minister of Transport E. Dietrich

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❖ Science

2019 allocation: US$560 million Utilized 74%

Key targets

▪ To place the Russian Federation among the five leading countries in the world engaged in research and development, in areas determined as priorities of scientific and technological development. Currently Russia is ranked in eleventh position

▪ To improve the attractiveness of Russia to foreigners in the field of scientific research

▪ To ensure growth in R&D spending faster than GDP growth

Issues: Although the Science National Project has some of the most ambitious (if vague) KPIs, it is one of the most poorly funded. The whole project amounts to just US$96 billion through to 2024. However, within its framework are some challenging targets, in terms, for example of tripling the number of Russian scientific articles placed on international scientific data bases and quadrupling the number of study voyages made by Russian research ships.

Federal Projects

(1) Develop scientific and industrial cooperation

(2) Develop R&D infrastructure

(3) Develop human resources for R&D

Key Officials

Deputy Prime Minister Tatiana Galikova

Minister of Science M Katyukov

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Appendix 1: National Projects: Background and Development

May Decree 2018. In this statement, the tasked the Government with a series of "National Development Goals" to be achieved by 2024. These goals included ensuring sustainable natural population growth, raising life expectancy to 78 years, ensuring sustainable (higher than inflation) growth in real incomes and pensions, reducing the poverty by half, improving housing conditions for at least five million families every year, accelerating technological development, ensuring accelerated adoption of digital technologies in the economy and social sphere, entry of the Russian Federation into the top-five global economies, thus ensuring a sufficient rate of economic growth while maintaining macroeconomic stability and creating a high- performance export-oriented sector in the basic sectors of the economy. These goals are conceptually aligned with the international agenda, including a number of UN Sustainable Development Goals. National Projects (NPs). The NPs are a key tool in implementing the national development goals. The 12 National Projects are: Demography, Health, Education, Housing and Urban Environment, Ecology, Safe and High-Quality Roads, Productivity and Employment Support, Science, Digital Economy, Culture, Small and Medium Entrepreneurship and Support for Individual Entrepreneurial Initiative, International Cooperation and Exports, plus a Comprehensive Plan for The Modernization and Expansion of Core Infrastructure. 2012 May decrees. This was Putin’s first attempt to use the government’s fiscal reserves to boost the economy. Previously they had either not existed (in the 2000-2006 period) or had not been necessary (2006- 2008) or had been used to deal with the aftermath of the 2008 financial crisis (2009-2011). The main thrust of the 2012 May decrees was to boost the salaries of workers in the public sector, with the aim of bringing them close to the average for the region. Results of the 2012 May Decrees. Officially the 2012 May Decrees were mainly fulfilled – a government’s report published in 2016 said that 88% of the decrees had been implemented. However independent reports said that there had been a great deal of statistical manipulation to achieve this. For instance, a 2019 report by the RBC news service said that 2018 statistics showed that in reality in only a third of Russia’s regions were doctors’ salaries at the average for the region. One telling point is that the government and the President hardly ever refer to these decrees as a successful program. Reasons for the failure of the 2012 decrees. The general view from review bodies like the Audit Chamber and the All-Russian National Front is that the program was underfunded. One culprit here is that the fiscal crisis caused by the post-sanctions devaluation and the simultaneous fall in the oil price meant that the Federal Government had much less money to spend. Another issue was that the budget for the 2012 May decrees foresaw as much as 70% of the funding coming from local budgets, but these were hard hit by the 2014 crisis. The inability or the unwillingness of governors to fund these decrees is one likely reason for the high turnover of governors in the period 2016-2019. Other major projects. The two other high-profile projects of the last ten years have been the Sochi Olympics in 2014 and the Soccer World Cup in 2018. Both were viewed as successes in terms of execution, but financially the two events were very different. The Sochi Olympics was a financial disaster, while the World Cup managed to learn most of the lessons from Sochi and came in on time and on budget. Sochi. The Sochi Olympics ran massively over budget, and led to the bankruptcy of many of the contractors brought in to deliver the project. Part of the issue was government inefficiency leading to projects being commissioned without full design specifications and subsequent changes to those specifications, but a large part was due to corruption. Financial mismanagement significantly weakened two of Russia’s largest state banks, VTB and VEB, which had to be bailed out when a financial crisis hit in 2014. Although Sochi has not become the white elephant that some predicted, the Olympics have not managed to establish it as a real alternative to European holiday destinations for those Russians who can afford to travel.

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World Cup. The World Cup generally had a lower budget (about US$10 billion against the estimated US50 billion that Sochi cost) and was simpler to implement in that it really only required the upgrading of a number of stadia and their related infrastructure. All of the stadia were ready on time. One major difference between the World Cup and Sochi was that the stadium projects were farmed out to a number of different business groups, all of which were well capitalized and part of large business groups. In Sochi, much of the work was done by smaller contractors working under a central quasi-government authority, with the contractors relying on banks to pre-fund their work.

Lessons learned. We see three key lessons coming out of the experience of the last six years. First, the financing for any project needs to be fully locked down and declared before the project starts. Second, the financing needs to come from the federal budget, because there are too many calls on local budgets to allow for the financing of extra projects. Thirdly, there needs to be a senior figure in charge, with access to President Putin and seniority to ministers, otherwise the projects get swallowed up in inter-ministerial rivalries. We see these threads coming together in the fact that the 2018 National Projects have deputy Prime Ministers in charge of them, direct involvement by governors and ministers in the planning stage, and public line-by-line disclosure of the project costs and sources. No doubt, the Russian government will find new mistakes to make, but at least they seem to be avoiding the old ones.

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Appendix 2: Getting information about National Projects

The relative lack of information on the progress of the National Projects has been a source of criticism within Russia and by international commentators. In mitigation, we point to three factors:

▪ The NPs were launched hurriedly and without adequate preparation

▪ The NPs are a hugely ambitious program and require massive efforts to monitor

▪ The government has pledged to improve the availability of information and there are signs that this is happening. As detailed in the report, the National Projects consist of Federal Projects and these should be the main source of information for the action plans. A basic search can reveal information about the National Projects but little or no information is available regarding Federal Projects. Thus, compiling meaningful reports on the National Projects requires a thorough analysis of information available from different resources (publications, news, articles, reports, conversations with Ministers and officials and others). Unfortunately, he reorientation of state programs to the implementation of the National Projects has led to a decrease in the transparency of budget statistics of the Ministry of Finance. However, it should be noted that the financial openness of the Russian state is one of the highest in the world. Russia ranks 15th out of 102 in the Open Budget Index. The degree of openness of the Russian budget and the contract system is also highly rated in the other Open Data Barometer international index. In the past 20 years, the level of openness of public finances has grown markedly. In addition to the most obvious data (on the budget, on state contracts), a lot of other information is made public through a single website of the budget system, the websites of state and municipal institutions and several others. Before the advent of the National Projects, there were many years of work to translate the budget along program-targeted lines and since 2014, government programs have been legislated as the main way to distribute state funds. But everything changed with the advent of the National Projects - immediately there were changes in the consolidated budget list, affecting the detailing of expenses. Previously, the consolidated budget list was published in Excel format on the Ministry of Finance website, but from 2019 it is available only on the budget system website in the corresponding section and traditional coding for the budget spending has been changed with codes of national and regional projects. As a result, the transparency of the budget in everything related to national projects has significantly decreased. The MoF website cannot be used to follow the plans and progress of national projects and the scanty publication of information on the government website and on the futurerussia.gov.ru website does not compensate for the decrease in the financial transparency of the budget as a whole. In October 2019, the Government approved the creation of a new structure in the form of an Autonomous Non-profit Organization (ANO) for information support of national projects. The new structure is likely to be created in the near future and hopefully will help to fill the informational void surrounding the national projects. The availability of appropriate information and digital infrastructure is another factor of success. A special place here is given to the information system “Electronic Budget”. This system allows to see project plans and budgets, KPIs and project passports at all levels, however, the system is not currently accessible to outsiders. Thus, additional analysis is necessary to follow-up with the plans and implementation. A useful source of information, including ‘insider’ details can be found on the Telegram site, particularly on the May Decree channel.

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Reports Suite* Russia Macro Monthly. This monthly update provides a record of all of the events which investors in Russia are interested in, such as economics, politics, monetary policy and all business related developments. This publication also has updated economic forecasts for Russia and all of the CIS-Eurasia states. We also provide reviews of all new books published which are focused on or which may influence the Eurasia region. In Context. Whenever a topic arises which is both topical and of concern to our clients, such as the questions and threats posed by sanctions, we issue quick response notes to place the topic into a proper context. In these notes we highlight the areas of concern and set out our opinion about what to expect next and how to prepare for it. Eurasia country reports. We issue regular updates for all of the countries in the CIS-Eurasia region. These will cover not only macro and political events but will also highlight business trends and focus on opportunities for investors, both existing and emerging. These reports also look at and explain any risks in respective investment scenarios. Industry reports. The bulk of the work we undertake for our clients, for example, strategic industry analysis, is customized and is exclusive for the client. But, from time to time, we cover the general trends and focus on opportunities for investors in sectors which we believe have high growth potential. Over the past year we have issued reports covering agriculture, e-commerce, insurance, pharmaceuticals, construction, and many others. Thematic reports. In this series of reports we look at interesting and emerging themes which have relevance across the CIS-Eurasia region and are not exclusive to one country. We issue regular updates on the development of the Eurasia Economic Union (EaEU), the expanding Belt & Road network and the investment opportunities arising from this, Caspian Corridor developments, and others. Political briefings. For our clients we issue regular updates covering sensitive political issues in all of the countries of Eurasia. In these tightly controlled reports we are able to offer an un-biased and frank opinion about the events and set out the implications for businesses and investment risk.

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