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German Chancellor Angela Merkel on Sunday asked Russian President Vladimir Putin to "give a chance" to non-governmental organisations which she described as a "motor of innovation".
The two leaders were opening the Hanover industrial trade fair, with dozens of demonstrators protesting against Putin's crackdown on the NGOs outside the northern German city's convention centre where the opening ceremony was held.
Russia is the fair's partner country this year.
Merkel's statement, made in a much applauded opening speech, was a direct reference to Russian probes into a number of international NGOs including German think tanks, moves criticised by Moscow's partners.
In an interview with German public television station ARD, broadcast on Sunday, Putin defended the crackdown, arguing that Russians had a right to know which organisations that set up shop in the country were receiving foreign funds "and for what".
In her speech Merkel insisted on the importance of an active civil society in Russia.
"Russia wants to diversify... and we want to help it," she said adding that a key element of the diversification of the economy was innovation.
"We are convinced that this is particularly successful when there is an active civil society," she said.
Outside the Hanover convention centre about 100 demonstrators rallied peacefully calling on Moscow "to leave the NGOs alone".
The protest was organised by Amnesty International and Human Rights Watch.
Putin earlier praised solid German-Russian trade relations which last year totalled a record 74 billion euros ($96 billion).
"I'm sure that we will soon reach 100 billion," said Putin.
Merkel, who was to dine with Putin after the opening ceremony, said discussions about the space in which civil society must be able to work should be pursued.
The chancellor had taken Putin to task during a visit to Moscow in November when she criticised the condemnation of two of the members of punk-rock group Pussy Riot to two years in prison camp for anti-Putin hooliganism motivated by religious hatred in a church performance.
Putin was to join former German chancellor Gerhard Schroeder for a birthday bash later Sunday.
Schroeder, Merkel's immediate predecessor, turned 69 on Sunday.