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Lucia A Keegan  07/31/2006 10:34:01 AM  From  DB/Inbox:  Lucia A Keegan

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UNCLAS    SENSITIVE     PARIS 05146

SIPDIS
cxparis:
    ACTION: ECON
    INFO:   SCI AGR FCS ENGO OECD ECSO ECNO TRDO POL UNESCO
            AMBO PAO LABO DCM AMB

DISSEMINATION: ECONIN
CHARGE: PROG

VZCZCFRO473
PP RUEHFR
DE RUEHFR #5146/01 2091625
ZNR UUUUU ZZH
P 281625Z JUL 06
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC PRIORITY 9916
INFO RUEHMO/AMEMBASSY MOSCOW PRIORITY 5511
RUEHBJ/AMEMBASSY BEIJING PRIORITY 1300
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEAUSA/DEPARTMENT OF EDUCATION WASHDC PRIORITY
RUEAUSA/DEPT OF HHS WASHDC PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHFR/OECD COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 03 PARIS 005146 
 
SIPDIS 
 
SENSITIVE 
 
FROM USOECD PARIS 
 
STATE PASS TO USTR 
 
E.O. 12958:N/A 
TAGS: ECON PGOV AORC OECD FR
SUBJECT:  THE OECD BUDGET: PUSHING RUSSIA TO REFORM 
 
REF: 2004 PARIS 6860 
 
¶1.  (SBU) Summary: The role played by the OECD at the G8 summit is 
only one of many OECD activities aimed at strengthening the market 
economy and democratic governance in Russia.  A comprehensive 
economic survey, scheduled for completion in September, will focus 
on innovation and reform of public administration.  A recently 
completed investment policy review focuses on policy transparency 
and reform of capital controls.  The OECD is following up on its 
2005 Regulatory Reform Review, examining in particular Russia's 
capacity for regulatory impact analysis and the framework for 
regulatory institutions. An OECD study on the WTO and Russia notes 
that the accession process has had a positive influence on domestic 
economic reforms, despite continued state involvement in the 
economy. 
 
¶2.  (SBU) Though cautious in their assessment, OECD officials 
believe that in areas such as corporate governance, competition, and 
investment, the OECD has had a genuine impact on policy in Russia, 
and Russian officials have acknowledged OECD contributions. 
Reform-minded Russian officials continue to work closely in many 
policy areas with the OECD: their latest proposals for cooperative 
activities with the OECD span 18 policy areas, ranging from banking 
and finance to tariff regulation. 
 
¶3.  (SBU) Russia long ago made clear its desire to join the OECD as 
a member and takes seriously the joint understanding that its 
collaboration with the OECD has membership as its ultimate goal. As 
a non-member, it has joined more OECD committees and other bodies as 
an observer than any other country, though its attendance is spotty. 
 Nor has Russia adhered to any of the major OECD instruments, such 
as the Anti-Bribery Convention or the Declaration on International 
Investment and Multinational Enterprises.  Nevertheless, some OECD 
officials believe that inviting Russia to begin the process of OECD 
accession now would be a win-win proposition: it would bolster 
reform and reformers in Russia, and enhance the influence of the 
OECD and its free-market philosophy in the global economy.  They 
believe such an invitation would not bestow a stamp of approval on 
Russia's current direction or policies, since, as with Russia's path 
of accession to the WTO, it would only be the beginning of a long 
process whose timing and final outcome would depend on genuine 
reform progress.    End Summary 
 
THE OECD AND RUSSIA: THE G8 AND MORE 
 
¶4.  (U) OECD relations with Russia are extensive and long-standing. 
At the 2005 G8 Gleneagles Summit, President Putin asked 
International Energy Agency Executive Director Claude Mandil for the 
Agency's support for Russia during its G8 Presidency in 2006 and to 
support Russia's focus on energy security.  This request was seen as 
a logical extension of the OECD's IEA work and long-standing 
cooperation with the Russian government over the last twelve years, 
which has focused on the development of rational energy policies. 
The IEA was involved in all preparatory meetings related to the 
energy security theme of the G8 work, including the G8 Energy 
Ministerial Meeting (March 15-16 in Moscow), and Mandil attended the 
G8 Summit in St. Petersburg on July 17.  Beyond the high level 
official meetings, IEA staff also discussed energy issues with key 
Russian officials designated by President Putin as part of the G8 
Expert Committee on Energy Security, as well as with Minister 
Kristenko, senior Gazprom officials, the Russian G8 Sherpa, Igor 
Shuvalov, and sous-Sherpa, Andrei Kondakov. 
 
¶5.  (U) In addition, new OECD Secretary General Gurria attended the 
G8 Finance Ministers meeting in St. Petersburg.  The Pre-Summit 
Statement by G8 Finance Ministers welcomed "the ongoing work in the 
OECD on the Financial Education Project," and expressed support for 
"the proposal by Russia and the OECD to organize an international 
conference in Moscow on financial literacy..." The same statement 
also noted the "OECD's high standards of transparency and effective 
exchange of information on tax matters," and, separately, called for 
continued actions by all countries to strengthen their adherence to 
the OECD's Financial Action Task Force recommendations for fighting 
money laundering and terrorism financing. 
 
ECONOMIC REVIEW 
 
¶6.  (SBU) G8 involvement is only one example of OECD-Russia 
cooperation in many policy areas.   A comprehensive economic policy 
report on Russia -- still in draft form -- is a good example of OECD 
products regarding Russia: though drafted after consultations with 
Russian officials, it is candid in its assessments and policy 
recommendations.   The report states that further reforms are 
necessary in Russia because the "main factors underpinning current 
growth are transitory."  It notes that "the expansion of state 
ownership overall must be regarded as a step back," and urges that 
this trend be reserved.  The report recommends greater transparency 
in connection with public procurement, and notes that 
"anti-corruption efforts would be facilitated by increasing the use 
of information technologies...between officials and businesses and 
private citizens."  The OECD advocates a "healthy, open business 
environment," and suggests that policymakers "pay particular 
attention to reducing barriers to market entry, facilitating the 
diffusions of foreign technologies...and stimulating competition." 
 
INVESTMENT REVIEW 
¶7.  (U) The latest OECD report on investment in Russia puts its 
policy recommendation in the title: "Investment Policy Review of 
Russia 2006: Enhancing Policy Transparency."  Discussing the report, 
an OECD official commented that making the ruble convertible was a 
positive step to increasing investment flows, but needed to be 
accompanied by measures such as adequate reporting on transactions 
and robust oversight of financial institutions.   Further, "to fully 
realize its investment potential, given its natural resources, large 
domestic market and relatively low wages, Russia needs to cut the 
restrictions facing foreign investors looking to invest in Russian 
firms."  Further, "the OECD recommends that the future strategic 
sector law narrowly defines the sectors concerned, limits the scope 
of restrictions to foreign control over domestic companies based on 
a strict interpretation of essential security interests, and sets 
specified time limits for notifications of government decisions to 
the applicants." 
 
REGULATORY REFORM 
 
¶8. (SBU)  An outline of the update of the OECD's 2005 Regulatory 
Reform Review notes that while there has been a "dramatic 
strengthening of the states' rule-making capacity, the same cannot 
be said for rule enforcement."  Noting that "there appears to be 
strong demand for this work (i.e., regulatory reform review) from 
the Russian authorities," it proposes a number of follow-up 
activities, including seminars on administrative reform, to include 
the design of regulatory agencies. 
 
WTO ACCESSION PROCESS 
 
¶9. (SBU) A 2005 OECD report reaches the qualified conclusion that 
the WTO accession process has had a positive influence on Russia's 
domestic economic reforms.  For example, according to the report, 
negotiations on specific issues, including services, subsidies, 
standards and certification, intellectual property rights, uniform 
trade policy and government procurement have "have had a profound 
influence on development of new legislation and institutions in 
these areas."   The report acknowledges, however, that the reforms 
"are still a work in progress," noting (as does the draft economic 
review) that the Russian government continues to play a major role 
in the economy, through ownership of enterprises and natural 
resources, subsidies, and price controls. 
 
OTHER AREAS OF COOPERATION 
 
¶10.  (U) There is also ongoing or recent OECD-Russia cooperation in 
many other policy areas, including statistics, employment, small and 
medium enterprises, transportation (including road freight, road 
safety and railway regulatory reform), tourism, science and 
technology, human resource development, the environment (including 
water supply, finance, and environmental policies), trade, 
agriculture, tax policy and administration, corporate government, 
anti-corruption, competition, financial markets, and development. 
 
 
OECD'S IMPACT 
 
¶11.  (SBU)  OECD officials believe the cooperation program with 
Russia has had a positive impact, even if it is difficult to measure 
with precision.  According to an internal OECD study, OECD 
investment policy experts have strengthened the role of reformers in 
Russia on implementation of special economic zones and concessions, 
and forthcoming legislation on strategic sectors. On corporate 
governance, a Russian Corporate Governance Roundtable, with diverse 
participation on the Russian side (officials, investors, companies) 
resulted in reform recommendations that were drawn on in producing 
Russia's corporate governance framework legislation.  The 2002 
Russian corporate governance code, for example, was prepared on the 
basis of the OECD Corporate Governance Principles.  Finance Minister 
Kudrin and Economic Development and Trade Minister Gref have 
personally praised OECD products deriving from the Roundtable. On 
competition, the OECD's 2004 Global Forum on Competition recommended 
a tighter focus on the Russian competition authority's mandate -- 
and the Russian Government did narrow the mandate shortly 
thereafter. 
 
FROM RUSSIA, WITH REQUESTS 
 
¶12. (SBU) Reform-minded Russian officials have worked closely with 
OECD counterparts for many years, both in response to OECD 
initiatives and in setting out areas of interest to Russia.  In 
their most recent proposals (September, 2005), Russian officials 
recommended enhanced cooperation in 18 policy areas.  In banking and 
finance, the Russians stated that the expect output result was 
"gradual lifting of restrictions and the sequence of measures for 
the liberalization of the movements of capital and financial 
services."  In taxation, the proposal was for raising the efficiency 
of taxation in order to create "a favorable climate for the Russian 
and foreign taxpayers."  On competition policy, the Russians endorse 
"raising the quality and efficiency of antimonopoly regulation, 
(and) development of fair competition on the markets." 
 
RUSSIA AND THE OECD 
 
¶13.   (SBU) Russia applied for OECD membership in 1996, and the 
OECD, in response, acknowledged that Russia's accession was a shared 
ultimate goal.  As a non-member, Russia has joined twenty committees 
and other OECD bodies, more than any other non-member, but has a 
poor attendance record.  In addition, Russia has not adhered to any 
of the major OECD instruments, such as the Anti-Bribery Convention 
or the Declaration on International Investment and Multinational 
Enterprises (Russia applied to be a member of the OECD's 
anti-bribery convention in 2000, but has not taken the steps 
necessary to join the convention -- such as passing legislation 
criminalizing foreign bribery). 
 
INVITING RUSSIA? 
 
¶14.  (SBU) Nevertheless, some OECD officials have told us that 
inviting Russia to begin the process of OECD accession now would be 
a win-win proposition: it would bolster reform and reformers in 
Russia, while enhancing the influence of the OECD and its 
free-market philosophy in the global economy.  In their view, such 
an invitation would not bestow a stamp of approval on Russia's 
current direction or policies, since, as with Russia's path of 
accession to the WTO, it would only be the beginning of a long 
process whose timing and final outcome remained uncertain, but 
depended on genuine reform progress. 
 
COMMENT 
 
¶15. (SBU) The ongoing cooperation between Russia and the OECD is 
extensive, and -- at least as seen from Paris -- appears to involve 
key reform-minded officials in Russia, such as Finance Minister 
Kudrin and Minister of Economic Development Gref.  At the same time, 
the OECD is not naove about the direction Russia has taken in recent 
years, as the government's economic and political controls have 
tightened.   Following recent governance reforms, the OECD is now 
moving to enlarge both its membership and its engagement with 
non-member economies, as a means of enhancing the OECD's own 
relevance in the global economy.   In this context, we believe the 
case for an invitation to Russia to begin -- but only to begin -- 
the process of accession merits close consideration.  MORELLA