VZCZCXYZ0013
PP RUEHWEB

DE RUEHMO #5428/01 3201445
ZNR UUUUU ZZH
P 161445Z NOV 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 5308
INFO RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

UNCLAS MOSCOW 005428 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/RUS 
TREASURY FOR TORGERSON 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR WARLICK AND MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EIND RS
SUBJECT: RUSSIA'S BUSINESS COMMUNITY SEES MORE CONTINUATION 
THAN CHANGE 
 
REF: MOSCOW 5373 
 
¶1.  (U) This message is sensitive but unclassified, and not 
for internet distribution. 
 
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Summary 
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¶2.  (SBU) During the 4th Moscow Business Dialogue on November 
12, government officials and business professionals forecast 
a general continuation of the current mix of market and 
statist economic policies after the end of Putin's term as 
president in March 2008.  For instance, when asked what the 
country could expect after March 2008, Central Bank (CBR) 
First Deputy Chairman Aleksey Ulyukaev dryly replied, 
"April," indicating an expectation that GDP, investments, and 
consumption would continue to rise.  There was, however, 
debate about the state,s role in the economy.  Deputy 
Regional Development Minister Maksim Bystrov said the state 
would continue to be active in development projects.  MDM 
Bank Chairman Oleg Vyugin and Deutsche Bank Chief Economist 
Yaroslav Lissovolik agreed that the economy would continue to 
grow regardless but argued that it would do better if the 
government interfered less and relied more on the markets. 
Finally, Ulyukaev indicated that monetary policy was shifting 
from supporting a strong ruble to fighting inflation through 
interest rates.  End Summary. 
 
-------------------------------------------- 
No Major Changes Expected In Economic Course 
-------------------------------------------- 
 
¶3. (SBU) Speakers representing Russian business and the GOR 
at the 4th Moscow Business Dialogue said they did not expect 
major changes in Russia's economic course after the 
elections.  President of the Russian Union of Industrialists 
and Entrepreneurs Aleksandr Shokhin expressed the 
conventional wisdom that "there is no doubt about United 
Russia's victory in December."  The success of the Putin 
years had compelled most political parties "who hoped to 
reach the 7 percent threshhold (required for party 
representation in the Duma)" to embrace economic policy 
platforms reflecting the current course. 
 
¶4. (SBU) According to Shokhin, only the "most radicalized 
parties such as the Communists" have excluded business 
community considerations from their proposals and agendas. 
The country's mid-term economic goals depended upon 
implementing a long-term legislative strategy, which was 
expected to be approved in February 2008.  Putin's leadership 
of United Russia would, therefore, put the Duma solidly 
behind a continuation of policies that have prevailed during 
the last eight years.  Key initiatives on enhancing Russia's 
business climate currently before the Duma included 
amendments to tax and corporate governance legislation as 
well as passage of the Strategic Sectors Law. 
 
¶5. (SBU) Deputy Central Bank (CBR) Chairman Aleksey Ulyukaev 
echoed Shokhin's sentiment that the post-election economy 
would continue to grow with few disruptions and decreasing 
imbalances.  The Russian economy "broke the cycle of 
political dependence years ago."  In the intervening period, 
Russia's fiscal prudence generated reserves to withstand 
external shocks to the economy.  Since 1999, exports were the 
overwhelming driver of economic growth, "but domestic 
consumption became more important" in the last two years. 
Much of that consumption spurred increased foreign direct 
investment (FDI) and rising initial public offering (IPO) 
volumes placed domestically and abroad, which translated into 
"high marks for Russia's economy from foreign businesses." 
GOR officials put in place the necessary conditions to 
encourage these results and would probably undertake only 
minor changes to the current mix of economic policies. 
 
----------------------------- 
State's Role and Common Sense 
----------------------------- 
 
¶6.  (SBU) Regional Development Deputy Minister Maksim Bystrov 
outlined how the GOR had incorporated its intermediate-term 
economic development strategy into the three-year budget. 
The multi-year budget represented an unprecedented initiative 
and major policy shift and built transparency into the GOR's 
 
spending priorities, creating predictability in its spending 
patterns.  Consequently, this system of fiscal discipline 
would allow the state to continue playing an active role as 
an investor and co-investor in the country's economic growth. 
 
¶7. (SBU) Bystrov said the state's role in the economy would 
continue through programs such as the Federal Venture Fund, 
Public-Private Partnerships (PPP), the Development Bank, the 
Concessions Law, and the various Special Economic Zones. 
Bystrov noted that programs such as Special Economic Zones 
had been criticized both as excessive and insufficient, but 
he argued the state had a role to spur greater 
diversification and could be expected to do so. 
 
¶8. (SBU) MDM Bank Chairman of the Board, and former Federal 
Financial Markets Service Director, Oleg Vyugin sounded a 
more cautionary note, particularly where the state's role was 
concerned.  He repeated a number of times that the GOR's role 
in Russia's economic development was not necessarily a bad 
thing, as long as it exercised "common sense."  Some 
investment decisions the GOR should have made, such as in 
health care, education, and physical infrastructure, however, 
had been postponed.  Now the GOR was trying to make up for 
lost time and favored leveraging public resources with 
private sector technology and know-how. 
 
¶9. (SBU) In particular, Vyugin noted that infrastructure 
projects under the PPP framework have languished as a result 
of administrative delays or started much more slowly than 
anticipated.  Russia would benefit from a more 
straight-forward rubric of "sponsoring" the business 
community's involvement in large-scale infrastructure and 
development projects.  The current pace of investments, 
around 20 percent of GDP, was insufficient for Russia's needs 
and might be hindered under the PPP system, according to 
Vyugin. 
 
¶10.  (SBU) Despite having signed a "voluntary" price controls 
agreement covering eight food categories (reftel), President 
of food and beverage maker Wimm-Bill-Dann (WBD) David 
Yakobashvili maintained a strongly bullish outlook on Russia. 
 He said he expected the Kremlin to continue to facilitate 
the conditions in which Russian firms could thrive 
domestically and to work toward commonly applied standards, 
especially in the food sector, for Russian firms' success 
abroad.  Increasing global demand for food in the last three 
years put a premium on efficiency for WBD and its suppliers. 
The GOR's market-oriented treatment of the food sector 
allowed WBD as well as its competitors to grow domestically 
and abroad.  Yakobashvili explained that his firm understood 
the sensitivity of the food inflation issue and would 
probably extend its commitment under the price controls 
agreement into the spring 2008. 
 
--------------------- 
Inflation and the WTO 
--------------------- 
 
¶11.  (SBU) Ulyukaev said that CBR monetary policy was 
shifting.  The practice of managing ruble appreciation had 
outlived its usefulness as a means of controlling inflation 
and tended now to draw in "hot money" from abroad that was 
helping to further fuel inflation.  Ulyukaev said he expected 
the CBR to liberalize ruble exchange rate policies and move 
toward using interest rates to control inflation. In 
addition, he said that in the wake of subprime mortgage 
concerns, Russia's banking sector had found new interest in 
acquiring short-term funds from the CBR at market rates.  He 
said the CBR recognized that not all banks enjoyed equal 
access to this liquidity and would work toward smoothing this 
imbalance for large and small banks. 
 
¶12.  (SBU) In response to Ulyukaev, Vyugin said the economy 
would benefit from less focus on managing inflation through 
exchange rate levers.  Sooner or later, ruble appreciation 
would occur and reduce Russia's trade surplus.  According to 
Vyugin, a strong ruble would not necessarily hurt Russian 
firms' competitiveness.  Instead, the strong ruble would 
allow Russian companies to upgrade their facilities and 
modernize production through cheaper foreign technology 
imports.  Turning to the current GOR focus on rising food 
prices, Vyugin said that rising food prices were a global 
phenomenon and that there was little that could be done to 
stem price growth. 
 
 
¶13.  (SBU) Deutsche Bank Chief Economist Yaroslav Lissovolik 
said that Russia's private sector would benefit from more 
market-oriented governance like Ulyukaev described.  The 
banking sector would experience growth if the Central Bank 
was focused on supplying and absorbing liquidity through 
interest rates levers.  Russian firms would also benefit from 
the competition that Russia's membership in the WTO would 
provide.  Lissovolik stressed that the Russian economy was at 
such a stage that it needed the discipline, and would reap 
development gains, that would come from membership.  He added 
that Russia's accession might reinvigorate the stalled Doha 
round of negotiations and inject new thinking into the body. 
 
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Comment 
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¶14.  (SBU) The speakers agreement that the current political 
cycle would not lead to a major change in Russia's economic 
policies comes as no surprise.  However, what did come as a 
surprise at an event like this was the degree of debate over 
the state,s role in the economy.  To the extent that 
Vyugin's view is representative of the broader private 
sector, it is clear that many are uncomfortable with the 
state's role, as presently conceived, in promoting economic 
development.  If Russia is to successfully move to the next 
level in its economic development, in which growth should be 
less and less dependent on oil and gas exports, it will need 
to redefine the balance between its penchant for statist 
approaches in favor of the benefits of a market orientation. 
End Comment. 
BURNS