VZCZCXRO6137
PP RUEHLN RUEHVK RUEHYG
DE RUEHMO #1264/01 1270836
ZNR UUUUU ZZH
P 060836Z MAY 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 7924
INFO RUEHLN/AMCONSUL ST PETERSBURG PRIORITY 4935
RUEHVK/AMCONSUL VLADIVOSTOK PRIORITY 2804
RUEHYG/AMCONSUL YEKATERINBURG PRIORITY 3149
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 MOSCOW 001264 
 
SIPDIS 
 
DEPT FOR EUR/RUS/PATTERSON AND TUMINARO 
DOC FOR 4231/IEP/EUR/JBROUGHER 
TREASURY FOR TORGERSON 
NSC FOR WARLICK 
STATE PLS PASS FOR USTR HAFNER 
 
E.O. 12958: N/A 
TAGS: ECON EINV EIND PGOV PREL RS
SUBJECT: ECONOMIC MINISTRIES TAKE ON MEDVEDEV'S PRIORITIES 
 
¶1. (SBU) Summary.  Econ Minister Counselor met separately 
with Deputy Minister for Regional Development (MRD) Vitaliy 
Shipov and Deputy Minister for Economic Development and Trade 
(MEDT) Andrei Klepach in late April to discuss their 
respective Ministry's roles in the first year of President 
Medvedev's administration.  Shipov said the MRD would carry 
out many of Medvedev's highest priority projects, such as 
programs on housing and infrastructure.  The MRD was also 
preparing a Regional Development Strategy, which would be a 
companion piece to the 2020 Economic Development Program of 
MEDT.  Klepach said his Ministry's 2020 plan would be 
complete by fall but in addition MEDT was working on a reform 
program for the first year of Medvedev's presidency, which 
would focus on economic modernization and include tax cuts. 
End Summary 
 
--------------------------------------------- --------- 
REGIONAL DEVELOPMENT: HOUSING AND INFRASTRUCTURE FOCUS 
--------------------------------------------- --------- 
 
¶2. (SBU)  In an April 28 meeting with Econ M/C, Shipov, who 
also serves as MRD Minister Kozak's state secretary, said 
that many of President Medvedev's highest priorities, 
including federal programs on housing and infrastructure 
investment projects would fall under the MRD.  As a result, 
the MRD was likely to take on added importance in the new 
government.  He said the Ministry had strong political 
support from President-elect Medvedev and would receive 
additional resources after the change in government in May. 
 
¶3. (SBU) Shipov claimed that housing construction was on the 
upswing but acknowledged that affordable housing remained a 
major GOR concern.  He expressed interest in reviving a 
housing "seminar" that would bring together experts, 
including from the U.S., and provide Russia with an 
opportunity to learn from the experiences of other countries. 
 That said, Russia did not intend to solve the current 
shortage by creating government housing.  It was committed to 
private sector solutions, which would be supported by the GOR 
through two MRD-managed funds: the Fund to Assist Housing 
Maintenance, which would subsidize repairs of existing 
housing stock and the Fund on Promoting Housing Construction, 
which would sell idle federally-owned land for housing 
construction. 
 
¶4. (SBU) Shipov confirmed that his Ministry now also had 
responsibility over the GOR's Investment Fund for major 
capital investment projects.  He said the GOR commission 
overseeing these projects had already approved 20 of them, 
including such high-profile ones as the Moscow-St.Petersburg 
toll road and the St.Petersburg-Helsinki expressway.  The 
MRD's plan was to use the Investment Fund to provide seed 
money to start the projects but to develop them through 
public-private partnerships.  Foreign firms would be welcome 
to participate. 
 
¶5. (SBU) Shipov said the authority for many federally-funded 
projects would be delegated to regional authorities and 
projects would be designed to stimulate regional initiatives. 
 He added that transferring authority back to the regions was 
one of the Ministry's key goals.  For instance, 
responsibility for social infrastructure, such as education 
and health care, along with budget resources had been moved 
back to the regions, which "knew better" what was needed 
locally.  The Ministry would, however, continue to provide 
budget support and would monitor regional government 
activities. 
 
¶6. (SBU) Shipov added that the Ministry was an active 
participant in developing the GOR's 2020 Economic Development 
Program, which was being spearheaded by the Ministry of 
Economic Development and Trade (MEDT), and which was 
currently being finalized.  He added that his Ministry was 
also working on a separate blueprint for regional development 
through 2020, which he expected to be approved in the fall. 
 
-------------------------------------- 
ECONOMICS MINISTRY: "THE GOR'S BRAINS" 
-------------------------------------- 
 
¶7. (SBU) In an April 29 meeting, MEDT Deputy Minister, Andrei 
 
MOSCOW 00001264  002 OF 002 
 
 
Klepach, told Econ M/C that MEDT was the driving force behind 
the GOR's economic development plans, the government's 
economic "brains" as it were.  He said this included 
responsibility for the 2020 Economic Development Program, 
which he expected to be complete and approved in the Fall. 
However, it also included an economic reform program to be 
implemented early in Medvedev's administration.  This program 
would be ready to be unveiled by summer and would focus on 
tax reforms to stimulate consumer spending and value-added 
economic activity.  The centerpiece would be a reduction in 
the VAT rate. 
 
¶8. (SBU) Klepach said health care and education modernization 
would take center stage in the near-term reforms.  He said 
that the MEDT's reform programs were currently under review 
with the Ministries of Social Development and Education.  He 
said these would be "messy and radical" reforms and very 
costly for the federal budget.  In addition, the MEDT was 
currently working on new ideas and projects that included 
federal programs to support the arts, infrastructure projects 
for the handicapped, and professional education.  He said 
that these proposals would be ready by year's end. 
 
¶9. (SBU) Klepach acknowledged disagreement within the GOR 
over the reform program.  The Finance Ministry was opposed to 
fiscal loosening which it believed would result in lower 
government revenues.  MEDT, however, believed that the 
resulting increased economic activity would pay for itself by 
increasing revenues.  He was optimistic that a compromise 
with the Finance Ministry would be reached.  In any event, 
Klepach said Russia had pressing needs and some fiscal 
loosening was inevitable.  Moreover, the current budget 
surplus was not sustainable: the price of oil would 
inevitably fall and the budget surplus would then shrink. 
Modernizing the economy would create more sustainable methods 
of supporting fiscal policy. 
 
¶10. (SBU) Klepach added that in the short-run Russia could 
experience some economic turbulence.  For instance, he 
expected a trade deficit to appear by 2011/12, even if the 
price of oil were to remain at or above $70 per barrel.  In 
addition, the international credit crunch had caused capital 
outflow.  Although the situation had improved in April and 
FDI remained strong, there was still a net outflow so far in 
¶2008.  Klepach said monetary policy would have to adjust to 
the change in the balance of payments with interest rates 
rising and the exchange rate falling. 
BURNS