R 310952Z DEC 08
FM AMCONSUL YEKATERINBURG
TO SECSTATE WASHDC 1238
INFO AMEMBASSY MOSCOW 
AMCONSUL ST PETERSBURG 
AMCONSUL VLADIVOSTOK 
AMCONSUL YEKATERINBURG 
DEPT OF TREASURY WASHINGTON DC
USDOC WASHDC 0008

UNCLAS YEKATERINBURG 000083 
 
 
E.O. 12958: N/A 
TAGS: ECON EINV RS
SUBJECT: HOW TO WEATHER THE ECONOMIC CRISIS:  A TALE OF TWO FORA 
 
Sensitive but unclassified.  Not for internet distribution. 
 
¶1. (SBU) Summary:  Consulate officers attended a Sverdlovsk 
oblast Advisory Council meeting on November 28, and the Eighth 
Urals Investment Forum in Chelyabinsk on December 4.  Both 
meetings were dedicated to discussing ways to weather the 
economic crisis.  Politicians were enthusiastic promoters of 
foreign investment as a solution to the crisis and emphasized 
the importance of small and medium enterprises (SME), but gave 
no details on policy or legislative changes that might promote 
these objectives.  Meanwhile, private business is looking to the 
government at all levels for a lifeline to get through the 
crisis, but also suggests measures such as reducing tariffs on 
key items and public investment in R&D.  Participants in both 
fora acknowledged that more needs to be done to diversify the 
economy, improve infrastructure and foster transparency in the 
business environment .  End summary. 
 
Cheerleading from the Administration 
------------------------------------- 
 
¶2. (SBU) At his Advisory Council meeting, Sverdlovsk oblast 
governor Eduard Rossel emphasized that efficiency must improve, 
noting that the productivity of Russian machine tool 
manufacturers is 40 times lower than foreign manufacturers.  He 
said it is urgent that government encourage the creation of new 
SME to absorb the newly unemployed.  Rossel expressed an 
interest in public works projects similar to US depression-era 
programs.  He also said that the region has been given RR 8 
million for development of nano technology.  He highlighted the 
need to adopt energy saving methods and technologies, especially 
as government budgets are contracting. 
 
¶3. (SBU) At the Urals Investment Forum, Yuriy Klyopov, deputy 
governor of Chelyabinsk oblast, recited steps the oblast has 
taken to attract foreign investment.  He and other Chelyabinsk 
officials profiled projects for which they hope to find foreign 
investors in 2009; they consider tourism projects to be among 
the most promising.  Klyopov also said that major companies in 
the region will continue major investments and expansion despite 
the international crisis.  However, Klyopov acknowledged that 
the regional budget outlook for 2009 is strained because 
metallurgical production provides 64 percent of the oblast 
budget and sales have declined. 
 
¶4. (SBU) Other government representatives in Chelyabinsk 
stressed that the federal government needs to provide money to 
municipalities to help support small and medium enterprises. 
The plan would provide not only credit, but expert business 
planning assistance to start-ups as well as SME in difficulty. 
Special programs to provide loan guarantees to assist 
export-oriented companies are also needed.  Viktor Sorvin, head 
of Sverdlovsk Regional Administration of the Central Bank of 
Russia, recommended that government implement measures to 
attract investment, especially foreign direct investment, and 
invest more in innovation and high tech industries. 
 
More Realism from Property Developers 
----------------------------------------- 
 
¶5. (SBU) Speaking about the construction sector at the federal 
and regional levels, Gosduma deputies Andrei Nazarov and Valeriy 
Gartung were less optimistic.  They noted that the fall of oil 
prices, capital outflows, and an expectation that the situation 
will worsen have affected demand for housing and commercial 
space, and have led developers to freeze many projects. 
Overall, the sector has already seen layoffs and lower salaries. 
 They predicted that an extended downturn could result in the 
collapse of the sector.  Both presenters emphasized that the 
sector looks to government at all levels to take excess supply 
off the hands of developers and to keep things going with public 
projects such as hospitals and sports centers.  (Note: we 
understand that Yekaterinburg city officials have concluded a 
deal to acquire 630 apartments from AtomStroiKomplex developer 
and will sell them to public employees.) 
 
¶6. (SBU) Denis Sharipov, chairman of the association of 
Bashkhortostan Construction Companies, also hit a more realistic 
note, saying that unemployment is rising and the banking sector 
has suffered in Bashkhortostan.  He emphasized that to weather 
the crisis, the republic will have to invest in research and the 
modernization of infrastructure to diversify the economy away 
from raw materials.  Bashkhortostan also plans to support small 
businesses by extending credit to prevent a repeat of 1998 when 
30-50 percent of small businesses disappeared. 
 
¶7. (SBU) The director of a Chelyabinsk construction company 
strongly criticized government inaction vis-`-vis the 
construction industry, asserting that one person employed in the 
construction industry creates six jobs in other sectors.  He 
pointed to government policies that have resulted in lack of 
demand and sales of housing units.  He suggested several steps 
the government should take to stimulate public-private 
partnership in the construction sector:  removal of 
administrative barriers; creation of a transparent land 
registration database; government construction of basic 
infrastructure to support future housing construction; and 
government subsidies of mortgages. 
 
And Prescriptions from the Private Sector 
------------------------------------------ 
 
¶8. (SBU) EBRD representative Tatiana Yembulaeva stressed that 
expensive credit (note:  in Yekaterinburg the commercial lending 
rate is now 28 percent) will continue to disrupt the lending 
market.  Yembulaeva said that EBRD will invest up to USD 7 
billion in Russia in 2009, as part of a 20 percent increase 
worldwide in investments in countries with transitional 
economies.  EBRD's priorities will be infrastructure projects. 
EBRD looks to municipal and regional authorities to:  1) improve 
the regulatory and institutional base for investment; 2) balance 
risks through risk sharing and guarantees; 3) ensure clear and 
transparent rules for all players in the market including 
foreign investors; and 4) improve infrastructure.  EBRD also 
recommended investing in companies with good governance that are 
diversifying the economy. 
 
¶9. (SBU) Ernst & Young representatives counseled government 
participants to address barriers to foreign investment, such as 
a accounting and tax systems that are not compatible with 
western practices; lack of transparency; a complicated legal 
system; and a general lack of understanding of corporate 
decision-making processes.  Other business representatives also 
called on government to invest in technology parks, sponsor 
business incubators, and work together with universities and 
business to create an environment where engineers laid off from 
metallurgical companies can start their own small businesses. 
 
Comment 
----------- 
 
¶10. (SBU) At both meetings there was a marked contrast between 
optimistic promotion from government officials with more 
realistic appraisal of the economic situation from business 
representatives.  The sharply worded recommendations to 
government to lower import duties on key equipment and improve 
the investment climate in other ways might gain traction in a 
region where politics is dominated by business interests.  For 
all of the discussion, very little new ground was covered in 
these sessions.  Moreover, the prescriptions presented are all 
complex fixes that would have a positive effect only over time. 
Meanwhile, the regions are facing up to the immediacy of the 
impact of the crisis.  In discussions with consulate contacts, 
it has become clear that regions that were previously net tax 
donors to the Center will suffer more as a result of the crisis. 
 Kurgan Oblast, for example, receives around 60% of its regional 
budget from the Center, so is in relatively better shape to face 
¶2009.  On the other hand, like Chelyabinsk, Sverdlovsk oblast, 
where metallurgy accounts for 52 percent of gross regional 
production, is heavily affected by the drop in demand for metal 
products. 
 
 
SANDUSKY