Identifier
Created
Classification
Origin
06MOSCOW11830
2006-10-20 14:25:00
CONFIDENTIAL
Embassy Moscow
Cable title:  

SCENESETTER: TREASURY U/S LEVEY'S VISIT TO MOSCOW

Tags:  ECON KTFN EFIN PTER OTRA OVIP RS 
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DE RUEHMO #1830/01 2931425
ZNY CCCCC ZZH
P 201425Z OCT 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 4315
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RHEHNSC/NSC WASHDC PRIORITY
C O N F I D E N T I A L MOSCOW 011830 

SIPDIS

SIPDIS

STATE FOR EUR/RUS
TREASURY COX/ALIKONIS/BAKER
NSC FOR TGRAHAM, TRACY MCKIBBEN

E.O. 12958: DECL: 12/19/2015
TAGS: ECON KTFN EFIN PTER OTRA OVIP RS
SUBJECT: SCENESETTER: TREASURY U/S LEVEY'S VISIT TO MOSCOW

Classified By: Ambassador William J. Burns, Reasons 1.4 (b/d).

C O N F I D E N T I A L MOSCOW 011830

SIPDIS

SIPDIS

STATE FOR EUR/RUS
TREASURY COX/ALIKONIS/BAKER
NSC FOR TGRAHAM, TRACY MCKIBBEN

E.O. 12958: DECL: 12/19/2015
TAGS: ECON KTFN EFIN PTER OTRA OVIP RS
SUBJECT: SCENESETTER: TREASURY U/S LEVEY'S VISIT TO MOSCOW

Classified By: Ambassador William J. Burns, Reasons 1.4 (b/d).


1. (C) On behalf of the U.S. Mission in Russia, we extend a
warm welcome to you and your delegation. Your visit offers
an opportunity to continue your discussions with the Russians
on combating terrorism financing as well as our grave
concerns about Iran's and North Korea's activity in this
regard. Your visit will help continue these themes of how
our two countries can work collaboratively to lessen the
threat posed by North Korea and Iran, including disrupting
threatening financial flows to, through, and from them. The
Russians, as always, are most receptive to a message that we
share a common threat and that only by working together can
we ensure greater peace and stability.


2. (SBU) One major development since your most recent visit
was the murder of Central Bank of Russia First Deputy
Chairman Andrey Kozlov last month. Kozlov was an energetic
reformer who enjoyed political support at the highest levels.
The interlocutors with whom you will meet during this visit
held Kozlov in high regard. He championed the strengthening
of counter-terrorism financing and anti-money laundering
controls, and led efforts to revoke licenses of banks
complicit in these activities. President Putin has publicly
vowed to carry on Kozlov's work and has called for the
establishment of an interagency working group to rid the
country's financial system of shadow economy entities.

MONEY-LAUNDERING
--------------


3. (SBU) Russia, as you know, now has developed a solid
legislative and regulatory foundation for combating money
laundering and terrorism financing. Its role in spearheading
the creation of the Eurasia Group of Combating Legalization
of Proceeds from Crime and Terrorist Financing (EAG) has
demonstrated both the political will and capability to
improve the region's fight against money laundering and

terrorism financing. Nevertheless, vulnerabilities remain.
Russia's Federal Service for Financial Monitoring (FSFM)
estimates that Russian citizens may have laundered as much as
$7 billion in 2005. Experts believe that most of the dirty
money flowing through Russia derives from domestic criminal
or quasi-criminal activities, including evasion of tax and
customs duties and smuggling operations.


4. (SBU) Oversight of the banking system also needs
strengthening. Banking reform efforts have emphasized
enforcing more stringent capital adequacy standards and
strengthening anti-money laundering controls. Authorities
have revoked more than 110 licenses from banks that have not
fulfilled their capital adequacy and suspicious transaction
control requirements. Despite this progress to make the
banking sector more transparent, Russia continues to suffer
from a weak system of financial intermediation.
Profitability among commodities producers has generated an
excess of capital, but there is an equal-size demand for
capital that domestic banks are not meeting.

NORTH KOREA
--------------


5. (C) In your discussions with the Russians before the G8
Summit, you have urged the GOR to conduct investigations to
ensure that North Korea does not use Russian financial
institutions to facilitate illegal activities. This theme
was echoed at the Summit in other high-level G8 meetings.
The Central Bank has warned Russian banks to be aware of
entering into relationships with North Korean banks.
Russia's Federal Financial Monitoring Service is monitoring
all contacts with North Korea and North Korean financial
institutions.

AN AGREEMENT WITH THE UNITED STATES?
--------------


6. (C) The Director of the Federal Financial Monitoring
Service (Russia's Financial Intelligence Unit) Viktor Zubkov
has praised cooperation with the U.S. on financial crimes
investigations. Russian business daily newspaper Vedomosti
reported that Zubkov credited a recent instance of
information sharing with the U.S. for helping to identify
terrorist cells operating in the North Caucasus. He and
Central Bank of Russia Deputy Chairman Viktor Melnikov,
however, have criticized the pace with which Financial Action
Task Force (FATF) requests are processed. During their
meetings with you, they are likely to raise the issue of
formalizing a bilateral information-sharing agreement.

TERRORIST DESIGNATIONS
--------------


7. (SBU) Russia is generally supportive of the process of
designating terrorist entities within the UN Security Council
and a Russia's support was key to the passage of the UN
Security Council Resolution 1617, the successor resolution to
UNSC 1267.


8. (SBU) As you will recall, the United States has placed a
hold on the Russian-sponsored designation of a Chechen at the
UN 1267 Committee, citing a lack of evidence to meet the
legal threshold for a terrorist designation. In April 2005,
Russia placed a hold on two U.S.-sponsored designations -
Buisir and Al-Hiyari, also citing lack of legal evidence.
The issue has become an irritant in our otherwise productive
and positive relationship on terrorism finance and financial
crimes.

BACKGROUND ON THE RUSSIAN ECONOMY
--------------


9. (SBU) Since 2000, Russia has been an economic growth
success story driven by high oil prices and strong, sustained
consumer demand spurred by Russia's emerging middle class
(20-35 percent of the population). GDP has increased at
impressive annual rates of six-to-seven percent for eight
straight years. Real average incomes have risen as well, and
the poverty level has dropped from 40 percent of the
population in 1998 to 20 percent today. Unemployment is a
relatively low seven-to-eight percent. Russia has used its
ample foreign reserves (over $261 billion) to pay off its
debts. Russia has tucked away almost $70 billion, or roughly
6.7 percent of GDP, in a Stabilization Fund to insure against
future oil price fluctuations. At the same time, the
Government has pursued a firm course of fiscal conservatism,
running budget surpluses (a record 7.5 percent in 2005),and
resisting significant pressure to spend Russia's oil
windfall. Foreign investment, which lagged for years, is
finally reaching levels comparable to other emerging markets
(recent projections put FDI in 2006 at almost $20 billion, or
3 percent of GDP).


10. (SBU) Nonetheless, significant weaknesses remain.
Growing and pervasive high-level corruption, increasing state
control over murkily-defined "strategic sectors," excessive
bureaucracy, lack of transparency and rule of law, disregard
for property rights, and the unpredictable application of the
tax code are the biggest threats to long-term growth. Social
reforms (namely health care, municipal housing, and
education) have stalled, largely because of political
reluctance to embark into uncharted territory in the run-up
to the 2008 presidential election. Inflation persists in the
low double-digits; the budget is slowly becoming more
dependent on high energy prices; and higher social spending
and government salaries are increasing expenditures. These
problems are exacerbated by the labor market in Russia, which
faces two critical challenges: shortages caused by poor labor
mobility between regions and a demographic crisis - the
population is declining by 700,000 people per year.


11. (U) Since its consolidation in 1996, the Russian stock
market has experienced growth that has led emerging markets.
Capitalization was close to USD 1 trillion by the end of
August, compared to USD 346 billion at the end of August
2005, and USD 177 billion at the end of 2003. Natural
resource firms have fueled the vast majority of this growth,
thanks to a favorable ruble exchange rate following the 1998
crisis and global increases in commodities prices. The
participation of foreign and domestic institutional investors
is rising, as are market trading volumes and liquidity.
Perhaps the most unsung factor accompanying Russia's swelling
market valuations has been the trend among established and
emerging firms in Russia to raise primary market equity
capital at home.
BURNS