RUSSIAN DEVELOPMENT "BANK" TAKES SHAPE

UNCLAS MOSCOW 013002

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EUR/RUS
TREASURY FOR BAKER/GAERTNER
NSC FOR MCKIBBEN

E.O. 12958: N/A
TAGS: ECON EFIN EINV RS
SUBJECT: RUSSIAN DEVELOPMENT "BANK" TAKES SHAPE


Summary
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1. (SBU) At a meeting of cabinet ministers on December 14,
Economic Development and Trade Minister German Gref delivered
a presentation on the prospective scope and functions of a
new Russian Development Bank (RDB). Gref's proposal would
consolidate the Foreign Economic Activity Bank of the USSR
(Vneshekonombank, VEB),the existing Russian Development
Bank, and the Russian Export-Import Bank into a unified
government development-financing structure. The new
institution would have charter capital totaling USD 70
billion and would provide long-term financing for
infrastructure projects and high-tech, export-oriented
industries. The ministers approved Gref's concept and
Finance Minister Aleksey Kudrin's suggestion that the Prime
Minister serve as the head of the RDB's Oversight Council.
Prime Minister Mikhail Fradkov directed the ministers to
develop a draft bill on the bank before the end of the year.
End Summary.

Russian Development Bank: Long-Term Focus
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2. (SBU) Addressing a cabinet ministers' meeting on December
14, Economic Development and Trade Minister German Gref
outlined the prospective objectives and functions of the
proposed Russian Development Bank (RDB). He explained that
the RDB would emerge from the consolidation of the Foreign
Economic Activity Bank of the USSR (Vneshekonombank, VEB),
the existing Russian Development Bank, and the Russian
Export-Import Bank. Gref emphasized that the government
should foster transparency and self-sufficiency in RDB
operations. The consolidated structure would start
operations from a capital base of USD 70 billion with the
goals of supporting economic development, establishing new
market sectors, and eliminating infrastructure imbalances
among Russia's regions. The RDB's main lines of business
would be infrastructure and social projects, development and
export of high-tech products, advanced technology imports,
research and development support, and small business
financing.


3. (SBU) Gref observed that the RBD, which President Putin
first advocated in January, would complement existing
government-supported institutions such as the Agency for Home
Mortgage Lending, the Federal Agency for Management of
Special Economic Zones, and the Investment Fund. He also
told cabinet members that the proposed move was in keeping
with other countries' experience in establishing government
finance institutions. He expressed hope that the RDB would
reproduce the successes of Ex-Im Bank in the U.S., the
Japanese Development Bank, and Brazil's Socio-Economic
Development Bank. Gref argued that the RDB, as a government
development institution, should focus on long-term project
finance. He suggested that partnership with the private
sector would not only reduce some of the government's burden
in supporting priority sectors, but also raise the
profitability of longer-term endeavors.

Not a Traditional Bank
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4. (SBU) Under Gref's plan, the RDB would not serve as a
bank in the traditional sense of the word since it would not
operate under a license from the Central Bank. The RDB would
neither make loans to individuals nor trade in securities,
and would require special legislation to be organized as a
government corporation. Gref suggested that the
legislation's general guidelines for the RDB should be to
diversify the economy, improve infrastructure, and create
conditions for long-term economic development. The
government would review the RDB's performance annually and
adjust priority areas as necessary. The government would
provide general oversight, and the RDB would be subject to
independent audits.

RDB Concept Ultimately Approved
--------------


5. (SBU) There was apparently some debate. Deputy Prime
Minister Medvedev recommended calling the institution the
"Russian Development Fund" or "Russian Development
Corporation" since it would not technically operate as a
bank. Justice Minister Ustinov offered general objections to
Gref's plan, noting that many laws would need to be passed
for the RDB to function as outlined. In an apparent effort
to forge consensus among the ministers, Finance Minister
Kudrin urged that the government appoint the RDB's leadership
and suggested the Prime Minister serve as the head of the
Oversight Council. The ministers unanimously approved the
RDB concept, and Prime Minister Fradkov directed the
ministers to develop draft legislation that could be
submitted to the Duma before the end of the year.

Comment
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6. (SBU) The idea of a Russian Development Bank had been
kicking around for years prior to Putin's January nudge.
Gref's presentation fell short of the mark that Putin had set
earlier this year, namely that the government's draft bill on
the Russian Development Bank be presented to the Duma by
December 15, but it advanced the issue nevertheless.
Disagreements between Gref and Kudrin on the prospective
bank's functions slowed the process this year, but now these
appear to be behind them. The establishment of this bank
would be a concrete measure in the emerging unified policy
that Gref has often articulated to promote genuine
diversification of the Russian economy, including through
exports. The proposed legislation creating the RDB, however,
is likely to be very general in nature, given the two-week
deadline and Prime Minister's reported frustration at
"waiting months for us to give birth to this bank." End
Comment.
RUSSELL