Identifier
Created
Classification
Origin
06MOSCOW6334
2006-06-14 10:08:00
UNCLASSIFIED
Embassy Moscow
Cable title:  

GROWTH AND CORRUPTION IN RUSSIA'S REGIONAL

Tags:  ECON EINV ELAB SOCI POL RS 
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ZNR UUUUU ZZH
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FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 7572
INFO RUCNCIS/CIS COLLECTIVE
RUEHXD/MOSCOW POLITICAL COLLECTIVE
RUEHLN/AMCONSUL ST PETERSBURG 3100
RUEHVK/AMCONSUL VLADIVOSTOK 1459
RUEHYG/AMCONSUL YEKATERINBURG 1712
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
UNCLAS SECTION 01 OF 05 MOSCOW 006334 

SIPDIS

SIPDIS

NSC FOR GRAHAM/MCKIBBEN
USDOC FOR 4231/ITA/MACK/RISD/JBROUGHER/MEDWARDS
STATE FOR EUR/RUS

E.O. 12958: N/A
TAGS: ECON EINV ELAB SOCI POL RS
SUBJECT: GROWTH AND CORRUPTION IN RUSSIA'S REGIONAL
ECONOMIES

REF: A. MOSCOW 2449

B. 05 MOSCOW 14851

MOSCOW 00006334 001.2 OF 005


UNCLAS SECTION 01 OF 05 MOSCOW 006334

SIPDIS

SIPDIS

NSC FOR GRAHAM/MCKIBBEN
USDOC FOR 4231/ITA/MACK/RISD/JBROUGHER/MEDWARDS
STATE FOR EUR/RUS

E.O. 12958: N/A
TAGS: ECON EINV ELAB SOCI POL RS
SUBJECT: GROWTH AND CORRUPTION IN RUSSIA'S REGIONAL
ECONOMIES

REF: A. MOSCOW 2449

B. 05 MOSCOW 14851

MOSCOW 00006334 001.2 OF 005



1. SUMMARY: While none would dispute that Moscow leads Russia
in economic development, it is increasingly clear that many
cities beyond Moscow are experiencing healthy growth. Small
and medium-sized enterprise (SME) owners in large provincial
cities report expanded opportunities and gradually improving
business climates. Corruption, not surprisingly, is
commonplace and grudgingly accepted as a cost of doing
business. Nonetheless, there are signs that businesses are
becoming more assertive in protecting their rights against
predatory bureaucrats. Finding and keeping qualified workers
is another headache, as the best and the brightest still move
to Moscow or abroad. Despite the obvious problems, regional
diversification is clearly now part of the story of Russian
economic growth. END SUMMARY.
.
SPREADING THE WEALTH
====================


2. (U) During recent trips to five regional capitals --
Astrakhan (on the Caspian),Syktyvkar (near the Urals at the
Arctic Circle),Smolensk (bordering Belorussia),Novosibirsk
and Tomsk (western Siberia) -- we heard again and again how
much the face of those cities had changed for the better over
the last five years. One small businessman in Astrakhan who
had moved there in 2001 told us we wouldn't recognize the
place, the difference was so great; coffee shops and
restaurants had sprung up catering to a growing middle class,
and shopping malls had been replacing traditional outdoor
markets. In Novosibirsk, while stuck in traffic unthinkable
only a few years before, we heard that more (and increasingly
foreign) cars were on the roads, that apartment prices had
jumped 100% last year in response to surging demand for
better housing, and how the buying power of the growing
consumer class had led several U.S. investors to the
continued expansion of their restaurant and coffeehouse
chains. In Tomsk, 24-hour 1950's-style diners, cafes, and
trendy European clothing stores lined the streets.

Construction cranes were visible from every corner of
Syktyvkar. Even in Smolensk, where regional growth rates lag
behind the national average, contacts spoke of the
significant growth in retail establishments that was
expanding consumer choice.


3. (U) In these provincial capitals, contacts pointed to
different drivers of growth. Shipbuilding in Astrakhan,
paper in Komi, diamond cutting in Smolensk, oil in Tomsk, and
metallurgy in Novosibirsk all play prominent roles in those
regional economies. But it was at the small and medium-sized
business level (SMEs) that the greatest optimism about
prevailing trends was evident. Significant real income
growth has meant greater purchasing power among the consumer
base in most large cities, giving rise to numerous retail
shops catering to that growing demand. Easier (though still
not easy) access to financing had opened more opportunities
to SMEs. Perhaps more important, according to many contacts,
was that business owners were simply starting to get over the
hump on the learning curve and getting better at what they
do. As Olga Romanenko, head of OPORA business association in
Astrakhan, put it, "You have to remember - private business
in Russia is very young. We've lacked experience and
business traditions. But we're learning."
.
BUREAUCRATIC ATTITUDE ADJUSTMENT
================================


4. (SBU) SMEs may also be benefiting from a general shift in
attitudes among bureaucrats regarding the importance of small
business. Now that President Putin has, on several
occasions, publicly proclaimed government's need to support
SMEs, "civil servants have gotten the message that small and
medium-sized businesses are a driving force in the economy,"
the head of the Astrakhan Chamber of Commerce told us. "Good
ideas are coming from Moscow," Smolensk's head of OPORA said,
"and of course local bureaucrats do everything looking back
at Moscow," she added. As a result, regional and municipal
governments are reaching out to find ways to support small
business. "Local leaders want to look good to Putin -- they

MOSCOW 00006334 002.2 OF 005


want to demonstrate that they can generate growth," and so
are working to assist SMEs, the head of Novosibirsk Oblast's
Chamber of Commerce told us.


5. (SBU) In many cities, we heard, it helps that more public
officials are coming into office with business experience.
In Astrakhan, for example, the new Governor, a former
businessman, appointed people with business backgrounds to
seven of 14 top positions in the oblast. "They know the
problems from the inside, and are able to give us real
support," Romanenko told us. One former entrepreneur,
recruited by Astrakhan's Governor, shared with us his
initiative for educating and empowering SMEs (with inspection
log books and access to a harassment hotline) to resist
shake-down attempts by overzealous inspectors acting beyond
the law (a tactic we have also admired at work in Rostov on
Don). The new mayor of Syktyvkar, an entrepreneur in his
early 30s, gained office by promising a better business
climate. "He's part of a new generation that understands the
potential business has to make a better life for people
here," the Director of the Komi Chamber of Commerce explained.
.
BUSINESS STANDS UP FOR ITSELF
=============================


6. (SBU) Moreover, business owners are learning to assert
themselves in this new environment. "After so many years of
communist mentality, people are becoming more active, and are
seeing that they can influence affairs," Romanenko said. As
an example, she noted that she and her fellow
tourist-business owners had effectively lobbied the Governor
to replace an incompetent head of the regional tourism
agency. A group of Smolensk small business owners told us
that increasingly, small business owners knew their rights,
e.g., about what inspections were allowed and how often.
"Step by step, we see attitudes changing as businessmen
become educated and bureaucrats realize there are limits on
what they can get away with," we heard. Vladimir Shargayev
of the Smolensk Anti-Corruption Commission agreed:
"Bureaucrats used to prey upon the ignorance of business
people. But now, there is lots of legal assistance, and
people know they no longer need to pay -- they can take them
to court."


7. (SBU) Representatives of the Siberian Civic Initiatives
Support Center told us that though such business activism was
not growing rapidly, it was growing. Collective action is
still rare, but they estimated that five percent of
businesses in Novosibirsk now belonged to some sort of
professional association. As the head of Astrakhan's Chamber
of Commerce put it, "We're not going out into the streets
with posters, or holding public meetings, but we are quietly
influencing policy," as with a year-long cooperative effort
between the Chamber and the regional and local governments to
identify and reduce administrative barriers. According to
the Director of the Novosibirsk Small Business Development
Center, as more businesses regularize their activities and
abide by the laws, they are developing a different
relationship with government: "Now that they legally pay
taxes and payroll, there is less fear, and they can make
demands like, 'Why are there potholes? I pay my taxes!'"


8. (U) Thus, gradually and persistently, SMEs in many regions
are taking increasing advantage of and even expanding the
economic free space in which they can operate. Their
on-the-job training -- about business best practices, about
their own rights as owners, and about how to cope in what
remains a challenging environment -- is having a cumulative
beneficial effect. Their gains may not be evident to
first-time visitors off a plane from Moscow, we were
cautioned, but such evolutionary progress was clear to anyone
familiar with where things stood only a few short years ago,
we heard.
.
SO MUCH FOR THE GOOD NEWS
=========================


9. (SBU) For all their optimism about the general trends,
small business owners were still clear-eyed about the
considerable obstacles in their way. For example, though

MOSCOW 00006334 003.2 OF 005


credit had become more available and affordable, long-term
credit was still hard to come by. Real estate markets remain
opaque and unnavigable, and are becoming increasingly
unaffordable. For some (e.g., in Syktyvkar) security was an
issue, with competitors sometimes opting for arson or
intimidation rather than fair market competition. The
objectivity of the courts in many regions remains suspect.
And of course, there is always the red tape. Two of the most
often-cited problems mentioned, though, had to do with
maintaining a qualified workforce and coping with corruption.
.
HARD TO FIND GOOD HELP THESE DAYS
=================================


10. (SBU) Any time we met with owners who required a skilled,
non-professional workforce, they identified a shortage of
qualified employees as a huge challenge. "The system of
vocational education that we had in Soviet times has been
destroyed," a member of the Smolensk Coalition for SME
Support explained, "and for 15 years people's skills have
deteriorated." The head of the Novosibirsk City Chamber of
Commerce complained that educational institutions churned out
plenty of lawyers, accountants and secretaries, but that
skilled laborers were in huge deficit. Starved for cash and
unreformed, the old vocational education system does little
now to meet modern labor market needs, we repeatedly heard.
(See also Ref A.)


11. (SBU) When qualified applicants are available, both
professional and non-professional, too often they don't stick
around. "I don't like the job applicants that I do get, and
those who I would like to have stay all move to Moscow,"
Lyudmila Pushkareva, the owner of a Smolensk apparel company,
told us. Aleksey Kantemerov, President of the Astrakhan
Chamber of Commerce, was resigned to the unfortunate reality
of migration patterns: "Just as a fish looks for deeper
water, a man looks for a better place." The head of a
Novosibirsk branch office for an IT firm told us that the
entire first generation from her office, save herself, was
now in Moscow. This internal brain drain constituted a real
constraint on regional growth, we heard. Regional capitals
do tend to attract young workers from the surrounding
(depressed) rural areas, and migrants (both legal and
illegal) from the CIS continue to come, but in most cases,
not enough to offset the losses. Absent dramatic increases
in immigration, the deficit will likely grow, as Russia's
demographic crunch begins to reduce the country's total
working age population in 2007 (Ref B).
.
THE STENCH OF CORRUPTION...
===========================


12. (SBU) Most of our contacts were rather fatalistic about
the presence of corruption in their regional economies.
"People accept corruption like they accept the sun," Lada
Yurchenko, the Deputy Director of the Siberian Civic
Initiatives Support Center, told us. According to the
Novosibirsk Oblast Chamber of Commerce, "If business can only
operate without corruption, then it won't operate." OPORA in
Astrakhan told us that, despite the changed attitudes of many
civil servants, law enforcement structures remain as
predatory as ever and negatively affect tourism and trade.
OPORA in Smolensk told us that without personal connections,
business found it difficult to get bank credit, to secure
property, or generally to gain the necessary permissions to
operate a business. When we asked the head of the
Novosibirsk City Chamber of Commerce whether there were any
serious anti-corruption steps being taken locally, he
replied: "It's easy for two people to say they want to lift a
tractor, but that doesn't mean they can do it." Only Moscow,
he explained, could provide the necessary muscle to tackle
the task.
.
...ISN'T SO BAD, ONCE YOU GET USED TO IT
========================================


13. (SBU) Still, like sewer workers who have decided not to
let the smell interfere with their work, most small business
owners have decided to plug their noses and press ahead. To
an extent, we heard, corruption-related costs were largely

MOSCOW 00006334 004.2 OF 005


just another expense -- certainly something to grumble about
(like taxes) but also something they would simply need to,
and usually could, cope with. As one Novosibirsk business
owner sardonically quipped, "Corruption isn't a problem, if
you pay." According to contacts in several cities, the
landscape seems to have morphed some as well, with fewer
cash-filled envelopes exchanging hands. "It's more about
connections and string-pulling than bribery and corruption,"
a Novosibirsk restaurateur told us. "I've surrounded myself
with partners who have the right connections. You've got to
be willing to include people. If you're not willing to
share, someone will stick a spoke in your wheels," he
explained.


14. (SBU) Gifts and charitable contributions have also
emerged as primary methods for building and maintaining
necessary connections. Most of the business people we asked
said that, of course, they sent birthday, New Year's and
Women's Day presents (but nothing too extravagant) to key
bureaucrats and officials. "For us, this isn't corruption.
It's just smart business," we were told. Many contacts also
reported regularly receiving official letters on government
stationery requesting donations -- sometimes for charitable
causes championed by the Governor's wife, other times for
computer equipment, reflective vests, or similar, mundane
operational needs of the local government. "It's normal, and
an opportunity to give back to the community" we heard.
Several business people noted that good old fashioned bribes
more often came into play when initiated by a businessman who
wants to get around the law, or to accelerate an otherwise
lengthy process. For those willing to play by the rules and
fortunate enough to work in a field without heavy government
regulation, the occasional hand-over of some cash to the fire
inspector or a few others may still be necessary, but regular
gifts or contributions to "grease the wheels" were the main
methods for keeping their businesses on track.

SHRINKING OPPORTUNITIES FOR EXTORTION
=====================================


15. (SBU) More businesses appear to be "playing by the
rules," which over the long-term should reduce their
susceptibility to extortion. Sergey Semka, a deputy in the
Novosibirsk Regional Administration, told us that ten years
ago, new businesses were popping up everywhere, but a
minority were legally registered. As of five years ago, 70%
were registered, and now 99% were. With the documents to
prove their right to operate, small businesses had become
harder targets for attempted shake-downs. Several owners
told us that they had gradually transitioned to completely
above-board payroll systems to lower their vulnerabilities.
(Note: A general, gradual trend out of the shadow or "gray"
economy that was occurring was also driven by growing
interest in accessing credit, whether for business, cars,
homes, or other investments that require transparent
accounting, we heard.)


16. (SBU) Regional officials have worked as well (with
varying degrees of enthusiasm) to minimize the points of
leverage that government has over business. The Governor of
Novosibirsk, we learned from several NGOs, had installed a
new transparent electronic tendering procedure for government
contracts to replace the old back-corridor deals that had
been the norm. A member of the Astrakhan City Duma claimed
that they "work constantly to reduce direct contact between
businessmen and civil servants, including restricting the
number of inspections that are allowed." In Novosibirsk and
Astrakhan, business associations reported that the
implementation of a new "one-window" process had greatly
simplified business registration and dramatically reduced the
points of contact between SME owners and officials. However,
the perceived success of this federally mandated program
varied considerably from region to region. In Smolensk it
got poor marks from business contacts, suggesting it was for
show, and had not really simplified registration. In
Syktyvkar we heard, "Sure there's one window, but you've
still got to go to it five times.")


17. (SBU) In a few exceptional cases, SMEs have even overcome
their fatalism and gotten into the anti-corruption fight. In

MOSCOW 00006334 005.2 OF 005


Tomsk, business associations have partnered with NGOs and the
media for a USAID-funded initiative to ferret out corruption
loopholes in all proposed legislation, and have published
corruption "grade tables" for every regional Duma deputy
(that have reportedly cost some their seats in subsequent
elections). The coalition's legal aid service has provided
over 2000 free consultations to companies bold enough to
resist extortion, and a professionally produced public
information campaign has further raised awareness.
Corruption may still permeate most government-business
interaction, but business owners are better educated about
their rights in most, and in rare cases like Tomsk, business
is actively fighting back.
.
COMMENT
=======


18. There is no question that Russia's impressive economic
growth over the past seven years has not spread to all
corners of the country. Most of rural Russia, many of the
former military-industrial cities, and nearly all of its
towns dedicated to a single factory or industry have largely
been left behind. Still, many regional capitals are plugged
in and are benefiting from and contributing to Russian
growth. The fact that they may fall far short of the flashy
wealth of Moscow matters little. What matters is how far
they have come. The visible signs of growth -- more shops
and restaurants, cars, construction, and the palpable
optimism of many SME owners -- are good indicators that part
of the story of Russia's growth is one of nascent regional
diversification and revival.
BURNS