THE OECD BUDGET: PUSHING RUSSIA TO REFORM

UNCLAS SECTION 01 OF 03 PARIS 005146

SIPDIS

SENSITIVE

FROM USOECD PARIS

STATE PASS TO USTR

E.O. 12958:N/A
TAGS: ECON PGOV AORC OECD FR
SUBJECT: THE OECD BUDGET: PUSHING RUSSIA TO REFORM

REF: 2004 PARIS 6860


1. (SBU) Summary: The role played by the OECD at the G8 summit is
only one of many OECD activities aimed at strengthening the market
economy and democratic governance in Russia. A comprehensive
economic survey, scheduled for completion in September, will focus
on innovation and reform of public administration. A recently
completed investment policy review focuses on policy transparency
and reform of capital controls. The OECD is following up on its
2005 Regulatory Reform Review, examining in particular Russia's
capacity for regulatory impact analysis and the framework for
regulatory institutions. An OECD study on the WTO and Russia notes
that the accession process has had a positive influence on domestic
economic reforms, despite continued state involvement in the
economy.


2. (SBU) Though cautious in their assessment, OECD officials
believe that in areas such as corporate governance, competition, and
investment, the OECD has had a genuine impact on policy in Russia,
and Russian officials have acknowledged OECD contributions.
Reform-minded Russian officials continue to work closely in many
policy areas with the OECD: their latest proposals for cooperative
activities with the OECD span 18 policy areas, ranging from banking
and finance to tariff regulation.


3. (SBU) Russia long ago made clear its desire to join the OECD as
a member and takes seriously the joint understanding that its
collaboration with the OECD has membership as its ultimate goal. As
a non-member, it has joined more OECD committees and other bodies as
an observer than any other country, though its attendance is spotty.
Nor has Russia adhered to any of the major OECD instruments, such
as the Anti-Bribery Convention or the Declaration on International
Investment and Multinational Enterprises. Nevertheless, some OECD
officials believe that inviting Russia to begin the process of OECD
accession now would be a win-win proposition: it would bolster
reform and reformers in Russia, and enhance the influence of the
OECD and its free-market philosophy in the global economy. They
believe such an invitation would not bestow a stamp of approval on
Russia's current direction or policies, since, as with Russia's path
of accession to the WTO, it would only be the beginning of a long
process whose timing and final outcome would depend on genuine
reform progress. End Summary

THE OECD AND RUSSIA: THE G8 AND MORE


4. (U) OECD relations with Russia are extensive and long-standing.
At the 2005 G8 Gleneagles Summit, President Putin asked
International Energy Agency Executive Director Claude Mandil for the
Agency's support for Russia during its G8 Presidency in 2006 and to
support Russia's focus on energy security. This request was seen as
a logical extension of the OECD's IEA work and long-standing
cooperation with the Russian government over the last twelve years,
which has focused on the development of rational energy policies.
The IEA was involved in all preparatory meetings related to the
energy security theme of the G8 work, including the G8 Energy
Ministerial Meeting (March 15-16 in Moscow),and Mandil attended the
G8 Summit in St. Petersburg on July 17. Beyond the high level
official meetings, IEA staff also discussed energy issues with key
Russian officials designated by President Putin as part of the G8
Expert Committee on Energy Security, as well as with Minister
Kristenko, senior Gazprom officials, the Russian G8 Sherpa, Igor
Shuvalov, and sous-Sherpa, Andrei Kondakov.


5. (U) In addition, new OECD Secretary General Gurria attended the
G8 Finance Ministers meeting in St. Petersburg. The Pre-Summit
Statement by G8 Finance Ministers welcomed "the ongoing work in the
OECD on the Financial Education Project," and expressed support for
"the proposal by Russia and the OECD to organize an international
conference in Moscow on financial literacy..." The same statement
also noted the "OECD's high standards of transparency and effective
exchange of information on tax matters," and, separately, called for
continued actions by all countries to strengthen their adherence to
the OECD's Financial Action Task Force recommendations for fighting
money laundering and terrorism financing.

ECONOMIC REVIEW


6. (SBU) G8 involvement is only one example of OECD-Russia
cooperation in many policy areas. A comprehensive economic policy
report on Russia -- still in draft form -- is a good example of OECD
products regarding Russia: though drafted after consultations with
Russian officials, it is candid in its assessments and policy
recommendations. The report states that further reforms are
necessary in Russia because the "main factors underpinning current
growth are transitory." It notes that "the expansion of state
ownership overall must be regarded as a step back," and urges that
this trend be reserved. The report recommends greater transparency
in connection with public procurement, and notes that
"anti-corruption efforts would be facilitated by increasing the use
of information technologies...between officials and businesses and
private citizens." The OECD advocates a "healthy, open business
environment," and suggests that policymakers "pay particular
attention to reducing barriers to market entry, facilitating the
diffusions of foreign technologies...and stimulating competition."

INVESTMENT REVIEW

7. (U) The latest OECD report on investment in Russia puts its
policy recommendation in the title: "Investment Policy Review of
Russia 2006: Enhancing Policy Transparency." Discussing the report,
an OECD official commented that making the ruble convertible was a
positive step to increasing investment flows, but needed to be
accompanied by measures such as adequate reporting on transactions
and robust oversight of financial institutions. Further, "to fully
realize its investment potential, given its natural resources, large
domestic market and relatively low wages, Russia needs to cut the
restrictions facing foreign investors looking to invest in Russian
firms." Further, "the OECD recommends that the future strategic
sector law narrowly defines the sectors concerned, limits the scope
of restrictions to foreign control over domestic companies based on
a strict interpretation of essential security interests, and sets
specified time limits for notifications of government decisions to
the applicants."

REGULATORY REFORM


8. (SBU) An outline of the update of the OECD's 2005 Regulatory
Reform Review notes that while there has been a "dramatic
strengthening of the states' rule-making capacity, the same cannot
be said for rule enforcement." Noting that "there appears to be
strong demand for this work (i.e., regulatory reform review) from
the Russian authorities," it proposes a number of follow-up
activities, including seminars on administrative reform, to include
the design of regulatory agencies.

WTO ACCESSION PROCESS


9. (SBU) A 2005 OECD report reaches the qualified conclusion that
the WTO accession process has had a positive influence on Russia's
domestic economic reforms. For example, according to the report,
negotiations on specific issues, including services, subsidies,
standards and certification, intellectual property rights, uniform
trade policy and government procurement have "have had a profound
influence on development of new legislation and institutions in
these areas." The report acknowledges, however, that the reforms
"are still a work in progress," noting (as does the draft economic
review) that the Russian government continues to play a major role
in the economy, through ownership of enterprises and natural
resources, subsidies, and price controls.

OTHER AREAS OF COOPERATION


10. (U) There is also ongoing or recent OECD-Russia cooperation in
many other policy areas, including statistics, employment, small and
medium enterprises, transportation (including road freight, road
safety and railway regulatory reform),tourism, science and
technology, human resource development, the environment (including
water supply, finance, and environmental policies),trade,
agriculture, tax policy and administration, corporate government,
anti-corruption, competition, financial markets, and development.


OECD'S IMPACT


11. (SBU) OECD officials believe the cooperation program with
Russia has had a positive impact, even if it is difficult to measure
with precision. According to an internal OECD study, OECD
investment policy experts have strengthened the role of reformers in
Russia on implementation of special economic zones and concessions,
and forthcoming legislation on strategic sectors. On corporate
governance, a Russian Corporate Governance Roundtable, with diverse
participation on the Russian side (officials, investors, companies)
resulted in reform recommendations that were drawn on in producing
Russia's corporate governance framework legislation. The 2002
Russian corporate governance code, for example, was prepared on the
basis of the OECD Corporate Governance Principles. Finance Minister
Kudrin and Economic Development and Trade Minister Gref have
personally praised OECD products deriving from the Roundtable. On
competition, the OECD's 2004 Global Forum on Competition recommended
a tighter focus on the Russian competition authority's mandate --
and the Russian Government did narrow the mandate shortly
thereafter.

FROM RUSSIA, WITH REQUESTS


12. (SBU) Reform-minded Russian officials have worked closely with
OECD counterparts for many years, both in response to OECD
initiatives and in setting out areas of interest to Russia. In
their most recent proposals (September, 2005),Russian officials
recommended enhanced cooperation in 18 policy areas. In banking and
finance, the Russians stated that the expect output result was
"gradual lifting of restrictions and the sequence of measures for
the liberalization of the movements of capital and financial
services." In taxation, the proposal was for raising the efficiency
of taxation in order to create "a favorable climate for the Russian
and foreign taxpayers." On competition policy, the Russians endorse
"raising the quality and efficiency of antimonopoly regulation,
(and) development of fair competition on the markets."

RUSSIA AND THE OECD


13. (SBU) Russia applied for OECD membership in 1996, and the
OECD, in response, acknowledged that Russia's accession was a shared
ultimate goal. As a non-member, Russia has joined twenty committees
and other OECD bodies, more than any other non-member, but has a
poor attendance record. In addition, Russia has not adhered to any
of the major OECD instruments, such as the Anti-Bribery Convention
or the Declaration on International Investment and Multinational
Enterprises (Russia applied to be a member of the OECD's
anti-bribery convention in 2000, but has not taken the steps
necessary to join the convention -- such as passing legislation
criminalizing foreign bribery).

INVITING RUSSIA?


14. (SBU) Nevertheless, some OECD officials have told us that
inviting Russia to begin the process of OECD accession now would be
a win-win proposition: it would bolster reform and reformers in
Russia, while enhancing the influence of the OECD and its
free-market philosophy in the global economy. In their view, such
an invitation would not bestow a stamp of approval on Russia's
current direction or policies, since, as with Russia's path of
accession to the WTO, it would only be the beginning of a long
process whose timing and final outcome remained uncertain, but
depended on genuine reform progress.

COMMENT


15. (SBU) The ongoing cooperation between Russia and the OECD is
extensive, and -- at least as seen from Paris -- appears to involve
key reform-minded officials in Russia, such as Finance Minister
Kudrin and Minister of Economic Development Gref. At the same time,
the OECD is not naove about the direction Russia has taken in recent
years, as the government's economic and political controls have
tightened. Following recent governance reforms, the OECD is now
moving to enlarge both its membership and its engagement with
non-member economies, as a means of enhancing the OECD's own
relevance in the global economy. In this context, we believe the
case for an invitation to Russia to begin -- but only to begin --
the process of accession merits close consideration. MORELLA