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