RUSSIA: AMBASSADOR'S APRIL 26 MEETING WITH AUDIT

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 001960 SIPDIS SIPDIS STATE FOR EUR/RUS FOR WARLICK, HOLMAN, AND GUHA STATE FOR EB/ESC/IEC GALLOGLY AND GARVERICK NSC FOR KLECHESKI AND MCKIBBEN TREASURY FOR BAKER DOC FOR 4231/IEP/EUR/JBROUGHER DOE FOR HARBERT/EKIMOFF/PISCITELLI E.O. 12958: DECL: 04/27/2017 TAGS: ECON EPET ETRD PGOV PINR PREL RS SUBJECT: RUSSIA: AMBASSADOR'S APRIL 26 MEETING WITH AUDIT CHAMBER CHAIRMAN STEPASHIN Classified By: Amb. William J. Burns. Reasons: 1.4 b/d ¶1. SUMMARY (C) In an April 26 meeting with the Ambassador, Audit Chamber Chairman Stepashin remarked that the presence of former Presidents Bush and Clinton at the Yeltsin funeral will help improve U.S.-Russian relations. He also said that problems with Iranian payments for Bushehr continue to hold back the project, called for using the stabilization fund for development, and announced plans to audit Central Bank operations. The Ambassador also passed along condolences for President Yeltsin's death. END SUMMARY . U.S. AND RUSSIA -------------- . ¶2. (C) Commenting on U.S.-Russia relations, Stepashin acknowledged that the relationship is presently going through a tough patch and stressed that the underlying reasons might not be fully appreciated in Washington. The psychological aspect is an important component of our relationship. He said the U.S. gesture of sending two former presidents to Boris Yeltsin's funeral and television images of their genuine sympathy for Yeltsin's family did more to improve U.S.-Russian relations than recent high-level meetings and negotiations. . ¶3. (SBU) Another factor at play is Russia's complex relationship with its post-Soviet neighbors. Stepashin used the analogy of old neighbors living under the same roof. Although, they were still touchy about past wrongs, this is only temporary and they will learn to live together. Only time can help them forgive each other. Bringing up current disputes with Estonia and the soldier's monument and Poland over meat imports and prosecution of former leader General Wojciech Jaruzelski, he claimed these were more complicating factors than U.S. missiles and radars in the Czech Republic and Poland. He said, as a former military man, he knew that these installations posed no danger. He cited the example of Kosovo and Yugoslavia when he was Prime Minister as a model to work out of the current impasse over the U.S. missile defense issue in Eastern Europe. Stepashin also suggested increasing ties between the Duma and Congress as one way to improve the relationship. . IRAN AND BUSHEHR -------------- . ¶4. (C) Stepashin said that Rosatom Director Kiriyenko had requested his assistance on the Bushehr question. (Note: According to the Audit Chamber's website, Stepashin sent a letter in March to his Iranian counterpart, Mohammed Reza Rakhimi, to look into financing problems for the Bushehr nuclear power station. Atomstroyexport has been constructing the power plant, but work stalled in January because Iran stopped making payments on the project. End note.) He said payment problems at Bushehr continue to hold back the project and also summarized Russia's position on Iran's nuclear program. He said that our positions are similar: Russia also does not want Iran to develop nuclear weapons or allow proliferation. However, he said it is important to avoid a military solution. As an ex-military officer, he was certain that the problem could not be solved by force. Iran sits in a strategic region for Russia, close to its borders and next to Azerbaijian. Whereas Russia's influence was limited because the current Iranian leadership was more difficult to deal with than the previous one, Russia still had more room to maneuver than the U.S. . STABILIZATION FUND AND THE ECONOMY -------------- . ¶5. (SBU) In response to the Ambassador's question about the economy, Stepashin gave a broad and detailed opinion on Russia's current economic course. He said that the Norwegian model of development no longer applied. (Comment: He was probably referring to the Norwegian example of setting up a rainy day fund to soak up excess revenues from oil exports. End comment.) The GOR has been worried about a repeat of the 1998 ruble crisis for too long. As a result, there have been MOSCOW 00001960 002 OF 003 too many missed opportunities in the past few years. He said that he had recently met with Economic Development and Trade (MEDT) Minister Gref, who shared these views. He predicted the Stabilization Fund would be split up into a Reserve Fund and a Fund for Future Generations. He also took pride in the success of the fund to date and took credit for the idea of establishing the fund three years ago. ¶6. (U) The new three-year budget would lay the foundation for Russia's future development and address three primary goals: increase living standards, revive the real economy, and define the course of development. He said that the new budget gave the government more flexibility and will act as a catalyst for domestic investment. He noted that the new budget was also "more closed, but this is our problem." (Note: He is probably referring to the lack of public oversight in implementing the federal budget. Recent press articles have highlighted the Audit Chamber's efforts to strengthen its authority as the agency with primary responsibility for increasing the effectiveness of public expenditures. End note.) He said that there was no problem with foreign investment and claimed that $200 billion came into the country last year. . ¶7. (SBU) On monetary policy, he expected the inflation rate to be around 6-8 percent this year. He identified the high refinancing rate of the Central Bank as a cause of low domestic investment in the country. Stepashin stated as a matter of fact that the Audit Chamber would be looking into Central Bank operations. (Note: On April 20, the Duma gave the Audit Chamber the go-ahead to audit the Central Bank. End note.) The strong ruble on the back of high energy and commodity prices has led to higher imports. He is concerned that imports could replace domestic production. . ¶8. (SBU) He listed two main challenges facing economic development: the lack of management experience in the government at the mid- and higher-levels and income disparity. As an example, he said this year the government managed to spend only $70 billion out of $230 billion designated for development projects. Administrative reform and Putin's repeated urging have not been able to increase the effectiveness of the bureaucracy. He identified the government tendering system as one area that needed attention. The growing income disparity between the rich and the poor is also becoming a problem. He cited the recent election in Krasnoyarsk, where 22 percent of the population voted for the communists, as a signal that the government needs to address this issue. . AUDIT CHAMBER/GAO COOPERATION -------------- . ¶9. (U) Stepashin also described the Audit Chamber's international activities and domestic priorities. He discussed his recent trip to the UN's INTOSAI (International Organization of Supreme Audit Institutions) in Vienna where corruption was a main topic of discussion and acknowledged the problem in Russia. He stressed that he has a very good relationship with GAO Comptroller General David Walker and was looking forward to signing an MOU between the two agencies in November to move cooperation onto a practical footing. On the homefront, he told the Ambassador that the Audit Chamber recently held a joint collegium with the General Procuracy and that the two agencies were cooperating in two main areas: land ownership/distribution in the regions and IPR protection. He commented that he hoped to learn from U.S. experience in protecting intellectual property. . COMMENT -------------- . ¶10. (C) Chairman Stepashin was joined by External Relations Director Nikolay Paruzin, Auditor Viktor Kosourov, and MFA North American Desk Head Nikolay Vladimir. Stepashin spoke easily and knowledgeably about a range of topics outside his immediate brief. This is no doubt a result of his broad experience in government having served at one time or another as Justice Minister, Internal Affairs Minister, Federal MOSCOW 00001960 003 OF 003 Security Services Head, and Prime Minister. While exiting, he joked with MFA's Vladimir by asking whether he got everything right. At the risk of fueling the presidential succession rumor mill, an advisor to MEDT Deputy Minister Belousov told econoffs this week that Stepashin may be a dark horse candidate for the 2008 presidential elections. End comment. BURNS