RUSSIA: AMBASSADOR'S APRIL 27 MEETING WITH DEPUTY

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 001981

SIPDIS

SIPDIS

STATE FOR EUR/RUS
STATE FOR EB/IFD
NSC FOR KLECHESKI AND MCKIBBEN
TREASURY FOR BAKER
USDOC FOR 4231/IEP/EUR/JBROUGHER

E.O. 12958: DECL: 04/30/2017
TAGS: ECON ETRD EINV PGOV PREL RS
SUBJECT: RUSSIA: AMBASSADOR'S APRIL 27 MEETING WITH DEPUTY
PRIME MINISTER ZHUKOV

REF: A. MOSCOW 1354


B. STATE 51895

Classified By: Ambassador William J. Burns, Reasons 1.4 (b/d).

Summary
--------------


1. (C) In an April 27 meeting with the Ambassador, Deputy
Prime Minister Aleksandr Zhukov emphasized the GOR's strong
interest in WTO accession, mentioning he hoped to have an
opportunity to discuss the issue with USG officials
participating in a May 21 conference on corporate governance
in New York. He said the GOR is also ready to begin taking
steps toward OECD membership. He outlined the transformation
of the Stabilization Fund that President Putin had described
a day earlier in his national address. Zhukov downplayed the
need for a financial markets mega-regulator, provided a
bullish outlook on the growth of non-oil, non-gas sectors,
and expressed strong hope that senior-level USG officials
would participate in the St. Petersburg Economic Forum in
June. End Summary.

WTO Accession
--------------


2. (C) Deputy Prime Minister Aleksandr Zhukov told the
Ambassador he had agreed to participate in the U.S.-Russia
Roundtable on corporate governance and cross-border
investment on May 21 in New York. Zhukov said he hoped the
conference, sponsored by the New York Stock Exchange and
Russia's Council for Corporate Governance, would provide an
opportunity to meet informally with USG officials to discuss
issues related to Russia's WTO accession. He said meetings
on the margins of the May 21 conference could provide some
much-needed perspective as Russia works toward this
objective. Like other GOR officials (Reftel A),he
acknowledged in general terms the disagreements impeding the
conclusion of the multilateral process, but he added that the
problems were not "fundamental" and could be resolved "rather
quickly." He said WTO membership remained a priority and
that the GOR wanted to finalize the process before
parliamentary elections in December so that Russia could
announce its membership on January 1, 2008.

Upcoming OECD Vote
--------------


3. (C) Zhukov described the GOR's position supporting
Russia's membership in the OECD. He said Russia deserved
positive consideration during the May 15-16 ministerial
meeting, and that a vote in Russia's favor would signify
support for the accession process to begin. He suggested
that, if the OECD approves the launching of talks, the May 21
corporate governance conference would also allow for an
informal dialogue with USG officials to begin Russia's OECD
accession process.

Too Early for Financial Mega-Regulator
--------------


4. (C) Responding to the Ambassador's question about a
unified financial markets regulator, which has been the topic
of much press speculation, Zhukov said that Russia may need
such an institution in the future but that it had more
pressing economic changes to pursue. He acknowledged that
the debate had resurfaced as a result of disappointment in
some circles with the Central Bank. Zhukov praised the
Central Bank's reform-minded leadership, emphasizing the
benefits that the deposit insurance program had rendered in
terms of cleaning up the sector. He said that removing the
bank supervision function from the Central Bank would be
disruptive with few benefits.

Budget Changes
--------------


5. (SBU) Zhukov highlighted some of the changes in budget
programs that President Putin had described a day earlier in
his national address. One of the most significant changes is

MOSCOW 00001981 002 OF 002


the transformation of the current Stabilization Fund into the
Reserve Fund and the National Well-Being Fund. Zhukov said
that as the GOR reduces the budget's dependence on oil and
gas revenues, transfers from the Reserve Fund to cover budget
shortfalls in the early stages will probably be the same
magnitude as budget surpluses in recent years. In 2008,
Zhukov said Reserve Fund transfers to the budget would
probably equal 6.5 percent of GDP, declining to 3.7 percent
of GDP soon thereafter.


6. (SBU) The National Well-Being Fund will consist of two
components. The first will support the GOR's pension reform
efforts by encouraging investment. Although Zhukov noted the
rules were still being finalized, the plan calls for the GOR
to match workers' contribution to private sector account,
ruble for ruble. The second component will support
development objectives. The fund will supply the seed
capital for the government's Nanotechnology Corporation, the
Russian Development Bank, and the Venture Fund.


7. (SBU) Zhukov observed that the dynamism among the sources
of budget revenue have been diversifying away from oil and
gas extraction and export taxes. He said that in 1Q07, tax
revenue from oil and gas extraction grew only 4 percent,
compared to 14 percent for manufacturing. Profit and
personal income tax revenues grew more than 12 percent and
revenue from import tariffs is expected to double in the next
three years. Zhukov noted that the composition of revenue
from import tariffs was moving away from retail and consumer
goods toward capital goods.

St. Petersburg Economic Forum
--------------


8. (C) After providing a brief overview of Russia's recent
economic achievements and efforts to improve its image as a
destination for foreign direct investment, Zhukov made a
strong, special request that senior-level USG officials
attend the St. Petersburg Economic Forum in June. He
stressed that this year's event would have a higher profile
than in recent years. The Ambassador pledged to revisit the
issue with Washington.

Comment
--------------


9. (C) Zhukov exhibited his characteristic optimism as he
talked about economic diversification and Russia's WTO
accession timetable. He was especially intent upon
emphasizing Russian interest in high-level USG participation
in the St. Petersburg Economic Forum. End Comment.
BURNS