RUSSIA: REYMAN'S RIO-CENTER LOOKS FOR ALTERNATIVE

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 002527

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DOC FOR 4231/IEP/EUR/JBROUGHER

E.O. 12958: DECL: 05/30/2017
TAGS: ECON EINV EIND PGOV PREL RS
SUBJECT: RUSSIA: REYMAN'S RIO-CENTER LOOKS FOR ALTERNATIVE
ECONOMIC COURSE

Classified By: Econ M/C Pamela Quanrud. Reasons 1.4 (b/d).


1. (C) Summary. Six months before the Duma elections and
nine months before the Presidential contest, several economic
think-tankers are laying out strategies for the post-Putin
period. Most of these plans are descriptive, not
prescriptive: they are critical of the government's record on
modernizing and diversifying the economy, but lack specifics
on how to right the course. Surprisingly, most think-tankers
do not shy away from using the word liberal to describe their
orientation - though their liberalism is qualified as
"pragmatic," in contrast to the "ideological liberals" in the
government today and many actually envision an even stronger
role for the state in the economy. The think tanks hope to
mirror the experience of German Gref's Center for Strategic
Research (CSR) and shape economic policy in the next
presidential administration. End summary.
.

2. (SBU) We recently met with three of these informal policy
advisors, Leonid Grigoriev, President of the Institute of
Energy and Finance, Iosef Diskin, head of the Council of
National Strategy, and Ruslan Grinberg, head of the Russian
Academy of Science Institute of Economics. These three were
keynote presenters at a recent conference sponsored by the
Center for the Development of an Information Society, or the
RIO center, which has ties to Communications Minister Leonid
Reyman. Over the upcoming months, we will meet with other
leading economic think tanks to help identify the economic
policy direction of the next administration and possible
candidates for Ministers Gref and Kudrin's positions.
.
THE THINK TANKS
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3. (SBU) When Putin became Prime Minister in 1999, he
established the CSR, with German Gref as its head, to develop
an economic reform program and put the Russian economy onto a
market path. Over the past eight years, the Center has been
the center of economic legislation drafting or has
contributed to drafts of Putin's key reforms, including the
flat tax, land privatization, pension reform, health care,
benefits monetization, and the public private partnership
initiative. However, when the reform momentum slowed, the
CSR's role in economic policy-making also diminished.
.

4. (SBU) The first think tank in our study is the RIO center,
a think tank with ties to Communications Minister Leonid
Reyman and headed by Igor Yurgens, also the Vice President of
the Russian Union of Industrialists and Entrepreneurs and a
Vice President at Renaissance Capital. The center was
established in 2003 with Reyman as its head. According to
its website, it's mission is to promote the development of an
information society in Russia. However, the center's
activities have been broadened and last year, under Yurgen's
leadership, the center launched a program to map out a
modernization strategy for the country. On May 16, the RIO
center organized a conference on "Alternative Modernization
Strategies for the Russian Economy" and commissioned three
reports from Grigoriev, Diskin, and Grinberg. According to
the RIO center website and our contacts, the two
front-runners for the 2008 presidential elections, Dmitriy
Medvedev and Sergey Ivanov, were to attend the May 16
conference, but were no shows.
.

5. (SBU) Opening the conference, Yurgens characterized the
three reports as liberal (Grigoriev),moderate (Diskin) and
conservative (Grinberg). The conference was well attended by
well-known economic researchers, and present and former
government officials, including: Yevgeniy Yasin (the Higher
School of Economics and former Economics Minister),Yevgeniy
Gontmakher (former Deputy Social Development Minister),
Andrey Klepach (Ministry of Economic Development and Trade),
Elvira Nabiullina (head of Dep. Premier Medvedev's Expert
Council on Realization of National Priority Projects and
former head of CSR).
.
THREE ALTERNATIVE MODELS
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6. (C) Iosef Diskin heads the Council of National Strategy.

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This group gained notoriety during the Yukos Affair when they
published a report on the growing influence of oligarchs in
the economy that played out like a Kremlin manual to deal
with oligarchs with political aspirations. In his
presentation, which also mirrored his discussion with us,
Diskin lays out a modernization strategy that provides
political prerequisites rather than concrete policies for
economic development. He told us that his main criticism of
the current economic course was the disconnect between the
government's reforms and the population's real needs, and
cited the housing reform passed last year -- which did not
address, in his opinion, the acute lack of affordable housing
-- as an example. He advocated building a national coalition
-- including government, business, and society -- as the
first step to modernization. Diskin was also the least
concerned out of the three authors about the economy's
dependence on energy and even called for strengthening
Russia's position as an energy superpower. Diskin also
favored using the Stabilization Fund for investments into
energy infrastructure projects, such as oil and gas
pipelines, power stations, and electrical grids.
.

7. (SBU) Ruslan Grinberg also criticized current economic
policies as liberal dogmatism with Putin's economic ministers
too reliant on market mechanisms and low inflation, instead
of advancing a comprehensive state industrial policy, to
drive Russia's modernization forward. He said economic
policies from the 1990s to Putin's Administration have
resulted in the "primitivization" of the economy and
advocated a more interventionist state, employing
preferential taxes and import tariffs to protect and nurture
strategic industries. He saw Russia's comparative advantage
in the following sectors: ballistic/space, aviation, nuclear,
armaments, power machines, shipbuilding, transportation
machinery, nanotechnology, and bio- and genetic engineering.
The two priorities of building an innovation/hi-tech economy
and reviving the old industrial economy also needed to be
coordinated.
.

8. (SBU) Leonid Grigoriev presented a more balanced
assessment of current economic policies and credited the
macroeconomic stability of recent years and improvements in
the business climate to prudent economic policies. However,
he painted a dire picture for Russia's economic future if
these immediate challenges were not addressed: creating
sustainable sources of growth, increasing the value-added
component to production, stimulating innovation, leveling out
the regional disparities in development, and reducing the
energy-intensiveness of production. After laying out four
different scenarios for Russia's future development, using
his terms -- Energy Rents, Mobilization, Inertia, and
Modernization -- he concluded that the most difficult, but
promising course is the Modernization scenario. Under this
framework, the three main actors -- the State, civil society,
and business -- will compromise and exercise self-restraint
to balance their parochial interests and achieve
modernization of the country. Grigoriev was not optimistic
that this scenario will win out, and gave it only a five
percent chance. He viewed the Inertia scenario -- the
current course -- as the most likely in the next eight years.
.

9. (SBU) All three authors concluded that modernization
cannot occur without a broad base coalition. This reflects
the authors' main criticism of the current economic course:
the lack of an overall strategy and the growing alienation of
the population from government policies. All three pointed
to the perception of a growing income disparity between the
rich and the poor as a troubling development that required a
change in policies. Another common factor in all three
reports was their use of polling data to support their
arguments.
.
COMMENT
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10. (C) The three think-tankers were quite adamant in their
conversation with us that their policy prescriptions were
liberal in nature. This appears to reflect their conviction
that markets will have to play a role in Russia's
modernization. However, all three authors also advocate a

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larger role for the state. For Grigoriev, the role appears
limited to coordinating coalition building, whereas Grinberg
supports state policies that pick winners and losers. As
Troika Dialog chief economist Gavrilenkov puts it, the next
administration will have to exercise greater professionalism
and discipline, having less room to maneuver with declining
budget surpluses, growing energy constraints, and neglected
reforms in the social services sector. The next economic
team will face the unfinished business of the Putin years,
including, revamping the pension, health, housing, and
education system, with less resources to solve them. With
these challenges, it's not surprising that Grigoriev gives
the modernization scenario only an outside chance of success.
End comment.
BURNS