RUSSIA'S BUSINESS COMMUNITY SEES MORE CONTINUATION

UNCLAS MOSCOW 005428

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EUR/RUS
TREASURY FOR TORGERSON
DOC FOR 4231/IEP/EUR/JBROUGHER
NSC FOR WARLICK AND MCKIBBEN

E.O. 12958: N/A
TAGS: ECON EFIN EIND RS
SUBJECT: RUSSIA'S BUSINESS COMMUNITY SEES MORE CONTINUATION
THAN CHANGE

REF: MOSCOW 5373


1. (U) This message is sensitive but unclassified, and not
for internet distribution.

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Summary
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2. (SBU) During the 4th Moscow Business Dialogue on November
12, government officials and business professionals forecast
a general continuation of the current mix of market and
statist economic policies after the end of Putin's term as
president in March 2008. For instance, when asked what the
country could expect after March 2008, Central Bank (CBR)
First Deputy Chairman Aleksey Ulyukaev dryly replied,
"April," indicating an expectation that GDP, investments, and
consumption would continue to rise. There was, however,
debate about the state,s role in the economy. Deputy
Regional Development Minister Maksim Bystrov said the state
would continue to be active in development projects. MDM
Bank Chairman Oleg Vyugin and Deutsche Bank Chief Economist
Yaroslav Lissovolik agreed that the economy would continue to
grow regardless but argued that it would do better if the
government interfered less and relied more on the markets.
Finally, Ulyukaev indicated that monetary policy was shifting
from supporting a strong ruble to fighting inflation through
interest rates. End Summary.

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No Major Changes Expected In Economic Course
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3. (SBU) Speakers representing Russian business and the GOR
at the 4th Moscow Business Dialogue said they did not expect
major changes in Russia's economic course after the
elections. President of the Russian Union of Industrialists
and Entrepreneurs Aleksandr Shokhin expressed the
conventional wisdom that "there is no doubt about United
Russia's victory in December." The success of the Putin
years had compelled most political parties "who hoped to
reach the 7 percent threshhold (required for party
representation in the Duma)" to embrace economic policy
platforms reflecting the current course.


4. (SBU) According to Shokhin, only the "most radicalized
parties such as the Communists" have excluded business
community considerations from their proposals and agendas.
The country's mid-term economic goals depended upon
implementing a long-term legislative strategy, which was
expected to be approved in February 2008. Putin's leadership
of United Russia would, therefore, put the Duma solidly
behind a continuation of policies that have prevailed during
the last eight years. Key initiatives on enhancing Russia's
business climate currently before the Duma included
amendments to tax and corporate governance legislation as
well as passage of the Strategic Sectors Law.


5. (SBU) Deputy Central Bank (CBR) Chairman Aleksey Ulyukaev
echoed Shokhin's sentiment that the post-election economy
would continue to grow with few disruptions and decreasing
imbalances. The Russian economy "broke the cycle of
political dependence years ago." In the intervening period,
Russia's fiscal prudence generated reserves to withstand
external shocks to the economy. Since 1999, exports were the
overwhelming driver of economic growth, "but domestic
consumption became more important" in the last two years.
Much of that consumption spurred increased foreign direct
investment (FDI) and rising initial public offering (IPO)
volumes placed domestically and abroad, which translated into
"high marks for Russia's economy from foreign businesses."
GOR officials put in place the necessary conditions to
encourage these results and would probably undertake only
minor changes to the current mix of economic policies.

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State's Role and Common Sense
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6. (SBU) Regional Development Deputy Minister Maksim Bystrov
outlined how the GOR had incorporated its intermediate-term
economic development strategy into the three-year budget.
The multi-year budget represented an unprecedented initiative
and major policy shift and built transparency into the GOR's

spending priorities, creating predictability in its spending
patterns. Consequently, this system of fiscal discipline
would allow the state to continue playing an active role as
an investor and co-investor in the country's economic growth.


7. (SBU) Bystrov said the state's role in the economy would
continue through programs such as the Federal Venture Fund,
Public-Private Partnerships (PPP),the Development Bank, the
Concessions Law, and the various Special Economic Zones.
Bystrov noted that programs such as Special Economic Zones
had been criticized both as excessive and insufficient, but
he argued the state had a role to spur greater
diversification and could be expected to do so.


8. (SBU) MDM Bank Chairman of the Board, and former Federal
Financial Markets Service Director, Oleg Vyugin sounded a
more cautionary note, particularly where the state's role was
concerned. He repeated a number of times that the GOR's role
in Russia's economic development was not necessarily a bad
thing, as long as it exercised "common sense." Some
investment decisions the GOR should have made, such as in
health care, education, and physical infrastructure, however,
had been postponed. Now the GOR was trying to make up for
lost time and favored leveraging public resources with
private sector technology and know-how.


9. (SBU) In particular, Vyugin noted that infrastructure
projects under the PPP framework have languished as a result
of administrative delays or started much more slowly than
anticipated. Russia would benefit from a more
straight-forward rubric of "sponsoring" the business
community's involvement in large-scale infrastructure and
development projects. The current pace of investments,
around 20 percent of GDP, was insufficient for Russia's needs
and might be hindered under the PPP system, according to
Vyugin.


10. (SBU) Despite having signed a "voluntary" price controls
agreement covering eight food categories (reftel),President
of food and beverage maker Wimm-Bill-Dann (WBD) David
Yakobashvili maintained a strongly bullish outlook on Russia.
He said he expected the Kremlin to continue to facilitate
the conditions in which Russian firms could thrive
domestically and to work toward commonly applied standards,
especially in the food sector, for Russian firms' success
abroad. Increasing global demand for food in the last three
years put a premium on efficiency for WBD and its suppliers.
The GOR's market-oriented treatment of the food sector
allowed WBD as well as its competitors to grow domestically
and abroad. Yakobashvili explained that his firm understood
the sensitivity of the food inflation issue and would
probably extend its commitment under the price controls
agreement into the spring 2008.

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Inflation and the WTO
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11. (SBU) Ulyukaev said that CBR monetary policy was
shifting. The practice of managing ruble appreciation had
outlived its usefulness as a means of controlling inflation
and tended now to draw in "hot money" from abroad that was
helping to further fuel inflation. Ulyukaev said he expected
the CBR to liberalize ruble exchange rate policies and move
toward using interest rates to control inflation. In
addition, he said that in the wake of subprime mortgage
concerns, Russia's banking sector had found new interest in
acquiring short-term funds from the CBR at market rates. He
said the CBR recognized that not all banks enjoyed equal
access to this liquidity and would work toward smoothing this
imbalance for large and small banks.


12. (SBU) In response to Ulyukaev, Vyugin said the economy
would benefit from less focus on managing inflation through
exchange rate levers. Sooner or later, ruble appreciation
would occur and reduce Russia's trade surplus. According to
Vyugin, a strong ruble would not necessarily hurt Russian
firms' competitiveness. Instead, the strong ruble would
allow Russian companies to upgrade their facilities and
modernize production through cheaper foreign technology
imports. Turning to the current GOR focus on rising food
prices, Vyugin said that rising food prices were a global
phenomenon and that there was little that could be done to
stem price growth.



13. (SBU) Deutsche Bank Chief Economist Yaroslav Lissovolik
said that Russia's private sector would benefit from more
market-oriented governance like Ulyukaev described. The
banking sector would experience growth if the Central Bank
was focused on supplying and absorbing liquidity through
interest rates levers. Russian firms would also benefit from
the competition that Russia's membership in the WTO would
provide. Lissovolik stressed that the Russian economy was at
such a stage that it needed the discipline, and would reap
development gains, that would come from membership. He added
that Russia's accession might reinvigorate the stalled Doha
round of negotiations and inject new thinking into the body.

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Comment
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14. (SBU) The speakers agreement that the current political
cycle would not lead to a major change in Russia's economic
policies comes as no surprise. However, what did come as a
surprise at an event like this was the degree of debate over
the state,s role in the economy. To the extent that
Vyugin's view is representative of the broader private
sector, it is clear that many are uncomfortable with the
state's role, as presently conceived, in promoting economic
development. If Russia is to successfully move to the next
level in its economic development, in which growth should be
less and less dependent on oil and gas exports, it will need
to redefine the balance between its penchant for statist
approaches in favor of the benefits of a market orientation.
End Comment.
BURNS