GREF CENTER'S VIEWS ON RUSSIA'S ECONOMIC DIRECTION

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 005784

SIPDIS

SIPDIS

DEPT FOR EUR/RUS KELLY, WATSON, PATTERSON
DEPT FOR EEB/ESC
DOE FOR HARBERT/EKIMOFF
DOC FOR 4231/IEP/EUR/JBROUGHER
NSC FOR WARLICK

E.O. 12958: DECL: 12/11/2017
TAGS: ECON EIND PREL RS
SUBJECT: GREF CENTER'S VIEWS ON RUSSIA'S ECONOMIC DIRECTION

REF: MOSCOW 2527

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

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Summary
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1. (C) In a December 6 meeting, Ksenia Yudaeva, Director of
Research at the Center for Strategic Research (CSR or the
Gref Center),the economic brain trust for the GOR's economic
reforms in the early years of President Putin's
administration, told econoff that while reform momentum has
slowed the Center remains influential. She said the Center's
current projects include preparing the Ministry of Economic
Development and Trade's (MEDT) long-term economic strategy
paper, preparing regional economic development strategies for
Minister of Regional Development Kozak, and conducting
research for Sberbank and the newly created Development Bank.
Yudaeva appeared resigned to the current GOR reliance on
state corporations as a model of economic policy and may be
pinning her hopes on CSR's contacts in the GOR to lobby
against the excesses of state intervention in the economy.
She said that inertia will most likely characterize GOR
economic policy for some time following the March 2008
presidential elections. End summary.

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Gref Center Stays Plugged In
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2. (SBU) Yudaeva said that when Putin became prime minister
in 1999, he established the CSR, with GQman Gref as its
head, to develop an economic reform program and put thQ
Russian economy onto a market path. (N.B. Gref went on to
head MEDT until the cabinet reshuffle in October and was
appointed the head of Sberbank in November.) 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. While reform momentum
slowed two years ago and the CSR's role in economic
policy-making diminished, Yudaeva said the center remains
influential. For instance, she noted that Elvira Nabiullina,
another former head of CSR, was appointed MEDT Minister in
September 2007.


3. (SBU) Yudaeva said CSR is currently working on a number of
projects for the MEDT, the Ministry of Regional Development,
Sberbank, and the Development Bank. In addition, she noted
that she and CSR president Mikhail Dmitriev sit on a number
of government commissions, such as commission on
administrative reform and corporate governance, to emphasize
the close working relationship between the GOR and CSR.


4. (SBU) According to Yudaeva, her staff is currently working
with the MEDT on the preparation of a new long-term economic
strategy paper. However, she said the paper would be more of
a comprehensive overview of economic trends instead of a new
strategy on economic development. The Center is also working
closely with newly-appointed Minister of Regional Development
Kozak. In April, while still Southern polpred, Kozak
approached her to work on an economic development strategy
for the Southern District. Since Kozak's new appointment,
the project has expanded to include drafting of an economic
strategic plan for all seven federal districts. She added
that the Ministry will not allocate a single kopeck for
development projects in any of the seven districts until each
district presents a strategic development plan.


5. (C) Yudaeva said CSR is also conducting research for
Sberbank, now that Gref has been appointed as its head, and
is working with the newly created Development Bank. Yudaeva
said that the deputy director of the Development Bank, Sergei
Vasiliev, is a close colleague.


6. (SBU) In response to a question about CSR's sister
organizations in the regions, Yudaeva said that the Moscow
CSR office has no relationship with these regional think
tanks that use the CSR moniker and that her office often

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competes with these other offices on various projects.

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Russia's Competitiveness and State Corporations
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7. (SBU) Yudaeva talked about the competitiveness research
project that CSR started at the beginning of 2006. Then-MEDT
Minister Gref hired Harvard academic Michael Porter to
conduct research on Russia's competitiveness vis-a-vis other
countries. On November 22, CSR conducted a seminar with
presentations prepared by Harvard University professors
Michael Porter and Christian Ketels. The report, which can
be found on CSR's website, presents an overview of Russia's
competitiveness vis-a-vis the rest of the world.


8. (SBU) In addition to high oil prices, the report
highlighted the ruble devaluation and unused production
capacity as factors behind much of the economic growth from
1998 to 2004. However, these factors had been exhausted by
2004 and Russia's competitiveness has started to decline.
The report noted the GOR's failure to take advantage of
Russia's macroeconomic stability to implement reforms, such
as overhauling the health care and educational systems, to
increase competitiveness and diversify the economy.


9. (C) Yudaeva commented that Porter's reports have generated
mixed reactions from the MEDT. For example, MEDT Director of
Forecasting Andrey Klepach, criticized the report for not
offering any new ideas. He also criticized the report's
reliance on international indices and rankings, which fail to
capture important nuances in the trends. MEDT Deputy
Minister Androsov, on the other hand, was quite pleased with
the report because the MEDT could use it to support its
position in internal GOR debates on economic policy.


10. (C) Yudaeva said that, in general, she agreed with the
conclusions in the report especially its criticism of the
state's growing presence in the economy. She admitted that
little could be done about this shift, in particular given
the many vested interests in the Kremlin surrounding the push
to create state corporations. For example, she said that
Chemezov's ambitions were the sole reason behind the recent
creation of Rostechnologiya, the defense sector holding
company that will absorb arms exporter Rosoboronexport and a
half a dozen other defense sector companies.


11. (SBU) Yudaeva said that another reason for the GOR's
preference in relying on state corporations to address
everything from shipbuilding, housing, and the nuclear
industry to preparing for the 2014 Winter Olympics in Sochi,
is its frustration that the privatization drive in the 1990's
has not revived Russia's manufacturing base. She said the
GOR wanted faster results and guarantees. She added that the
Russian mentality, shared by the population and government
officials alike, to trust authority figures over private
agents, also contributed to the shift in economic policy to
the state corporation model.

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Post Putin Economic Policy
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12. (C) Turning to economic policy after the March 2008
presidential elections, Yudaeva commented that economic
policy would most likely continue without significant change
with a new president. She said that only external factors
could lead to a significant change in economic policy. For
example, a large drop in energy prices or some other external
shock might lead to an economic policy course correction.


14. (C) Yudaeva appeared resigned to the fact that the GOR
has chosen the state corporation model to solve its immediate
economic problems. She said there were cycles in Russia's
economic policy history with periods of centralization and
decentralization following one another. The trend towards
centralization would eventually make way for more
liberalization. In a few years, for instance, she predicted
that the GOR would liberalize the gas sector with
semi-autonomous companies allowed to operate side by side
with Gazprom.

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15. (SBU) When asked whether any of the presidential hopefuls
are creating think tanks similar to Putin's creation of CSR
in 1999 when he became prime minister, Yudaeva commented that
the economic environment was completely different in 1999.
At the time, the country was in the midst of an economic
crisis and drastic measures were necessary, but now, there
was no urgency. She added that other economic think tanks
are positioning themselves as CSR's successors, but she
claimed they are not presenting any new ideas (reftel).
BURNS