TFGG01: PRESIDENTIAL ASSISTANT SIGNALS NEW,

C O N F I D E N T I A L MOSCOW 002410

SIPDIS

STATE FOR EUR/RUS; NSC FOR MWARLICK

E.O. 12958: DECL: 08/14/2018
TAGS: ECON EINV ETRD PREL PGOV RS
SUBJECT: TFGG01: PRESIDENTIAL ASSISTANT SIGNALS NEW,
NEGATIVE TACK ON WTO ACCESSION

Classified By: CDA Eric S. Rubin for Reasons 1.5 (b) and (d).

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Summary
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1. (C) In an August 13 meeting with the Charge, Presidential
Assistant Arkadiy Dvorkovich signaled that the GOR
anticipated being denied WTO accession this year and was
looking to cast blame on the U.S. and others for politicizing
the process. He warned that Russia would take steps to
protect domestic industries if accession failed and would
question the institution's legitimacy, especially in the wake
of the Doha round failure. At the same time, Dvorkovich
acknowledged that a modern, competitive economy -- Russia's
goal -- needed to be an open economy. End Summary.

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WTO: Blaming Others
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2. (C) Dvorkovich agreed that economic ties between the U.S.
and Russia had been improving but noted that their potential
exceeded their reality. WTO accession for Russia would have
been a step toward realizing that potential. Russia had
hoped for WTO accession this year. However, Georgia had
already been blocking formal negotiations and the prospects
for accession seemed increasingly remote. In addition, other
issues were being raised that were "political" in nature and
that would seem to indicate a conscious decision on the part
of some countries to block accession. International
integration, including WTO accession, was still important to
Russia, but not at any price.


3. (C) In response to a question about how to preserve the
gains and momentum of this year, Dvorkovich responded that
Russia was not prepared to pretend that "everything was
fine." If it failed to accede this year, Russia would almost
certainly take unilateral steps to protect its domestic
industries. Moreover, the prospects for eventual accession
would dim significantly. There were forces within Russia
opposed to WTO accession. These opponents would feel
vindicated by failure and would oppose future negotiations.
Asking rhetorically who should want Russia's WTO accession
more, Dvorkovich implied that it should be the international
community. He said Russia,s failure to accede, coming on
the heels of the Doha round's failure, would undermine the
legitimacy of the WTO.

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Modernization Still a Priority
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4. (C) Dvorkovich did acknowledge, however, that Russia
needed to open its economy in order to modernize it and make
it more competitive. The economy was on a good trajectory,
growing fast and accumulating potential for future growth.
However, modernization was critical to the country's future
and there was much still to be done. With inflation for
instance, the GOR's answer was to stimulate a supply response
to the increased domestic demand driving prices up.
Dvorkovich admitted that it would take 3-5 years to address
the infrastructure bottlenecks preventing that supply
response but said that in the interval the government would
lower inflation by restricting the money supply, through
aggressive efforts to break up "monopolistic" pricing blocks
(i.e. Mechel),and by limiting "imported" inflation.


6. (C) Dvorkovich said the GOR was also moving to modernize
the economy by removing bureaucratic impediments.
Anti-corruption legislation would be passed this fall, which
would reduce costs, especially for small and medium size
enterprises. SMEs were roughly 20 percent of the economy,
which was far below Western levels. Anti-corruption efforts
would stimulate the sector. The CDA noted past U.S.
experience in this field and offered assistance. Dvorkovich
said the anti-corruption legislation, which was due August
25, was being drafted by the Ministry of Economic Development
(MED) and the Anti-Monopoly Service and recommended working
with those institutions.


7. (C) Dvorkovich said that a third area where the government
was working to modernize the economy and stimulate growth was
tax policy. Tax revenue was rising faster than incomes, a
sign that tax compliance was increasing and the informal
economy shrinking. The GOR needed to reduce the tax burden,
especially on businesses to encourage faster growth. VAT
rates, in particular, were too high. A reduction would

return profit margins to were they had been a year ago,
before tax compliance had begun to improve.

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Comment
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8. (C) Dvorkovich was clearly implying that U.S-Russian
negotiations over the commercial behavior of state-owned
enterprises fall into the category of "political" objections
to WTO membership. Although the GOR's negotiators have been
appreciative of U.S. support and far more critical of the EU,
we would guess that the GOR will spin this differently in
public, fingering us as the main reason Russia is denied
membership. We will look at this issue more closely in a
septel, but Dvorkovich is probably right that it will be a
long while before Russian accession is this close again.
RUBIN