UNION OF INDUSTRIES SHOKHIN PUSHES FOR INCREASED

C O N F I D E N T I A L MOSCOW 002864

SIPDIS

STATE FOR EUR/RUS; NSC FOR JELLISON

E.O. 12958: DECL: 09/23/2018
TAGS: ECON EINV ETRD PREL PGOV RS
SUBJECT: UNION OF INDUSTRIES SHOKHIN PUSHES FOR INCREASED
BUSINESS TIES WITH THE U.S.; DEFENDS PAUSE IN WTO ACCESSION
PROCESS

Classified By: Ambassador John R. Beyrle for Reasons 1.5 (b) and (d)

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SUMMARY
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1. (C) President of the Russian Union of Industrialists and
Entrepreneurs (RSPP) Alexander Shokhin told the Ambassador
that it was important to expand U.S.-Russia business
dialogues. On WTO, he said he and many of his counterparts
in RSPP supported accession, but added that a one or two year
"pause" in the accession process would help some domestic
industries, including agriculture, enhance their
international competitiveness. Shokhin expressed qualified
support for the government's efforts to address Russia's
financial crisis but said despite intervention, there was
likely to be a shake-out in the banking sector with some
second and third tier banks folding. Shokhin said the RSPP
strongly favors a reduction in VAT and plans to lobby the
Duma and wage a media campaign to this end. He claimed that
the Russian leadership realizes the need to restore investor
confidence, weakened by the Georgia and the financial crisis,
and was confident that capital would return to Russia when
the international situation stabilizes. End Summary.

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Rekindling the U.S.-Russia Business Dialogue
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2. (C) RSPP President Alexander Shokhin told the Ambassador
that the recent Sochi Investment Forum was a success in terms
of high level foreign and Russian business participation and
the levels of substantive business deals concluded on the
margins. He noted in particular that there were no "black
lists" barring certain Russian companies from participation;
e.g.; President Medvedev had a cordial meeting with
representatives of the embattled coal and steel producer
Mechel.


3. (C) Stressing that interaction and "mutual dependencies"
created in the global business community help reduce
international political tensions, Shokhin expressed
satisfaction with the results of the RSPP and AmCham
co-sponsored roundtable at the Sochi Forum. He added that he
would work to "reanimate" the business dialogue begun with
U.S. Chamber of Commerce President Tom Donahue at the June
2008 Saint Petersburg Economic Forum, and was giving thought
to an intensive U.S.-Russia energy forum, replete with
strategic projects and intergovernmental talks on resolving
customs and other technical problems.


4. (C) Shokhin said the intergovernmental commission on
strategic industries, chaired by PM Putin, would add
transparency to the Strategic Resources Law and help resolve
legal and administrative disputes involving foreign companies
in the strategic sectors. In particular, the commission
would likely give its green light to Conoco-Phillips'
application to aquire shares in Lukoil, now that the
Strategic Resources law has been passed. This was, in his
view, a sign that the Russian authorities are trying to reach
out to foreign business community and accommodate, where
possible, major foreign investors.

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WTO Membership
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5. (C) Shokhin backtracked somewhat on his recent, much
publicized observation that Russia could use a pause in the
WTO accession process to protect sensitive industries. He
told the Ambassador that he was among the "50 percent" of
RSPP membership (including Severstal's Mordashov) advocating
Russian accession to the WTO. WTO membership would
ultimately benefit Russian producers and consumers and
Russia's being "inside the tent" would give it an advantage
in steel dumping disputes, especially in a period of falling
metals prices.


6. (C) Shokhin explained, however, that the "inevitable
delay" of one or two years in Russia's accession might be
advantageous for some domestic industries that needed
protection from foreign competition. He listed manufacturers
of automobiles and automobile parts as among those domestic
industries needing a "breathing spell" to get up to
international standards and assure their competitiveness
before entering the WTO. He also applied the infant industry


argument to agriculture, indirectly justifying Russia's
withdrawal of some commitments in that sector.


7. (C) Shokhin said the U.S. should spare no effort in
coaxing the Russians to move ahead with the accession
process, if for no other reason than to give U.S. companies
better access to the Russian market. He regretted that the
dialogue with the EU over a "WTO Plus agreement" was on hold
owing to the Georgia conflict.

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Financial Situation
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8. (C) Shokhin said that the RSPP supported the government's
measures to energize the stock markets, although he and other
RSPP members were uneasy about bolstering the bourse and
financial markets through direct injections of budget funds.
He cautioned against excessive interference with the market
mechanisms, noting half in jest that the $700 billion U.S.
taxpayers' bailout of Wall Street - and the virtual
"nationalization" of AIG - smacked of Soviet-style socialism.
The Central Bank's lowering the reserve requirements had
been a better approach; it had successfully injected
liquidity into the financial system.


9. (C) Shokhin said Russia's largest banks - Sberbank, VTB,
and Gazprombank - had been the beneficiaries of the
government's 59 billion USD loan to support the country's
financial system, but were reluctant to lend to second and
third tier banks with toxic loan portfolios. Many of the
banks in the latter category did not follow internationally
accepted accounting practices, and if they did not fold
first, they would be unlikely be able to pay back the loans.


10. (C) Shokhin said that on the margins of the Sochi
Investment Forum, he and other captains of industry
(Vekselberg, Troika Dialog President Vardanyan, and Lukoil's
Alekperov) met with Medvedev and suggested the formation of a
"rapid reaction financial task force", comprised of
government officials and businessmen, that would make
recommendations on coping with the crisis. He said Medvedev
was receptive to the idea. Shokhin envisioned a task force
that actually had teeth - not unlike the former Experts'
Committee on Securities, in which financial experts and
business representatives had direct influence on regulatory
legislation.


11. (C) Shokhin remarked that he meets with both Medvedev and
Putin fairly regularly - sometimes wearing his hat as
Chairman of the Russian Employers' Association and sometimes
in his capacity as management's voice on the Tripartite
Commission governing labor relations. He added that neither
of the tandem has been sympathetic with RSPP's persistent
lobbying for a lowering of the VAT tax. The RSPP is
nonetheless going to take the VAT issue to the public,
mobilizing press resources as its disposal and pressuring
Duma deputies with ties to the RSPP.

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Investor Confidence
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12. (C) Shokhin took pains to impress upon the Ambassador
that Russia is not seeking to isolate itself internationally
and that the Sochi Forum was proof that the government is
trying to win back investor confidence. He attributed
capital outflows to reactions by "speculative investors" not
only to the Georgia conflict, but to what he described as
"advisories" from the USG discouraging investment in Russia.
To wit: Western investment bankers were telling Finance
Minister Kudrin that the USG and the FED were pressuring U.S.
investors to pull out of Russian markets.


13. (C) The Ambassador responded that there were no such
directives from the USG, but explained that investor
confidence hinged in large part on commitments of the Russian
government to modernize and diversify its economy along the
lines of President Medvedev's February speech in Krasnoyarsk.
The ongoing U.S.-Russia business dialogue would also play an
important role in that regard.

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Comment
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14. (C) Shokhin categorizes himself as an economic liberal,
but is straddling the fence on WTO. On the one hand, he
associates himself with the liberal oligarch Mordashov as an
advocate of WTO accession, but he also sympathizes with the
"protectionists" who seek to delay accession on infant
industry grounds. The latter seem to have the upper hand. On
a positive note, his call for expanded business ties with the
U.S. may reflect the sentiments of a growing number inside
the RSPP that isolation is not in Russia's long term economic
interests. End Comment.
BEYRLE