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) -------------- SUMMARY -------------- ¶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. -------------- Rekindling the U.S.-Russia Business Dialogue -------------- ¶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. -------------- WTO Membership -------------- ¶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. -------------- Financial Situation -------------- ¶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. -------------- Investor Confidence -------------- ¶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. -------------- Comment -------------- ¶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