U/S JEFFERY'S JAN 30 MEETING WITH RUSSIA'S CENTRAL

C O N F I D E N T I A L MOSCOW 000327 SIPDIS SIPDIS STATE FOR EUR/RUS, EEB/IFD TREASURY FOR MEYER, TORGERSON NSC FOR WARLICK E.O. 12958: DECL: 02/08/2018 TAGS: EFIN ECON RS SUBJECT: U/S JEFFERY'S JAN 30 MEETING WITH RUSSIA'S CENTRAL BANK CHAIRMAN IGNATIYEV REF: MOSCOW 141 Classified By: Ambassador William J. Burns, Reasons 1.4 (b/d). Summary -------------- ¶1. (C) During a January 30 meeting with Under Secretary of State for Economic, Energy and Agricultural Affairs Reuben Jeffery, EEB Principal Deputy Assistant Secretary Elizabeth Dibble and the Ambassador, Central Bank of Russia (CBR) Chairman Sergey Ignatiyev provided a generally optimistic outlook on Russia's economy for the year but emphasized that controlling inflation would be among the GOR's top economic policy priorities. Ignatiev said Russia had demonstrated resilience in the aftermath of the "unpleasant" conditions related to subprime concerns. On Sovereign Wealth Fund (SWF),Ignatiev issued a caution. He conceded that establishing SWF-related investment guidelines was prudent policy but warned that the countries "overly concerned with transparency, risk not being recipients of SWF investments." End Summary. Strong Growth in '07, Caution for '08 -------------- ¶2. (C) On January 30, Central Bank Chairman Ignatiyev told U/S Jeffery that Russia had, again, achieved strong economic growth in 2007 but that one of the GOR's main goals for 2008 would be controlling inflation. Russia's real GDP growth was, according to Ignatiyev 7.6 percent or higher. (Official statistics released on January 31 reflected 8.1 percent real GDP growth for the year.) However, inflation had reached 11.9 percent, which Ignatiev characterized as a "temporary" condition that did not need to be addressed with "hasty" control measures. (This appeared to be a reference to the price controls program on "socially significant food items" Prime Minister Zubkov launched before the December 2007 Duma elections.) Ignatiyev said that an increase in world food prices and the strong growth in net capital inflows, estimated at USD 82 billion, were the main factors behind the jump in inflation. He anticipated that growth in food prices during 2008 would slow relative to 2007 and speculated that net capital inflows would only reach USD 40 billion. ¶3. (C) Ignatiyev noted that Russia's current account balance would continue to shrink as would the GOR's budget surplus. Both developments indicated Russia was approaching an important phase in its economic development as industry imported more capital goods to replace the outdated stock of Soviet technology and as the GOR moved toward a non-oil budget. Although these factors suggested a relative slowdown in the country's economic growth, he said uncertainty facing financial markets was more worrying. ¶4. (C) Ignatiyev said the "unpleasant" conditions brought on by concerns over the extent of the subprime situation served as a reinforcement of the lessons the financial crisis of 1998 had provided. Business operations had not been fundamentally affected but access to financing had became a growing preoccupation. Banks and larger corporations secured syndicated loans for some of their short-term needs but, in recent weeks, had begun expressing concerns about the way this would play out over the longer-term. The upward re-pricing of risk for emerging market countries and companies in subprime's aftermath threatened to increase costs for a wide swath of Russian companies and banks, both state-owned and private. Ignatiyev said the Central Bank would continue to develop tools by which it would make more credit available to smaller and non-state banks. Sovereign Wealth Management -------------- ¶5. (C) U/S Jeffery encouraged the Central Bank and the GOR to maintain active participation with the international financial community regarding investment and disclosure guidelines for Sovereign Wealth Funds (SWFs). Ignatiyev briefly outlined the rules covering asset management for the Reserve Fund (reftel),which along with the National Prosperity Fund, would comprise Russia's SWF. He said the GOR was still discussing options for managing managing SWF investments, for instance whether to adopt the Singapore model. ¶6. (C) Ignatiyev also emphasized the virtue of SWFs, highlighting that they could be a much-needed and long-term stabilizing force in financial markets. Working in conjunction with other countries to establish transparency standards and "to minimize the dangers" was sensible policy making, Ignatiyev said. However, he commented that some countries had given too much attention to the issue of transparency. "Countries that are overly concerned will not be recipients of SWF investments," Ignatiyev warned. He cautioned against having "reasonable discussions" devolve into "protectionism" and urged a balancing of the risks with the rewards. ¶7. (U) This message has been cleared by U/S Jeffery. BURNS