C O N F I D E N T I A L MOSCOW 003347

SIPDIS

STATE FOR EUR/RUS, EEB/IFD
TREASURY FOR TORGERSON
DOC FOR 4231/MAC/EUR/JBROUGHER
NSC FOR ELLISON

E.O. 12958: DECL: 11/13/2018
TAGS: EFIN ECON RS
SUBJECT: GOR MONITORING OF BANKS, ANTI-CRISIS FUNDS

REF: MOSCOW 3322

Classified By: ECON MC Eric T. Schultz, Reasons 1.4 (b/d).

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Summary
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1. (C) During a November 11 meeting with leaders of the
Russian Chamber of Commerce and Industry (RCCI), President
Medvedev outlined a plan for Central Bank (CBR) officials to
ensure that banks receiving anti-crisis funds turn those
resources into loans for domestic firms. At the meeting,
RCCI President Yevgeniy Primakov expressed support for this
plan, demanding that banks extend credit as a means of
sustaining employment and current levels of industrial
production. In a November 12 meeting with us, Russian Union
of Industrialists and Entrepreneurs (RUIE) First Vice
President Aleksandr Murychev endorsed Medvedev's plan. He
said effective supervision of the use of the GOR's
anti-crisis resources was critical and praised official
efforts to mitigate the crisis, while expressing hope that
the GOR would soon expand support to include regional banks
and small businesses. Murychev also claimed that the
government's policy of accumulating reserves had been
vindicated and that the reserves would be sufficient to see
Russia through the downturn. End Summary.

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Medvedev: Russia Can "Demand" Bank Action
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2. (U) During a November 11 meeting with RCCI leaders, a
portion of which was televised and which Russian newspapers
covered extensively, President Medvedev announced that
Central Bank (CBR) "commissars" would monitor the
disbursement of budget- and reserves-sourced liquidity to the
country's largest banks. According to Medvedev, the program
is designed to remedy slow financial intermediation between
the GOR and firms in need of credit. Medvedev said CBR
officials would be responsible for ensuring that government
funds deposited with the banks would actually be transferred
to firms in the form of loans rather than used to shore up
recipient banks' balance sheets.


3. (U) In the same meeting, RCCI President Primakov publicly
and volubly expressed his support for the CBR monitoring

program. He explained that the banks receiving these public
funds had a "social obligation" to pass the resources along
in the form of credit financing. He said the GOR should
demand cooperation from recipient banks. Tight or closed
global credit markets meant the GOR's anti-crisis liquidity
was a lifeline for all Russian firms and, consequently, was
necessary to sustain current employment and production levels.

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Supervision: The Missing Link?
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4. (C) In a November 12 meeting with us, RUIE First
Executive Vice President Aleksandr Murychev also embraced the
CBR monitoring program. He told us the banks' management of
this liquidity would be key to the success of the GOR's
anti-crisis measures. He supported the GOR's plan for
Central Bank monitors to supervise the implementation of the
program. Earlier in the year, the large banks that had
received billions of rubles in short-term loans had absorbed
those resources with little impact on the banking sector or
the broader economy. Murychev said Central Bank monitors
would inject an element of accountability into the
anti-crisis program and would ensure the liquidity was used
effectively.

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GOR Should Support Regional Banks, SMEs
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5. (C) Murychev said staving off deepening uncertainty about
the banking sector's solvency was and would continue to be a
key challenge for the GOR. He expressed optimism that the
GOR would continue to demonstrate flexibility regarding
anti-crisis measures. In that regard, he said the GOR might
need to re-evaluate its approach to supporting the banking
sector as the effects of the crisis become more acute. For
example, most of the Russian banks that have experienced the
greatest difficulty have been relatively large,
internationally rated private banks headquartered in Moscow.
That large Moscow banks were safe banks was no longer
axiomatic, according to Murychev. He commended regional
banks for having stayed afloat on their own so far through
their prudent management of cash and clients. However, these
banks would inevitably face difficulties, and directing more
liquidity to them would become increasingly critical in the
coming weeks and months.


6. (C) Murychev said the RUIE supported a government boost
to aggregate demand. An increase in the volume of government
procurement contracts and subsidized interest rates would
help small businesses as well as sustain employment and
overall commercial activity across the country. As with
support to the banking sector, careful oversight would be
critical to the success of this proposal. Business
associations and officials needed to insist on a transparent
bidding process.

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Reserves and the Ruble
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7. (C) Murychev praised the GOR's financial stewardship
which had produced close to $600 billion in reserves in
recent years. The Finance Ministry's conservative fiscal
policy had been vindicated and had given Russia the resources
to withstand current conditions. Murychev acknowledged that
reserves had dropped sharply since mid-August but argued the
reserves had been earmarked responsibly and creatively to
address the domestic effects of the financial crisis. He
said that RUIE member firms, in a series of surveys on the
GOR's anti-crisis measures, strongly supported efforts to
ensure the country's banks had reliable access to liquidity
as the necessary first step in resolving the credit crunch.


8. (C) Murychev asserted that, although the financial crisis
had affected the U.S. for more than a year, it had affected
Russia for only three months. Capital might continue to flow
out of the country as investors and depositors worried about
the value of the ruble and the stability of the banking
sector. Foreign currency reserves, however, were sufficient
to mitigate the economic strain of falling commodity prices
and weakening demand. Referring to Medvedev's November 5
Presidential Address, he added that the goal of making the
ruble a reserve currency was a natural aspiration because of
what it represented: a strong economy and stable political
environment (reftel). Murychev conceded, however, that the
long-term program of reforming the Russian economy and
enhancing the status of the ruble would be a distant second
priority behind efforts to stabilize the economy for the next
18 months.

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Comment
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9. (C) We are skeptical that the GOR will succeed in getting
banks to expand lending by Central Bank oversight and fiat.
Moreover, this strikes us as further evidence of the GOR's
continuing faith in administrative controls to resolve
economic problems -- a bad predisposition given that the
crisis will deepen in coming months and the GOR will
inevitably flirt with capital and price controls among other
state-centric measures. End Comment.
BEYRLE