PUTIN TAKES ON THE FINANCIAL CRISIS

C O N F I D E N T I A L MOSCOW 003376 SIPDIS STATE FOR EUR/RUS, EEB/IFD TREASURY FOR TORGERSON DOC FOR 4231/MAC/EUR/JBROUGHER NSC FOR ELLISON E.O. 12958: DECL: 11/20/2018 TAGS: EFIN ECON RS SUBJECT: PUTIN TAKES ON THE FINANCIAL CRISIS REF: MOSCOW 3366 Classified By: Ambassador John R. Beyrle, Reasons 1.4 (b/d). -------------- Summary -------------- ¶1. (C) Prime Minister Putin's speech to the United Russia Congress on November 20 was arguably the GOR's most forthcoming public statement to date about the effects of the financial crisis in Russia. Although he reiterated that the cause of the current financial turmoil was the U.S. mortgage market, he acknowledged that Russia needed to make changes to withstand the lingering effects of the crisis. Putin declared that the crisis would not prevent the GOR from working to achieve the country's long-term economic development goals. He also outlined a $20 billion stimulus package to support economic activity during the expected slowdown. Our contacts said Putin deserves credit for finally acknowledging the extent of the crisis, though there is skepticism about the way forward he laid out. End Summary. -------------- Putin Acknowledges Crisis; Outlines Stimulus -------------- ¶2. (C) In his most forthcoming public comments to date on the crisis, Putin told the United Russia Party Congress on November 20 the unfolding global crisis would test the stability of each country. He said what had started as a financial crisis was becoming an economic crisis, and was comparable to a "natural disaster." Russia needed to take action to weather the storm. He cited the turmoil stemming from the U.S. mortgage bubble as the proximate cause of the crisis but focused on Russia and the resources the GOR would bring to bear, without dwelling on U.S. culpability or continuing to maintain the government claims that Russia would be relatively unaffected. ¶3. (C) Putin subsequently announced a fiscal stimulus package, which the Finance Ministry has estimated to be worth RUR 580 billion (approximately $20 billion). The bulk of the stimulus, RUR 400 billion ($14.6 billion),would come from reducing profit taxes from 24 percent to 20 percent. Under this amendment to the tax code, regional governments would have the latitude to cut profit taxes another 4 percent. Putin also called for changes in the accounting rules for depreciation to take effect on January 1, 2009. The proposal to allow for accelerated depreciation, from 10 percent of the underlying asset to 30 percent, would, according to the Finance Ministry, save companies an additional RUR 100 billion ($3.6 billion). Individual taxpayers would benefit from the doubling of the housing deduction that Putin announced. The provision, which would apply retroactively to January 1, 2008, could produce RUR 260,000 ($9,500) in savings per household and as much as RUR 50 billion ($1.8 billion) nationwide. Putin also pledged an increase in unemployment benefits, from monthly payments of RUR 1,500 ($55) to RUR 4,900 ($178),which the Finance Ministry forecast would inject an additional RUR 30 billion ($1.1 billion) into the economy. ¶4. (SBU) Finally, Putin also announced that the defense industry would receive RUR 50 billion ($1.8 billion) and that the GOR would purchase RUR 83 billion ($3 billion) in apartments for veterans and citizens living in severely damaged housing. The initiatives Putin mentioned did not form an exhaustive list. Many of the proposals had previously been included in a list of 55 economic rescue measures the GOR approved earlier this month. Putin's speech was primarily an introduction to the steps the GOR planned to take in support of its broader pledge to support the financial, agricultural, automotive, aviation, defense, housing, and small business sectors. ¶5. (C) Putin couched the GOR's readiness to support the economy in terms of domestic weaknesses that had exacerbated the effects of the crisis in Russia. He drew attention to the need for greater competitiveness, particularly in machine building, the natural resources sector, transportation and banking. He said low productivity and lags in innovative forms of production had also hindered growth and would continue to do so as the crisis unfolded. Consequently, the GOR would not discard the plan to achieve these priority objectives, which were also addressed in the stimulus package. He added that the country's sound policies had produced significant international reserves, which had allowed the GOR to address the crisis. Putin cautioned the Congress, however, that using international reserves would not eliminate all problems. The time had come to direct more resources toward the real economy and toward longer-term reforms. -------------- -------------- High Marks for Facing the Problem; but Will it Work? -------------- -------------- ¶6. (C) Citibank Russia Chief Economist Elina Ribakova told us Putin and the GOR deserved high marks for finally discussing, even in general terms, the magnitude of the crisis. She also praised the GOR's efforts to date, including support for the banking sector, providing companies with assistance in repaying foreign loans, and maintaining confidence in the ruble. Ribakova said she expected Putin's speech would limit further government efforts to deflect criticism by blaming the U.S. for the crisis. Putin had effectively said the country had work to do and had to take charge of its own fate. Returning to the issue of U.S. responsibility, according to Ribakova, would now be backward looking. ¶7. (C) Alfa Bank Chief Strategist Ron Smith told us he had doubts about the efficacy of Putin's proposed stimulus package to support the economy. He said the GOR had a dual motivation for reducing taxes in the current environment. Announcing tax cuts at this stage of the crisis could help stimulate the economy in the short run. Putin, however, was well aware that tax cuts alone held little meaning if the economy as a whole was slowing anyway, especially cuts on profits that might not materialize. Smith posited that Putin's other motivation was hortatory, to encourage the country's firms to work more productively, use energy more efficiently, and produce goods or provided services in a more innovative way that would help Russia come out of the downturn in better shape. -------------- Comment -------------- ¶8. (C) Smith's concerns about the efficacy of the stimulus package announced by Putin are widely shared among our contacts. However, and we would argue more importantly, so is Ribakova's praise for his public acknowledgment of the depth of the crisis to come. End Comment. BEYRLE