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).

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Summary
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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.

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Putin Acknowledges Crisis; Outlines Stimulus
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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.

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High Marks for Facing the Problem; but Will it Work?
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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.

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Comment
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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