Identifier
Created
Classification
Origin
08MOSCOW3497
2008-12-04 10:38:00
CONFIDENTIAL
Embassy Moscow
Cable title:  

PUTIN CALLS FOR RUSSIAN INVESTOR CLASS

Tags:  EFIN ECON RS 
pdf how-to read a cable
VZCZCXYZ0001
PP RUEHWEB

DE RUEHMO #3497/01 3391038
ZNY CCCCC ZZH
P 041038Z DEC 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 0969
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
C O N F I D E N T I A L MOSCOW 003497 

SIPDIS

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

E.O. 12958: DECL: 12/03/2018
TAGS: EFIN ECON RS
SUBJECT: PUTIN CALLS FOR RUSSIAN INVESTOR CLASS

Classified By: Ambassador John Beyrle, Reasons 1.4 (b/d).

-------
Summary
-------

C O N F I D E N T I A L MOSCOW 003497

SIPDIS

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

E.O. 12958: DECL: 12/03/2018
TAGS: EFIN ECON RS
SUBJECT: PUTIN CALLS FOR RUSSIAN INVESTOR CLASS

Classified By: Ambassador John Beyrle, Reasons 1.4 (b/d).

--------------
Summary
--------------


1. (C) In a December 1 cabinet meeting, Prime Minister Putin
voiced frustration over the country's reliance on foreign
markets to fund domestic growth. He blamed foreign investors
for driving down the market value of Russian firms. While
Russia would not place restrictions on foreign capital, Putin
insisted that Russia develop home-grown securities investors
and stronger financial institutions. He also advocated a
far-reaching FDIC-like insurance system, which would
compensate investors who incurred losses. Putin's call for
an investment insurance program seems unworkable and would
likely carry an exorbitant price tag without being effective.
End Summary.

--------------
A Look Backward
--------------


2. (SBU) The December 1 presidium (core cabinet) meeting -
much of which was televised on the evening news - focused on
Russia's long-term financial market strategy. Prime Minister
Putin chaired the meeting during which he expressed his
dismay over the country's excessive dependence on foreign
capital. Before the onset of the crisis, Russian firms had
received the majority of their credit financing either
directly from foreign lenders or as a result of foreign
borrowing by Russian banks, Putin said. The same had been
true for equity financing. When foreign capital left the
country following the global liquidity squeeze, the GOR had
been compelled to step in and provide needed financial
resources.


3. (SBU) Putin deplored the steep fall in the value of
Russia's stock markets, which he claimed was a result of this
dependence on foreign capital. Without mentioning specifics,
Putin said decisions about which Russian securities to buy
and sell and at what price were being made outside the
Russian Federation. In some cases foreign investors had
driven the market capitalization of Russian firms far below
the value of the firms' underlying assets. Putin said the
GOR recognized that foreign capital had contributed to
Russia's recent growth and had no plans to place restrictions
on it. However, Russian equity values' being determined

abroad was "ugly" and "unfair" and needed to be prevented in
the future.

--------------
A Look Forward?
--------------


4. (SBU) Putin said the way to prevent this in the future
was to turn Russia into an international financial center.
This would result in a massive class of domestic investors
and create powerful financial institutions with global reach.
Among the steps Putin said the country needed to reach this
objective were an insider trading law, simplifications of the
tax and visa regimes for businesses, and a reduction in the
costs of raising domestic capital and attracting foreign
capital. He said the financial crisis represented an
opportunity to achieve this goal and called on the GOR to
submit draft legislation on these issues in the near future.


5. (SBU) Putin also called for the formation of a system
that would guarantee domestic and foreign investors against
losses in Russia's markets. The system would be similar to
the Deposit Insurance Agency for retail bank deposits. Putin
said this measure would help uphold investor rights,
safeguarding them from fraud and market manipulation and
other "unconscionable" actions by market participants.

-------------- --
Recognizing the Problem is Not Russia's Problem
-------------- --


6. (C) Reactions to the speech from financial industry
insiders were largely negative. Alfa Bank Chief Economist
Natalya Orlova, for instance, told us that Putin's analysis
of developments in the stock market had been "myopic."
Orlova said Putin had, apparently, not recognized that stock
purchasing decisions incorporated a variety of factors and
were not based solely on the value of a company's assets.
She said foreign investors might actually have underestimated
the negative effect of certain Russia-specific factors, such
as the large role of the state in the economy and the GOR's
use of $4 billion in international reserves each week to
support the ruble. If Russian investors dominated stock
trading, valuations might be even lower, Orlova said.


7. (C) Orlova was even more critical of Putin's investment
insurance system. She said it would not succeed in
stabilizing markets if implemented but would be very
expensive. In that regard, she noted that the budget was
already facing a serious revenue shortfall in 2009 and that
Finance Minister Kudrin had already said the Reserve Fund
might need to be tapped to the tune of RUR 1 trillion ($36
billion) in 2009 to make up the difference. She said the
insurance system would blow a further hole in the budget that
Russia could ill afford, especially for a program that would
be so obviously open to abuse.


8. (C) Finally, Orlova said Putin's plans to foster a
dynamic investor base and strong financial institutions
sounded great in theory. However, the GOR had spent years
unsuccessfully encouraging Russians to invest in domestic
stocks and bonds. The problem, Orlova said, was a basic lack
of trust that was fueled by widespread official corruption
and the state's excessive and opaque role in the economy.
Until these were addressed, Russia would not develop a strong
domestic investor class.

--------------
Comment
--------------


9. (C) Putin's diatribe against foreign investors is yet
another sign of GOR anger over a crisis officials feel is not
Russia's fault but whose effects they can do little to
mitigate. In this context, the investment insurance program
is the latest effort in a series of increasingly desperate
efforts to find something that can restore confidence to
Russian markets. We would agree with Orlova, however, that
the program, if implemented, would not stabilize the markets
but could prove prohibitively expensive, especially with
Russian insiders looking for yet another government handout.
Putin's comments are the latest indication that Russian
leaders remain in denial about the extent to which the
Russian economy is linked inextricably with global economic
trends. After all, much of the steep rise in the value of
Russian companies during the last five years was the result
of inflows of the same foreign capital whose outflow now
criticizes. End Comment.
BEYRLE