CHAIRMAN OF RUSSIA'S SECOND-LARGEST BANK SAYS U.S.

C O N F I D E N T I A L MOSCOW 003585

SIPDIS

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

E.O. 12958: DECL: 10/01/2018
TAGS: EFIN ECON RS
SUBJECT: CHAIRMAN OF RUSSIA'S SECOND-LARGEST BANK SAYS U.S.
RECOVERY KEY TO RUSSIAN RECOVERY

REF: A. MOSCOW 3376

B. MOSCOW 3497

Classified By: Charge d'Affaires Eric Rubin, Reasons 1.4 (b/d).

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Summary
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1. (C) In a December 8 meeting with the Ambassador, VTB
Chairman Andrey Kostin said next year would be very difficult
for Russia's economy and that the U.S. economy's recovery
would be the key to an economic turnaround in Russia. Kostin
praised the GOR's response to the financial crisis to date
but expressed doubts about using reserves to support the
ruble and said he favored devaluation. Kostin speculated
that a high-ranking official would need to take the fall as
the crisis inevitably deepened, though of course not Putin or
Medvedev. He discounted a change in the country's direction
away from market economics and characterized the goal of
turning Russia into an international financial center as a
"useful" focal point for reform. End Summary.

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As America Goes, So Goes Russia
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2. (C) Andrey Kostin, Chairman of Russia's second-largest
bank, VTB, told the Ambassador that Russia was expecting a
very difficult 2009 economically. Kostin said Russia had
overcome the liquidity squeeze "relatively easily" but that a
bigger blow to the financial sector was coming next year as
debtors began to default on loans. Demand in the country was
also drying up at virtually any price. Large parts of the
economy were already feeling the effects with economic
activity falling rapidly in the mining, construction and
steel sectors to name only a few. Kostin predicted that the
price of oil could fall as low as $25 a barrel for Urals oil
next year, which would further undermine the Russian economy.


3. (C) Kostin said Russia was counting on a rapid U.S.
economic recovery in 2009 to lift the global economy (and
Russia) out of recession. Russian officials and the business
community understood that the slowdown in the U.S. had
already led to lower overall production and reduced
employment in Russia and that absent a recovery in the U.S.
it would get worse. To illustrate the linkage between the
U.S. and Russian economies, Kostin said that profits for many
Russian steelmakers in recent months had fallen sharply, as
much as 90 percent for some firms, at the same time growth in
the U.S. was slowing. He conceded that some Russian
officials viewed the U.S. downturn as comeuppance, but Kostin
said Putin had recently commented to him that the U.S.
recession "was no cause for celebration" in Russia.

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GOR Policies: Praise and Disagreement
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4. (C) Kostin said Russia's recent economic policies had
allowed the GOR to respond forcefully as the financial crisis
broke domestically and at least mitigate the effects. In
particular, he praised the GOR's budget surpluses and
accumulation of reserves -- resources he noted that the GOR
did not have at its disposal in 1998. These additional
resources had facilitated short-term and long-term liquidity
injections to help keep industry and the banking sector
afloat. With Russia's stock markets collapsing and global
financial markets closing to Russian borrowers, even blue
chip firms such as Gazprom, Rosneft and VTB had been unable
to refinance their previous borrowings. The GOR had been
able to step in and save the companies (and their highly
over-leveraged oligarch owners) from defaulting.


5. (C) Despite his regard for Russia's economic leadership,
Kostin said he disagreed with the current policy of using
reserves to engineer a soft landing for the declining ruble.
Capital flight, falling oil prices, and the shrinking money
supply were putting downward pressure on the ruble and had
generated expectations of its devaluation. The increased
pace of the Central Bank's open market operations threatened
to undo in a matter of months, by the end of the first
quarter 2009, the accumulated reserves that it had taken the
country years to build.

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Who Is to Blame?
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6. (C) Kostin noted that if the growing pessimism about the
Russian economy was borne out, someone would have to take the
blame. A scenario combining a lengthy recession with rapidly
vanishing reserves, Kostin predicted, would mean that a
high-ranking official would be singled out -- "it's a
tradition," he said. Putin and Medevedev were the only ones
that were safe, according to Kostin. However, he doubted
that Finance Minister Kudrin was in any real danger, given
the degree to which Putin trusts him.

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Russia and Foreign Capital
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7. (C) The Ambassador noted Putin's recent comments
criticizing the role foreign capital had played in Russia's
stock market collapse. This had raised doubts about Russia's
commitment to market economics and seemed incongruous with
Putin's calls for Russia to become an international financial
center.


8. (C) In response, Kostin avoided any criticism of Putin's
public comments but said that he did not believe Russia was
likely to move away from market economics toward greater
state control or to close its economy. In that regard, he
thought the focus on creating an international financial
center was a "useful" focal point for economic reform. For
example, it would result in a better environment for
investors, including an easier visa regime for foreigners.
He added that developing domestic sources of long-term
financing was not incompatible with being open to foreign
capital.

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Comment
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9. (C) After weeks of blaming the U.S. for the financial
crisis, from President Medvedev and Prime Minister Putin on
down, government officials and economic elite are beginning
to accept that Russia's economic fate depends at least in
part on how quickly the U.S. economy begins to grow again.
RUBIN