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). -------------- Summary -------------- ¶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. -------------- As America Goes, So Goes Russia -------------- ¶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. -------------- GOR Policies: Praise and Disagreement -------------- ¶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. -------------- Who Is to Blame? -------------- ¶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. -------------- Russia and Foreign Capital -------------- ¶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. -------------- Comment -------------- ¶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