Identifier
Created
Classification
Origin
08MOSCOW3586
2008-12-12 07:48:00
CONFIDENTIAL
Embassy Moscow
Cable title:
DEUTSCHE BANK CHIEF ECONOMIST ON CRISIS IN RUSSIA,
how-toVZCZCXRO4545 OO RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR DE RUEHMO #3586/01 3470748 ZNY CCCCC ZZH O 120748Z DEC 08 FM AMEMBASSY MOSCOW TO RUEHC/SECSTATE WASHDC IMMEDIATE 1097 INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY RHEHNSC/NSC WASHDC PRIORITY RHMFISS/DEPT OF ENERGY WASHDC PRIORITY RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 003586
SIPDIS
DEPT FOR EUR/RUS
E.O. 12958: DECL: 12/11/2018
TAGS: ECON EINV ENRG ETRD EFIN PREL PGOV RS
SUBJECT: DEUTSCHE BANK CHIEF ECONOMIST ON CRISIS IN RUSSIA,
RUBLE, SCAPEGOATS
Classified By: A/DCM Alice Wells for reasons 1.4 (b/d).
-------
Summary
-------
C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 003586
SIPDIS
DEPT FOR EUR/RUS
E.O. 12958: DECL: 12/11/2018
TAGS: ECON EINV ENRG ETRD EFIN PREL PGOV RS
SUBJECT: DEUTSCHE BANK CHIEF ECONOMIST ON CRISIS IN RUSSIA,
RUBLE, SCAPEGOATS
Classified By: A/DCM Alice Wells for reasons 1.4 (b/d).
--------------
Summary
--------------
1. (C) In a December 6 meeting with EEB Special
Representative Frank Mermoud, Deutsche Bank's Chief Economist
Yaroslav Lissovolik said that investors, foreign and Russian,
were concerned about increased GOR control over the economy.
He said the GOR's intervention in support of the ruble was a
mistake that was bound to fail. Finally, he acknowledged
that the GOR might eventually have to sacrifice a senior
official to assuage public opinion and agreed that in that
event the most likely candidate would be Deputy Prime
Minister Shuvalov. End Summary.
--------------
Investor's Fear Increased State Control
--------------
2. (C) Lissovolik said he had just recently returned from a
trip to Western Europe to meet with interested potential
investors. He said the numbers were far greater than the
same trip he had taken the year before. For instance, in
Stockholm he said 40 potential investors had shown up for his
presentation; the year before it had been five. Lissovolik
said, however, that the degree of interest was not good news
since most of the attendees had expressed concern about
corporate governance issues and the future of the market
model in Russia.
3. (C) Lissovolik said he had told the investors that the
role of the Russian state in the economy might increase
because of the crisis. The Russian government was divided on
economic issues into camps of liberals and hard-liners. The
former favored an open and integrated economy, the latter
wanted greater state control. Prime Minister Putin was at
the nexus of this divide and was himself "half liberal and
half hard-liner." Putin's background and training inclined
him toward state control but he always understood that his
main goal for the past few years, to catch up economically to
the West, required foreign capital and a more open economy.
4. (C) Lissovolik said, however, that at least for the short
term, Putin and the government's goal had changed. It could
change again when the global recession begins to ease, which
Lissovolik thought could come as early as the fourth quarter
next year. But for now the goal was survival and this was
playing into the hands of the hardliners. The downturn
undermined Putin's main achievement as president, the
restoration of stability, and an extended downturn could lead
to increased social tensions. The hardliner were using this
to push for greater government control over the economy. In
addition, the degree of Russian dependency on foreign capital
had come as a nasty shock for the regime and the hardliners
were using that to argue for less international integration.
5. (C) Lissovolik acknowledged concern in the Russian
business community that with the hardliners ascendant, the
GOR was unlikely to use the downturn to enact needed reforms
and position Russia for the end of the recession. Even more
worrisome was the possibility that powerful elements within
the government would use greater state control over the
economy to further their own personal interests. The
incident that was causing the most concern in this regard was
the government investigation of potash miner Uralkali. The
government's sudden reopening of the investigation into a
mine collapse and the prospect of a massive fine that would
cripple the company (reported in the NYTimes last weekend)
were fueling suspicions that someone in the government
planned to seize the company.
--------------
Ruble Devaluation
--------------
6. (C) Lissovolik said that downward pressure on the ruble
would continue as long as oil prices continued to fall. $40
a barrel (breached late last week) was a key barrier for the
GOR. Below this, they would have to rethink their policies,
especially projected revenues and planned expenditures. He
said that roughly two-thirds of the $150 billion in lost
reserves over the past two months had been used to support
the ruble. The other third had been result of valuation
MOSCOW 00003586 002 OF 002
changes (the U.S. dollar appreciating relative to the Euro,
driving down the value of Russian reserves denominated in
Euros ) 60 percent of the total).
7. (C) Lissovolik said the GOR's current policy, gradually
devaluing the ruble in small increments, would not work. In
his view, gradualism was a recipe for failure; it had never
worked anywhere it had been tried. It would be better for
the GOR to accept the inevitable and devalue the currency
now, rather than waste its reserves slowing the rate of
depreciation for political reasons. Lissovolik acknowledged,
however, that this would be politically difficult for the
government, which was genuinely concerned that a one off
devaluation could cause panic, leading to a meltdown of the
currency as happened in 1998. However, despite the risks,
Lissovolik said a devaluation was inevitable. The Central
Bank was burning through its reserves too quickly and did not
have enough to sustain the current policy if the downturn
persisted until the second half of 2009.
--------------
Finding a Scapegoat
--------------
8. (C) Lissovolik agreed that if the downturn persisted well
into next year it would not be enough to blame the crisis on
global factors, including especially the U.S. -- a domestic
scapegoat would need to be found. He discounted rumors that
Putin himself might step down or that Medvedev would go; they
were simply too important. He also discounted the rumors
that it might be Kudrin. The Finance Minister was too
central to economic decision-making and market confidence and
too close to Putin. In addition, the GOR had spun the
reserves as the major difference from 1998 and Kudrin was
widely credited with their accumulation. In that context, it
would be difficult to explain his dismissal.
9. (C) Lissovolik said Central Bank head Ignatiev could be a
candidate, especially in the event of a decision to devalue,
which Ignatiev would have to announce. A broader cabinet
shuffle could also include MED Minister Nabiullina, who
Lissovolik said was generally thought to have been
unimpressive in the position. However, Lissovolik agreed
that these individuals might prove neither well enough known
nor important enough to serve as a scapegoat. In that event,
it would need to be someone more senior and the only likely
candidate left was Deputy Prime Minister Shuvalov.
Lissovolik said the latter already appeared to be taking the
lead on anti-crisis measures and might be setting himself up
for the role. (N.B. Putin announced December 12 that Shuvalov
would head a newly formed anti-crisis commission.)
Lissovolik said given how decisions were made in the regime,
Shuvalov would have to have agreed to take the fall and would
be rewarded for doing so, first with a profitable position in
the &private8 sector and later with a return to government
in an even more important position.
10. (C) Lissovolik added that though he thought Kudrin was
safe, his impression from talking to his sources within the
GOR was that the Finance Minister's position had been
weakened by the crisis. This would likely make it more
difficult for him to hold the line on tax cuts. The
proponents of tax cuts, especially at the Ministry of
Economic Development (MED) were arguing that a VAT reduction,
which they had long advocated, could stimulate the economy.
Kudrin might also be unable to hold off tax cuts for the oil
industry, which was getting squeezed by high taxes and
falling prices.
--------------
Comment
--------------
11. (C) One of the favorite parlor games in Moscow today is
guessing which government official might take the fall for
the economic crisis. The news today about Shuvalov's new
responsibilities would seem to support Lissovolik's view that
Shuvalov is a likely suspect. Lissovolik is also on safe
ground in predicting increased state control over the economy
as a result of the crisis, at least in the short-term.
RUBIN
SIPDIS
DEPT FOR EUR/RUS
E.O. 12958: DECL: 12/11/2018
TAGS: ECON EINV ENRG ETRD EFIN PREL PGOV RS
SUBJECT: DEUTSCHE BANK CHIEF ECONOMIST ON CRISIS IN RUSSIA,
RUBLE, SCAPEGOATS
Classified By: A/DCM Alice Wells for reasons 1.4 (b/d).
--------------
Summary
--------------
1. (C) In a December 6 meeting with EEB Special
Representative Frank Mermoud, Deutsche Bank's Chief Economist
Yaroslav Lissovolik said that investors, foreign and Russian,
were concerned about increased GOR control over the economy.
He said the GOR's intervention in support of the ruble was a
mistake that was bound to fail. Finally, he acknowledged
that the GOR might eventually have to sacrifice a senior
official to assuage public opinion and agreed that in that
event the most likely candidate would be Deputy Prime
Minister Shuvalov. End Summary.
--------------
Investor's Fear Increased State Control
--------------
2. (C) Lissovolik said he had just recently returned from a
trip to Western Europe to meet with interested potential
investors. He said the numbers were far greater than the
same trip he had taken the year before. For instance, in
Stockholm he said 40 potential investors had shown up for his
presentation; the year before it had been five. Lissovolik
said, however, that the degree of interest was not good news
since most of the attendees had expressed concern about
corporate governance issues and the future of the market
model in Russia.
3. (C) Lissovolik said he had told the investors that the
role of the Russian state in the economy might increase
because of the crisis. The Russian government was divided on
economic issues into camps of liberals and hard-liners. The
former favored an open and integrated economy, the latter
wanted greater state control. Prime Minister Putin was at
the nexus of this divide and was himself "half liberal and
half hard-liner." Putin's background and training inclined
him toward state control but he always understood that his
main goal for the past few years, to catch up economically to
the West, required foreign capital and a more open economy.
4. (C) Lissovolik said, however, that at least for the short
term, Putin and the government's goal had changed. It could
change again when the global recession begins to ease, which
Lissovolik thought could come as early as the fourth quarter
next year. But for now the goal was survival and this was
playing into the hands of the hardliners. The downturn
undermined Putin's main achievement as president, the
restoration of stability, and an extended downturn could lead
to increased social tensions. The hardliner were using this
to push for greater government control over the economy. In
addition, the degree of Russian dependency on foreign capital
had come as a nasty shock for the regime and the hardliners
were using that to argue for less international integration.
5. (C) Lissovolik acknowledged concern in the Russian
business community that with the hardliners ascendant, the
GOR was unlikely to use the downturn to enact needed reforms
and position Russia for the end of the recession. Even more
worrisome was the possibility that powerful elements within
the government would use greater state control over the
economy to further their own personal interests. The
incident that was causing the most concern in this regard was
the government investigation of potash miner Uralkali. The
government's sudden reopening of the investigation into a
mine collapse and the prospect of a massive fine that would
cripple the company (reported in the NYTimes last weekend)
were fueling suspicions that someone in the government
planned to seize the company.
--------------
Ruble Devaluation
--------------
6. (C) Lissovolik said that downward pressure on the ruble
would continue as long as oil prices continued to fall. $40
a barrel (breached late last week) was a key barrier for the
GOR. Below this, they would have to rethink their policies,
especially projected revenues and planned expenditures. He
said that roughly two-thirds of the $150 billion in lost
reserves over the past two months had been used to support
the ruble. The other third had been result of valuation
MOSCOW 00003586 002 OF 002
changes (the U.S. dollar appreciating relative to the Euro,
driving down the value of Russian reserves denominated in
Euros ) 60 percent of the total).
7. (C) Lissovolik said the GOR's current policy, gradually
devaluing the ruble in small increments, would not work. In
his view, gradualism was a recipe for failure; it had never
worked anywhere it had been tried. It would be better for
the GOR to accept the inevitable and devalue the currency
now, rather than waste its reserves slowing the rate of
depreciation for political reasons. Lissovolik acknowledged,
however, that this would be politically difficult for the
government, which was genuinely concerned that a one off
devaluation could cause panic, leading to a meltdown of the
currency as happened in 1998. However, despite the risks,
Lissovolik said a devaluation was inevitable. The Central
Bank was burning through its reserves too quickly and did not
have enough to sustain the current policy if the downturn
persisted until the second half of 2009.
--------------
Finding a Scapegoat
--------------
8. (C) Lissovolik agreed that if the downturn persisted well
into next year it would not be enough to blame the crisis on
global factors, including especially the U.S. -- a domestic
scapegoat would need to be found. He discounted rumors that
Putin himself might step down or that Medvedev would go; they
were simply too important. He also discounted the rumors
that it might be Kudrin. The Finance Minister was too
central to economic decision-making and market confidence and
too close to Putin. In addition, the GOR had spun the
reserves as the major difference from 1998 and Kudrin was
widely credited with their accumulation. In that context, it
would be difficult to explain his dismissal.
9. (C) Lissovolik said Central Bank head Ignatiev could be a
candidate, especially in the event of a decision to devalue,
which Ignatiev would have to announce. A broader cabinet
shuffle could also include MED Minister Nabiullina, who
Lissovolik said was generally thought to have been
unimpressive in the position. However, Lissovolik agreed
that these individuals might prove neither well enough known
nor important enough to serve as a scapegoat. In that event,
it would need to be someone more senior and the only likely
candidate left was Deputy Prime Minister Shuvalov.
Lissovolik said the latter already appeared to be taking the
lead on anti-crisis measures and might be setting himself up
for the role. (N.B. Putin announced December 12 that Shuvalov
would head a newly formed anti-crisis commission.)
Lissovolik said given how decisions were made in the regime,
Shuvalov would have to have agreed to take the fall and would
be rewarded for doing so, first with a profitable position in
the &private8 sector and later with a return to government
in an even more important position.
10. (C) Lissovolik added that though he thought Kudrin was
safe, his impression from talking to his sources within the
GOR was that the Finance Minister's position had been
weakened by the crisis. This would likely make it more
difficult for him to hold the line on tax cuts. The
proponents of tax cuts, especially at the Ministry of
Economic Development (MED) were arguing that a VAT reduction,
which they had long advocated, could stimulate the economy.
Kudrin might also be unable to hold off tax cuts for the oil
industry, which was getting squeezed by high taxes and
falling prices.
--------------
Comment
--------------
11. (C) One of the favorite parlor games in Moscow today is
guessing which government official might take the fall for
the economic crisis. The news today about Shuvalov's new
responsibilities would seem to support Lissovolik's view that
Shuvalov is a likely suspect. Lissovolik is also on safe
ground in predicting increased state control over the economy
as a result of the crisis, at least in the short-term.
RUBIN