KOZAK ON ECONOMIC DECENTRALIZATION, REGIONAL

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 000538

SIPDIS

SIPDIS

STATE FOR EUR/RUS; NSC FOR MWARLICK

E.O. 12958: DECL: 02/27/2018
TAGS: ECON EINV ETRD PREL PGOV RS
SUBJECT: KOZAK ON ECONOMIC DECENTRALIZATION, REGIONAL
DEVELOPMENT


Classified By: Ambassador William Burns for Reasons 1.5 (b) and (d).

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Summary
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1. (C) In a February 27 meeting, Minister of Regional
Development Dmitry Kozak told the Ambassador that the GOR was
committed to a policy of economic decentralization but that
the pace would vary from region to region depending on local
factors, above all local leadership. Kozak said different
regions faced different obstacles to development and that the
GOR would tailor its plans accordingly. In that regard, he
explained that his concept of "macro-regions" was intended to
promote economic efficiency in the regions. End Summary.

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Decentralization -- Region Specific
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2. (C) Kozak told the Ambassador that the central government
recognized the importance of transferring authority to the
regions to spur their economic development. After the chaos
of the 1990s, Russia had recentralized to restore order.
However, this recentralization had led to red tape and
bureaucracy which in turn was causing economic stagnation in
many parts of the country and the central government now
needed to begin devolving power not just to the regions but
to municipalities as well.


3. (C) Kozak stressed, however, that some regions were
already developing more rapidly than others because of better
leadership. In transferring authority to the regions, the
center would need to hold individual regional leaders
accountable and be prepared to step back in as needed. In
that regard, the center's role in the regions would be
directly correlated to the extent of assistance it needed to
provide. Those regions that needed little help would be
allowed more freedom to run their own affairs.

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Obstacles to Regional Development
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4. (C) Kozak told the Ambassador that the GOR would tailor
regional development plans to the specific obstacles in a
given region. In the Far East, for instance there was a lack
of labor and of infrastructure. The central government might
need to offer incentives to attract labor, such as housing
allowances and income supplements. The center would also
likely have to invest public funds in developing the region's
infrastructure. For instance, the Far East had 22 airports
that needed to be refurbished and thousands of kilometers of
roads that needed to be built if it was to develop faster.


5. (C) In the North Caucasus, on the other hand, Kozak said
stability had been the main problem following the Chechen
conflict. Central subsidies had helped restore stability and
the main obstacle now was unemployment. It was up to
regional leaders to reduce their reliance on subsidies, which
could not be maintained indefinitely, and to create
employment opportunities by, among other things, attracting
private investment. Some leadership, such as in
Kabardino-Balkaria had made progress; others such as in
Ingushetia, were stuck or sliding backwards economically. In
broad terms, Kozak said the 2014 Sochi Olympics should have a
major economic impact on the region.

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Regional Development Plans
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6. (C) Kozak said he was developing the concept of
"macro-regions" to speed regional development. These
macro-regions would be encouraged to develop into
self-sustaining economic entities with specific
specializations. For instance, if a region had a particular
natural resource, then factories utilizing that resource
would be built in the region. This would reduce
transportation costs and improve economic efficiency. Kozak
stressed that this was an economic rather than a political
plan. While administrative changes might be made to borders
and the like, it would only be done so in the interest of
economic goals.


7. (C) Kozak said the GOR would also continue to use Special
Economic Zones (SEZs) to promote regional development, but

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only in places where development was lagging, such as the Far
East. SEZs and their tax and other special preferences were
unnecessary in regions that were already developing.

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U.S. Experience
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8. (C) The Ambassador noted our own experience with
federalism questions and offered to share it as Russia's
decentralization went forward. Kozak responded positively,
welcoming any information the U.S. could provide. He also
responded positively to the Ambassador's suggestion that he
meet soon with the American Chamber of Commerce, many of
whose members are increasingly looking to Russia's regions
for investment opportunities, to discuss his plans for
regional economic development.

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Comment
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9. (C) Kozak is one of the more business-like and direct
members of the senior Russian political leadership. He was
only recently brought back to Moscow from the North Caucasus
where he was President Putin's personal representative.
Newly empowered and with a healthy budget, he has quickly
taken charge in a ministry that had previously been a
backwater. While Kozak is often rumored as a candidate for
other high-level GOR portfolios, he left the impression of
someone who assumed he would remain in his current post for
some time to come.
BURNS