MEDVEDEV AND RUSSIA'S NATIONAL PRIORITY PROJECTS

C O N F I D E N T I A L MOSCOW 000558

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E.O. 12958: DECL: 02/08/2018
TAGS: ECON PGOV RS SOCI
SUBJECT: MEDVEDEV AND RUSSIA'S NATIONAL PRIORITY PROJECTS
-- ALL HAT, NO CATTLE?

REF: A. MOSCOW 431

B. MOSCOW 5924

Classified By: ECMIN Eric T. Schultz for reasons 1.4 (b) and (d).

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SUMMARY
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1. (C) President Putin's choice of Dmitry Medvedev as his
successor has been cause for optimism among much of Russia's
business elite, who point to Medvedev's calls for more
economic freedom. However, Medvedev's public record provides
little substance to support this rhetoric. In addition to
his problematic chairmanship of Gazprom, Medvedev's other
high profile responsibility has been running Russia's
National Priority Projects (NPPs) in healthcare, education,
housing, and agriculture since 2006. Under Medvedev, the
NPPs have accomplished relatively little, providing grist for
cynics who see the NPPs as window dressing and leading to
public disillusionment.

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Medvedev as Closet Liberal
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2. (C) Echoing the prevailing business sentiment in Russia,
Renaissance Capital's Senior Russian partner, Igor Yurgens,
told us that President Putin had chosen the successor with
the "higher ceiling." He said Dmitry Medvedev was more
likely to allow greater economic and political freedom and to
bring Russia closer to Europe and to the West than the other
alternatives. This sense of optimism in Russia's business
community has been further reinforced by Medevdev's campaign
for the presidency and in particular his speech February 15
at the Krasnoyarsk Economic Forum, when he called for reduced
corruption and greater economic freedom (Ref a). A European
diplomatic colleague present at the speech said it received a
strongly favorable response from the audience, which had been
composed largely of Russian businessmen.


3. (SBU) The international business community has also
reacted positively to Medvedev's rhetoric. They have
interpreted the Krasnoyarsk and other comments by Medvedev
and his surrogates as a signal that Medvedev's presidency
will pursue more market-oriented economic policies. In a
recent internal meeting, the Director of the American Chamber
of Commerce highlighted Medvedev's four "I"s: investment,
innovation, institutions and infrastructure, which he said
would mean a much improved business climate for investors,
foreign and domestic.

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Record versus Rhetoric
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4. (C) Medvedev's liberal economic rhetoric is not matched by
a record of accomplishments. Critics of Medvedev, such as
former Deputy Energy Minister Vladimir Milov, have pointed to
his record as Chairman of Gazprom, when the company used
Russia's energy wealth to pursue political objectives, as
evidence that Medvedev is unlikely to back up his words with
deeds. Lending further fuel to critics has been Medvedev's
other high profile responsibility of the past few years --
his chairmanship of Russia's National Priority Projects
(NPPs). The NPPs were started in 2005. President Putin gave
Medvedev responsibility for them the following year,
reportedly to help develop a positive public image for his
protege.


5. (C) From the beginning, critics of the projects contended
that the NPP were "window dressing" intended to provide cover
for the government's broader economic policies. Lending fuel
to this criticism has been the performance of the NPPs,
including under Medvedev. The projects were intended to
address key social deficiencies and help nurture a Russian
middle class. The first three sectors identified were
education, health and housing. Agriculture, which still
employs a large percentage of Russian workers, was later
added as a fourth priority. However, nearly three years
after their launch, and despite Medevdev's personal
involvement, most experts agree that the projects have been
too small in scope and have failed to reform social systems
in need of deep structural changes.

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Performance of the Projects

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6. (SBU) To assess whether the criticism is deserved we
decided to take a closer look at each of the four projects.
What we found is a mixed record. Some of the projects have
been more successful than others but even the more successful
projects have been fairly modest in their scope and in none
of them did the reality match the GOR's lofty rhetoric of
fundamental reform.

Education: the Most Successful Project
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7. (SBU) The modernization of the education system has been
the most successful of the four projects. In 2007, USD 1.85
billion (50 billion rubles) funded 1400 new buses, internet
connectivity in every school, teacher salary increases
averaging 25-30 percent, and awards for innovative teachers
and schools. Marina Kiseleva, Deputy Head of Coordination of
the Education National Project at the Ministry of Education,
told us that one of the project's main accomplishments was
the new flexibility of schools to decide the best way to
educate their students.


8. (SBU) However, the project has not achieved many of its
short-terms goals. Kiseleva said that schools had a
difficult time accepting the new responsibility for
modernizing their institutions, especially determining how to
make most efficient use of the money. Kiseleva also admitted
that there was a huge regional disparity in the quality of
education and teacher qualifications and acknowledged that
there were no concrete proposals for future programs or for
spending this year's budget of USD 1.7 billion.

Healthcare: Improved Technology but Costs, Access Problems
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9. (SBU) Olga Kochetkova, Acting Head of the Department for
Monitoring the National Priority Projects, told us that the
health care NPP was improving the state of healthcare in
Russia "little by little." In 2007, the GOR claimed the
healthcare NPP had been responsible for providing 42,487 new
units of diagnostics equipment, higher-quality medication,
and 13,244 new ambulances and that this in turn had led to
lower mortality rates and increased birth rates and life
expectancy.


10. (SBU) However, most experts in the sector, such as Ksenia
Yudayeva, Director of Research at the Center for Strategic
Research, argued that rising incomes, not the NPP, had led to
such improvements. Moreover, even Kochetkova acknowledged
that the greatest weakness of the project was its failure to
improve affordability of and access to quality healthcare.
She added that future plans were unclear due to rumors of a
reorganization of the Ministry of Health and Social
Development, but that any new initiatives would likely be
implemented at the regional, rather than federal level.

Affordable Housing -- Little Progress
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11. (SBU) According to the GOR, the affordable housing
project's 2007 budget of USD 2.3 billion led to the
construction of 66 million square meters of new housing
(714,000 new apartments),30 percent more than in 2006.
However, experts note that there is still a large imbalance
between housing demand and supply, which has effectively
maintained high housing prices. The GOR estimates that only
20 percent of Russians were able to afford a new home in
2007, compared with 60 percent of Russians who were in need
of new or renovated housing.


12. (SBU) More important in the long run, is continued
weakness in mortgage lending. Alfa Bank told us that the
mortgage market in Russia amounts to only 1.8 percent of GDP
compared with 15-20 percent in Eastern European countries and
80 percent in the U.S. Moreover, Andrei Shirokov, Head of
the Department of Real Estate and Urban Infrastructure
Management at the Moscow Institute of State and Corporate
Governance, noted that up to two-thirds of Russia's housing,
or 3.8 billion square meters, needs repair and estimated that
the repairs would require USD $200-400 billion.

Agriculture NPP -- a Failure
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13. (SBU) In December 2007, Russian Minister of Agriculture

Aleksey Gordeyev declared
"victory" in implementation of the National Priority Project
for Development of the Agroindustrial Complex and announced
that it would be replaced by a five-year "Program of
Agricultural Development and Market Regulation" (much of
which is yet to be funded). Gordeyev pointed to increases in
meat and dairy production, increased loans to smallholders
and cooperatives, and the Russian Agricultural Bank
(Rosselkhozbank),responsible for nearly two thirds of
agricultural loans issued under the NPP, quadrupling its
branch network. In addition, he claimed that the NPP had
created 3,700 rural cooperatives.


14. (SBU) In reality, however, the NPP has largely been a
failure. Ministry officials admitted publicly that roughly
half of the new rural cooperatives exist only on paper.
Other officials acknowledged that the reported increases in
meat and milk production were unsupported, and increases in
meat production were either unrelated to the project
(poultry) or have led to financial hardship (pork). Finally,
the rapid expansion of credit cooperatives and
Rosselkhozbank's branch network, coupled with the political
imperative to push money out to rural areas in advance of the
December 2007 Duma elections, resulted in many suspect loans
that will likely lead to a ballooning default rate in 2008.

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A Disillusioned Public
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15. (SBU) The flawed implementation of the NPPs appears to
have disillusioned the Russian public. More than half (53
percent) of respondents to a Levada Center poll said the NPPs
had not affected them at all. The public was also skeptical
about continuing the NPPs, as nearly half (49 percent) of
respondents did not believe the projects would improve the
country's social woes. Much of the public's cynicism appears
to have its roots in the fact that more than half (52
percent) of respondents thought the funding would be
inefficiently spent. Moreover, more respondents believed the
money would be stolen than spent efficiently (22 and 15
percent, respectively). In addition, based on anecdotal
information, between 10 and 30 percent of NPP funds was
diverted to kickbacks in return for program award, and thus
not spent as intended.

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Comment
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16. (C) With respect to the NPPs, Medvedev has failed to
match a record of accomplishment with his strong rhetoric in
favor of improved social services. Last month he announced
that the GOR was drafting a new long-term program for social
and economic development through 2020. However, most of the
experts with whom we talked predicted that this too would
accomplish little. Under a Medvedev presidency, the most
likely scenario is a continuation of the current approach of
small scale projects and that he would avoid any large
controversial reforms. That said, Medvedev may come under
pressure early in his presidency to make good on his promises
and accelerate social spending. How he responds to that
pressure could be an early indicator of the direction
economic policy will take in his presidency. End comment.
BURNS