Identifier
Created
Classification
Origin
08MOSCOW721
2008-03-14 15:13:00
CONFIDENTIAL
Embassy Moscow
Cable title:
MERRIL LYNCH RUSSIA CEO DISMISSES LIKELIHOOD OF
how-toVZCZCXYZ0002 PP RUEHWEB DE RUEHMO #0721/01 0741513 ZNY CCCCC ZZH P 141513Z MAR 08 FM AMEMBASSY MOSCOW TO RUEHC/SECSTATE WASHDC PRIORITY 7145 INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY RHEHNSC/NSC WASHDC PRIORITY
C O N F I D E N T I A L MOSCOW 000721
SIPDIS
SIPDIS
STATE FOR EUR/RUS, EEB/IFD
TREASURY FOR MEYER, TORGERSON
DOC FOR 4231/IEP/EUR/JBROUGHER
NSC FOR WARLICK
E.O. 12958: DECL: 03/14/2018
TAGS: ECON EFIN ENRG PREL RS
SUBJECT: MERRIL LYNCH RUSSIA CEO DISMISSES LIKELIHOOD OF
ECONOMIC REFORMS UNDER MEDVEDEV
REF: MOSCOW 709
Classified By: ECMIN Eric T. Schultz, Reasons 1.4 (b/d).
-------
Summary
-------
C O N F I D E N T I A L MOSCOW 000721
SIPDIS
SIPDIS
STATE FOR EUR/RUS, EEB/IFD
TREASURY FOR MEYER, TORGERSON
DOC FOR 4231/IEP/EUR/JBROUGHER
NSC FOR WARLICK
E.O. 12958: DECL: 03/14/2018
TAGS: ECON EFIN ENRG PREL RS
SUBJECT: MERRIL LYNCH RUSSIA CEO DISMISSES LIKELIHOOD OF
ECONOMIC REFORMS UNDER MEDVEDEV
REF: MOSCOW 709
Classified By: ECMIN Eric T. Schultz, Reasons 1.4 (b/d).
--------------
Summary
--------------
1. (C) Former Central Bank First Deputy Chairman, and
current CEO of Merrill Lynch in Russia, Sergei Aleksashenko
told us he did not anticipate that President-elect Medvedev
would implement any pro-market reforms. Medvedev would be
too weak and dependent on Putin to make major changes and
would face resistance from vested interests. Moreover, the
current strength of the Russian economy eliminated the
requisite sense of urgency to begin a program of reforms.
That said, Aleksashenko acknowledged that the Russian economy
faced serious challenges but they were all long-term and only
present-tense crises would command the GOR's attention. End
Summary.
--------------
Krasnoyarsk "Just Rhetoric"
--------------
2. (C) Aleksashenko, who clarified he was offering his
personal views as opposed to those of Merril Lynch, said he
was not optimistic that the vision outlined in
President-elect Medvedev's February 15 Krasnoyarsk speech
would be realized. The pro-market rhetoric was "nice" but it
was just rhetoric. If you looked at Putin's campaign
speeches of 2000 you would see similar rhetoric. The primary
cause for Putin's stalled reform efforts was a lack of
political will. Putin had had the power to combat the
corruption he decried in his State Council address on
February 8. He had also had the power to improve the
country's education and health care systems and make other
changes. Aleksashenko expressed doubt that Medvedev would
muster the will to succeed where Putin had not.
3. (C) Moreover, Aleksashenko said Medvedev was unlikely to
command the kind of political loyalty that Putin enjoyed, at
least initially. For one thing, Putin would probably retain
his hold on the "reins of power" for the first year while
Medvedev made the "big change from First Deputy Prime
Minister to President." This transition period would serve
as a brake on any momentum for initiating reform. Putin
might leave the post of Prime Minister after this transition,
but even that would not "free" Medvedev to initiate reforms.
Putin would retain influence but more importantly power would
still be concentrated in Putin's friends "who were not
necessarily Medvedev's friends" and these vested interests
would likely oppose reforms.
--------------
Economic Environment Unfriendly to Reform
--------------
4. (C) In addition to a lack of political will, Aleksashenko
said the reality of Russia's current prosperity and
macroeconomic stability would discourage the prospects for
reform. "By any measure, Russia is in good shape
economically and it is difficult for any government to
undertake reforms in such an environment." According to
Aleksashenko, the GOR would feel no pressure to take action
in the absence of an external shock, such as a significant
fall in oil revenues. However, the current account is
balanced at USD 65 a barrel and the price of oil was unlikely
to fall any where near that level. In fact, it was more
likely that prices would continue to rise over time as demand
continued to rise.
5. (C) According to Aleksashenko, Russia's budding status as
a safe financial haven was yet another factor eliminating the
necessary sense of urgency behind successful reform efforts.
The strengthening ruble, steady real GDP growth since 2000,
domestic political stability, and the absence of
mortgage-related problems had sustained Russia's
attractiveness in the midst of a slump in developed
economies' financial markets. Russian companies had
substantially increased their foreign debt in the last year,
to nearly $400 billion, 25 percent of it short-term debt.
6. (C) Aleksashenko said Merril Lynch had anticipated that
Russian companies might have trouble refinancing this
short-term in the wake of the U.S. sub-prime mortgage crisis.
However, in the fourth quarter of 2007, not only had Russian
companies refinanced $20 billion in short term debt, they had
raised an additional $15 billion. As long as foreign capital
was flowing into the country it was hard to argue that Russia
needed, for instance, to improve its investment regime.
--------------
Threats to Prosperity Distant
--------------
7. (C) Aleksashenko said that although Russia's current
prosperity militated against reform that did not mean there
were no problems in the Russian economy. Senior GOR
officials understood the need to tackle corruption and
strengthen property rights if the country were to maximize
its economic potential. There was a significant difference
between the six percent growth Russia was likely to see in
the next few years and the eight percent it was capable of
but that difference would only be apparent over time and the
GOR would only address these structural problems when it had
to.
8. (C) Along the same lines, Aleksashenko added the threats
to the oil sector were real but distant. For instance, the
emergence of an oil substitution model, whereby factories and
vehicles used something besides oil as an energy source,
could reduce demand and lack of upstream incentives could
reduce production, especially of oil. However, these
problems would not begin to be felt until 2020, if current
rates of development continued. In the interval, the Russian
economy was likely to continue to rely heavily on the export
of hydrocarbons and other natural resources rather than
diversifying.
--------------
Comment
--------------
9. (C) Aleksashenko's pessimism is well-grounded in reality.
Russia's government would not be the first to delay needed
long-term reforms in the absence of any compelling short-term
need. We can, however, see at least a few problems that
could crop up short term that could force Medvedev's hand,
such as rising inflation and infrastructure bottlenecks.
BURNS
SIPDIS
SIPDIS
STATE FOR EUR/RUS, EEB/IFD
TREASURY FOR MEYER, TORGERSON
DOC FOR 4231/IEP/EUR/JBROUGHER
NSC FOR WARLICK
E.O. 12958: DECL: 03/14/2018
TAGS: ECON EFIN ENRG PREL RS
SUBJECT: MERRIL LYNCH RUSSIA CEO DISMISSES LIKELIHOOD OF
ECONOMIC REFORMS UNDER MEDVEDEV
REF: MOSCOW 709
Classified By: ECMIN Eric T. Schultz, Reasons 1.4 (b/d).
--------------
Summary
--------------
1. (C) Former Central Bank First Deputy Chairman, and
current CEO of Merrill Lynch in Russia, Sergei Aleksashenko
told us he did not anticipate that President-elect Medvedev
would implement any pro-market reforms. Medvedev would be
too weak and dependent on Putin to make major changes and
would face resistance from vested interests. Moreover, the
current strength of the Russian economy eliminated the
requisite sense of urgency to begin a program of reforms.
That said, Aleksashenko acknowledged that the Russian economy
faced serious challenges but they were all long-term and only
present-tense crises would command the GOR's attention. End
Summary.
--------------
Krasnoyarsk "Just Rhetoric"
--------------
2. (C) Aleksashenko, who clarified he was offering his
personal views as opposed to those of Merril Lynch, said he
was not optimistic that the vision outlined in
President-elect Medvedev's February 15 Krasnoyarsk speech
would be realized. The pro-market rhetoric was "nice" but it
was just rhetoric. If you looked at Putin's campaign
speeches of 2000 you would see similar rhetoric. The primary
cause for Putin's stalled reform efforts was a lack of
political will. Putin had had the power to combat the
corruption he decried in his State Council address on
February 8. He had also had the power to improve the
country's education and health care systems and make other
changes. Aleksashenko expressed doubt that Medvedev would
muster the will to succeed where Putin had not.
3. (C) Moreover, Aleksashenko said Medvedev was unlikely to
command the kind of political loyalty that Putin enjoyed, at
least initially. For one thing, Putin would probably retain
his hold on the "reins of power" for the first year while
Medvedev made the "big change from First Deputy Prime
Minister to President." This transition period would serve
as a brake on any momentum for initiating reform. Putin
might leave the post of Prime Minister after this transition,
but even that would not "free" Medvedev to initiate reforms.
Putin would retain influence but more importantly power would
still be concentrated in Putin's friends "who were not
necessarily Medvedev's friends" and these vested interests
would likely oppose reforms.
--------------
Economic Environment Unfriendly to Reform
--------------
4. (C) In addition to a lack of political will, Aleksashenko
said the reality of Russia's current prosperity and
macroeconomic stability would discourage the prospects for
reform. "By any measure, Russia is in good shape
economically and it is difficult for any government to
undertake reforms in such an environment." According to
Aleksashenko, the GOR would feel no pressure to take action
in the absence of an external shock, such as a significant
fall in oil revenues. However, the current account is
balanced at USD 65 a barrel and the price of oil was unlikely
to fall any where near that level. In fact, it was more
likely that prices would continue to rise over time as demand
continued to rise.
5. (C) According to Aleksashenko, Russia's budding status as
a safe financial haven was yet another factor eliminating the
necessary sense of urgency behind successful reform efforts.
The strengthening ruble, steady real GDP growth since 2000,
domestic political stability, and the absence of
mortgage-related problems had sustained Russia's
attractiveness in the midst of a slump in developed
economies' financial markets. Russian companies had
substantially increased their foreign debt in the last year,
to nearly $400 billion, 25 percent of it short-term debt.
6. (C) Aleksashenko said Merril Lynch had anticipated that
Russian companies might have trouble refinancing this
short-term in the wake of the U.S. sub-prime mortgage crisis.
However, in the fourth quarter of 2007, not only had Russian
companies refinanced $20 billion in short term debt, they had
raised an additional $15 billion. As long as foreign capital
was flowing into the country it was hard to argue that Russia
needed, for instance, to improve its investment regime.
--------------
Threats to Prosperity Distant
--------------
7. (C) Aleksashenko said that although Russia's current
prosperity militated against reform that did not mean there
were no problems in the Russian economy. Senior GOR
officials understood the need to tackle corruption and
strengthen property rights if the country were to maximize
its economic potential. There was a significant difference
between the six percent growth Russia was likely to see in
the next few years and the eight percent it was capable of
but that difference would only be apparent over time and the
GOR would only address these structural problems when it had
to.
8. (C) Along the same lines, Aleksashenko added the threats
to the oil sector were real but distant. For instance, the
emergence of an oil substitution model, whereby factories and
vehicles used something besides oil as an energy source,
could reduce demand and lack of upstream incentives could
reduce production, especially of oil. However, these
problems would not begin to be felt until 2020, if current
rates of development continued. In the interval, the Russian
economy was likely to continue to rely heavily on the export
of hydrocarbons and other natural resources rather than
diversifying.
--------------
Comment
--------------
9. (C) Aleksashenko's pessimism is well-grounded in reality.
Russia's government would not be the first to delay needed
long-term reforms in the absence of any compelling short-term
need. We can, however, see at least a few problems that
could crop up short term that could force Medvedev's hand,
such as rising inflation and infrastructure bottlenecks.
BURNS