MOSCOW OBLAST GOVERNMENT: ON THE BRINK OF

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 002102 SIPDIS E.O. 12958: DECL: 08/16/2019 TAGS: PGOV PREL PHUM PINR ECON KDEM KCOR RS SUBJECT: MOSCOW OBLAST GOVERNMENT: ON THE BRINK OF FINANCIAL COLLAPSE? Classified By: Acting Political Minister Counselor David Kostelancik. Reason: 1.4 (b),(d). ¶1. (C) Summary: The Moscow Oblast Government is on the verge of financial collapse. While the economic crisis is a contributing factor, corruption on a massive scale plays an equally significant role. Deputy Governor Aleksey Panteleyev, Moscow Oblast Governor Boris Gromov's top ally, left his post under a cloud on June 1. Suffering from both the crisis and the loss of his old crony, Gromov's days may be numbered as his power base slips, and he tries to use his waning influence to secure funding to bail out the region from default while also bringing home the bacon for United Russia in local elections slated for October 11. End Summary. Double Whammy Slams Moscow Oblast -------------- ¶2. (C) The Moscow Oblast, a federal subject of Moscow which is a separate administrative subject of the Russian Federation and does not include Moscow City, is facing a financial emergency for two reasons. First, the economic crisis has hit the Moscow Oblast. Revenues have decreased as expenditures and interest payments on government debt have increased, resulting in a budget crunch. Secondly, the Oblast has suffered massive financial losses through criminal schemes. Moscow Oblast on the Verge of Financial Ruin -------------- ¶3. (C) Moscow Oblast requires a bailout from the federal government, despite the fact that Prime Minister Vladimir Putin already stated he would no longer provide such support. According to a July 27 Nezavisimaya Gazeta article, the federal authorities were forced to intervene urgently since Governor Boris Gromov's team's incompetent stewardship has resulted in the current budget deficit of 18 percent. The Moscow Oblast's debts exceed the allowable limit and are growing, and interest payments on debts are almost triple what the Oblast can afford. On July 23, Nezavisimaya Gazeta reported that the Government Presidium distributed 4.6 billion rubles (approximately USD 150 million) in emergency subsidies from the federal budget to the Moscow Oblast in response to Gromov's appeal for assistance. Georgiy Prokopov, a political consultant at EEK Consulting Group and an independent expert on regional studies, also voiced his grave concern July 15 that the Moscow Oblast is practically in a state of default. ¶4. (C) Carnegie Moscow Center regional expert, Aleksey Titkov told us July 21 that the Moscow Oblast annual budget was 330 billion rubles (USD 10 billion),but the Moscow Oblast Duma cut it by five percent, or roughly 15 billion rubles, in 2009. In Titkov,s view, additional budget cuts are likely later this year. He told us that Gromov is now focusing on how to obtain money and how to address corruption. Independent regional analyst Aleksandr Kynev remarked July 24 that the Moscow Oblast is surviving off of federal banks and "government life support." ¶5. (C) Moscow Oblast's dire financial situation may have some criminal roots. The Rosbalt news agency reported on an investigation involving the possible embezzlement of funds from the Moscow Oblast budget. According to Nezavisimaya Gazeta, the embezzlement scheme involved about 2.6 billion rubles of Oblast money which was intended to resolve housing and municipal services problems. Instead, oblast government officials regularly transferred budget money to a network of dummy firms which were illegally registered in the names of unsuspecting citizens. The media speculates that officials in the Moscow Oblast government then transferred these embezzled funds abroad. ¶6. (C) Prokopov told us that the economic crisis is an underlying problem, but that the default situation relates mainly to the dark story about former Moscow Oblast Finance Minister Aleksey Kuznetsov stealing money from the Moscow Oblast budget. According to newspaper reports, Kuznetsov fled the country last year and is in hiding to avoid criminal prosecution on charges of exceeding his powers of office. Prokopov believed Kuznetsov stole around USD 20 billion in regional funds and attempted to conceal the act by buying land both in the Moscow Oblast and abroad. Kuznetsov's wife also had construction businesses that may have been linked to the Moscow Oblast budget. Prokopov also speculated that the sacking of Kuznetsov and the resignation of Deputy Governor Aleksey Panteleyev may have been connected to Gromov's outside business interests. MOSCOW 00002102 002 OF 003 ¶7. (C) While the crisis is causing officials to scrutinize the budget, they are uncovering financial discrepancies. Since Moscow Oblast was apparently already facing a problem with missing money, the crisis could have been the final blow. Given the current financial realities, it is apparent that the Moscow Oblast is in a bad predicament and will not have enough money for necessary spending. The Political Fallout in Moscow Oblast -------------- ¶8. (C) Linked to the financial situation, pundits cannot agree whether Deputy Governor Aleksey Panteleyev resigned or was sacked. Officially, Panteleyev submitted his resignation on June 1 and the Moscow Oblast Duma approved Konstantin Sedov, Deputy Head of the Federal Tax Service, as his successor. Nezavisimaya Gazeta reported on June 19 that State Duma Deputy Gennady Gudkov, who represents the Moscow Oblast, claimed that Panteleyev intentionally stepped down in order to help the Moscow Oblast avoid default. ¶9. (C) Mariya-Luiza Tirmaste, a journalist at Kommersant daily newspaper, added on July 28 that Gromov suffered a huge personal loss with Panteleyev's departure since they had been close allies and had served together in the Russian military in Afghanistan. Tirmaste told us that Panteleyev's fate was suspicious since only a week after his resignation, he landed softly, joining the Federation Council as a representative of the Nenetsky Autonomous Region, a vast oil region. She told us that one alternative explanation for Panteleyev's resignation was that local elections would take place soon within the Moscow Oblast and Gromov may have wanted him to control the election results, but Panteleyev may have declined, blaming the crisis as a reason for being unable to carry out this task. Tirmaste told us that Panteleyev most likely left office because of the huge debt in the Moscow Oblast. She thought he was probably positioning himself to become a governor in another region, such as in Sverdlovsk. ¶10. (C) According to Prokopov, Gromov "gave" Panteleyev to the Kremlin as part of a bargain aimed at helping Gromov remain in power. In his view, Panteleyev would have negatively influenced the elections and financial situation in the Moscow Oblast, so getting rid of him assigned the responsibility for the region's debt to Panteleyev and let Gromov off the hook. Similarly, Titkov told us that Gromov tried to make a cabinet change by sacking Panteleyev. Prospects for Gromov -------------- ¶11. (C) Consensus among experts is that Gromov is on his way out, but our sources thought that he would likely make a heroic effort to remain in charge through the end of the immediate crisis and at least through the October local elections. According to Prokopov, Gromov managed Moscow Oblast finances poorly, but the financial crisis put him in a weaker political position. For instance, during Moscow Oblast elections in March 2008, Gromov did not support some of the mayors who won, such as in the Mozhayskiy region and in Solnichnogorst. Prokopov told us that Gromov was particularly weak last year when he almost resigned during the Kuznetsov scandal. He thought Gromov would try to stay in his post for the time being in an attempt to address Oblast financial problems. ¶12. (C) Prokopov told us that Gromov is weaker since Sedov replaced Panteleyev as Deputy Governor because Sedov answers to the Kremlin, not Gromov, and Sedov, not Gromov, has the lead in addressing financial problems. According to Prokopov, the federal government already gave Gromov a substantial amount of money in January and February to prevent default, but Gromov was unable to handle it properly. Sedov now controls this money, which came directly from the federal budget and from banks. Prokopov believed that Gromov would hang on until 2010 or 2011 and that Sedov may then become the next governor. In the meantime, Prokopov thought Gromov would stay in power to help United Russia win the local elections and to prevent collapse. ¶13. (C) According to a June 19 Nezavisimaya Gazeta article, Public Chamber member Vyacheslav Glazychev said a double resignation, including Gromov and Moscow Mayor Yuriy Luzhkov, was quite possible. He predicted that by fall there would be a strong change in Gromov's cabinet. Regional Analyst Aleksandr Kynev told us July 24 that he believed Gromov would be out within the next two years since the Moscow Oblast is going bankrupt. He thought either Sedov would become the MOSCOW 00002102 003 OF 003 next governor or Gromov would hang around as a symbolic governor, but that Sedov would hold the real power. ¶14. (C) Kommersant's Mariya-Luiza Tirmaste told us July 28 that it is not clear what would happen to Gromov, but that he is weak and could possibly become an ambassador somewhere. Tirmaste told us that without Panteleyev, Gromov only has half the power. According to Tirmaste, Gromov is a leader in a strategic area since not many leaders know the issues in Moscow Oblast and no candidates have been identified to replace him. She thought that either Sedov or the person who would fill the new vacant Deputy Governor post were best positioned to become the next governor. She noted that in May, just one week after Panteleyev was gone, the Moscow Oblast government structure was changed, adding two additional Deputy Governor positions. Comment -------------- ¶15. (C) Moscow Oblast, on the verge of financial default and drained by reported high levels of corruption, could benefit, in the view of some observers, from a change in leadership. We do not know which analysts are correct, but we will continue to observe as the situation unfolds. Yet the transparency of planned October local elections is in doubt, leaving the Kremlin for the time being to address the messy financial situation through changing the places of minor players on the gameboard. RUBIN