MEDVEDEV'S ANNUAL ADDRESS: ECONOMIC FOCUS SHOWS

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 002782 SIPDIS E.O. 12958: DECL: 11/12/2019 TAGS: PREL PGOV PMAR PHUM PINR ECON EFIN RS SUBJECT: MEDVEDEV'S ANNUAL ADDRESS: ECONOMIC FOCUS SHOWS GOOD INTENTIONS, LONG WAY TO GO REF: 08 MOSCOW 3243 Classified By: Ambassador John R. Beyrle; reasons 1.4(b/d). ¶1. (C) Summary: In contrast to his 2008 address, in which he focused first and foremost on foreign policy, the war with Georgia and harsh criticism of the United States, the overwhelming focus of Medvedev's November 12 annual address was on domestic shortcomings and the need to take steps to address them. However, there were few detailed proposals. His calls for greater emphasis on education, for improvement of conditions for business and agriculture throughout the country, and for specific attention to the problems (and political ramifications of inaction) in mono-cities (towns in which a large portion of the population is employed by one single industry) have been debated and discussed at length for over a year. He did not specifically promise additional funding, nor did he make any detailed proposals. Septel covers the political focus of the speech. End Summary. Break with the Past -------------- ¶2. (SBU) Referring to his September 10 "Russia Forward" article, Medvedev stated that Russia needed to shed its dependence on exports of raw materials, build a new, high-tech economy, and completely modernize its industrial base in order to survive in the 21st century. The economic crisis hit Russia more severely than other countries, he declared, partly because the country had failed to address problems inherited from the Soviet past. That is, it failed to reform the economy's primitive infrastructure, lessen its "humiliating" dependence on raw materials exports, and reorient its production to people's real needs. The GOR had spent more than one trillion rubles ($34.8 billion) to bail out a dozen large corporations before the economic crisis broke out last year. Medvedev stressed that from now on, the government would help out those only companies that are ready to provide sound business plans and plans for increasing their efficiency. "Inefficient companies must go through bankruptcy proceedings or leave the market", he said. "We won't be protecting them forever." But Keep Social Obligations Intact -------------- ¶3. (SBU) Medvedev reported that regional programs on labor stabilization had helped about two million Russians keep their jobs, but the situation remained difficult. More than a million Russians were still at risk of losing their jobs, and pressing social issues needed to be addressed. The GOR would fully meet its social commitments despite the global financial and economic slowdown, Medvedev promised. Pensions would grow more than planned initially. Over the next three years, the average pension would grow no less than 1.5 times, and all pensioners would have incomes larger than the subsistence minimum by 2010. All war veterans would be provided with housing. Meanwhile, special attention would be devoted to improving the situation in single-company towns (monogoroda). Within six months, the government would prepare comprehensive programs on how to diversify the economy in those towns. In extremely difficult situations, direct government assistance would be provided. In some areas, workers would have to be relocated. The GOR would continue supporting the agricultural sector, which was growing even during the economic crisis thanks to the success of the National Priority Project in that sphere. National Priority projects in health and education, Medvedev claimed, had much to do with the recently reported reversal in Russia's demographic situation. The GOR would help stimulate consumer demand by providing consider credits and expanding housing construction. New Investments in Infrastructure and Innovation -------------- --- ¶4. (SBU) Medvedev stated that a Presidential Commission had developed plans for investing in strategic sectors: medical technology, pharmaceuticals, IT, telecommunications, space explorations, and energy conservation. The GOR would support development of new technologies through grants, tax breaks and streamlining of regulations for starting new projects. By 2010, the GOR would prepare rules and regulations for introducing e-trading in the sphere of infrastructure investment, and basic documents , such as drivers' licenses, would eventually be made available electronically. Nuclear MOSCOW 00002782 002 OF 002 energy would be developed as an alternative to fossil fuels and as a means for achieving energy efficiency. Emphasis would be placed on developing space technologies and the GLONASS satellite navigation system. Russia also needed to develop a powerful research and development center that would focus on supporting key Russian industries. Reducing the state sector -------------- ¶5. (SBU) Medvedev stated that the public sector share of the economy (40 percent) was excessive. With economic crisis tensions easing, modernization of the state sector was needed - even in the so-called strategic sectors. State corporations had "no prospects" in their present form and needed overhauling to improve management and effectiveness. Independent auditors needed to examine them, Medvedev suggested, and many would be either closed down or transformed into joint stock companies (with the state retaining control). The tax system also needed streamlining, Medvedev declared. In the near future, considerable attention would be made lowering the overall tax burden on business. ¶6. (SBU) The financial sector was weak and insufficiently capitalized, Medvedev stated. The GOR will introduce a plan outlining specific measures to improve the financial system in order to meet the needs of modernization. In the meantime, there were signs of resumed lending growth in the banking sector, reduction in the level of NPLs, relative stability in the currency markets, and a slowdown in inflation. Comment -------------- ¶7. (C) Indeed, the major success story in the Russian economy has been lowering of the y-o-y inflation to less than 10 percent (mostly a result of weak investment, consumption and weak bank lending). The reduced rate of inflation has made it possible for the Central Bank to cut interest rates and bring the benchmark refinancing rate to the lowest level in over a decade (9.5 percent). While this is expected to boost credit growth and help companies borrow and invest, to date banks remain reluctant to lend due to concerns about borrower risk. That said, the World Bank and EBRD in recently revised down their growth forecast for Russia (3.32 percent) and predicted a steeper contraction in GDP for 2009 (8.7 percent vice the earlier forecast of 7.9 percent). The World Bank reported that the major reasons for Russia's weaker than expected performance were: lack of structural reforms and excessive dependence on raw export commodities - making the country vulnerable to future financial shocks. In particular, Russia's non-exporting sectors, not dependent on global commodity demand, continue to suffer from depressed consumer demand and limited availability of credit. ¶8. (C) Medvedev's cheerleading in the direction of innovation and modernization has not had an immediate direction on the GOR's economic strategy, which still seems to be focused on diversifying gas export routes rather than the economy as a whole. The energy and metallurgical sectors remain the chief generators of revenue, and will continue to do so as the global economy recovers. The GOR's recent generous bailout of Deripaska's Rusal and the nearly bankrupt state-run automobile plant Avtovaz fly in the face of Medvedev's calls for weaning state corporations off the government payroll and making them more efficient. Plans for privatization of state enterprises are focused on the sale of minority shares in second rate companies in the shipping and insurance sectors - not on potentially lucrative assets such as Rosneft. ¶9. (C) Nevertheless, Medevdev's address is an eloquent statement of Russia's chronic economic ills; the Dutch disease, corruption, weak legal institutions and lack of a stable environment for investment. With dwindling resources in its reserve fund and the need to borrow abroad to cover its deficit, however, the GOR is unlikely to have the means or the will to invest in those structural changes (i.e., health, education, infrastructure) necessary to transform Medvedev's vision into reality anytime soon. Beyrle