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

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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