KUDRIN URGES COORDINATED U.S.-RUSSIAN EFFORTS ON

C O N F I D E N T I A L MOSCOW 000364 SIPDIS STATE FOR EUR/RUS, EEB/IFD STATE PLEASE PASS TO USTR ROHDE TREASURY FOR TORGERSON AND WRIGHT DOC FOR 4231/MAC/EUR/JBROUGHER NSC FOR ELLISON E.O. 12958: DECL: 02/12/2019 TAGS: EFIN ECON ETRD RS SUBJECT: KUDRIN URGES COORDINATED U.S.-RUSSIAN EFFORTS ON CRISIS, WTO REF: MOSCOW 203 Classified By: Ambassador John Beyrle, Reasons 1.4 (b/d). ¶1. (C) Summary. In a February 11 meeting with Under Secretary for Political Affairs William Burns, the Ambassador, and NSC Senior Director for Russian Affairs Michael McFaul, Finance Minister Aleksey Kudrin gave a general outline of the GOR's efforts to remedy the crisis domestically, including further assistance to the banking sector and the GOR's revised 2009 federal budget. He expressed hope that the upcoming G-8 meeting in Rome would provide momentum in advance of the April G-20 Summit in London on efforts to coordinate responses to the financial crisis and to reform the international financial architecture. Kudrin also urged close U.S.-Russian coordination on Russia's WTO membership. He acknowledged Russia needed to muster the political will to resolve pending WTO accession issues, such as agricultural subsidies, but argued in familiar terms that an expression of support from the U.S. was the key to bringing the accession to a speedy conclusion. End Summary. -------------- -------------- Anti-Crisis Plan Focus: Banking Sector Support, Budget -------------- -------------- ¶2. (C) As the meeting began (at 9:15 on a day that, to judge from the line-up in his outer office, was far from over), Kudrin sighed as he took his seat and lamented that "the (country's) banks are not providing credit to the economy." He understood the banks faced a very uncertain economy and that they were concerned primarily with their own survival. However, the banks were too preoccupied with the scope and severity of the crisis and as a result were still not lending enough, which had put a brake on economic activity. The GOR was therefore still working to restore liquidity to the Russian banking system through additional support. ¶3. (C) Kudrin said the GOR's other anti-crisis focus was on the revised 2009 federal budget. The budget's goal was to optimize its spending -- from banking sector support, to unemployment support for "one-company towns" in the regions, to assistance for neighboring countries. The budget's overall expenditures were likely to remain constant, but they would be restructured with these goals in mind, with some programs being reduced and others, especially those that supported social spending, likely to receive increases. ¶4. (C) Kudrin said the GOR had agreed internally on a deficit of 7 percent of GDP which, once the National Welfare Fund's disbursement of subordinated loans to the banking sector was included, would reach 8 percent of GDP. However, he confided that his own expectations for the budget were much more pessimistic; that the deficit might exceed 15 percent of GDP. He hastened to add that few officials in the GOR shared pessimism but that, at his direction, the Finance Ministry was working on a number of scenarios to prepare for such an eventuality. (Note: By way of comparison, the Reserve Fund, which is likely to be used to finance the deficit, is roughly 12 percent of GDP. End Note.) Kudrin also observed that despite Russia's recession, inflation for 2009 would be at least 15 percent and could be higher, meaning that Russia was in the grip of stagflation. -------------- G-20 Summit, U.S. Deficit -------------- ¶5. (C) Kudrin said his goal for the upcoming G-8 meeting in Rome was to engage his counterparts on their ideas for the April G-20 agenda. He said he looked forward to raising the subject with Treasury Secretary Geithner. He expressed hope that an exchange of views with Geithner and other counterparts would lead to specific recommendations on implementing Italy's "Global Standards" initiative, which he said was focused on establishing a unified approach to issues such as market regulation, anti-money laundering practices, and intellectual property rights protections. ¶6. (C) Kudrin said he liked the idea of harmonizing regulatory environments as a means of stabilizing the world economy. The endeavor would not only aid in the development of individual markets but would also facilitate diversification of capital markets. In that regard, he noted the impact of the crisis was palpable in Russia, particularly as global investors fled to the dollar as a safe haven currency. ¶7. (C) Kudrin ventured, however, that the USG's ability to continue its borrowing pace was not sustainable. He acknowledged that U.S. Treasuries were the most liquid instrument in the world, but related how Chinese officials had expressed to him their regret they had no choice but to continue holding and investing in Treasuries. Kudrin speculated that the USG's uninterrupted access to global capital markets had generated a false sense of security that the government would always be able to fund its obligations. He conceded a similar feeling had prevailed among GOR officials who now recognized that capital markets were essentially closed to Russia, but who were nevertheless still confident that the country's USD 388 billion in reserves could be marshaled, if needed, to save the day. -------------- Russia's WTO Bid: Time Is Of The Essence -------------- ¶8. (C) In response to the Ambassador's query about the status of Russia's WTO accession, Kudrin reiterated his view (reftel) that a coordinated approach with the U.S.--including a clear expression of support from the new U.S. administration--on Russia's WTO accession bid was the key to a speedy conclusion. Agreement on the general Working Party Report was essentially complete; and resolution of technical issues related to agricultural standards and subsidies, IPR protections, and state-owned enterprises were all that remained to be done. With U.S. support, accession could be finalized in a month's time. Kudrin acknowledged that Russia had its own work to complete, namely mustering the political will to settle the pending issues of agricultural subsidies and phytosanitary measures. Nevertheless, he suggested that U.S. efforts to broker a compromise on the outstanding issues would send a much-needed signal about the importance the U.S. attached to Russia's membership. ¶9. (C) Kudrin said that the longer the accession process continued with no results, the more influence protectionist-leaning lobbyists and interests were gaining, especially in the agricultural sector. The Federal Veterinary Service (VPSS) in the Ministry of Agriculture, for example, was moving toward adopting EU sanitary/phytosanitary standards (SPS),including the ban on U.S. poultry treated with chlorine washes, that could choke off U.S. imports. Kudrin acknowledged that EU standards was a cover for the agriculture lobby's protectionist tendencies but argued that, in the absence of progress on WTO accession, advocates of a more open trade regime were on the defensive. He added that the U.S. example was also critical to the debate in Russia. Reports of the U.S. stimulus package's initial "Buy American" provisions had, for instance, aided internal opponents of WTO membership. ¶10. (C) Under Secretary Burns underscored that the message he was bringing from President Obama was that the U.S. and Russia had an opportunity to restart their relations, including on economic issues such as WTO accession. He noted that protectionism posed a real danger for the U.S. and for Russia. However, both countries now had an opportunity to translate positive rhetoric into concrete action. The Ambassador added that Russia's WTO membership could signal for economic stability what START had signified about U.S.-Russian stewardship in the area of security. U/S Burns emphasized that Russia needed to act on longstanding initiatives like barriers to U.S. agricultural products and the arbitrary behavior of the Veterinary Service if we were to make progress together on WTO. -------------- Prelude to a Late-Night Meeting -------------- ¶11. (C) Before the 9:15 pm meeting began, a coterie of Russia's "who's who" in banking emerged from Kudrin's office, including: Sberbank President German Gref, VTB Chairman Andrei Kostin, VEB Chairman Vladimir Dmitriev, and Central Bank Chairman Sergei Ignatiev. An agitated Gref approached Under Secretary Burns, the Ambassador, and NSC Senior Director McFaul with bitter criticism of the U.S. and Russian responses to the crisis. Gref said the GOR had made a course correction from its "early nonsense" but said much of the GOR was still in denial about the likely depth and duration of the recession. He said the best prescription for Russia would be to maintain macroeconomic stability, which meant striving for the smallest possible federal budget deficit. He said the U.S. should be striving for the same stability and in that regard criticized the U.S. stimulus plan, which he said would monopolize already-scarce global credit in a futile attempt to end the recession in the U.S. by the end of ¶2009. -------------- Comment -------------- ¶12. (C) Kudrin was open and candid about the economic challenges Russia faces. An inclusive U.S. approach in the G-8 and G-20 and a good-faith show of support on our part for Russia's WTO bid would likely help Kudrin preserve Russia's push toward greater international economic integration despite the recession and in the face of strong domestic opposition. BEYRLE