SUBJECT: DVORKOVICH AND A CRISIS OF "PLANETRAY

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000502 SIPDIS DEPT FOR EUR/RUS; NSC FOR MCFAUL E.O. 12958: DECL: 02/21/2018 TAGS: ECON EFIN ENRG ETRD PGOV PREL RS SUBJECT: SUBJECT: DVORKOVICH AND A CRISIS OF "PLANETRAY DIMENSIONS" REF: A) MOSCOW 403 B) MOSCOW 424 Classified By: Ambassador John R. Beyrle for reasons 1.4 (b/d). -------------- Summary -------------- ¶1. (C) In a February 27 meeting with the Ambassador, President Medvedev's Economic Assistant, Arkadiy Dvorkovich, said he predicts the downturn in Russia will be deeper and longer than the GOR had originally thought. He said the GOR would cover a large deficit this year out of the Reserve Fund but would likely have to borrow from abroad and cut expenditures in 2010 and 2011 to make ends meet. He said the GOR was husbanding its remaining reserves and reducing support to RusAl and other firms, which would have to attempt to restructure their debts on their own. Large external debt payments due in 2009 would, however, put downward pressure on both reserves and the ruble as would oil prices if they began to fall again. Dvorkovich agreed that U.S-Russian relations showed promise, noting that for the GOR the Obama-Medvedev meeting in London would overshadow the G20 Summit. In that regard, he said Medvedev had directed the Ministry of Energy to resolve its dispute with ExxonMobil over the Sakhalin I budget dispute forthwith. End Summary. -------------- Crisis Worse Than Expected -------------- ¶2. (C) The Ambassador noted that in Dvorkovich's recent interview in the magazine Itogi, the magazine had quizzed him about earlier statements that Russia would weather the downturn without difficulty and that the downturn would last only until the end of 2009. Dvorkovich acknowledged his earlier optimism had been misplaced and that the Russian economy was rapidly slowing while inflation was actually set to rise. He said current economic developments were in line with GOR projections. However, these were GOR projections from December not September. ¶3. (C) Dvorkovich said no one had seen an economic crisis quite like this before, a crisis he had characterized in the interview as being of "planetary dimensions." If it were only a cyclical downturn, as the GOR had earlier assumed, then it could be over by the end of 2009 or the beginning of ¶2010. But if it were something else, a paradigm-shifting downturn, then it was difficult to predict how long it would last and how far the economy would fall. This was true, he added, not only for Russia but all the world's economies. ¶4. (C) The Ambassador noted that Gazprom head Miller had recently told us (reftel A) that he saw this as a cyclical downturn, and thus saw no reason to adjust his company's investment plans. Dvorkovich scoffed in response, noting that Miller must know best how to run his company. -------------- Budget Debate Nearing its End -------------- ¶5. (C) Dvorkovich said the two-month debate within the GOR over the revised 2009 budget was coming to an end; the budget should be released next week. Dvorkovich said the delay was the result of the unexpected severity of the downturn. There had been a major disagreement over how large a deficit to run in response to the crisis. The GOR was still arguing internally over the final figure but it would be at least 8 percent of GDP. It could be higher if advocates of greater spending won the argument in favor of an additional one percent of GDP to be spent on housing and infrastructure. These were the two areas with the greatest multiplier effects, according to Dvorkovich, and which would best stimulate growth and mitigate the downturn. ¶6. (C) Dvorkovich disputed Amb. Beyrle's comment that Russia had lost two months as the budget debate dragged on. The process could have been more efficient, he granted, but that was true for all countries as various steps were tried in the hopes of stemming the crisis. However, he did acknowledge that the delay had sharply curtailed government spending. As a result, despite a drastic downturn in revenue, the GOR had actually run a surplus so far in the first quarter of 2009. MOSCOW 00000502 002 OF 003 That said, Dvorkovich noted that the lack of government spending had not been good for growth. ¶7. (C) Dvorkovich said there had also been a debate over how to finance the deficit. The GOR had made the decision use the Reserve Fund this year, in part because it believed that in the medium-term, with its low public debt, Russia would have access to international credit. If the downturn persisted until 2010 or 2011, the GOR would need the additional resources and it would also have to look at cutting expenditures. In fact, the GOR was already moving to delay priority projects, such as building new schools, which were needed but could be put off until the future, when the economy had recovered. The one area that would not be touched, Dvorkovich insisted, was social spending. -------------- External Debt -------------- ¶8. (C) Dvorkovich added that the GOR had also made the decision to curtail support for private sector external debts (septel). Companies that had over-committed (such as Oleg Deripaska's RusAl) had to restructure their debts on their own. In that regard, Dvorkovich noted that RusAl had already made a significant effort to cut costs and that this was making it much easier for it to restructure its debts (reportedly in excess of $14 billion coming due this year) despite the lack of GOR support. Dvorkovich added, however, that the GOR could reconsider supporting RusAl if need be. ¶9. (C) Dvorkovich said the ruble had stabilized in recent weeks but he acknowledged that there was still downward pressure on both Russia's reserves and on its currency. Certainly if oil prices were to fall the ruble would depreciate and, this time, the CBR had neither the resources nor the intention to intervene. In addition, there was pressure from the capital account, with outflows generated from heavy external debt payments this year. He expected to see reserves decline another $60-70 billion in 2009 as Russian companies bought dollars to repay these external debts. ¶10. (C) The Ambassador noted the presence of Central Bank monitors in Russian banks starting this week and asked if the GOR were considering other administrative controls on the movement of capital. Dvorkovich said the monitors had been there before but had had their authority augmented. He denied that they were a form of capital control, something which the GOR would not do. In that regard, he noted the monitors had no direct authority over a bank's operations. Their purpose was to report risky or unethical behavior to the Central Bank for action. -------------- Bilateral Relations -------------- ¶11. (C) The Ambassador noted that there was at least a sharp "V" shaped recovery underway in U.S-Russian relations, with meetings in the near future between Secretary Clinton and FM Lavrov in March, and presidents Obama and Medvedev in April. Dvorkovich agreed and noted that for the GOR, the meeting between the two presidents in London was far more important that the G-20 Summit on the financial crisis both would be attending. ¶12. (C) Dvorkovich acknowledged an increase in GOR interest in cooperation on anti-corruption. He agreed this was an area where the U.S. and Russia should focus bilateral attention. Russia believed corruption was primarily a trans-national issue, which required an international approach. To that end, Russia was planning to sign the OECD Anti-Bribery Convention and was looking for other ways to use progress internationally to send a domestic signal about the GOR's commitment to reducing corruption. ¶13. (C) The Ambassador said Russia's WTO accession was another area where we should focus renewed energy. WTO accession could do for the basket of economic issues what START negotiations could do for strategic issues; provide critical early momentum. Dvorkovich agreed. -------------- MOSCOW 00000502 003 OF 003 Exxon-Mobil -------------- ¶14. (C) The Ambassador noted ExxonMobil's on-going difficulties with the Ministry of Energy over the budget for the Sakhalin I project (reftel). He cautioned that this was not an issue Russia would want to see on President Obama,s agenda. Dvorkovich responded that there were issues to resolve but also that there was a need for the Ministry of Energy to move faster in resolving them. He said Medvedev had instructed DPM Sechin and Energy Minister Shmatko to that effect. -------------- Comment -------------- ¶15. (C) Dvorkovich's private and public pessimism over the Russian economy marks a distinct change from even a few weeks ago. In that regard, he could have perhaps been more generous to Gazprom head Miller, who seemed to be toeing the government line on the economy when the Ambassador met him, albeit working from out-of-date talking points. Of the many bad statistics released recently, the sudden, severe drops in industrial production and GDP in December and January appear to have done the most to promote a more sober view within the GOR. The need for decisive steps is acute: unitl now, most of their anti-crisis measures have been short-term patches designed to see them through to a rise in commodity prices, which they were counting on happening before the end of 2009. With that scenario looking highly unlikely now, the budget deficit approach that Dvarkovich has been a leading advocate of to provide an economic stimulus becomes more difficult to sustain into 2010. End comment. BEYRLE