Identifier
Created
Classification
Origin
09MOSCOW502
2009-03-02 13:41:00
CONFIDENTIAL
Embassy Moscow
Cable title:  

SUBJECT: DVORKOVICH AND A CRISIS OF "PLANETRAY

Tags:  ECON EFIN ENRG ETRD PGOV PREL RS 
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INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
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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
-------

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