RUSSIA TRADES LOANS FOR PRESTIGE IN THE CIS AMID

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000620

SIPDIS

E.O. 12958: DECL: 03/10/2019
TAGS: PREL ECON EFIN RS ZK
SUBJECT: RUSSIA TRADES LOANS FOR PRESTIGE IN THE CIS AMID
DEEPENING FINANCIAL CRISIS

REF: A. MOSCOW 220

B. BISHKEK 102

Classified By: Ambassador John R. Beyrle for reasons 1.4 (b) and (d)


1. (C) Summary. Despite its own increasing financial woes,
the Russian government has recently pledged economic
assistance to Kyrgyzstan, Belarus and Armenia, as well as
$7.5 billion to a new Eurasian Economic Community (EurAsEc)
anti-crisis fund. Discussions with Ukraine and Tajikistan on
financial aid are reportedly also ongoing. While Moscow has
not disclosed the terms of its assistance packages to the CIS
countries, speculation about the strings attached is rampant.
Regardless of the specific short term quid pro quos the
Russians may have extracted from their beneficiaries,
Russia's use of financial assistance underscores its wish to
maintain long term prestige and influence in the CIS space,
where Moscow views its traditional strategic interests as its
foreign policy priority. Given the significant Russian
commercial interests in the region, the GOR is also looking
to help prevent a collapse of the CIS economies that would
have detrimental effects on its own economy. It remains to
be seen, however, whether the GOR can fully fund its various
assistance pledges given the ongoing internal policy logjam
on the federal budget and the government's dwindling
resources. End Summary

Russia Opens Its Wallet...
--------------


2. (SBU) The March 3 MFA report on Russian foreign policy
and diplomatic activities in 2008 unambiguously states that
Russia considers its nearest geopolitical environment,
particularly the CIS, as its "absolute foreign policy
priority," where the country has "traditional strategic
interests." This echoes recent statements by top Russian
officials, including President Medvedev and Foreign Minister
Lavrov, regarding Moscow's "mutually privileged relations"
with its former Soviet republics (Ref A). As the
repercussions of the global financial crisis reverberate
increasingly and alarmingly throughout the region, the GOR
has, on paper at least, put its money where its mouth is,
announcing a series of aid packages to CIS countries that
include: a $2.3 billion assistance package to Kyrgyzstan, a
$2 billion loan to Belarus, a $7.5 billion contribution to
the newly created $10 billion EurAsEc anti-crisis fund, and a
$500 million package to Armenia. A $5 billion emergency
assistance loan to Ukraine to cover the budget deficit is
currently under discussion along with an additional $3
billion assistance package for Belarus, while the Tajik
government has reportedly sought "urgent humanitarian
assistance" from Russia. Although Tajik President Emomali
Rahmon,s February 24-25 visit to Moscow did not yield any
announcements, he and President Medvedev reportedly discussed
cooperation in energy projects and in the 670-megawatt
Sangtuda-1 hydro electric power plant, a $720 million project
in which Russia has a 83.55% stake.


3. (C) Details on all of these packages are sketchy.
Piecing together reporting from various sources, it would
appear the $2 billion to Belarus and the $500 million to
Armenia are straight loans with possible ongoing discussions
on the two countries' entering the ruble zone. The loans are
reportedly at a slightly better than market rate. Similar
financial assistance from Moscow in the past had involved
15-year repayment schedules with an initial 4-year grace
period, as well as the takeover of Armenian state assets by
Russian companies. As Embassy Bishkek reported in Ref B, the
structure of the $2.3 billion package to Kyrgyzstan is more
complicated and might not put as big a dent in Russia's
wallet than first meets the eye. A big chunk of the amount
is a $1.7 billion loan to help finance the construction of
the Kambarata 1 hydroelectric dam, the terms of which are
still to be negotiated. The rest consists of the write off
of approximately $150 million in existing Kyrgyz debt to
Russia, a $150 million grant to be disbursed by the Russian
government, and a $300 million loan in budgetary support.
The GOR reportedly promised to disburse the latter two pots
of money, amounting to $450 million total, by April 30.

...With Strings Attached
--------------


4. (C) While the exact terms of the GOR's aid offers to the
former Soviet republics are shrouded in secrecy, speculation
over the political and economic strings attached runs
rampant. Among the packages, the financial aid to Kyrgyzstan
has attracted by far the most attention amidst rumored
Kremlin pressure for Bishkek to close the Manas air base.
Similarly, commentators have speculated that the GOR has

MOSCOW 00000620 002 OF 003


delayed delivery of the second tranche of its $2 billion loan
to Belarus because of Belarusian reluctance to fulfill its
promise to recognize South Ossetia and Abkhazia in the face
of EU pressure (N.B. According to March 13 press reports, the
GOR may have now provided $500 million of the $1 billion
second tranche funds). In the wake of President Rahmon's
visit, Russian press was abuzz with speculation that Moscow
had not offered Tajikistan a package similar to Kyrgyzstan's
due to Rahmon's failure to give Russia a controlling stake in
the Rogun hydroelectricity project, for which $800 million in
Russian investment is being sought, and his foot dragging on
moving a Russian air base from its current Dushanbe Airport
location to a new site as per a 2004 agreement between the
two governments. With regard to the $5 billion loan to
Ukraine that is currently under discussion, experts assume
Russia at a minimum wants to ensure that its interests in
Ukraine would continue to be served by providing Prime
Minister Tymoshenko with the credit "win" in advance of the
presidential elections. While the media has speculated over
specific demands such as gaining control over Ukraine's gas
transit pipelines or Ukraine's abandoning its NATO
aspirations, many experts and EU diplomats believe Russia can
score a soft power victory by supporting Ukraine at a time
when the EU and the international financial institutions are
not seen to be delivering. Little is known about the aid
offer to Armenia, which could be a balancing factor to
Russia's recent overtures to Azerbaijan in view of that
country's hydrocarbon resources.

Political and Economic Benefits for Russia
--------------


5. (C) While the GOR may be utilizing its assistance
packages to extract specific short term concessions from its
neighboring countries, its largess at a time when its own
economy is increasingly slipping toward a recession is also
based on long term strategic interests. For a region prone
to playing the balance of power game, many of the former
Soviet republics still look toward Russia as the de facto
dominant player, but are increasingly seeking to play off
Moscow against other players such as Beijing, Washington, and
Brussels (Ref A). The GOR, despite its formal renunciations
of the "zero-sum" game, understands this reality well and
thus is under pressure to open its wallet in order to
maintain its prestige and special interests in the region, as
well as to ensure its neighbors' good will toward Russia.
The situation is complicated by the fact that as the Russian
economy contracts and the number of officially registered
unemployed is expected to reach almost 3 million by the end
of the year, CIS members are hurting from the loss of
remittance payments that millions of migrant workers send
home from their construction and retail jobs in Russia.
Central Asian leaders, in particular, are looking toward
Moscow to remedy the situation.


6. (C) Russian assistance to the CIS countries also serves
Moscow's own economic interests. Deputy Director of the CIS
Institute Andrey Grozin points out that prestige and
influence aside, stability in the post Soviet space is a top
priority for the Russian government. Given the significant
Russian business and trade interests with the former Soviet
republics, particularly with regard to oil and gas in the
Central Asian countries, a collapse of the CIS economies
would be potentially disastrous to the already troubled
Russian economy. The Ministry of Economic Development,s
Chief of the CIS Economic Cooperation Department Sergey
Chernyshev agrees, stating that measures some CIS governments
have already taken, including tightening monetary policies
and cutting budget spending and investments into the real
sector, could harm the financing of projects that involve
Russian investors.

But Does Russia Have the Money?
--------------


7. (C) The current $64,000 question is whether the Russian
government can fulfill its various assistance obligations
given its own economic woes. The reality is that the Russian
economy is increasingly feeling the effects of the ongoing
financial crisis, and the federal budget is no exception.
After more than two months of intense negotiations, Cabinet
ministers still have not reached a consensus on expenditures
in their effort to implement Prime Minister Putin's December,
2008 call for a revised 2009 federal budget. The
inter-ministerial disagreements have taken shape against a
backdrop of an expected 40-percent drop in revenues relative
to the original budget. There are apparently inflexible
positions within the Russian government about the best use of
budget resources to mitigate the expected contraction. One
indication of the seriousness of the budget crisis is that

MOSCOW 00000620 003 OF 003


the government is asking Rosnanotech and other state
corporations to return previously disbursed government funds.



8. (C) Many experts believe that given the protracted
budget debate and the GOR's dwindling resources, Russia is
unlikely to fulfill all the assistance commitments that it
has made to its neighbors in recent months. Lena
Lebedinskaya, a federal budget specialist at the Economic
Experts Group consultancy to the Finance Ministry, told us
certain programs under the budget's "National Security"
heading could be restructured to allow for the disbursement
of initial tranches this year but possibly at a fraction of
the originally proposed amount. She speculated that these
proposed loans would suffer the same fate of
non-implementation that befell other Russian government
crisis-mitigation measures, such as the $50 billion foreign
debt repayment fund from which Vnesheconombank (VEB)
ultimately distributed only $11 billion before the GOR
discontinued the program.

Comment
--------------


9. (C) While Russia may desire to use its economic
resources to play a more controlling role in the affairs of
its neighbors, its own mounting economic problems may
complicate its ability to carry out its commitments. GOR
reserves are now being committed to an ever growing budget
deficit and Russia faces the likelihood of renewed external
borrowing in 2010, if not before, at high interest rates. At
the same time, the assistance pledged to the various CIS
countries are relatively small in amount vis-a-vis their
economies' growing need for external bailout. With countries
such as Ukraine, Belarus, and Tajikistan reportedly also
looking elsewhere for funds to weather the current storm,
Russian attempts to buy prestige and influence may not yield
as much return as the GOR has initially hoped. Whether for
political or budgetary reasons, the GOR has already missed
the reported February deadline for providing the full second
tranche of loans to Belarus. The next test will be whether
it will provide Kyrgyzstan the $450 million first tranche by
the April 30 deadline, especially in light of Bishkek's
apparent willingness to consider a new contract for the U.S.
use of the Manas air base.

BEYRLE