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Cablegate: Despite Strong Telecom and It Sectors, Minister Reiman

VZCZCXRO0904
PP RUEHHM RUEHLN RUEHMA RUEHPB RUEHPOD RUEHVK RUEHYG
DE RUEHMO #1443/01 1431318
ZNR UUUUU ZZH
P 221318Z MAY 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 8206
INFO RUEHZN/EST COLLECTIVE
RUCNCIS/CIS COLLECTIVE
RUEHYG/AMCONSUL YEKATERINBURG 3172
RUEHVK/AMCONSUL VLADIVOSTOK 2824
RUEHRA/AMEMBASSY RIGA 5397

UNCLAS SECTION 01 OF 02 MOSCOW 001443

STATE FOR EB/CIP AMBASSADOR GROSS, RICHARD BEAIRD
USDOC/ITA/MAC MATTHEW EDWARDS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: TSPL PGOV EINT TINT ECPS RS
SUBJECT: DESPITE STRONG TELECOM AND IT SECTORS, MINISTER REIMAN
REPLACED

REF: A) MOSCOW 1336 (C)
B) MOSCOW 1321
C) MOSCOW 893

MOSCOW 00001443 001.2 OF 002


-------
Summary
-------

1. (SBU) The May 12 GOR cabinet reshuffle replaced IT and
Communications Minister Leonid Reiman with longtime Presidential
Protocol Chief Igor Shchyogolev. The move surprised observers, who
thought Reiman's long personal relationship with Putin and
successful development of Russia's communications industry would
keep him in his position. Reiman landed on his feet, however, with
an appointment as Presidential Advisor on innovation.

2. (SBU) Despite charges of conflict of interest and other
questionable business dealings, Reiman leaves a record of sustained
growth in Russia's telecom and IT sector. Recently-released figures
show Russia's Information and Computer Technology (ICT) market
booming in 2007, with 25 percent growth overall and big gains in
internet use and personal computer ownership. Shchyogolev will face
several challenges in his new position, which has taken over press
function from the Ministry of Culture, making him Minister of
Communications and Press. These include expanding broadband and
third generation wireless service, privatizing state landline
monopoly Svyazinvest and managing pressure from Reiman. End
Summary.

--------------------------
Reiman Out, Shchyogolev In
--------------------------

3. (SBU) Counter to widespread speculation, Leonid Reiman was
replaced as Information Technologies and Communications (ITC)
Minister in the May 12 cabinet reshuffle (reftels A and B). The
next day, however, the GOR announced that Reiman would take a
position as Presidential Advisor. Our Ministry contacts were
surprised by the move, telling us that they only learned of the
switch through media reports. The new Minister, Igor Shchyogolev,
was Head of President Putin's Protocol Service from 2002 - 2008, and
head of Putin's Press Service from 2000 - 2002. Prior to that,
Shchyogolev was Press Secretary to Prime Minister Primakov (1998)
and an ITAR-Tass correspondent in Moscow and Paris. Just 42 years
old, he speaks French, English and German. Consistent with
Shchyogolev's background, the Ministry's functions shifted and it
was renamed the Ministry of Communications and Press (MCP), which
adds the press functions formerly handled by the Ministry of
Culture.

4. (SBU) A well-placed industry contact described Shchogolev's
posting as "a reward for long-term service" to Putin. Shchyogolev
has no telecom or IT experience, so the focus of the Ministry was
shifted to include mass media. Ilya Ponomarev, a member of the
State Duma Committee on Information Policy, Information Technologies
and Communications, told us that Reiman's new posting is a way to
keep innovation policy under the direct control of the President.
He reports that in the previous administration, the Kremlin and
White House fought over control of innovation strategy. Before last
week's changeover, innovation was part of the portfolio of First
Deputy Prime Minister Sergey Ivanov. Ponomarev tells us to expect
Medvedev to announce the creation of an innovation council, chaired
by the President and directed by Reiman.

5. (SBU) Reiman had been ITC Minister since 1999. He was considered
one of the most economically liberal ministers in the Putin cabinet,
and is credited with directing a prolonged boom in Russia's telcom
and IT sector. His tenure was marred, however, by well-publicized
allegations of conflicts of interest. Russian capital company Alfa
Group charged Reiman with money laundering in several foreign
courts. The court cases produced evidence that Reiman, through
off-shore holding companies, owns a stake worth $2.5 billion in
Russia's third-largest mobile communication company (MegaFon). Last
year, MegaFon was granted one of three highly-prized third
generation wireless licenses. Most observers agree that it was
probably Reiman's questionable business dealings, not his
performance as Minister, that cost him his cabinet position.

---------------
Reiman's Legacy
---------------

6. (SBU) Ironically, Reiman's dismissal came shortly after the
official release of IT and telecom statistics for 2007 that showed a

MOSCOW 00001443 002.2 OF 002


continuation of the solid growth the sectors have experienced for
the past decade under Reiman's watch. The Minister also reported
success in his drive to connect Russian schools to the internet
within the framework of the National Priority Project on Education.

7. (SBU) In a recent meeting with us, MITC Deputy Director for
International Cooperation Maksim Timofeyev highlighted some of the
Ministry's recent accomplishments. In 2007, the Russian IT and
communications market reached 1.5 trillion rubles ($65 billion), a
25 percent increase over 2006. This included 983 billion rubles
($423 billion) from telecommunication services and 450 billion
rubles ($20 billion) from information technologies. The number of
internet users in Russia grew to 35 million, up 40 percent.
Personal computer ownership grew to 31 million, up 36 percent. The
number of households accessing broad-band Internet access grew by 50
percent, reaching 4.8 million.

8. (SBU) Timofeyev also reported that Russia had 180 million mobile
phone subscribers in 2007, greater than Russia's population of 142
million. Although this represents a 15 percent increase over 2006,
the rate of growth slowed from previous years. To address market
saturation, the Ministry proposes refocusing its priorities beyond
expanding service zones and improving coverage quality to the
provision of high-end services like high-speed Internet, mobile
television and video calling.

----------------------------------
Ministry Challenges and Priorities
----------------------------------

9. (SBU) Initial comments by Minister Shchyogolev indicate that he
may focus Ministry efforts on expanding broadband connection, which
is still at low levels, especially outside major cities. Another
continuing challenge is the establishment of third generation (3G)
wireless service. The GOR issued 3G licenses to Russian companies
MTS, VimpelCom and Megafon in 2007. So far, however, only St.
Petersburg, through MegaFon, offers 3G service. Service in Moscow
was held up by Ministry of Defense refusal to allow civilian use of
3G frequencies, which was finally lifted on March 20. Timofeyev
reported that 3G networks will soon be operating in Moscow and
Sochi, with a Ministry goal of coverage in 10 major Russian cities
by 2010. The new minister will also face the long-anticipated
privatization of State landline monopoly Svyazinvest.

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

10. (SBU) Although IT and Telecom continue to be among Russia's
fastest-growing sectors, the new Minister will face a number of
hurdles. In addition to the industry issues of expanding broadband
and 3G wireless service and privatizing Svyazinvest, there will also
be internal management challenges. There have been moves by the FSB
to subject the telecoms and IT industries to strategic sectors
restrictions (reftel C). Shchyogolev will also have to contend with
Reiman's continued influence in the sector, exerted from a powerful
position.

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