Cablegate: How to Weather the Economic Crisis: A Tale of Two Fora

R 310952Z DEC 08


E.O. 12958: N/A

Sensitive but unclassified. Not for internet distribution.

1. (SBU) Summary: Consulate officers attended a Sverdlovsk
oblast Advisory Council meeting on November 28, and the Eighth
Urals Investment Forum in Chelyabinsk on December 4. Both
meetings were dedicated to discussing ways to weather the
economic crisis. Politicians were enthusiastic promoters of
foreign investment as a solution to the crisis and emphasized
the importance of small and medium enterprises (SME), but gave
no details on policy or legislative changes that might promote
these objectives. Meanwhile, private business is looking to the
government at all levels for a lifeline to get through the
crisis, but also suggests measures such as reducing tariffs on
key items and public investment in R&D. Participants in both
fora acknowledged that more needs to be done to diversify the
economy, improve infrastructure and foster transparency in the
business environment . End summary.

Cheerleading from the Administration

2. (SBU) At his Advisory Council meeting, Sverdlovsk oblast
governor Eduard Rossel emphasized that efficiency must improve,
noting that the productivity of Russian machine tool
manufacturers is 40 times lower than foreign manufacturers. He
said it is urgent that government encourage the creation of new
SME to absorb the newly unemployed. Rossel expressed an
interest in public works projects similar to US depression-era
programs. He also said that the region has been given RR 8
million for development of nano technology. He highlighted the
need to adopt energy saving methods and technologies, especially
as government budgets are contracting.

3. (SBU) At the Urals Investment Forum, Yuriy Klyopov, deputy
governor of Chelyabinsk oblast, recited steps the oblast has
taken to attract foreign investment. He and other Chelyabinsk
officials profiled projects for which they hope to find foreign
investors in 2009; they consider tourism projects to be among
the most promising. Klyopov also said that major companies in
the region will continue major investments and expansion despite
the international crisis. However, Klyopov acknowledged that
the regional budget outlook for 2009 is strained because
metallurgical production provides 64 percent of the oblast
budget and sales have declined.

4. (SBU) Other government representatives in Chelyabinsk
stressed that the federal government needs to provide money to
municipalities to help support small and medium enterprises.
The plan would provide not only credit, but expert business
planning assistance to start-ups as well as SME in difficulty.
Special programs to provide loan guarantees to assist
export-oriented companies are also needed. Viktor Sorvin, head
of Sverdlovsk Regional Administration of the Central Bank of
Russia, recommended that government implement measures to
attract investment, especially foreign direct investment, and
invest more in innovation and high tech industries.

More Realism from Property Developers

5. (SBU) Speaking about the construction sector at the federal
and regional levels, Gosduma deputies Andrei Nazarov and Valeriy
Gartung were less optimistic. They noted that the fall of oil
prices, capital outflows, and an expectation that the situation
will worsen have affected demand for housing and commercial
space, and have led developers to freeze many projects.
Overall, the sector has already seen layoffs and lower salaries.
They predicted that an extended downturn could result in the
collapse of the sector. Both presenters emphasized that the
sector looks to government at all levels to take excess supply
off the hands of developers and to keep things going with public
projects such as hospitals and sports centers. (Note: we
understand that Yekaterinburg city officials have concluded a
deal to acquire 630 apartments from AtomStroiKomplex developer
and will sell them to public employees.)

6. (SBU) Denis Sharipov, chairman of the association of
Bashkhortostan Construction Companies, also hit a more realistic
note, saying that unemployment is rising and the banking sector
has suffered in Bashkhortostan. He emphasized that to weather
the crisis, the republic will have to invest in research and the
modernization of infrastructure to diversify the economy away
from raw materials. Bashkhortostan also plans to support small
businesses by extending credit to prevent a repeat of 1998 when
30-50 percent of small businesses disappeared.

7. (SBU) The director of a Chelyabinsk construction company
strongly criticized government inaction vis-`-vis the
construction industry, asserting that one person employed in the
construction industry creates six jobs in other sectors. He
pointed to government policies that have resulted in lack of
demand and sales of housing units. He suggested several steps
the government should take to stimulate public-private
partnership in the construction sector: removal of
administrative barriers; creation of a transparent land
registration database; government construction of basic
infrastructure to support future housing construction; and
government subsidies of mortgages.

And Prescriptions from the Private Sector

8. (SBU) EBRD representative Tatiana Yembulaeva stressed that
expensive credit (note: in Yekaterinburg the commercial lending
rate is now 28 percent) will continue to disrupt the lending
market. Yembulaeva said that EBRD will invest up to USD 7
billion in Russia in 2009, as part of a 20 percent increase
worldwide in investments in countries with transitional
economies. EBRD's priorities will be infrastructure projects.
EBRD looks to municipal and regional authorities to: 1) improve
the regulatory and institutional base for investment; 2) balance
risks through risk sharing and guarantees; 3) ensure clear and
transparent rules for all players in the market including
foreign investors; and 4) improve infrastructure. EBRD also
recommended investing in companies with good governance that are
diversifying the economy.

9. (SBU) Ernst & Young representatives counseled government
participants to address barriers to foreign investment, such as
a accounting and tax systems that are not compatible with
western practices; lack of transparency; a complicated legal
system; and a general lack of understanding of corporate
decision-making processes. Other business representatives also
called on government to invest in technology parks, sponsor
business incubators, and work together with universities and
business to create an environment where engineers laid off from
metallurgical companies can start their own small businesses.


10. (SBU) At both meetings there was a marked contrast between
optimistic promotion from government officials with more
realistic appraisal of the economic situation from business
representatives. The sharply worded recommendations to
government to lower import duties on key equipment and improve
the investment climate in other ways might gain traction in a
region where politics is dominated by business interests. For
all of the discussion, very little new ground was covered in
these sessions. Moreover, the prescriptions presented are all
complex fixes that would have a positive effect only over time.
Meanwhile, the regions are facing up to the immediacy of the
impact of the crisis. In discussions with consulate contacts,
it has become clear that regions that were previously net tax
donors to the Center will suffer more as a result of the crisis.
Kurgan Oblast, for example, receives around 60% of its regional
budget from the Center, so is in relatively better shape to face
2009. On the other hand, like Chelyabinsk, Sverdlovsk oblast,
where metallurgy accounts for 52 percent of gross regional
production, is heavily affected by the drop in demand for metal


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