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Reference ID Created Released Classification Origin
07MOSCOW976 2007-03-07 15:09 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow


DE RUEHMO #0976/01 0661509
R 071509Z MAR 07

C O N F I D E N T I A L MOSCOW 000976 
E.O. 12958: DECL: 03/06/2017 
REF: A. 06 MOSCOW 13072 
     B. 06 MOSCOW 12814 
     C. 06 MOSCOW 4035 
Classified By: EST Counselor Daniel J. O'Grady, Reasons 1.4(b,d). 
1. (C) SUMMARY: On March 5 Prime Minister Fradkov fired Ramil 
Khabriyev, head of the Russian Federal Supervision Service 
for Health Care and Social Development (Roszdravnadzor). 
Fradkov cited continuing problems with inconsistent supply 
and deficit spending for drugs provided under the 
government's benefits program for the disabled, retirees, and 
low income families.  Despite deficit spending under the 
program in 2006, and continued underfunding in 2007, 
President Putin, Fradkov, and First Deputy Prime Minister 
Medvedev have assured the public that the program will be 
fully funded.  Yet many drug distributors and producers still 
have not been paid for drugs they supplied under the program 
in 2006.  For the moment, despite a cascade of recent 
scandals and missteps (Refs A and B), Health and Social 
Development Minister Zurabov appears safe, although there are 
signs the Kremlin's confidence in him is waning.  President 
Putin scolded Zurabov over the poor implementation of the 
drug benefits program at a meeting with the Cabinet February 
26, and tasked Medvedev to resolve the problems.  In his 
March 5 webcast, Medvedev indicated that Zurabov was living 
on borrowed time.  United Russia and Just Russia Duma 
Deputies this week wrote an "ultimatum" to Zurabov proposing 
that he either resign or solve the problems by March 20.  The 
majority of our contacts believe Khabriyev was fired as the 
fall guy to protect Zurabov, but many observers maintain 
Zurabov will ultimately be sacked when politically 
beneficial, either before the November Duma elections or the 
March 2008 presidential election. END SUMMARY. 
Deficit Spending and Supply Disruptions 
2. (SBU) The government budgeted 29 billion rubles in 2006 to 
pay for a program to provide drugs to social welfare 
beneficiaries, including the disabled, retirees, and low 
income families.  That money ran out in July 2006, and the 
government incurred an additional 31 billion rubles in debts 
to drug makers and suppliers who continued to supply drugs 
under the program for the remainder of the year.  Health 
Ministry officials put forward various explanations for the 
difficulties in funding the program, including the high price 
of certain medicines.  They also suggested that doctors had 
written too many prescriptions for expensive medicines, 
rather than subscribing cheaper alternatives, possibly as a 
result of lobbying from drug companies and distributors.  In 
2007, several expensive medicines were removed from the list 
of drugs available under the program to try to minimize 
3. (SBU) Drug producers and suppliers suffered financially 
because they weren't fully paid for 2006, and this led to 
supply disruptions in 2007.  Dozens of regions reported 
supply problems under the program in January and February. 
For instance, in February in Rostov Oblast, there were 
widespread shortages of insulin, which forced many diabetics 
to check themselves into the hospital to receive routine 
injections.  Groups representing Russian diabetics and 
hemophiliacs recently wrote to President Putin complaining 
about shortages of the everyday drugs on which they rely. 
Is Corruption Really to Blame? 
4. (C) Corruption also played a role in the program's 
burgeoning expenses.  The program is funded by the Federal 
Mandatory Health Insurance Fund, whose top management was 
sacked in late November 2006 and is now under indictment for 
bribery and kickbacks in organizing the drug tenders for the 
program (Ref B).  The Fund reports to the Health and Social 
Development Ministry. 
5. (SBU) While the 2007 budget included an additional amount 
to cover the deficit spending in 2006, that amount was 
insufficient to cover the entire shortfall.  The Duma has 
approved an additional 16 billion rubles to fund the deficit 
spending in 2006, but by our calculations, as much as 25 
billion rubles more will be needed to fully cover the 
program's expenses and fully reimburse drug suppliers and 
The Kremlin Weighs In 
6. (SBU) President Putin scolded Health and Social 
Development Minister Zurabov over the problems with supply 
and financing of the drugs program at a regular meeting with 
the Cabinet on February 26.  He tasked First Deputy Prime 
Minister Medvedev to help the Ministry resolve the problems 
and instructed the Ministry of Finance to fully fund the 
7. (SBU) Ramil Khabriyev, the head of the Fede
ral Supervision 
Service for Health Care and Social Development 
(Roszdravnadzor), recently stated publicly that the Mandatory 
Health Insurance Fund was to blame for the problems, since it 
controlled both the financing and procurement of drugs under 
the program.  Since the Fund, rather than Roszdravnadzor, 
played the primary role in implementing the program, it was 
somewhat puzzling when Prime Minister Fradkov announced March 
5 that Khabriyev was being fired for the program's problems. 
However, with all of the Insurance Fund's heads already 
dismissed and indicted last November (Ref B), some observers 
suggested Khabriyev was sacrificed since there was no one 
significant left to fire at the Fund. 
8. (SBU) Putin, Fradkov, and Medvedev have all sought to 
reassure the public that the drug program's problems will be 
sorted out within the next few weeks.  The United Russia and 
Just Russia Duma factions have also presented Zurabov with an 
"ultimatum" to either suggest how to fix the program's 
problems by March 20, or to resign.  A March 7 scheduled 
appearance by Zurabov before the Duma was canceled. 
Khabriyev Takes the Fall for his Boss 
9. (C) Most of our public health contacts believe Khabriyev 
is the fall guy allowing Zurabov to keep his post, at least 
temporarily.  Zurabov also announced March 5 that several 
regional public health officials would be fired in the coming 
days over the problems with the drugs program. 
10. (C) Khabriyev, a medical doctor and the former Health 
Minister for the Republic of Tatarstan, has spent the last 12 
years in Moscow working in various official positions 
regulating pharmaceuticals and medical equipment.  He is 
well-connected to Russian pharmaceuticals production and 
distribution business interests.  His daughter is married to 
the owner of Makiz-Pharma, one of Russia's largest drug 
suppliers and the Russian distributor of Johnson and Johnson 
Russia Eager to Develop Domestic Drug Production 
--------------------------------------------- --- 
11. (SBU) The problems with implementing the benefits program 
have led to renewed calls for Russia to develop its domestic 
drug industry, which may allow the government to economize on 
the costs of the drug program.  In recent years, Russia has 
seen some of the fastest growth in pharmaceutical sales.  In 
2005, Russia's drugs market was the twelfth largest 
worldwide, and sales growth was the second fastest (behind 
only Brazil and just ahead of China), but the vast bulk of 
the market is supplied by foreign firms. 
12. (SBU) Lamenting that over 90 percent of the drugs sold in 
Russia are made abroad, on March 5 President Putin called for 
Russia to develop domestic drug production.  Russian 
officials have long considered the country's dependence on 
foreign drug supplies to be a national security threat. 
13. (SBU) Last week, the press reported the GOR plans to 
consolidate various state-owned drug-making enterprises and 
research institutes into a single holding company, and to 
sell up to half of the holding companies' shares to foreign 
drug companies by the end of 2007.  Moscow Mayor Luzhkov 
likewise harbors dreams of turning the greater Moscow region 
into a national drug production center. 
Zurabov Once Again Survives a Scandal, At Least For Now 
--------------------------------------------- ---------- 
14. (C) COMMENT: This is just the latest in a series of 
scandals and missteps affecting Zurabov's Ministry, though 
Khabriyev is the first senior official within the Ministry 
swept up in these scandals who did not have close business or 
official ties to Zurabov.  Recent events include the 
senior-level corruption disclosed in mid-November 2006 within 
the Health Insurance Fund when it procured drugs under the 
benefits program (Ref B), on-going corruption investigations 
at the Pension Fund and Social Insurance Fund which came to 
light in December 2006, and a botched protocol and tender for 
expensive AIDS drugs in December (Ref C).  Even earlier, 
Zurabov weathered scandals during a failed attempt at pension 
reform in 2003, when he was head of the Pension Fund, and 
during the monetization of benefits in 2005 (Refs B and C). 
A businessman rather than a medical professional, Zurabov 
remains one of the wealthiest ministers, and closely 
connected to big business in the fields of health insurance 
and drug and medical equipment distribution (Refs B and C). 
He is politically unpopular. 
15. (C) COMMENT CONTINUED: With plenty of money (in theory) 
available to cover the 2006 deficit spending under the drug 
beneficiary program, we suspect that the purported "crisis" 
with the program may have been partly manufactured to cast 
Medvedev in the role of a hero for stepping in to resolve the 
problem.  Despite Khabriyev taking the fall for his boss, 
many observers still continue to believe Zurabov will 
ultimately be sacked when it will be most politically 
beneficial, either in advance of the November elections or 
the March 2008 presidential election. 


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